The International Monetary Fund (IMF) has predicted that the recent conflict in West Asia will cause a serious setback to the improving global economy. The Fund has stated that the conflict in West Asia has thrown the global economic outlook into disarray and is likely to have a significant impact, with developing countries being twice as affected as developed countries.

The IMF has released the ‘World Economic Outlook’ and the ‘Global Financial Stability Report’, providing projections, problem identification and suggestions for the economic scenario. According to the IMF report, the growth rate of the world economy will be limited to 3.1 percent in 2026. The IMF also has another estimate that the world economic growth will shrink further to 2.5 percent if the war continues. The current growth rate of 3.1 percent projected for 2026 is 0.3 percent lower than the projection last January. Last January, the Fund had estimated economic growth at 3.4 percent. 

However, the IMF says that the global economic growth rate projection has been reduced as the impact of the conflict has been confirmed. The economic growth projected for 2026 is even lower than the average growth rate. The average global economic growth rate from 2000 to 2019 is 3.7. ‘Had there been no war, global economic growth would have been stronger,’ the report said, ‘so the current slowdown in economic growth is mainly due to the West Asian conflict.’ 

The Fund also projects that global average inflation will rise to 4.4 percent in 2026. It will increase further if the war continues. ‘Despite major trade disruptions and policy uncertainty, the global economy was in positive territory last year, and this momentum was expected to continue in 2026, despite risks. Therefore, we were projecting global economic growth to be higher than expected,’ said Pierre Olivier Gurinsa, IMF economic advisor and chief economist, at the report launch. ‘But now the war in West Asia has stopped this momentum. The closure of the Strait of Hormuz and the serious damage to key energy infrastructure in West Asia have led to rapid increases in oil and gas prices. The prices of diesel, jet fuel and chemical fertilizers have also increased.’

The IMF projects that this will affect almost all countries. The first impact will be price increases. ‘Prices of chemical fertilizers, food items, transportation will increase. It will disrupt supply chains, increase inflation and reduce the purchasing and spending capacity of the general public,’ the report says, ‘Remittances from countries that send workers for foreign employment may decrease.’ 

The economic growth rate of economically influential countries such as the United States, China and India will also shrink in 2026 compared to 2025. Accordingly, the IMF projects that the economic growth rate of the United States, China and India will be limited to 2.3 percent in 2026, 4.4 percent in China and 6.5 percent in India. 

‘The world economy is once again facing the threat of being derailed due to the war that broke out in West Asia towards the end of February 2026,  its impact will be serious, especially in emerging and developing countries dependent on imports, with the economic growth of developing countries reduced by 0.3 percent,’ the report says.

The IMF also projects that Nepal’s economic growth will be limited to 2.9 percent. The Asian Development Bank (ADB) last week also projected Nepal's economic growth to be limited to 2.7 percent, while the government had estimated an economic growth of 6 percent in the current fiscal year. The war in West Asia is certain to cause serious damage to it. For Nepal, it is certain to have a decline in remittance inflows, an impact on imports and exports, a contraction in foreign employment, and an impact on Nepalese in the Gulf region and tourist arrivals. 

It is not yet possible to say with certainty how deep the impact will be for Nepal. But according to initial estimates, economic growth is certain to be hit hard. 'There is a risk of further damage to the energy infrastructure in conflict-affected areas, the impact of which will be even greater. This will have an impact on developing economies that will be almost double that of developed economies,' the IMF report said. 'Geopolitical tensions could worsen, which could turn the current situation into the largest energy crisis in modern history.'

The IMF has also made suggestions to the government, finance ministry and central banks to deal with this crisis. It has been pointed out that strong policies are also needed to deal with the economic and geopolitical situation in particular. For that, the first priority is to try to keep price growth stable, maintain financial stability, and not delay structural reforms. 

‘The fiscal situation has become more tight than before due to rising public debt. Price controls, subsidy programs are popular. But this has created distortions, because such programs are not well designed, they are difficult to remove. Ultimately, there is pressure in terms of finances. Appropriate fiscal policies should be adopted,’ suggests IMF Economic Advisor and Chief Economist Gurinsa. ‘Even if the current war affects, preparations should be made now so that it does not affect long-term economic growth. We should focus on the development of renewable energy. Policymakers should encourage the adoption process. We should find ways to ease labor market problems.’