IMF Forecasts 1.3% Economic Contraction for Pakistan, Middle East and North Africa in 2026 as Iran War Rages

The International Monetary Fund has delivered a grim warning for Pakistan and its neighbours: the war against Iran will shrink economic output across the Middle East, North Africa and Pakistan by 1.3 per cent this year, though growth is expected to rebound to 6.6 per cent in 2027.

Main News Report

The IMF on Thursday released its regional economic outlook for Pakistan, the Middle East and North Africa in Dubai, forecasting a sharp drop in economic output in 2026 as a result of the US-Israeli-led war against Iran. The Fund said the region's output was expected to contract by 1.3 per cent because of the war's impact on energy production, shipping, tourism, trade and confidence.

According to Reuters's coverage of the forecast, economic output would increase sharply in 2027, but would generally stay below pre-war projections. The IMF's baseline assumption is that the conflict will abate in early 2027 and that trade will gradually normalise during the year — though it stressed the outlook remained clouded by "exceptionally high uncertainty".

• 1.3% — forecast contraction in regional output in 2026
• 6.6% — expected growth rebound in 2027, but still below pre-war projections
• Oil exporters hit hardest — directly affected by disruptions to energy production and shipping
• Oil importers more resilient — domestic demand supported by remittances, tourism and prompt policy responses

Background Context

The forecast lands at a moment of rapidly escalating regional conflict. Houthi attacks on Saudi oil infrastructure, including the Shaybah oilfield, have rattled energy markets, while strikes and retaliatory threats around the Strait of Hormuz have put shipping routes under severe strain — developments PakInsight Hub has been tracking as they unfold.

Pakistan, as an oil-importing economy, sits in the group the IMF considers more resilient: countries where domestic demand is supported by remittance inflows, tourism and favourable financial conditions, alongside policy responses that shield consumers from higher commodity prices. The government cut petrol prices by Rs2.71 per litre from today, a move that directly cushions households against the kind of energy-price shocks the IMF warns about.

The warning also follows the IMF's separate pressure on Islamabad over fiscal policy: the Fund recently flagged Pakistan's unfair tax system, in which the salaried class pays Rs629 billion while real estate and traders largely escape.

Reactions and Statements

The IMF said the war's impact had been "substantial, but uneven", with oil-exporting economies suffering most from disruptions to energy production and shipping. "The main risks derive from further disruption to energy production and trade routes that could drive energy prices higher," the Fund said in a statement outlining its key messages, adding that external financial conditions could also tighten.

The Fund cautioned that global investors could reassess AI-driven productivity gains and push interest rates higher amid inflation and fiscal concerns. It urged policymakers to prioritise price stability, preserve fiscal sustainability, maintain central bank independence and enact structural reforms to boost productivity and create jobs — the same mantra it delivered at last week's annual meetings.

For Pakistan, the resilience noted by the IMF — remittances, tourism and prompt policy action — will be tested if the conflict drags on. With Washington ordering diplomats out of Saudi Arabia as Houthi strikes intensify, the risk of further energy-price spikes is anything but theoretical.

Why This News Matters

For ordinary Pakistanis, this forecast is about the price of everything. A wider regional contraction means slower trade, dearer imports and pressure on the rupee — while any spike in global oil prices feeds directly into petrol bills, transport fares and food prices. The 6.6 per cent rebound the IMF projects for 2027 offers hope, but the warning that output will stay below pre-war projections signals lasting damage.

The report also matters politically: Islamabad is under twin pressure — the IMF's demands for tax reform at home and a regional war it cannot control but must cushion against. How the government balances protecting consumers with fiscal discipline will shape the coming year's economic debate.

Future Developments

The IMF's baseline hinges on the conflict abating in early 2027 and trade normalising gradually. If instead energy production or shipping routes face further disruption, the outlook worsens — and Pakistan's import bill with it. Watch for the State Bank's next policy signals, the government's winter fuel-pricing decisions and any fresh IMF review of Pakistan's programme in the coming weeks.

Sources

• Dawn: "IMF sees 1.3pc contraction in Pakistan this year due to Iran war"
• Reuters: "IMF sees 1.3% contraction in Middle East, North Africa and Pakistan in 2026"

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