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

The International Monetary Fund has forecast a 1.3% contraction in economic output across the Middle East, North Africa and Pakistan this year, attributing the drop to the impact of the US-Israeli-led war against Iran on energy production, shipping, tourism, trade and confidence. The fund expects a sharp rebound to 6.6% growth in 2027, though it cautioned that output in these economies would generally remain below pre-war projections.

The IMF, which released its regional outlook in Dubai on Thursday, said the war's impact had been substantial but uneven. Oil-exporting economies were hit harder because they were directly exposed to disruptions in energy production and shipping, while oil importers proved more resilient, with domestic demand supported by remittances and tourism flows, favourable financial conditions and prompt policy responses that shielded consumers from higher commodity prices.

Its baseline assumes the conflict will abate in early 2027 and that trade will gradually normalise during the year. Even so, the fund described the outlook as clouded by "exceptionally high uncertainty", warning that the main risks derive from further disruption to energy production and trade routes that could drive energy prices higher. External financial conditions could also tighten if investors reassess AI-driven productivity gains and interest rates rise further amid heightened concerns about inflation and fiscal positions, it said.

For Pakistan, an oil importer, the forecast places the economy inside a regional bloc whose fortunes are being shaped by a conflict it is not party to, through energy prices, shipping costs and remittance and tourism flows. The IMF said growth in the Caucasus and Central Asia was moderating toward a more sustainable pace, forecasting 5.2% output growth in 2026 and 5% in 2027.

The fund repeated the message it delivered at last week's annual meetings, urging policymakers to prioritise price stability while preserving fiscal sustainability, maintaining central bank independence and enacting structural reforms to boost productivity and create jobs.