The Hill

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The US-Israeli war on Iran has caused one of the greatest supply shocks in “global energy market history,” according to an April 1 joint statement by the International Energy Agency, International Monetary Fund (IMF), and World Bank. 

The impact, they say, “is substantial, global, and highly asymmetric, disproportionately affecting energy importers, in particular low-income countries.” To meet the enormity of this challenge, the three organizations have created a joint task force to search for solutions. The task force need not look far for one major and immediately-deployable measure; the IMF itself has the power to provide widespread, rapid, and cost-free relief by issuing hundreds of billions of dollars worth of liquid reserve assets called Special Drawing Rights (SDRs) to its member countries around the world. 

Even prior to the war, much of the Global South was enduring sluggish growth and onerous debt burdens as a result of the economic fallout of COVID-19, interest rate hikes, trade instability, and commodity price volatility sparked by the war in Ukraine. 

The latest price shocks will disproportionately affect developing countries, which generally face tighter fiscal space and are more reliant on foreign exchange reserves to purchase crucial imports like food and medicine. Devastating foreign aid cuts combined with lower inflows of foreign direct investment have added to this pressure. As the IMF recently assessed of the war on Iran, however long it may last: “all roads lead to higher prices and slower growth.”

The World Food Programme estimates that an additional 45 million people could experience acute food insecurity in the case of a protracted conflict with oil prices above $100 a barrel – adding to 318 million people already in the midst of food insecurity. 

Some central banks have already reacted to the price shocks by increasing interest rates or delaying planned decreases — an attempt to tame inflation that risks exacerbating the effects of the shock without addressing the underlying challenges. When the US Federal Reserve increased its policy rate 11 times starting in 2022, and central banks around the world followed, developing countries suffered brutal increases to the cost of external borrowing – triggering balance of payments instability and what many consider to be an ongoing debt crisis. Recent events could result in another credit crunch, and price spikes have already increased bond spreads, making it even more difficult for developing countries to meet their financing needs.

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