Middle East Energy Shock Could Leave Developing Economies Deeper in Debt

A UNDP policy brief warns that the economic and social effects of military escalation in the Middle East are expected to persist despite a memorandum of understanding between Iran and the United States. Governments have cushioned households and firms through subsidies, tax cuts and price controls, but the fiscal cost is rising sharply, especially for developing economies already facing debt pressure.

The military escalation in the Middle East may have entered a less volatile phase, but its economic aftershocks are still moving through developing economies. A UNDP policy brief, titled Military Escalation in the Middle East: Cushioning the Global Shock, warns that the conflict's energy, fiscal and social costs are expected to endure despite a memorandum of understanding between Iran and the United States.

Governments have responded with fuel subsidies, tax cuts, price caps, strategic stock releases, emergency procurement, export restrictions, demand-management measures and fuel switching. These interventions have helped reduce the pass-through from international oil and gas prices to domestic retail prices, but UNDP warns that the cushioning is uneven and costly, with low- and middle-income countries having far less fiscal and financial room than advanced economies and large emerging markets.

The Crisis Is Cooling, but the Costs Are Not

The immediate social damage has been partly contained because governments absorbed some of the shock. Without intervention, higher fuel and food prices could have pushed many more households into hardship almost immediately. But cushioning the shock does not make it disappear. It shifts part of the burden from consumers to public budgets, state-owned enterprises and national balance sheets. For wealthier countries, that may be painful but manageable. For poorer and debt-stressed economies, it can mean deeper deficits, rising borrowing needs, weaker foreign-exchange buffers and less room for health, education and long-term development spending.

UNDP's report warns that temporary relief can become a fiscal trap if broad subsidies and price controls are allowed to linger. The policy question is no longer whether governments should protect people from sudden price shocks, but whether they can do so without weakening the very development systems meant to protect households over the long term.

Poverty May Have Been Delayed, Not Defeated

The shock has not yet produced the scale of welfare deterioration that might have followed such a large energy disruption. Domestic measures have helped contain part of the impact, but downside risks remain if energy markets tighten again, financial conditions worsen or global growth slows further.

UNDP's stress-test scenarios show the scale of the risk. Relative to the IMF baseline, an additional 6 million to 7.5 million people could fall into extreme poverty under adverse and severe downside scenarios. At the upper-middle-income poverty line, the potential reversal is much larger, with between 17 million and 45 million additional people at risk of falling below the threshold.

The poorest households are not the only ones exposed. Many families in developing economies live just above middle-income poverty thresholds, where a slowdown in earnings, remittances or job creation can quickly erase fragile gains. The danger is not only a sudden rise in extreme poverty, but a broader slide in economic security among households that had only recently moved above vulnerability lines.

Remittances and Fertiliser Are the Next Fault Lines

The Middle East shock is spreading through different regions in different ways. In South Asia, remittances from Gulf economies remain a crucial buffer. UNDP estimates that India, Pakistan and Bangladesh receive around USD 80 billion annually in GCC-linked remittance flows. Even a modest 5% to 10% disruption would mean USD 4 billion to USD 8 billion in reduced household and foreign-exchange inflows.

For millions of families, these flows support consumption, education, healthcare, debt repayment and housing. But remittances are not automatically resilient. If Gulf labour demand weakens, wage payments are delayed, migrant living costs rise, payment systems are disrupted or return migration increases, remittances could shift from being a shock absorber to a transmission channel.

In Africa, the sharper risk lies in fertiliser and food systems. UNDP warns that higher fertiliser prices and disrupted planting seasons could turn today's input shock into tomorrow's harvest shock. Fertiliser prices are projected to rise by 31% in 2026, driven by a 60% increase in urea prices, while Africa imports roughly 80% of its fertiliser requirements.

Planting decisions are still being made in parts of West, Central and East Africa. Delays in procurement, shipping or delivery could reduce fertiliser use, weaken yields and tighten food supplies months after energy prices stabilize, making fertiliser access a strategic food-security issue, not just an agricultural input concern.

The Fiscal Shield Could Become the Next Crisis

Energy subsidies are now the biggest trade-off. They protect households and firms in the short term, but they are expensive, often poorly targeted and difficult to unwind. UNDP estimates that global fossil fuel subsidies are on track to reach about USD 1.1 trillion in 2026 and could rise to USD 1.43 trillion in a severe scenario where average oil prices reach USD 110 per barrel. It would represent an increase of USD 410 billion to USD 740 billion from 2025.

For developing economies, this is colliding with a debt problem that was already severe. Close to half of the poorest countries are either "in" or at "high risk" of debt distress, while nearly 60% of developing economies with sovereign credit ratings are rated "highly speculative or worse."

Debt service is also eating into public revenue. The median developing economy is estimated to spend 9.53% of total government revenue on interest payments in 2026, double the share of a decade ago and the highest level in 25 years. Over 2024–2026, 55 developing economies are estimated to spend more than 10% of revenue on interest payments.

The next phase will test whether governments can move from broad emergency cushioning to targeted protection. UNDP argues that fiscal support should be temporary and focused on vulnerable populations and critical sectors, while broad-based subsidies should be avoided. Yet only about 25% of government price-support measures introduced in response to the 2026 energy crisis have so far been targeted.

The Middle East shock is now a development-finance test, a food-security warning and a poverty-risk signal. If oil prices stabilize, remittances hold, fertiliser reaches farmers and subsidies are gradually redirected toward targeted support, the worst outcomes may still be avoided. If not, the crisis could leave a deeper legacy: weaker budgets, higher debt, delayed development spending and millions more people pushed back toward economic insecurity.