The International Monetary Fund says heavily indebted, low-income nations may need spending cuts or debt restructuring as rising energy and food prices intensify economic pressures.
Web Desk: The International Monetary Fund (IMF) has warned that many low-income developing countries face difficult economic choices as the energy shock linked to the Iran war drives up costs and worsens existing debt pressures.
Speaking to Agence France-Presse (AFP) on the sidelines of the IMF and World Bank annual meetings in Bangkok, IMF Deputy Director of Research Petya Koeva Brooks said heavily indebted countries that rely on imported oil were among those most exposed to the crisis.
She warned that some vulnerable nations may have little room to increase spending to protect their populations and could need to cut expenditure or restructure debt if their financial obligations become unsustainable.
“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,” Brooks said, according to AFP.
Energy Crisis Adds to Economic Pressures
The conflict in the Middle East has disrupted energy supplies and pushed up global oil and gas prices, increasing costs for governments, businesses and households.
Higher energy costs are also affecting the prices of other goods, while disruptions to fertiliser supplies could add further pressure to agricultural production and food prices.
For low-income countries, these increases can be particularly difficult because households often spend a substantial share of their income on essential items such as food and fuel.
Countries that depend heavily on imported energy may also face higher import bills, adding pressure to public finances and external payments.
IMF Calls for Targeted Subsidies
The IMF has urged governments to provide narrowly targeted subsidies to help vulnerable households cope with the crisis rather than relying on broad-based support measures.
The Fund has also recommended rebuilding fiscal buffers and addressing rising public debt following repeated economic shocks since the Covid-19 pandemic.
Brooks said the policy choices facing the most vulnerable economies were particularly difficult because their populations were heavily exposed to rising food and energy costs.
The challenge for governments is to provide necessary relief without worsening already strained budgets or undermining longer-term financial stability.
Debt Restructuring May Be Necessary
The IMF official said many low-income countries were already experiencing debt distress or were close to it.
Where debt cannot be sustained, she said, governments should consider an orderly and timely restructuring rather than delaying action and potentially facing higher costs later.
Debt restructuring can involve renegotiating repayment terms with creditors to make a country’s obligations more manageable. The precise arrangements depend on the country’s financial circumstances and negotiations with its creditors.
The warning highlights the limited policy options available to countries that face high borrowing costs, rising prices and weak fiscal capacity at the same time.
AI Investment Creates Uneven Global Growth
The IMF’s World Economic Outlook, released on Tuesday, identified low-income developing countries that are net oil importers and have limited exposure to the artificial intelligence investment boom as particularly vulnerable to the current economic shocks.
The benefits of AI-related investment have been concentrated in economies with stronger technology industries and links to global AI supply chains.
Brooks warned that a slowdown in AI investment could also affect other economies through international trade, reducing output in advanced economies and their trading partners in Asia.
According to the IMF’s assessment cited by AFP, a worst-case scenario in which AI fails to deliver the expected productivity gains could reduce global GDP forecasts for 2028 by as much as 0.4 per cent.
Food Prices and Climate Risks Add to Uncertainty
The IMF also highlighted climate-related risks, including the potential effects of a particularly strong El Niño event.
El Niño is a natural climate pattern that can alter weather conditions and increase the risk of droughts and flooding in some regions. Such changes can affect agricultural output and contribute to fluctuations in food prices.
Brooks said increases in the prices of certain food and beverage products had already been factored into the IMF’s assessment, while warning that the wider effects could prove greater than anticipated.
The combination of elevated energy costs, food-price pressures, high debt and uneven technology-driven growth leaves vulnerable economies with limited room to respond.
The IMF’s central message is that governments must balance immediate support for affected households with measures to restore fiscal stability and ensure that public debt remains manageable.
