IMF Forecasts 1.3% Economic Contraction Across Middle East, North Africa and Pakistan

The International Monetary Fund (IMF) has projected a 1.3 percent economic contraction across the Middle East, North Africa, and Pakistan in 2026, as tensions between the US and Israel and Iran disrupt energy production, shipping, tourism, and trade. The outlook, released in Dubai on Thursday, anticipates a robust rebound in 2027, with a projected 6.6 percent growth in regional output.

The conflict has had a more pronounced impact on oil-exporting countries due to disruptions in energy production and shipping routes. Conversely, oil-importing economies have demonstrated greater resilience, buoyed by domestic demand, remittances, tourism receipts, favorable financial conditions, and policy measures aimed at protecting consumers from rising commodity prices.

Despite the expected recovery, the IMF predicts that the region's economy will still lag behind pre-war projections. This assessment is based on the assumption that the conflict will ease in early 2027 and that trade will gradually return to normal throughout the year. However, the IMF cautions that there remains a significant degree of uncertainty, with potential disruptions to energy production and trade routes capable of driving up energy prices and exacerbating the economic strain.

The IMF also flags the potential impact of investor reassessments of artificial intelligence-driven productivity gains, which could influence financial conditions. Higher interest rates, coupled with concerns over inflation and government finances, may further complicate the region's economic outlook.

In its recommendations, the IMF emphasizes the importance of price stability, sustainable public finances, and central bank independence. Additionally, the organization advocates for structural reforms aimed at boosting productivity and job creation, as governments navigate the economic fallout of the ongoing conflict.