Economic shocks, energy supply disruption; IMF warns of fiscal risks due to Middle East conflict

The International Monetary Fund (IMF) warned that the war in the Middle East has triggered a far-reaching global economic shock, disrupting energy markets, supply chains and financial stability while raising the risk of higher inflation and slower growth worldwide.

The International Monetary Fund (IMF) warned that the war in the Middle East has triggered a far-reaching global economic shock, disrupting energy markets, supply chains and financial stability while raising the risk of higher inflation and slower growth worldwide.

“The world faces yet another shock,” the IMF said in a detailed statement, adding that the conflict is “upending lives and livelihoods” and “dimming the outlook for many economies” that had only recently begun recovering from earlier crises.

The fund said the impact is global but uneven, with “energy importers more exposed than exporters, poorer countries more than richer ones, and those with meager buffers more than those with ample reserves.”

Beyond the humanitarian toll, the IMF said the war has severely disrupted the economies of directly affected countries, damaging infrastructure and industries in ways that could have lasting consequences. While those economies remain resilient, their short-term growth prospects are expected to weaken.

The IMF noted that about 25% to 30% of the world’s oil and 20% of liquefied natural gas pass through the Strait of Hormuz, making disruptions there especially significant for energy-importing regions in Asia and Europe.

“Large energy importers … are bearing the brunt of higher fuel and input costs,” the IMF said, adding that many countries in Africa and Asia are struggling to secure supplies even at elevated prices.

The compounding pressures in parts of the Middle East, Africa, Asia-Pacific and Latin America, where higher food and fertilizer prices and tighter financial conditions are adding strain. Low-income countries face heightened risks of food insecurity and may require increased external support, even as such aid declines.

The IMF warned that all potential scenarios point to worsening economic conditions. “All roads lead to higher prices and slower growth,” it said, noting that a short conflict could trigger price spikes, while a prolonged energy cost would elevate economic strain. Persistent tensions could also entrench inflation and uncertainty.

Energy is the main channel through which the shock is spreading, the IMF said. Disruptions tied to the Strait of Hormuz and regional infrastructure have created what the International Energy Agency described as the largest disruption to global oil markets in history. For fuel-importing economies, the IMF said, the impact is “a large, sudden tax on income.”

The effects are being felt across regions. In Asia’s major manufacturing economies, rising fuel and electricity costs are increasing production expenses and eroding purchasing power, while balance-of-payments pressures are weighing on currencies.

In Europe, the situation is reviving concerns similar to the 2021–22 gas crisis, with countries like Italy and the United Kingdom particularly exposed, while France and Spain are relatively shielded due to greater reliance on nuclear and renewable energy.

By contrast, some oil-exporting countries in the Middle East, Africa and Latin America could see improved fiscal and external positions if they can maintain exports. However, producers facing constraints—including some Gulf states—may see limited gains, and ongoing uncertainty could dampen investment and growth even after transit routes normalize.

The war is also reshaping global supply chains. Rerouting ships has increased freight and insurance costs and delayed deliveries, while disruptions to air traffic in the Gulf are affecting tourism and trade.

Fertilizer shipments — about one-third of which pass through the Strait of Hormuz — have been disrupted, raising concerns about food production and prices. The IMF warned that this could reduce crop yields and push food prices higher throughout the year, particularly as planting season begins in the Northern Hemisphere.

“The most vulnerable will bear the heaviest burden,” the IMF said, noting that food accounts for about 36% of consumption in low-income countries, compared with 20% in emerging markets and 9% in advanced economies.

The disruption could also affect supplies of key industrial inputs. The Gulf is a major source of helium used in products ranging from semiconductors to medical equipment, while Indonesia — responsible for about half of global nickel output — could face sulfur shortages needed for processing.

Eastern African economies may also suffer from weaker exports, logistical bottlenecks and reduced remittances linked to Gulf economies.

Inflation risks are rising globally, the IMF said, as higher energy and food prices feed into broader costs. Historically, sustained oil price spikes have led to higher inflation and slower growth, and the current shock could reverse progress made by many countries in stabilizing prices.

In regions where inflation had been relatively contained, such as parts of Asia and Latin America, rising costs could destabilize expectations. In Europe, additional energy-driven inflation could intensify cost-of-living pressures, while in low-income countries higher food prices pose acute economic and social risks.

“If people and businesses … believe inflation will remain higher for longer, they may build this into wages and prices,” the IMF warned, making the shock harder to contain without a sharper economic slowdown.

Financial markets have also been unsettled. Global stock prices have fallen, bond yields have risen and volatility has increased, tightening financial conditions worldwide. Higher borrowing costs are complicating debt servicing and refinancing for governments and businesses, particularly in emerging markets.

Countries with limited reserves and market access — especially in sub-Saharan Africa, the Middle East and South Asia — face heightened risks as rising import costs widen trade deficits and pressure currencies. High debt levels and tighter financial conditions are also increasing financing costs.

In contrast, advanced economies with strong financial systems and some commodity exporters, including Saudi Arabia, the United Arab Emirates, Brazil and Ecuador, may be better positioned to absorb the shock, though they remain exposed to uncertainty.

The IMF underscores how a single global shock can produce sharply different outcomes, from windfalls for some exporters to severe balance-of-payments strain and rising living costs for others.

With many countries already carrying record levels of debt, the fund warned that policymakers have limited room to respond and must carefully tailor measures to national conditions, particularly where fiscal space and reserves are constrained.

“We are closely monitoring these developments,” the IMF said, adding it will provide a fuller assessment in its World Economic Outlook and Global Financial Stability Report on April 14, followed by its Fiscal Monitor on April 15.

At the same time, the IMF said it is expanding support to member countries. Managing Director Kristalina Georgieva emphasized the institution’s role, saying, “In an uncertain world, more countries are needing more of our support. We are there for them.”