The war in the Middle East will lead to higher inflation and slower global growth, the head of the International Monetary Fund told Reuters on Monday, ahead of a forecast for the world economy planned by the global lender for next week.

The war has triggered the worst-ever disruption in global energy supply, with millions of barrels of oil production shuttered due to Iran’s effective blockage of the Strait of Hormuz, crucial for shipping one-fifth of the world’s oil and gas. 

Even if the conflict is swiftly resolved, the IMF is set to reduce its forecast for economic growth and bump up its outlook for inflation, Kristalina Georgieva, managing director of the IMF, said.

The war is expected to dominate discussions among finance officials from around the world at next week’s spring meetings of the IMF and World Bank in Washington.

The Fund is expected to release a range of scenarios in its upcoming World Economic Outlook due on April 14. 

It signaled a possible downgrade in a March 30 blog post, ⁠citing the asymmetric shock of the war and tighter financial conditions. Without the war, Georgieva said the IMF had expected a small upgrade in its projection for global growth of 3.3% in 2026 and 3.2% in 2027 as economies continue to recover from the pandemic.

“Instead, all roads now lead to higher prices and slower growth,” said Georgieva, who will preview the spring meetings in a speech on Thursday. World Bank President Ajay Banga will present his view at an Atlantic Council event on Tuesday.

“We are in a world of elevated uncertainty,” the IMF chief said, citing geopolitical tensions, technological advancements, climate shocks and demographic shifts. “All of this means that after we recover from this shock, we need to keep our eyes open for the next one.”

The war has shrunk global oil supply by 13%, Georgieva said, with the impact rippling through oil and gas shipments and into related supply chains such as helium and fertilizers.

Even a rapid end to hostilities and a fairly rapid recovery will result in a “relatively small” downward revision of the growth forecast and an upward revision of its inflation forecast, she said. If the war is protracted, the effect on inflation and growth will be greater.

POOR COUNTRIES WILL BE HIT HARDEST

Poor, vulnerable countries with no energy reserves will ⁠be hardest hit, Georgieva added, noting that many countries had little to no fiscal space to help their populations weather the price increases caused by the war, which in turn also increased the prospects of social unrest.

Georgieva said some countries had already asked for funding help, but did not name them. She said the IMF could augment some existing lending programs to meet countries’ needs. Eighty-five percent of the IMF’s members are energy importers.

Broad energy subsidies were not the answer, she said, urging policymakers to avoid government payments that could further inflame inflationary pressures.

The impact has been asymmetric, hitting energy-importing countries hardest, but even energy exporters such as Qatar are feeling the effect ⁠from Iranian strikes against their production facilities.

Qatar expects it will take three to five years to restore 17% of its natural gas production because of the damage, Georgieva said, while the International Energy Agency has reported 72 energy facilities have been damaged in the war, one-third of which have suffered significant damage.

“Even if the war is to stop today, there would be a lingering negative impact to the rest of the world,” she said.

FOOD SECURITY ⁠A CONCERN

After the U.S. and Israel attacked on February 28, Iran effectively closed the Strait of Hormuz, sending the price of crude oil and liquefied natural gas sharply higher. The international Brent crude benchmark settled near $110 on Monday, with cash benchmarks sourced to the Middle East at a substantial premium to that price.

The heads of the IMF, IEA and World Bank said last week they would form a coordinated effort to ⁠assess the energy and economic effects of the war.

Georgieva said the IMF was also engaging with the United Nations’ World Food Programme and Food and Agriculture Organization on food security.

The World Food Programme said in mid-March that millions of people will face acute hunger if the war continues into June. Georgieva said the IMF did not see a food crisis yet, but that could happen if the delivery of fertilizers was impaired.

Source: Reuters
-Agencies