IMF projects 1.3% contraction amid regional war fallout

The International Monetary Fund (IMF) has warned that the US-Israeli war against Iran could trigger a sharp

The International Monetary Fund (IMF) has warned that the US-Israeli war against Iran could trigger a sharp economic downturn across Pakistan, the Middle East and North Africa in 2026, with regional economic output projected to contract by 1.3 per cent before rebounding strongly in 2027.

In its regional economic outlook released in Dubai on Thursday, the IMF said the conflict had disrupted energy production, shipping, tourism and trade while weakening investor and consumer confidence. It warned that further interruptions to energy supplies and major trade routes could deepen the economic fallout.

The fund projected a significant recovery in 2027, forecasting growth of 6.6 per cent for the affected economies. However, it cautioned that economic output in many countries would remain below levels projected before the war.

The IMF said the impact of the conflict varied across the region. Oil-exporting economies faced greater pressure because of disruptions to energy production and shipping, while oil-importing countries showed greater resilience.

For Pakistan, the outlook raises concerns over the potential impact of higher energy costs, trade disruptions and weaker economic confidence. As an energy-importing country, Pakistan remains vulnerable to fluctuations in international oil prices and disruptions to global energy supplies.

The IMF’s baseline forecast assumes that the conflict will ease in early 2027 and that international trade will gradually return to normal during the year. However, the fund stressed that the outlook remained subject to exceptionally high uncertainty.

It identified further damage to energy production and disruptions along shipping routes as major risks that could push energy prices higher. Tighter international financial conditions could also place additional pressure on economies already facing inflationary and fiscal challenges.

The fund noted that oil-importing economies had benefited from resilient domestic demand, remittances, tourism receipts, favourable financial conditions and government measures aimed at protecting consumers from rising commodity prices.

Elsewhere, the IMF projected that economic growth in the Caucasus and Central Asia would moderate to more sustainable levels, reaching 5.2 per cent in 2026 and 5 per cent in 2027.

The fund urged governments across the region to prioritise price stability while maintaining sustainable public finances and protecting central bank independence. It also called for structural reforms to improve productivity, strengthen economic resilience and generate employment.

The latest projections underline the risks that prolonged geopolitical tensions pose to economic recovery, particularly for countries exposed to volatile energy markets and international trade disruptions.