The Assessment and Its Architects
The International Monetary Fund has delivered a verdict on the economic future of the Middle East, warning that the energy rich Gulf states will recover from the current war but will not return to their pre war growth trajectory in the medium term. The assessment, delivered by Jihad Azour, director of the IMF’s Middle East and Central Asia department, came as officials and experts gathered in Bangkok this week for the IMF World Bank annual meetings to confront a global economy battered by stubbornly high energy costs and mounting uncertainties. “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 and also will disrupt a certain number of infrastructure, and will require additional spending in order to increase resilience,” Azour told reporters.
The IMF’s projections, released on Tuesday, shows that the Middle East and Central Asia region is expected to contract by 0.3 percent in 2026, a dramatic downward revision of 2.2 percentage points from earlier forecasts. The broader Middle East, North Africa and Pakistan grouping is forecast to shrink by 1.3 percent this year, following growth of 3.3 percent in 2025.
Why the IMF Reached This Conclusion
The fund’s bleak assessment rests on a straightforward but devastating chain of causation. The war, which began with US-Israeli strikes on Iran on February 28, has effectively closed the Strait of Hormuz, a waterway that previously carried around 20 million barrels of oil per day, roughly a quarter of global maritime oil trade. Iran’s blockade of the strait, a response to what Tehran regards as illegal aggression, has choked off the primary export route for Gulf hydrocarbons. The IMF notes that infrastructure damage, shipping restrictions, and elevated freight and insurance costs have curtailed exports and weighed heavily on tourism and transport. Refinery outages and damage in the Gulf have removed an estimated 20 percent of internationally traded refined oil product supply, leaving prices 70 to 95 percent above pre war levels.
Higher oil prices, paradoxically, have not been enough to offset the lost production and exports. Oil exporters in the IMF’s broader Middle East and Central Asia grouping are expected to shrink 3.8 percent this year before growing 7.4 percent in 2027. The fund’s projections show Kuwait’s economy contracting by a staggering 16.7 percent in 2026, Iraq by 16.0 percent, Qatar by 15.6 percent, and Bahrain by 11.3 percent. Saudi Arabia, the region’s largest economy, faces a rare recession with a projected contraction of 3.3 percent, while the UAE is expected to shrink by 3.9 percent. Iran itself, the target of the US-Israeli campaign, is forecast to contract by 7.6 percent with inflation reaching 78.6 percent, a figure that reflects the punishing weight of economic warfare waged against its people.
The Saudi Paradox and the Limits of Resilience
Saudi Arabia’s projected recession is particularly significant given its historical ability to weather regional storms through robust energy exports. The kingdom entered the war with pre-war surpluses and has benefited from alternative oil export routes, including the East-West pipeline that diverts crude away from the blockaded Strait of Hormuz. Yet even these buffers have proven insufficient. The IMF warned that non oil activity is also slowing in some Gulf economies, a sign that the shock is spilling beyond the hydrocarbon sector into the broader fabric of economic life.
Azour noted that while government policies across the region have been able to soften the impact on the poorest, “policy buffers are narrowing” and the outlook “remains subject to exceptionally high uncertainty”. The fund’s recommendations, prioritizing price stabilization, rebuilding fiscal buffers, and strengthening capacity to withstand future shocks read as an acknowledgment that the region’s traditional coping mechanisms are reaching their limits. The IMF projects a sharp rebound in 2027, with growth of 6.3 percent for the Middle East and Central Asia and 7.9 percent for Saudi Arabia, but this recovery is contingent on the war ending and energy production and trade normalizing, conditions that remain far from assured.
How It Could Get Worse
The IMF was explicit that the risks are tilted to the downside. “The most important risk is a more prolonged conflict,” Azour said. In a downside scenario in which hostilities continue through June 2027, the fund projects oil prices reaching $130 per barrel in late 2026 and early 2027, a development that would inflict further damage on the global economy while offering little relief to Gulf exporters whose infrastructure and shipping routes remain under threat. The escalation between Saudi Arabia and Yemen’s Houthi movement has added a dangerous new dimension to the crisis. Houthi missile strikes have targeted Saudi airports, energy facilities, and even the headquarters of Saudi Aramco, the kingdom’s state oil giant. IMF Managing Director Kristalina Georgieva warned on Wednesday that these attacks could affect people “everywhere,” acknowledging that the conflict’s spillovers extend far beyond the region.
Crude oil prices have surged since the Strait of Hormuz was blockaded, and diesel and gasoline face particularly severe pressures. The IMF’s projections for oil importers in the region are more resilient, 4.7 percent growth in both 2026 and 2027, but this resilience depends on remittances and tourism inflows continuing, which could be jeopardized if the conflict widens further. Egypt’s growth forecast has been upgraded on the back of recovering Suez Canal activity, yet the fund warns that the delayed impact of the Gulf conflict will weigh on activity in 2027. For the people of Iran, the economic picture is catastrophic. The 78.6 percent inflation rate projected for 2026 means that Iranians are already paying the price of a war they did not start, with ordinary families struggling to afford food and medicine as the US squeeze on their economy intensifies.
A Scarred Future
The IMF’s assessment is a warning about the long term consequences of a war that has already reshaped the economic geography of the Middle East. The “scarring impact” Azour describes, the destruction of infrastructure, the disruption of trade networks, the erosion of investor confidence will not be undone when the guns fall silent. Rebuilding will require additional spending to increase resilience, but the fiscal space to make those investments has been eroded by months of lost revenue. The fund’s policy recommendations are sound: targeted cash transfers rather than broad subsidies, tighter monetary policy to contain inflation, and greater trade diversification to reduce reliance on vulnerable maritime chokepoints. Yet these measures cannot substitute for a political resolution to the conflict.
The war has demonstrated that even the wealthiest Gulf economies are not immune to the consequences of military confrontation. For Iran, which has been the target of a campaign of economic warfare that has cut off its oil exports and frozen its assets, the future is even more uncertain. The Islamic Republic has shown remarkable resilience, maintaining its blockade of the Strait of Hormuz and continuing to launch strikes against US and Saudi assets. But the economic cost is immense, and the Iranian people are bearing it.