In a dedicated analysis chapter, the IMF said the resurgence of armed conflicts after decades of relative calm is imposing high and persistent costs that extend well beyond the immediate human toll.
Economies at the centre of conflicts suffer sharp declines, while nearby countries and trading partners are also affected through wider economic impacts, it noted.
The IMF report follows the announcement that the United States and Iran agreed on Tuesday to a two-week ceasefire after nearly six weeks of intense fighting.
According to the report, economic output in countries affected by conflict typically drops by about three percent when war begins and continues declining, reaching cumulative losses of around seven percent within five years. This impact is deeper than in most financial crises or severe natural disasters.
The IMF highlighted the acute policy trade-offs faced by governments during wartime, including declining revenues alongside rising military expenditures, capital outflows, exchange rate pressures, reserve losses, and accelerating inflation.
Private consumption and investment contract significantly, exports fall more sharply than imports, and public debt tends to increase in the early years of conflict, it said.
Beyond the immediate shock, wars leave lasting scars on capital stock, employment, and productivity, while individuals exposed to conflict often suffer long-term health consequences. Although spillovers to other economies are generally smaller, they remain significant, particularly for neighbouring countries.
On recovery prospects, the IMF stressed that peace is essential but not sufficient. While output tends to rebound when conflicts subside, recoveries are often slow and incomplete, driven mainly by labour, with weak capital accumulation and productivity. In fragile settings where violence resumes, recovery can stall entirely.
Stronger post-conflict recoveries, the report noted, are typically supported by early debt restructuring, macroeconomic stabilization, and sustained international assistance, including financial aid and capacity development.
It said domestic reforms also play a critical role, particularly in rebuilding institutions, strengthening governance, fostering inclusion, and mitigating human capital losses.
Drawing on global conflict data since World War II, the IMF said wars have surged to levels not seen in decades, with more than 35 countries experiencing conflict on their territory in 2024, especially in the Middle East and sub-Saharan Africa.
The report also cited Ukraine as a case study, highlighting its reliance on emergency financing, fiscal reprioritization, exchange-rate controls, and a broader stabilization programme supported by external assistance.
The IMF affirmed that while post-conflict recovery is achievable, it is neither automatic nor swift, requiring sustained peace and coordinated policy action.
Defence spending boosts short-term growth but increases fiscal risks
In a related chapter, the IMF stated that global defence spending has risen sharply in recent years, with around half of countries increasing military budgets over the past five years amid heightened geopolitical conflicts.
The report found that large and sustained increases in defence spending have become more frequent, particularly in emerging market and developing economies. These increases typically last more than two and a half years and raise military spending by around 2.7 percent of GDP, with roughly two-thirds funded through larger budget deficits.
While defence buildups can support economic activity in the short term by boosting demand, particularly in defence-related sectors, they also generate inflationary pressures and increase medium-term vulnerabilities. On average, fiscal deficits widen by around 2.6 percent of GDP, while public debt surges by approximately seven percent within three years.
According to the report, wartime spending surges are even more costly, with public debt increasing by about 14 percentage points of GDP and social spending declining in real terms. Higher defence outlays can also weaken external balances, as countries often rely on increased imports of military equipment.
Although defence spending can act as a short-term stimulus, lifting output by more than three percent on average in peacetime episodes, the IMF warned of trade-offs. In some cases, increased military spending crowds out essential expenditures on health, education, and social protection.
The fund estimated that the overall economic impact of defence spending is close to one, meaning each unit of spending generates a similar amount of economic output, but this varies depending on how it is financed and how it is spent. Spending financed through deficits tends to produce stronger short-term growth but creates greater risks to long-term fiscal stability.
The report concluded that while higher defense spending can support growth and strengthen military capacity, it requires careful policy calibration to balance immediate economic support with long-term stability.
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