The repercussions of the US-Israeli war on Iran prompted international financial institutions to shift from financing development to crisis management, amid increasing financing pressures and political and economic challenges for the targeted countries, according to experts who spoke to Al Jazeera Net.
As the war escalated, these institutions found themselves facing a turbulent economic reality, characterized by rising energy prices, accelerating inflation, and increasing pressures on the budgets of developing countries, at a time when public debt levels in these countries reached record levels.
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The focus of the International Monetary Fund and the World Bank has shifted from financing long-term development projects to providing urgent support to affected countries, whether through quick loans or economic rescue programs.
The economic shock resulting from the war led to a rise in financing requests, especially from energy-importing countries, which faced sharp jumps in import costs.
The Fund’s Director General, Kristalina Georgieva, confirmed that “12 or more countries” are moving to request new financing programs due to the energy shock resulting from the war, while the World Bank said that it is holding talks with countries affected by the energy shock.
Pre-war priorities
The programs of the two institutions before the war were directed towards supporting infrastructure projects, financing the transition to clean energy, and financial reform programs in developing countries.
The World Bank has pledged to increase its financing to about $150 billion annually to address development and climate challenges, with a clear focus on sustainability.
The International Monetary Fund also continued to support fiscal balance programs, especially in countries suffering from budget deficits, through reforms that extend for years and target long-term economic stability.
These programs, despite their sometimes social costs, were aimed at restructuring the economies of countries in the long term.
Recovery financing
After the war and with the rise in energy prices, these institutions reconsidered their policies, including financing projects related to fossil fuels, after years of focusing on renewable energy, which reflects a remarkable change in the balance between climate goals and the necessities of economic stability, according to economist Hossam Ayesh.
Funding is no longer directed to sustainable development in the countries concerned, but rather to cover energy bills, support local currencies, and avoid economic collapse, which Ayesh calls in his statements to Al Jazeera Net “financing the recovery.”
Ayesh says that the war has radically reshaped the role of international financial institutions, as it moved from financing development to meeting the urgent needs of countries, adding that the International Monetary Fund and the World Bank are today presenting rapid programs aimed at reducing the effects of inflation, supporting the financial capabilities of countries, and preventing economic collapses that may disrupt debt repayment, especially in developing economies.
In this context, the World Bank said that it will support the governments of the countries that deal with it in confronting the challenges resulting from the conflict in the Middle East, including the significant rise in energy costs, by utilizing rapid financing tools.
In a statement issued last March, the World Bank explained its readiness to respond on a large scale by providing immediate financial assistance, policy expertise, and private sector support, with the aim of preserving jobs and growth in affected countries.
According to recent estimates, the bank said that it is able to raise about $25 billion through crisis response tools in the near term, and up to $70 billion in 6 months, depending on the need.
Historical precedents
This behavior is not new to international financial institutions, as they were forced to adopt a similar approach during the Corona pandemic in 2020 and 2021, when the International Monetary Fund provided emergency financing to more than 80 countries.
This shift also occurred after the outbreak of the Russia-Ukraine war, which prompted the World Bank to redirect funding toward energy and food security.
But the difference between these precedents and the current crisis is that the consequences of the war on Iran combine an energy shock, global inflation, and high debt levels, which makes the room for maneuver narrower for international financial institutions.
Resource adequacy
Despite the numbers announced by international financial institutions, there are concerns about insufficient resources to keep pace with the scale of the crisis, which raises fears of a widening gap in financing and the ability to respond to the crisis.
While the World Bank previously pledged to raise the annual financing ceiling to $150 billion to address climate and energy crises, actual flows did not exceed 40% of these pledges.
For its part, the International Monetary Fund warned that about 45 million more people may face severe food insecurity if the war continues and continues to disrupt the necessary fertilizer shipments at the present time.
The Fund said it expects a demand for short-term emergency support ranging between $20 billion and $50 billion for low-income and energy-importing countries.
Conditions and challenges
Despite the urgent need of countries for financing, questions are raised about the nature of the conditions imposed by financial institutions on borrowing countries in general, and at this critical stage in particular, in light of the increasing overlap between economic decisions and political considerations within these institutions.
While some indicators indicate relative flexibility in providing emergency loans, there are warnings that the associated economic reform programs may impose additional pressures on societies, especially in light of the rising costs of living and declining purchasing power.
These pressures include reducing subsidies, increasing taxes, and liberalizing energy prices. In light of high inflation, these measures may lead to additional social pressures, which revives the debate about the cost of these institutions’ intervention in times of crisis.
In this context, Dr. Janat Ben Abdullah, a writer and analyst specializing in political economy and international trade, believes that linking the current transformation to war alone ignores deeper roots, considering that the International Monetary Fund and the World Bank have formed – since after World War II – one of the pillars of the global economic system that has dealt with countries with varying degrees of influence.
She points out that major crises, whether geopolitical or economic, do not create this role as much as they reveal it, noting that the recent transformations come in the context of increasing awareness of societies, especially after pivotal events such as the Al-Aqsa flood, and the accompanying broader discussions about the nature of the international system and its working mechanisms.
Political dimensions
Jannat adds that the “economic rescue” programs offered by these institutions, despite being presented as support tools, raise repeated controversy about their social and economic impacts, especially in developing countries, as they are often linked to reforms that affect living standards and purchasing power.
In this context, the same speaker warns that the current shift towards emergency funding may not reflect a fundamental change in the philosophy of these institutions, as much as it represents a phased adaptation to crises, noting that such transformations have been repeated historically in times of crises, before returning to traditional funding patterns.
It also raises broader questions about the absence of real alternatives to the existing global financial system, considering that talking about emerging international blocs does not necessarily mean leaving the same system, but rather may reproduce it using different tools.
For his part, economic expert Hossam Ayesh warned that this transformation is not devoid of political dimensions, as it reflects – in his estimation – the influence of the American presence within these institutions, which makes their policies closer to the economic orientations of the United States.
He added that the next stage may witness the imposition of new, more stringent conditions, making some countries “more closely linked” to the policies of these institutions, in light of a world characterized by increasing geopolitical fragmentation, as the economy becomes a tool within the international influence struggle, and not just a mechanism for achieving development.
