Recent cuts to official development assistance (ODA) from the US and EU, coupled with new and higher US tariffs, pose a significant threat to the global economy, putting low- and middle-income countries (L&MICs) at heightened risk of economic instability.

This timely research provides a critical analysis of the channels of economic vulnerabilities of 119 L&MICs to the negative impacts of these simultaneous shocks. L&MICs may be affected by both shocks through their direct exposure (e.g., the significance of aid and US market in their economies), indirect exposure (e.g., integration into global trade and financial markets) and resilience (e.g., the presence or absence of policy buffers, other compounding risks such as susceptibility to climate change effects) to potential impacts of the shocks. Among L&MICs, Burundi, South Sudan and Lebanon are identified as facing the greatest vulnerability.

The report provisionally estimates the potential impacts of aid cuts and US reciprocal tariffs. It finds that L&MICs may lose $39-billion in aid in 2025, and $89-billion worth of exports annually if US demand falls due to high tariffs – the combined effect reaching 0.7% of GDP. Among country groups, LICs will disproportionately suffer losses of up to 2% of GDP, mainly through aid cuts. Fragile and small island states such as the Marshall Islands and Micronesia may witness a significant economic blow worth more than 30% of their GDPs through aid cuts alone, while Vietnam and Cambodia may experience export reductions worth 4% - 5% of their GDPs due to higher US tariffs. Within countries, the export-oriented garment sector may suffer more from US tariffs, and vulnerable groups such as women and children, are likely to be disproportionately affected by both shocks.

The report also outlines strategic, actionable responses – from debt reprofiling and monetary policy preparedness to trade diversification – that can empower countries to mitigate these threats and build more resilient, sustainable economic futures.

Report by the Overseas Development Institute