IMF sees 1.3% contraction in Middle East, North Africa and Pakistan in 2026

The International Monetary Fund (IMF) has issued a warning regarding rising inflationary pressures in Pakistan due to the ongoing Middle East conflict. The fund predicts that the country may require tighter monetary policy if the regional crisis continues and inflation rates increase further. According to the IMF's latest report titled 'October 2026 Regional Economic Outlook: Middle East and Central Asia, Steering Through Uncertainty: Strengthening Resilience in Challenging Times', inflation has surged in Egypt and Pakistan, with the former experiencing a year-over-year rise to 14.5% and the latter to 11.1% in August.

This surge is attributed to higher food and energy-related costs, highlighting the vulnerability of energy-importing economies to potential supply and trade disruptions. The report recommends that countries, especially those with inflation rates already above targets and accommodative policy stances, remain prepared to tighten monetary policy, a sentiment most notably echoed by the IMF in relation to Pakistan and the Kyrgyz Republic.

Pakistan, the only country with a flexible exchange rate in the Middle East and North Africa (MENA) region, has already increased interest rates following the onset of the conflict. Looking ahead, the IMF forecasts a significant decrease in economic output in Pakistan this year as imports rise and remittances moderate. The organization anticipates a substantial drop in economic output this year due to the US-led Israeli war against Iran, followed by a rebound to 6.6% growth in 2027.

However, the IMF warns that further disruptions in energy production could exacerbate the economic outlook. The Middle East and Central Asia (MENAP) region's output is expected to contract by 1.3% due to the war's impact on energy production, shipping, tourism, trade, and confidence. Economic output is projected to recover sharply in 2027, but it is expected to remain below pre-war projections.

The IMF has cautioned that a prolonged conflict could exacerbate inflationary pressures and dampen economic activity. In the adverse scenario of continued hostilities through the second quarter of 2027, oil prices could average approximately $130 per barrel, roughly 45% higher than the report's baseline assumption. Under this scenario, the MENAP and Central Asia (CCA) oil exporters would suffer severe repercussions, with real GDP falling by about 3.8% and inflation rising by approximately 1¼ percentage points above the baseline in 2027.