World Bank warns US-Iran conflict could slash global growth to 1.3% as inflation looms

Escalating tensions between the US and Iran could reignite inflation, drive interest rates higher, and drag global economic growth down to 1.3% from last year’s 2.9%, World Bank Chief Economist Indermit Gill stated.

Gill, who is set to retire at the end of August, noted that due to high uncertainty surrounding the war in the Middle East, the bank had modeled three different scenarios in its June economic forecast. However, the worst-case scenario—defined by the conflict lasting six months or longer—is already close to materializing, he said.

Under this scenario, global headline inflation is projected to reach 4.5%.

Gill stated that prolonged conflict and damage to regional oil infrastructure would further deepen food insecurity by disrupting shipments of fertilizer, helium, and sulfur required for agriculture, triggering a series of secondary effects that could include rising interest rates.

This represents the first statement by a senior World Bank official since tensions between Washington and Tehran escalated sharply following the collapse of an April ceasefire agreement, which had previously fueled hopes that the impact of the conflict would be less severe.

Gill noted that poorer nations, which have yet to fully recover from the COVID-19 pandemic, could face greater food insecurity. Meanwhile, countries with high debt levels will be hit by rising borrowing costs as interest rates climb, restricting spending on education, health, and other vital services.

“My personal view is that we may be perhaps a few months away from this, because we do not yet see policy interest rates beginning to rise,” the economist said.

“Once inflation accelerates, heavily indebted countries could be just months away from facing severe difficulties in meeting their debt service payments,” Gill added.

Signs of strain have already begun to emerge. According to a source briefed on the matter, some cash-strapped nations have requested increases to existing loans from the International Monetary Fund (IMF), while Pakistan requested a $10 billion foreign exchange stabilization fund from the US this week.

The World Bank’s June forecasts revealed that 40% of low- and middle-income countries are either already in debt distress or at high risk of falling into it.

Gill noted that this percentage corresponds to 32 countries but warned that this number could rise rapidly if interest rates climb. He added that even if other countries do not default on their debts, their long-term growth prospects could still decline.

“This is like a slow-moving train wreck,” Gill said, pointing out that countries that do pay their debts will be forced to deplete resources from education, healthcare, and other areas necessary to support future growth.

According to World Bank data, the average debt-to-GDP ratio for emerging and developing countries stood at approximately 74% in 2025. This is significantly higher than the pre-pandemic levels of around 50-55% recorded in late 2019. For low-income countries, this ratio rose from approximately 40% to 67%.

Gill stated that some countries will require debt relief on a case-by-case basis.

He said that the world’s largest economies—the US, China, and India—have remained relatively insulated from the impact of the war, with each drawing on different sources of resilience. However, developing nations have faced far greater challenges.

As debt vulnerabilities have mounted, the G-20 major economies have made some progress on reforms to the debt restructuring process, though improvements have been slow to materialize.

Nevertheless, Gill noted that there is some good news for developing nations. A new World Bank analysis on artificial intelligence readiness shows that these countries could benefit from the emerging technology and the productivity gains it promises. Gill pointed out that while approximately 10% of people in poor countries are likely to be negatively affected by AI, that figure stands at about 30-40% in rich nations.

Gill continued:

“Therefore, for these countries, AI could be a major gain. Developing countries should be much more optimistic about the impact of AI compared to developed nations.”

Gill added that AI could potentially help return growth to levels not seen in decades, though this is unlikely to happen within the current decade.