By Libby George and Andrea Shalal
Developing country policymakers left this week’s IMF-World Bank meetings more frustrated than ever that successive external shocks are derailing their efforts to tackle high debt, reform their economies and deliver better lives for millions of citizens now struggling to pay for food and fuel.
But unlike the past, some officials and economists say this crisis could be the tipping point that drives countries to take more independent and regionally co-ordinated action.
The Iran war and the meteoric spikes it caused in oil and fertiliser prices will weigh on global growth and drive up inflation, even if it ends soon, the IMF and World Bank said.
It threatens to blow out the fiscal balances of countries that had just got back on track after debt default, such as Zambia and Sri Lanka. And it is also eating into the buffers others built after the pandemic, the Russia-Ukraine war and the US trade tariffs upended their economies.
Kenya last week became the first larger emerging economy to publicly confirm it formally requested emergency funds from the World Bank.
“It’s like you got hit in the head many times. Once you got up, then you got hit again,” Chayawadee Chai-anant, assistant governor of Thailand’s central bank, told Reuters, of efforts to bounce back from crises.
The IMF has lowered its 2026 growth forecast for emerging nations to 3.9% from 4.2% in January, but those projections could worsen if the Iran war persists.
It’s a depressing mood, and it is also a repeated demonstration of the consequences on bystanders, where, due to developments not of their own making, they have to deal with a severe economic crunch.
— Reza Baqir, head of sovereign advisory services at Alvarez & Marsal
Reza Baqir, head of sovereign advisory services at Alvarez and Marsal, said countries making painful reforms, from debt restructuring to subsidy removal, are now left scrambling with fiscal balances destroyed by another crisis not of their making.
“It’s a depressing mood, and it is also a repeated demonstration of the consequences on bystanders, where, due to developments not of their own making, they have to deal with a severe economic crunch,” Baqir told Reuters.
Crisis rather than solutions
Nigeria is one such example. In the past three years, it has removed costly fuel subsidies, eased foreign exchange rules and streamlined regulations to draw a slew of foreign investor cash.
“We find we are doing all we can, and it is shock after shock, externally and exogenously created,” Nigerian finance minister Wale Edun told Reuters. “That sort of takes away from achievements and from our progress.”
Josh Lipsky, director of economic affairs at the Atlantic Council, said conversations with dozens of other financial leaders showed their patience was wearing thin.
“I sense the frustration they can’t actually deal with the big challenges they want to deal with. They want to talk debt. They want to talk about these things that define the decade, but every meeting is just a crisis. And I’ve just felt a different sense this time of what’s next.”
Kenya’s central bank governor, Kamau Thugge, told Reuters that before the Middle East war began, the country had stabilised the economy and got inflation under control, and the economic stimulus from rate cuts was emerging.
The war, though, paused the bank’s easing cycle, boosted all costs, and threw previous forecasts into doubt.
“It’s a bit frustrating,” he told Reuters.
The IMF and World Bank, though, offered few solutions during the week; top leaders, instead, cautioned countries against using energy subsidies to shield citizens while acknowledging that the latest hike in energy and food prices could well foment social unrest and outward migration.
IMF MD Kristalina Georgieva said 12 or more countries are seeking loans to help weather the shock, estimating demand of $20bn to $50bn, depending on the duration of the war.
The World Bank said countries could tap up to $25bn in crisis response funds quickly, with up to $60bn available over six months. Two days into the meetings, World Bank president Ajay Banga, clearly hearing urgent pleas for help, said the Bank could make up to $100bn available by year’s end, if needed, by restructuring its balance sheet.
But neither the IMF nor the G20, which had rushed to suspend debt service payments for the poorest countries in the early weeks of the Covid-19 pandemic, offered any new instruments.
Break the cycle
“What we saw this week was the Bank and the fund effectively saying, ‘Don’t worry, we can do what we’ve done in the past,’” said Christina Segal-Knowles, a former senior White House official now with the Rockefeller Foundation. “But you have a set of countries that are still vulnerable. Those tools have not put these countries back in a place where they’re sustainable.”
The world needs something that “breaks the cycle because, otherwise, the next shock we get to will be back in the same place”.
Longer-term loans, larger-scale financing and different forms of financing that allow countries to escape the “debt trap” are also options, she said.
Edun, who also chairs the G-24 group of developing nations, called on the institutions to do more but noted that amid drastic aid cuts and falling official development assistance, developing nations need to also focus on “self-help, self-reliance” and integration within regions, such as more trade on the African continent.
“I think the most important lesson is there has to be a reliance on domestic resource mobilisation in these countries,” he said during the G-24 panel.
Throughout the week, officials from Africa, Asia and Latin America said leaders in their regions were looking to boost their resilience to future energy shocks by shifting resources into renewable energy and taking advantage of other resources such as critical minerals to boost growth and create jobs.
The cushion has been quite low because it’s never recovered back all the way, so it’s thinner and thinner and thinner, especially for the fragile people. That’s why, in this crisis, I think it’s going to be more widespread.
— Chayawadee Chai-anant, assistant governor of Thailand’s central bank
Albert Park, chief economist of the Asian Development Bank, said Asian economies were racing to protect themselves from the negative effects. Vietnam and Indonesia had already announced new investments in renewable energy, and others would probably follow suit, he said.
But leaders are under pressure to act quickly, even as they look for lasting solutions.
World Bank forecasts show that a prolonged war could push an additional 50-million people into acute food insecurity, with about 10-million to 15-million jobs lost in the short-term alone.
“The cushion has been quite low because it’s never recovered back all the way, so it’s thinner and thinner and thinner, especially for the fragile people,” Thailand’s Chai-anant told Reuters. “That’s why, in this crisis, I think it’s going to be more widespread.”
Reuters
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