The Middle East’s economic outlook has sharply deteriorated following the outbreak of the Iran war, with the International Monetary Fund warning that the region faces one of its steepest growth downgrades in years and rising risks of further decline if the conflict persists.
Presenting the fund's latest Regional Economic Outlook for the Middle East and Central Asia, Jihad Azour, director of the IMF’s regional department, said the scale of the revision reflects the severity of the shock.
“This is among the largest six-month downgrades … since the global financial crisis,” Mr Azour said on Thursday, as the fund outlined how earlier economic momentum has been reversed.
The report projects growth across the Middle East, North Africa, Afghanistan and Pakistan region will slow to 1.4 per cent this year, down 2.3 percentage points from previous forecasts.
Uncertain outlook
During a discussion around the report, IMF officials warned that the outlook could worsen further as the conflict continues and energy prices remain elevated.
Roberto Cardarelli, an assistant director at the IMF's Middle East and Central Asia Department, said the assumptions underpinning the fund’s baseline scenario are increasingly being challenged by developments on the ground.
“If I were to bet any amount of money, I would bet on them showing worse number” Mr Cardarelli said.
This echoes the IMF chief's warning the day before, with Kristalina Georgieva saying "we must brace for tough times".
At the centre of the IMF’s outlook is a growing gap between its reference scenario, which assumes oil prices will average about $82 a barrel this year and the easing of disruptions by mid-year, and a more adverse scenario driven by prolonged conflict and higher prices.
During the briefing, The National asked whether the region was already moving into that downside case, noting that oil prices remain above $90 a barrel and infrastructure damage continues.
Mr Cardarelli said the IMF’s projections were finalised in the middle of last month, based on expectations that the conflict would be short-lived and that energy markets would begin to normalise by the middle of the year.
“Right now, oil prices are a little bit below $95 … we are kind of in between the reference and the others,” he said. “If you use futures prices … you get a little bit closer to the adverse scenario.”
He added that the longer the conflict continues, the more likely it is that outcomes will shift in a negative direction.
“Every day that goes by that the conflict remains and its energy prices remains higher … we’re going to get closer to an average scenario,” he said.
Countries most exposed
The report highlights how the disruption of traffic in the Strait of Hormuz, through which about one fifth of global oil supply passes, has sent shockwaves through global energy markets. Oil prices surged above $100 a barrel at one stage, while gas, fertiliser and shipping costs also rose sharply.
Mr Azour said the effects extend far beyond energy markets, affecting trade, logistics and food prices.
“The shock is broad, deep and still unfolding,” he said.
The impact across the region is highly uneven.
Gulf oil exporters directly affected by the conflict face the steepest downturns, with several economies expected to contract this year. Qatar has seen one of the largest downward revisions globally, reflecting damage to infrastructure and disruption to liquefied natural gas exports.
By contrast, Oman, whose sea access lies outside the Strait of Hormuz, is expected to see only a modest slowdown and could benefit from higher oil prices.
Oil-importing economies including Egypt, Jordan and Pakistan are facing a different set of pressures, as higher energy costs combine with weaker remittances and tighter financial conditions.
Mr Cardarelli said the extent of the fiscal impact will depend on government policy choices, particularly the use of subsidies.
“The more the subsidies, the more it’s going to be a fiscal story,” he said, highlighting how support measures can shift the burden between households and public finances.
Low-income and fragile states are the most exposed. In countries such as Yemen and Sudan, where food accounts for up to half of imports, rising prices risk worsening food insecurity and social pressures.
The IMF is urging governments to adopt what it describes as disciplined and agile policy responses, balancing support for vulnerable households with the need to preserve fiscal stability.
“Governments should allow automatic stabilisers to operate and deploy targeted, temporary support,” Mr Azour said, while cautioning against expanding broad fuel subsidies.
Central banks may also need to maintain or tighten policy to contain inflation, even as growth slows.
The outlook remains highly uncertain. A prolonged conflict could push oil prices higher for longer, dragging global growth down to 2.6 per cent and driving inflation above 5 per cent, according to the IMF.
However, Mr Cardarelli said there is still a potential upside if the conflict is resolved quickly.
“There’s also an upside, if you end soon, in a comprehensive way,” he said, noting that energy production could recover relatively quickly in that scenario.
