Sanoj Weeratunge, owner of a tour company in Colombo, Sri Lanka, had hoped this year would mark a recovery from the multiple crises his country has faced. However, the outbreak of war in Iran, located 2,700 miles away, coupled with a 35% increase in fuel prices by the government, caused business to decline by nearly a third. He expressed frustration over the setback after six difficult years of trying to regain pre-pandemic levels.
Countries like Sri Lanka, Egypt, and Pakistan, all lower-income nations already burdened by economic challenges, are now grappling with renewed difficulties as the war drives up the cost of energy imports. Despite a fragile ceasefire in the Gulf region, Colombo has reinstated fuel subsidies and secured a temporary relaxation of its International Monetary Fund (IMF) bailout conditions to ease financial pressure.
Similar efforts are expected from other affected nations during the upcoming IMF and World Bank spring meetings in Washington. IMF Managing Director Kristalina Georgieva indicated that the institution is prepared to provide emergency funding ranging from $20 billion to $50 billion in response to the crisis.
Former Pakistan central bank governor Reza Baqir, now an advisor on sovereign debt issues, highlighted the multifaceted impact on vulnerable countries. The 40% surge in oil prices has sharply increased import costs, while remittances from expatriates in the Gulf are projected to decline, further straining economies. Widening current account deficits and depreciating currencies—such as Egypt’s pound, which has fallen over 10% since the conflict began—make payments for oil, food, fertilizer, and debt servicing more expensive in dollar terms.
To manage these pressures, countries must rely on foreign currency reserves, additional borrowing, or cutbacks on other imports. Baqir emphasized the urgent need for a clear commitment from institutions like the IMF to support these nations promptly.
Pakistan’s foreign exchange reserves stood at $16.4 billion gross at the end of March, insufficient to cover three months of essential imports. JPMorgan analysts suggest the net figure is negative once the central bank’s foreign currency liabilities are accounted for. The government recently increased petrol prices for the second time, closed schools for half of March, and imposed a four-day workweek for government departments, which are now prohibited from purchasing new furniture or air conditioners.
Adding to Islamabad’s financial concerns is the upcoming repayment of a $3.5 billion loan from the United Arab Emirates. Failure to refinance this debt could exacerbate fiscal strain amid Pakistan’s ongoing $7 billion IMF program, former IMF official Jeff Franks. He noted that Pakistan and Egypt will likely emphasize the severity of this economic shock during meetings with IMF leadership next week.
Rising prices have also fueled public dissatisfaction in Pakistan and other affected countries. Karachi-based food delivery driver Maviq Hussain described the difficulty of managing daily expenses amid soaring costs. Egypt faces additional challenges, including a significant blow to its $19 billion tourism sector and potential disruptions to the Suez Canal. The country’s heavy debt burden, expected to consume 60% of revenues this year, is compounded by nearly $30 billion in payments due, exceeding half of its foreign exchange reserves.
Since the war’s onset, Egypt has seen an $8 billion outflow of foreign investment, Moody’s. The IMF has commended Cairo’s decision to allow its currency to absorb shocks, but the doubling of Egypt’s energy import bill suggests it will remain a focal point of international financial discussions.
Franks stressed the importance of flexibility in IMF conditionality to prevent the failure of these vulnerable economies. On the ground, ordinary citizens like Kelum Dissanayaka, a 37-year-old Sri Lankan father of three who works as a ride-hailing and delivery driver, face harsh realities. Due to rising costs and fuel rationing, he has missed his tuk-tuk lease payments for two consecutive months, underscoring the daily hardships endured by many.
