As energy costs rise, low-income developing nations that are feeling the economic impact of the Iran war may be forced to reduce public spending or to enter into debt restructuring negotiations, the International Monetary Fund (IMF) has said.
Deputy director of research at the IMF, Petya Koeva Brooks, said on Tuesday, that out of the entire group of countries that was most vulnerable to the energy shock would be those that were heavily indebted and imported oil.
Governments were going to be more worried about inflation, as debt had increased globally as a result of repeated economic shocks “in an already depleted world,” she said.
The conflict between the US and Iran has thrown the energy markets into disarray and various retaliative actions, including in the gulf, have had a impact on energy and oil and gas supplies. The surge in energy expenses have also started to affect the prices of other commodities, and a disruption in vital fertiliser supplies has compounded worries about food prices.
The IMF has called for narrow and targeted subsidies for households at risk, instead of broad-based support. Its appeal to countries also comes as a call to establish fiscal buffers and to tackle soaring debt after a number of years of economic bumps and bruises since the outbreak of the coronavirus crisis.
The new World Economic Outlook report by the IMF highlights how low-income developing nations that import more oil than they export will be especially vulnerable to the war.
The distribution of unreliable electricity access was particularly vulnerable in these countries because of the significant proportion of energy and food consumption in households, Koeva Brooks said. This means that more expensive prices may impact families living on a tight budget disproportionately.
She pointed out that the majority of low-income countries were already debt distress or nearing it. For governments that cannot reduce their debt loads with standard methods, she said restructuring might be an option.
The warning underscores the tough dilemma for fragile economies that are trying to keep household consumption from increasing with price increases, while keeping public finances on track. The energy- and food-induced pressures on prices could leave policymakers with limited space to ease prices and risks exacerbating existing debt situations.