International Monetary Fund:Weekend Read: Cushioning the Middle East War Shock

 

Dear MARIA,   In today's edition, we highlight: Cushioning the Middle East War Shock Global Imbalances: Old Questions, New Answers? Emerging Markets Face New Challenges with Nonbank Capital The Macroeconomics of Defense Spending Survey: Asia-Pacific Perspectives 2026 Spring Meetings MIDDLE EAST Cushioning the Middle East War Shock IMF Managing Director Kristalina Georgieva warned that the war in the Middle East has hit countries with a large, global, and asymmetric supply shock. In her Curtain Raiser speech ahead of the IMF–World Bank Spring Meetings, she stated that growth will be weaker and uneven. “Even in a best case, there will be no neat and clean return to the status quo ante,” she emphasized.   Georgieva outlined three main transmission channels: higher input prices and supply shortages that lift inflation and constrain demand; shifts in inflation expectations that could trigger a costly inflation process; and tighter financial conditions, including wider emerging-market spreads and a stronger dollar.   She appealed to all countries to “reject go-it-alone actions” such as export controls and price controls that can further upset global conditions.   Given the spillovers of the war in the Middle East, she said that demand for IMF financial support is expected to rise to $20–$50 billion. Georgieva concluded by emphasizing that “we are well resourced to meet this shock…our 191 member countries can count on us to support them with financing if needed.” Read the Speech GLOBAL IMBALANCES Global Imbalances: Old Questions, New Answers? Global current account imbalances are widening again, reversing a decade of steady decline following the global financial crisis. History suggests a clear risk: widening imbalances have often been accompanied by concentrated and lower-quality growth. They have also triggered sectoral dislocations across trading partners and preceded financial crises or abrupt reversals of capital flows.   This renewed widening has revived questions about which policy tools can meaningfully impact external positions. New IMF research shows that traditional macroeconomic policies remain the dominant drivers of external balances and are the best lever for addressing current account imbalances. Industrial policies and tariffs are not shortcuts to external rebalancing. When they affect the current account, they often do so by suppressing consumption or investment—hardly a recipe for sustainable growth. Durable rebalancing still depends on sound domestic policies, not trade barriers. Read the Blog EMERGING MARKETS As Emerging Markets Attract More Nonbank Capital, They Also Face New Challenges Emerging market firms and governments are increasingly turning to nonbank investors—such as investment funds, hedge funds, pension funds, and insurers—to raise financing. The latest IMF research shows that while this trend delivers important benefits, it also poses new risks—notably greater vulnerability to a sudden reversal in capital flows when global shocks occur.   Since the global financial crisis, portfolio flows to emerging markets have increased eightfold, reaching about $4 trillion. This funding can lower borrowing costs, support investment and productivity, and help firms integrate into global value chains.   But these flows are more volatile than bank lending and highly sensitive to global risk conditions. When global uncertainty rises, nonbank investors—especially mutual funds and hedge funds—tend to pull back quickly. Such reversals can raise borrowing costs, weaken currencies, and strain public and private balance sheets, particularly in countries with weaker fundamentals or limited policy buffers.   Policymakers need to monitor not just the size but the composition of capital inflows. Strong institutions, sound macroeconomic policies, adequate buffers, and flexible exchange rates can help countries manage risks. Read the Blog DEFENSE SPENDING Wars Impose Lasting Economic Costs, While More Defense Spending Means Hard Choices Beyond their devastating human toll, wars impose large and lasting economic costs. According to new IMF research, output in countries where fighting takes place falls by about 3 percent at the onset and continues falling for years, reaching cumulative losses of roughly 7 percent within five years. Output losses from conflicts typically exceed those associated with financial crises or severe natural disasters.   At the same time, rising geopolitical tensions are pushing governments to spend more on defense. Historical episodes show that defense buildups typically last nearly three years and raise spending by roughly 2.7 percentage points of GDP. While this can support demand in the short term, it is often financed by borrowing. Evidence from 164 countries showed deficits worsened by about 2.6 percentage points of GDP as a result of higher defense spending, with public debt rising by 7 percentage points within three years.    Economic recoveries from war are often slow and uneven. When peace is sustained, output rebounds but often remains modest relative to wartime losses. Early macroeconomic stabilization, decisive debt restructuring, and international support—including aid and capacity development—play a central role in restoring confidence and promoting recovery.   Recovery efforts are most effective when complemented by domestic reforms to rebuild institutions and state capacity, promote inclusion and security, and address the lasting human costs of conflict, including lost learning, poorer health, and diminished economic opportunities. Read the Blog SURVEY Asia-Pacific Perspectives: Survey on the IMF’s Work Do you live in the Asia Pacific region? If so, do you have a few minutes to share your views on the IMF’s work and communications in your country or in the region? Take our short survey by clicking the link below. Your feedback will help us improve our engagement ahead of the 2026 Annual Meetings in Thailand. After completing the survey, you will have the option to sign up for a free subscription to the IMF’s Finance & Development (F&D) magazine. Take the Survey MARK YOUR CALENDAR APRIL 13-18, 2026    2026 Spring Meetings    The 2026 Spring Meetings will take place in person from Monday, April 13, through Saturday, April 18 in the IMF and World Bank Group headquarters, in Washington, D.C.   The Meetings bring together central bankers, ministers of finance and development, private sector executives, civil society representatives, and academics to discuss the state of the global economy and issues of international concern. They are the only gathering of its kind in the world and a unique forum for discussion on economic policymaking.   Registration is now open. Register Here Thank you very much for your interest in the Weekend Read! Be sure to let us know what issues and trends we should have on our radar.  Noha Elbadawy  Editor | IMF Weekend Read   nelbadawy@IMF.org Stay connected with the International Monetary Fund: