IMF, World Bank sound alarm bells amid fragile ceasefire

The White House announcement on Friday that the Strait of Hormuz will now be “completely reopened” while the ceasefire holds provided immediate stimulus for markets. However, the spring International Monetary Fund and World Bank meetings in Washington earlier in the week revealed that the Iran crisis is already having a significant stagflationary shock.
The crisis has been a big net economic negative for almost all countries, especially in the Middle East. However, the IMF particularly cited the problems for sub-Saharan Africa and some small island states with low capacity to cope with the ensuing financial pain.
Highlighting concerns from the UN’s World Food Programme, for instance, the IMF asserts that high fertilizer prices will intensify food insecurity for another 45 million people. This will expand the number of people in hunger to more than 360 million around the world.
The IMF also said that the crisis would probably require it to step up its economic “firefighter” role in coming months. Even if the current US-Iran ceasefire proves sustainable, the IMF estimates that countries requiring bailout support may need around $20 billion to help alleviate “considerable hardship around the globe.” This could rise to about $50 billion if the fragile pause in the US-Israel-Iran military conflict breaks down.
Unfortunately, such a breakdown is more than a possibility. There is no obvious indication that the US is scaling back its military buildup in the Middle East, so further action remains a clear option.
This is the economic and political context that underlines why IMF Managing Director Kristalina Georgieva warned in recent days that “even in a best case, there will be no neat and clean return to the status quo ante” before the US and Israeli military campaign began in late February. The latest IMF global growth outlook, published on Tuesday, also pointed to growth downgrades, even in the “most hopeful scenario.”
Many private forecasters also perceive world economic prospects have changed materially for the worse since late February. Even if the fragile ceasefire is translated into a comprehensive settlement in coming weeks, the Independent Commodity Intelligence Services believes it will take three to six months for energy and wider markets to recover from the recent disruption. If the ceasefire collapses in April or later, a longer war of around six months would require a recovery period of least eight to 10 months.
One of the reasons that the IMF and World Bank are so worried about the situation is governments across the world have less fiscal firepower to try to counteract this latest economic shock than in the past. Global public debt reached a record high of $102 trillion in 2024. Although public debt in developing countries accounted for less than one-third of the total, about $31 trillion, worryingly it has grown twice as fast as in developed economies since 2010. 

Uncertainty is likely to remain at elevated levels.

Andrew Hammond

Another key relevant trend highlighted in the IMF’s Global Financial Stability Report, is how the share of emerging market debt from portfolio investors has doubled over the past two decades to around 80 percent. This reflects the fact that, since at least the 2007-08 international financial crisis, banks have retreated from lending in these higher-risk markets.
During this approximately 20-year period, emerging markets have received cumulative finance inflows of around $4 trillion. However, the IMF says that developing nations reliant on this portfolio investment, with limited policy capacity and/or less deep financial markets, are “particularly vulnerable to global financial shocks,” including the aftermath of the Iran conflict.
This is because portfolio investors, especially hedge and investment funds, have generally become less risk tolerant over these two decades, with greater likelihood of snapping back finance when market sentiment shifts. According to the IMF, a “sudden drop in these flows could intensify external financing pressures, widen corporate and sovereign spreads, and trigger sharp currency depreciations.”
In emerging markets, external portfolio debt liabilities averaged about 15 percent of gross domestic product. The IMF estimates portfolio equity liabilities average around 7 percent of GDP, but “represents an economically meaningful share of stock market capitalization in some emerging markets.”
One of the ironies of the new, weaker economic outlook is that the IMF had planned to upgrade, not lower, global growth forecasts last Tuesday. This relative optimism had been fueled by strong AI and tech investment, and supportive financial conditions.
However, the main conversation at the IMF-World Bank spring meetings was only how much worse the situation could become. To this end, Georgieva appealed to countries not to “pour gasoline on the fire.” This includes avoiding measures such as export and/or price controls to try to protect their economies in a way that “can further upset global conditions.”
Beyond the Iran war, there is also the lingering uncertainty posed by other risks, including US President Donald Trump’s trade tariff agenda. The IMF has flagged that US inflation could rise if firms pass on more of the cost of tariffs, or if goods previously designated for the US market force a new round of tariff hikes elsewhere in the world.
Taken together, uncertainty is likely to remain at elevated levels, even if the fragile ceasefire holds. An increasing number of governments and wider stakeholders are hoping for the best, but preparing for worse scenarios given the possibility of tensions in the Middle East escalating again.

• Andrew Hammond is an associate at LSE IDEAS at the London School of Economics.