Pacific Island and low-income Asian economies are facing downward growth revisions as energy shocks, rising fiscal pressures and uneven benefits from the artificial intelligence boom widen the gap between stronger and more vulnerable economies, the International Monetary Fund (IMF) says.
IMF Director of the Asia and Pacific Department, Krishna Srinivasan said the region’s economic resilience had helped sustain growth despite energy and trade shocks, but the benefits were uneven and risks to the outlook remained tilted to the downside.
Presenting the IMF’s latest Regional Economic Outlook for Asia and the Pacific at a virtual press conference from Bangkok on the sidelines of the IMF Annual Meeting, Srinivasan said regional growth was projected to slow from five percent in 2025 to 4.8 percent in 2026 and 4.4 percent in 2027.
Despite the slowdown, Asia was expected to contribute 68 percent of global economic growth, reflecting stronger-than-expected performance in several major economies.
However, Srinivasan said the outlook varied significantly across countries, with India, South Korea and some ASEAN economies benefiting from stronger technology-related investment and exports, while economies not directly benefiting from the technology boom faced weaker growth prospects.
“Low-income countries in the region, such as Cambodia and Bangladesh, and some Pacific island countries, have had sizable downward revisions,” he said.
Srinivasan identified three major forces shaping the region’s economic outlook: the energy shock that began in February, the technology boom that accelerated from the middle of 2025, and trade disruptions following tariff increases in 2025.
He said Asia’s heavy reliance on imported oil and gas, particularly from the Middle East, had exposed economies to higher energy costs and supply disruptions.
However, some countries had responded by diversifying energy import sources, reducing demand, increasing the use of alternative energy and drawing down inventories.
Government measures to contain inflation, support incomes and limit supply disruptions had also helped cushion the impact.
At the same time, strong demand for artificial intelligence infrastructure, semiconductors and data centres had boosted investment, exports and equity markets in several major Asian economies.
But Srinivasan warned that the resilience should not be taken for granted.
“There are limits to running down inventories, and fiscal costs of policy measures are increasing,” he said.
The IMF also warned that risks included renewed escalation of tensions in the Middle East, a reassessment of the profitability and productivity gains expected from AI, rising government borrowing costs and a potentially severe El Niño cycle.
Srinivasan said higher sea temperatures suggested the El Niño cycle could be exceptional, potentially adding to inflation and fiscal pressures across the region.
For Pacific Island Countries (PICs), these risks compound existing vulnerabilities, including high import dependence, exposure to climate-related disasters and limited fiscal buffers to respond to economic shocks.
On fiscal policy, Srinivasan said public debt across the region remained above pre-pandemic levels, while governments faced increasingly limited room to respond to further shocks.
Although Pacific Island and low-income countries generally had lower debt ratios than some other economies, their fiscal buffers were thinning.
“The combination of delayed consolidation, high debt and/or thinning financial buffers, and rising global yields calls for fiscal prudence supported by strong medium-term fiscal frameworks,” he said.
He said governments should provide targeted assistance to people affected by economic shocks rather than attempt to control prices across the economy.
“The idea would be to protect people and not prices,” Srinivasan said.
He also called for structural reforms to address youth unemployment and skills mismatches, support workers adapting to AI, strengthen social protection, improve energy security and deepen regional integration.
The IMF’s report also examined the impact of AI on employment, finding that employer demand for workers in jobs more exposed to AI had fallen by 10 percent.
However, Srinivasan said the decline had stabilised despite continuing advances in AI capabilities, suggesting the technology was changing the nature of work rather than simply eliminating jobs.
The findings point to the need for investment in skills and training so workers can adapt to changing labour market demands.
The report also argues that stronger social safety nets can support household consumption and living standards if designed to remain fiscally sustainable.
Srinivasan said reducing domestic policy barriers to trade in services could also generate long-term economic gains across Asia.
For Pacific economies, the outlook underscores the need to strengthen fiscal management, build resilience against energy and climate shocks, and ensure limited public resources are directed towards those most affected by rising costs.
