The world faces the spillovers from the war in the Middle East. In addition to the human toll, its economic effects are global and uneven, once again hitting the poorest and most vulnerable countries the hardest. This comes at a time when policy space has been eroded and geopolitical tensions have been increasing. Spillovers to Low-Income Developing Countries (LIDCs) will transmit through supply disruptions, higher commodity prices, second-round effects on inflation and expectations, tighter global financial conditions, exchange rate pressures, and reduced remittances from members of the Gulf Cooperation Council (GCC). The appropriate policy response depends on how the shock propagates through the domestic economy, calling for pragmatism and agility, supported by credible policy frameworks. In LIDCs, near term policies should be anchored in credible frameworks, while concerted efforts are key to enhance resilience and growth potential. Domestic structural reforms, including building strong institutions, also have an important role in the medium-term to attract stronger FDI inflows and create jobs. Robust support from the international community will be essential—especially for the most vulnerable LIDCs and fragile and conflict-affected states (FCS). The IMF stands ready to deploy all its tools to assist the membership—supporting sound policies, helping ensure this new test does not derail key medium-term priorities, and providing balance of payments financing where needed.
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