The International Monetary Fund has sharply downgraded its 2026 growth forecast for the Middle East and North Africa (MENA) region to 1.1%, citing severe disruptions to oil and gas exports caused by the ongoing war.
In its latest World Economic Outlook, the IMF revised its January projection of 3.9% growth, warning that major energy producers—including Iran, Iraq, and Qatar—are likely to bear the brunt of the slowdown.
Pakistan Outlook
The IMF also lowered Pakistan’s growth forecast to 3.5% for the next fiscal year, while raising its inflation projection to 8.4%. Although the Fund does not anticipate a major immediate shock this year, it identified Pakistan as highly exposed to the Middle East crisis.
The country imports nearly 90% of its energy from the region, leaving it vulnerable to supply disruptions and rising prices. At the same time, Pakistan has assumed a diplomatic role, seeking to mediate between the United States and Iran and hosting delegations from both sides.
Regional Impact Deepens
The conflict has severely damaged energy infrastructure and effectively shut down the Strait of Hormuz, a critical global oil transit route.
- Iran’s economy is now expected to contract by 6.1%, a sharp downgrade from earlier projections
- Qatar’s GDP could shrink by 8.6% due to damage to its LNG facilities
- Iraq’s economy is forecast to decline by 6.8%
According to the IMF, “commodity exporters directly affected by the conflict” are facing steep downward revisions due to reduced production and exports.
Countries most exposed—such as Bahrain, Iran, Iraq, Kuwait, and Qatar—are expected to suffer the most severe impacts. In contrast, economies like Saudi Arabia and the United Arab Emirates, which benefit from alternative export routes or more diversified economic structures, are likely to fare better.
- Saudi Arabia is projected to grow by 3.1%, supported by pipeline access to the Red Sea
- The UAE’s growth is also forecast at 3.1%, though down from 5.8% last year
- Bahrain and Kuwait may slip into mild contraction
Hope for Recovery — With Risks
The IMF expects regional growth to rebound in 2027, assuming energy production and transport systems return to normal in the coming months. However, it cautioned that this outlook could deteriorate if the conflict persists or infrastructure damage worsens.
Global Ripple Effects
The crisis is also weighing on energy-importing economies. Egypt, for example, saw its growth forecast cut to 4.2%, reflecting rising import costs.
Since February:
- Global equity markets have declined by 8%
- Sovereign bond yields have risen sharply
- Inflation expectations have strengthened
The IMF warned that financial markets remain fragile, noting that a prolonged conflict could tighten global financial conditions and heighten the risk of instability.
Financial System Risks
The Fund highlighted several potential pressure points:
- Losses on sovereign bonds could weaken banking systems
- Governments may face reduced capacity to support financial institutions
- Highly leveraged investors—such as hedge funds—could face forced asset sales
Hedge fund exposure to interest rate derivatives and sovereign bonds has surged to more than $18 trillion by 2025, amplifying systemic risks.
“Vulnerabilities only get triggered when you have a shock, and the war in the Middle East is that shock,” said Tobias Adrian, director of the IMF’s Monetary and Capital Markets Department.
Private Credit and AI Concerns
The IMF also flagged risks in the rapidly expanding $3.5 trillion private credit market, where rising defaults could spill over into broader corporate credit conditions.
Major firms—including Blue Owl Capital, Ares Management, Apollo Global, Blackstone, and KKR—have already restricted fund withdrawals amid growing investor concerns.
Additionally, the Fund warned that prolonged instability could slow investment in artificial intelligence, a key driver of recent global growth, potentially affecting companies dependent on this ecosystem.
Policy Recommendations
To mitigate risks, the IMF urged policymakers to:
- Prepare liquidity and funding support mechanisms
- Maintain a focus on inflation control through monetary policy
- Stabilize public debt through fiscal consolidation
- Target support toward vulnerable populations affected by rising prices
While current market adjustments remain orderly, the IMF cautioned that risks are increasingly skewed to the downside, particularly if the conflict endures.
Muhammad Luqman is Associate Editor at Views News Now. He writes on wide-ranging issues including economy, South Asia, the Middle East, agriculture, economy and innovation. Luqman has worked some of the leading news organizations and won acclaim for his original and research-based works.
