IMF forecasts 1.3% contraction in Middle East, North Africa and Pakistan as Iran war bites

The IMF on Thursday forecast a sharp drop in economic output in the Middle East, North Africa and Pakistan this year due to the US-Israeli-led war against Iran, followed by a rebound to 6.6 per cent growth in 2027, while warning that further energy production disruptions could worsen the outlook.

The International Monetary Fund said the region's output was expected to contract by 1.3 per cent as a result of the war's impact on energy production, shipping, tourism, trade and confidence. Economic output would increase sharply in 2027, but output in those economies would generally stay below pre-war projections.

The war's impact had been substantial, but uneven, with oil-exporting economies directly affected by disruptions to energy production and shipping hit harder, and oil importers proving to be more resilient, the IMF said in its regional outlook released Thursday in Dubai.

The IMF said its baseline assumed that the conflict would abate in early 2027 and that trade would gradually normalize during the year, but it said the outlook remained clouded by "exceptionally high uncertainty."

"The main risks derive from further disruption to energy production and trade routes that could drive energy prices higher," the IMF said in a statement outlining its key messages, noting external financial conditions could also tighten.

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.

Oil importers had proven more resilient, with domestic demand supported by remittances and tourism flows, favorable financial conditions, and prompt policy responses that safeguard consumers from higher commodity prices, the IMF said.

Growth in the Caucasus and Central Asia was moderating toward a more sustainable pace, the IMF said, forecasting a 5.2 per cent rise in economic output in 2026 and 5 per cent in 2027.

The IMF underscored the mantra it delivered during last week's annual meetings, urging policymakers to prioritize maintaining price stability, while preserving fiscal sustainability, maintaining central bank independence and enacting structural reforms to boost productivity and create jobs.