The economic, fiscal and social impacts of the recent Middle East military escalation are expected to persist despite the June 18 Memorandum of Understanding between Iran and the United States. Since April, many developing economies have sought to shield households and businesses from rising energy costs through subsidies, price caps, tax reductions and demand-management measures. While these policies have softened the immediate impact of higher prices, they have come at a significant fiscal cost.

Without such interventions, poverty is projected to increase substantially. Under an adverse global growth scenario, an additional 17 million people could fall into poverty by upper-middle-income standards, rising to 45 million under a severe scenario. Global fossil fuel subsidies are projected to exceed $1 trillion in 2026 and could reach $1.43 trillion if oil prices rise to $110 per barrel.

The effects of the shock differ across regions. Remittances have helped cushion impacts in South Asia, fertilizer disruptions risk worsening food insecurity in Africa, and energy subsidies in East Asia have contained inflation while increasing fiscal exposure. These pressures come at a time when nearly half of the world’s poorest countries are already in or at high risk of debt distress. As debt service costs continue to rise and fiscal buffers are exhausted, many governments are being forced to divert resources away from health, education and infrastructure. Sustained multilateral support will be essential to help vulnerable countries manage the crisis and protect development gains.