Iran war adds to a decade of shocks, with the global response still unclear

The Pacific is acutely exposed to the economic fallout of the Iran war, particularly its disruptions to global supply chains. Costs for oil imports, for example, are much higher for the Pacific than elsewhere in the world, typically equating to 5–15% of GDP due to high transport costs and a reliance on diesel generators for electricity.^* Only PNG is a net exporter of oil and gas, but weak linkages to the rest of the economy mean this provides limited benefit to the wider population. Most Pacific countries are also heavily exposed to higher global food prices and disruptions to world fertiliser supplies, with an estimated 60% of food imported.^* Strong El Niño conditions are also building, raising the risk of further economic and food security shocks.^* Geographical isolation also means fuel-cost spikes translate into sharp increases in local prices and reduced export competitiveness. Finally, the tourism-dependent economies of Cook Islands, Fiji, Palau, Samoa, Tonga, and Vanuatu are exposed to higher air-travel costs and a weaker global economy.

Pacific governments have limited capacity to cushion these economic shocks. Slower growth and rising spending pressures will strain public finances, while relatively underdeveloped social protection systems make it harder to provide targeted support to households facing higher prices, weaker job prospects, or food insecurity. As a result, more families may be pushed into poverty and forced to cut back on essential spending, including on healthcare and education.

Scenario projections by the ADB suggest the Iran war could reduce Pacific economic growth to 2.0–2.8% in 2026 and 1.1–2.5% in 2027, compared to 3.4% and 3.2% projected before the onset of the conflict.^* Yet the Iran war is only the latest in a series of major shocks to hit the region this decade. These include the Covid pandemic, the economic consequences of Russia’s invasion of Ukraine, elevated global inflation and interest rates, recent US tariffs and aid cuts, and major disasters such as Tonga’s 2022 volcanic eruption and Vanuatu’s 2024 earthquake.

A simple way to gauge the cumulative economic damage from these overlapping shocks is to compare GDP per person across the Pacific with pre-shock expectations.^* On this basis, Pacific income per person in 2025 was still 3% below its 2019 level, before the onset of the Covid pandemic. Prior to the Iran war, incomes were expected to return to pre-Covid levels by 2027. Those expectations could now be set back. Using the ADB growth scenarios, Pacific income per person could still be 2–4% below pre-Covid levels in 2027 (Figure 14). This would seal a “lost decade” of Pacific development, with negative implications for household incomes, poverty, jobs, and government budgets.^* In total, Pacific income per person would be 10–12% lower than expected before the pandemic.

At the time of writing, the scale of the international financial response is unclear, in part because the duration and severity of the economic shocks hitting the Pacific remain uncertain. Early indications suggest assistance will mainly be in the form of budget-support packages, echoing the response to the global financial crisis and the Covid-19 pandemic (Figure 15). Australia, for instance, has announced targeted budget-support packages for Fiji, Solomon Islands, and Samoa to help absorb fuel-price shocks, alongside a contribution channelled through the World Bank.^* It has also used diplomatic channels to press major Asian fuel suppliers to keep supply flowing to the Pacific.^* Beyond Australia, however, signs of dedicated crisis measures from other traditional donors have so far been muted. The ADB and World Bank have both announced large-scale financing responses to the crisis, though the Pacific's share is unknown.^* Whether the overall international response will result in additional, rather than reprioritised, financing support to the Pacific remains to be seen.