IMF Warns of Sharp Economic Contraction in Region Due to War

The International Monetary Fund (IMF) issued a stark warning on Thursday, identifying the ongoing war in the Middle East and its disruption of energy production, shipping routes, and vital infrastructure as the primary threat to economies in the Middle East and Central Asia. The IMF projects a 1.3% contraction for the Middle East, North Africa, and Pakistan region in 2026, a significant downturn from the 3.3% growth recorded last year.

Speaking at a press conference in Bangkok on the sidelines of the IMF and World Bank annual meetings, Jihad Azour, the IMF's Director for the Middle East and Central Asia Department, stated that the war has caused a varied economic shock across the region, with countries directly affected by military operations facing severe pressure. Azour emphasized that economic forecasts hinge on the swift restoration of energy production and trade to normal levels, as well as the ability of nations to maintain macroeconomic stability.

While initial disruptions from the war, including the closure of the Strait of Hormuz, were mitigated by pre-war energy surpluses, alternative shipping routes, demand adjustments, and significant inventory drawdowns, Azour cautioned that these factors offer no lasting protection. He warned that dwindling inventories and reduced spare production capacity increase the likelihood of greater price hikes if unrest resumes. "These reserve resources provided some time, but they are limited," Azour stated, adding that "inventories have decreased and spare production capacity has shrunk, and renewed disturbances could lead to much larger price adjustments."

Despite the projected sharp contraction for the current year, the IMF anticipates a recovery for the Middle East, North Africa, and Pakistan region, with growth expected to reach 6.6% in 2027. However, the pace of this recovery will vary significantly between countries. Oil-exporting nations directly impacted by the war are expected to experience a substantial contraction in 2026, followed by a sharp rebound in 2027 as energy production normalizes, though their economic output will likely remain below pre-war medium-term projections. Conversely, oil-importing economies in the region have demonstrated greater resilience and are expected to maintain this strength.

In the Caucasus and Central Asia, the IMF forecasts a slowdown in economic growth from 6.2% in 2025 to 5.2% this year, and then to 5% in 2027. Inflation is expected to continue declining from its high levels, as these economies have relatively better navigated the war's repercussions. Azour urged governments and policymakers to prioritize price stability, rebuild financial reserves, and enhance economic resilience against future shocks.

Separately, U.S. Treasury Secretary Scott Bessent called on the IMF during the annual meetings to intensify efforts against what he termed "competition-distorting policies," implicitly targeting China. Bessent stated that policymakers worldwide are grappling with how to preserve market-based systems amidst policies from some economies that distort competition and harm employment. He asserted that the IMF was established to prevent such policies and their negative consequences, warning that the institution risks marginalizing its role if it does not speak out on this critical issue. Bessent also urged the World Bank to focus on essential development and manufacturing sectors, including reliable and affordable energy, and called for the removal of restrictions on financing oil and gas exploration and extraction projects.