IMF tells poorest nations ‘no choice’ but to cut spending

The International Monetary Fund said on Tuesday, October 13, that low-income developing countries are taking the heaviest hit from the energy shock caused by the Iran war. Even so, the fund said many of them have "no choice" but to cut spending or face debt restructuring.kuwaittimes+1

Petya Koeva Brooks, deputy director of the IMF's Research Department, told AFP that heavily indebted oil-importing countries are facing the worst of the shock. She said they have hard choices to make in helping their citizens through the crisis. She spoke on the sidelines of the IMF and World Bank annual meetings in Bangkok.straitstimes+1

"Unfortunately, after years of the global economy being hit (by) shock after shock, debt levels have increased quite a lot, and at the same time, inflation has become a problem," she said.kuwaittimes+1

Most vulnerable economies

The IMF's World Economic Outlook was released the same day. It found that low-income developing countries that are net oil importers and have no exposure to the artificial intelligence investment boom are the most vulnerable to the war's effects.straitstimes+1

The US war on Iran has sent global energy prices soaring. Tehran's retaliation targeted Washington's Gulf allies and cut oil and gas supplies. Higher energy costs are now feeding into the prices of other goods, and supplies of fertilizer have also been disrupted.kuwaittimes

The fund has urged governments to keep any subsidies narrow and targeted. It has also called on all countries to rebuild fiscal buffers and deal with debt that has risen since the pandemic.straitstimes+1

"For those countries that are most vulnerable, this is where the consumption basket is heavily weighted towards energy and food, and so indeed it is much much more difficult," Koeva Brooks said. "But unfortunately there is no other choice".kuwaittimes+1

She said "many" low-income countries are in debt distress or close to it. Those that cannot fix the problem, she said, should seek restructuring. "Where debt is not sustainable, then resolving that debt and having orderly and timely restructuring is always better than waiting, because then the cost of restructuring down the road is going to be much higher," she said.straitstimes+1

AI boom splits the outlook

Despite the war, the IMF raised its 2026 global growth forecast, mainly because AI-related investment is lifting advanced economies. It expects advanced economies to grow 2.1 percent this year. Economies in the AI supply chain, such as Taiwan and South Korea, are expected to grow considerably faster.kuwaittimes+1

Koeva Brooks warned that if AI investment slowed, output would suffer "not only in advanced countries like the US but again through trade linkages also in Asia." In the IMF's worst-case scenario, where AI fails to deliver the promised productivity gains, global output in 2028 would be up to 0.4 percent lower than forecast.kuwaittimes

The outlook also points to climate risks. Koeva Brooks said an unusually intense El Niño is already pushing up some food prices. "We have a significant increase in beverage prices, in the prices of rice, and so on," she said. "Of course, it could turn out that the domino effect is even bigger than what we currently have".straitstimes+1