IMF sees Middle East economy shrinking 1.3% on Iran war

The International Monetary Fund said on Thursday, October 22, that economic output in the Middle East, North Africa and Pakistan will shrink 1.3% this year because of the US-Israeli-led war against Iran. It expects growth to rebound to 6.6% in 2027, according to Reuters. The IMF released the October Regional Economic Outlook in Dubai. The fund said the war has hurt the region through energy production, shipping, tourism, trade and confidence. Even with the rebound, output in these economies would generally stay below pre-war projections.charlotteobserver.com+1

Recovery depends on the war ending

The baseline forecast assumes the conflict eases in early 2027 and trade gradually returns to normal over the year. The IMF still warned of "exceptionally high uncertainty". "The main risks derive from further disruption to energy production and trade routes that could drive energy prices higher," the fund said. It added that financial conditions could tighten if investors rethink expected productivity gains from AI.charlotteobserver.com

The 2026 forecast is about 3 percentage points lower than the IMF's April projection, said Jihad Azour, director of the fund's Middle East and Central Asia Department. The region grew 3.3% in 2025. "We will not go back to the pre-war trajectory in the medium term because this shock will have a scarring impact on various sectors," Azour told reporters.english.aawsat.com+2

Oil exporters hit hardest

The war's effects have been uneven. Oil exporters exposed to disruptions in energy production and shipping have suffered the most. Oil importers have held up better, helped by remittances, tourism, favorable financial conditions and government steps to shield consumers from higher prices. Azour expects a V-shaped recovery in Gulf Cooperation Council economies. He said growth in oil-importing countries should pick up in 2026 and 2027, and that the GCC's current account surplus will shrink from about 5% of GDP in 2025 to 1.3% in 2026.english.aawsat.com+1

Country forecasts from the IMF's World Economic Outlook earlier this month show how deep the damage goes. Saudi Arabia's economy is expected to shrink 3.3% this year before growing 7.9% in 2027. The fund expects a 3.9% contraction in the United Arab Emirates and a 7.6% drop in Iran's GDP. It projects double-digit contractions for Iraq, Kuwait, Qatar and Bahrain, whose oil facilities were damaged in the fighting. Oman is the only Gulf state expected to grow in 2026.omanobserver.om

The fighting has spread beyond Iran to Saudi Arabia and Yemen, and maritime energy traffic is still disrupted. Azour said earlier that the outlook "depends critically on how quickly energy production and trade normalize".b360nepal.com+1