KATHMANDU, March 27: The Asian Development Bank (ADB) has cautioned that developing economies could face persistent impacts on economic growth and inflation due to the ongoing conflict in the Middle East.
Releasing research findings on Thursday, the multilateral lending institution noted that the conflict affects economies in Asia and the Pacific through higher energy prices, supply chain and trade disruptions, and tighter financial conditions. Tourism and remittances could also be impacted.
According to the ADB, the conflict in the Middle East could lower economic growth in developing Asia and the Pacific by up to 1.3 percentage points over 2026-2027 and raise inflation by 3.2 percentage points if energy market disruptions last more than a year.
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The ADB has outlined three risk scenarios, indicating that the effects on the region’s developing economies will depend largely on the duration of the disruptions. Under a short-lived conflict, energy price pressures would ease relatively quickly. “More prolonged disruptions would lead to larger and more persistent impacts on growth and inflation.”
Adverse effects on growth will be most severe for economies in developing Southeast Asia and the Pacific, with inflation rising highest in South Asian economies. The scenarios reflect the high degree of uncertainty around how the conflict and the associated disruptions will evolve, and should be treated with caution. In addition to higher energy prices, they account for broader supply chain disruptions and a global tightening of financial conditions.
In its four key policy responses, the ADB has recommended that the authorities concerned focus on stabilization rather than suppression of price signals. Allowing higher energy prices to pass through, at least in part, can encourage energy conservation, fuel switching, and investment in alternative energy sources. “Broad price controls or generalized subsidies can risk distorting incentives, delaying adjustment, and misallocating resources.”
In its recommendations, the ADB has advised governments to provide fiscal support, where needed, in a targeted and time-bound manner. Priority should be given to supporting vulnerable households and the most affected industries.
Central banks should focus on limiting excessive market volatility while keeping a close watch on inflation expectations. “Tightening policy too aggressively risks amplifying growth headwinds and exacerbating financial volatility.”
The ADB has advised governments to curb energy demand where feasible. Practical measures include temperature mandates to limit air-conditioning, cuts to non-essential lighting, peak-hour electricity-saving campaigns, and work-from-home or staggered schedules. Incentivizing public transport use and car-free days in urban areas on public holidays can also help reduce transport fuel use.
