How the Middle East Escalation Is Forcing Developing Countries Into a Fossil Fuel Subsidy Trap—and What the UNDP Says Can Be Done

For broader global subsidy figures, the IMF’s 2025 update (published June 2026) estimated explicit (fiscal) fossil fuel subsidies at $725 billion globally in 2024 (0.6% of GDP), with implicit subsidies—undercharging for environmental externalities—far larger at $6.7 trillion .

How Developing Countries Are Affected

Developing countries are being hit through multiple channels simultaneously, with the most severe impacts concentrated in import-dependent economies.

Massive Poverty Increases

The conflict could push more than 30 million people into poverty worldwide, with developing nations hit hardest . In the Arab States region alone, up to 4 million people could fall into poverty, reversing more than a year of economic growth . In the Asia-Pacific, an additional 8.8 million people are at risk . The global figure of 30 million people at risk spans 162 countries, according to UNDP modeling .

GDP Losses Across Regions

• Arab States region: GDP losses estimated at $120–194 billion, or 3.7–6.0% of collective GDP . This exceeds the cumulative regional GDP growth achieved in 2025 .
• Asia-Pacific region: Potential output losses of up to $299 billion, equivalent to 0.3–0.8% of regional GDP .
• Africa: A projected loss of 0.2 percentage points on output growth for 2026 if the conflict exceeds six months, with existing structural vulnerabilities compounding the damage .

The World Socialist Web Site, reporting on the UNDP Asia-Pacific findings, noted that higher fuel, freight, and input costs are “diminishing household purchasing power, raising food insecurity, straining public budgets, and weakening livelihoods” in underdeveloped Asian countries .

Soaring Energy and Freight Costs

Rising fuel and freight costs are the most immediate pressure point for import-dependent developing economies . This cascades into higher food prices, tighter household budgets, and squeezed small businesses. The IMF, analyzing the broader global impact, described the shock as “global, yet asymmetric,” with energy importers more exposed than exporters and poorer countries more exposed than richer ones .

Debt and Fiscal Pressures

Developing countries are spending hundreds of billions of dollars on emergency energy subsidies, leaving less money for schools, hospitals, and climate action . The UNDP’s June 2026 report explicitly frames these interventions as a crisis of fiscal crowding-out . African economies already facing tight fiscal and financial conditions are seeing added stress from disrupted trade routes, volatile energy and fertilizer markets, and exchange-rate pressures . South Asian countries are among the worst hit due to high energy import dependence . The UN News service reported that for developing countries, higher energy prices have tightened external financing conditions and weakened fiscal positions, particularly where policy space was already limited .

The Triple Shock

The UNDP describes a “triple shock” of energy price spikes, food price inflation, and economic growth slowdown hitting developing regions simultaneously . This combination is especially damaging because it compounds existing vulnerabilities: the Financing for Sustainable Development Report 2026 notes that with just four years left until the 2030 deadline for the Sustainable Development Goals, progress has stalled or reversed following the shocks of COVID-19, rising geopolitical tensions, and growing climate impacts .

Proposed Solutions

The UNDP, along with related UN bodies and academic partners, proposes a set of interconnected policy responses.

Targeted and Temporary Cash Transfers

The UNDP’s preferred policy response for fiscally constrained countries is replacing broad, untargeted fuel subsidies with targeted and temporary cash transfers . This approach aims to protect the most vulnerable households without locking in long-term fiscal commitments or distorting energy markets.

Fossil Fuel Subsidy Reform

The UNDP presents fossil fuel subsidy reform as a viable avenue for governments to create fiscal space, which can be channeled into green investment, correcting environmental externalities, and enhancing social protection . The approach is grounded in time-bound roadmaps, steps to close existing loopholes, and support for lower-income countries . A 2024 article in npj Climate Action (co-authored with UNDP perspectives) emphasizes that international commitments should require countries to submit their own time-bound phase-out roadmaps, with financial and technical support for developing nations .

Redirecting Subsidies Toward Clean Energy

The UNDP has published practical roadmaps for shifting fossil fuel subsidies toward low-emission public transportation and other green investments . This includes a step-by-step framework for building strong policy and institutional frameworks, adopting gradual phase-out strategies, and creating transparent, devolved implementation processes .

International Cooperation and Support for Lower-Income Countries

The UNDP and its partners stress that subsidy reform cannot succeed without international cooperation. The npj Climate Action article argues that countries should submit national roadmaps that define terms like “subsidies” and “(in)efficient,” and that these roadmaps should cover all fossil fuel subsidies across the economy . Lower-income countries will need financial and technical support to navigate the transition.

Debt Relief and Expanded Fiscal Space

While specific debt-restructuring proposals are not detailed in the reviewed UNDP reports, the need for debt relief and expanded fiscal space for the most vulnerable countries is a recurring theme. The UN News service, reporting on developing countries banding together amid the crisis, noted that the cost of paying back debts has been soaring for developing countries over the last several years . Addressing this debt burden is seen as a prerequisite for any sustainable recovery.

Key Caveat

The UNDP’s focus in these reports has been on the consequences of the crisis—poverty, GDP loss, fiscal strain—and the policy case for reforming subsidies, not on forecasting global subsidy levels for 2026. For precise 2026 subsidy data, IMF or IEA publications would be more direct sources. The IMF’s 2025 update (published 2026) provides the most recent comprehensive global estimate, with explicit subsidies at $725 billion in 2024 .