The International Monetary Fund has forecast a sharp economic contraction across the Middle East, North Africa and Pakistan this year, blaming the US-Israeli-led war against Iran for battering energy production, shipping and trade. The Fund expects the region’s output to shrink by 1.3 per cent in 2026 before rebounding to 6.6 per cent growth in 2027.
The IMF Pakistan contraction 2026 outlook was released on Thursday in Dubai as part of the Fund’s regional economic review. It warns that the war’s impact has been “substantial, but uneven”, with oil-exporting economies hit hardest by disruptions to energy production and shipping, while oil importers have proved more resilient.
IMF Pakistan contraction 2026: why the region is shrinking
The IMF said the 1.3 per cent contraction reflects the war’s damage across five channels: energy production, shipping, tourism, trade and business confidence. Oil exporters suffered directly from disrupted energy production and shipping routes, while oil-importing economies held up better.
Pakistan sits firmly in that second group. The Fund noted that oil importers had shown resilience, with domestic demand supported by remittances and tourism flows, favourable financial conditions, and prompt policy responses that shield consumers from higher commodity prices.
The forecast carries an important qualifier. Even with the projected 6.6 per cent rebound in 2027, output in these economies would “generally stay below pre-war projections”, the IMF said. In other words, the region is not expected to fully recover the growth it lost to the conflict.
What this means for Pakistan’s economy
For Pakistan, the forecast lands in an already difficult year. The World Bank has projected that inflation will rise to 8.2 per cent in the next fiscal year, up from an estimated 7.1 per cent this year, driven by energy and food costs. The IMF’s warning that further disruption to energy production and trade routes could push energy prices higher will sharpen those concerns in Islamabad.
There is some cushion. Pakistan’s heavy reliance on remittances, which the IMF cites as a stabilising force for oil importers, gives domestic demand a buffer that many regional peers lack. The government has also just cut petrol prices by Rs5.16 per litre, a move that will help households if it holds.
The honest caveat is the uncertainty. The IMF described the outlook as clouded by “exceptionally high uncertainty”, and its baseline assumes the conflict abates in early 2027 with trade gradually normalising. If the war drags on, or if shipping lanes face further disruption, the numbers will worsen.
Risks and the Fund’s advice to policymakers
The IMF listed two main risks to its outlook. First, further disruption to energy production and trade routes could drive energy prices higher, hitting importers like Pakistan through fuel costs and inflation. Second, external financial conditions could tighten if investors reassess AI-driven productivity gains and interest rates rise further amid worries about inflation and fiscal positions.
The Fund’s advice repeated the mantra from last week’s annual meetings: policymakers should prioritise price stability, preserve fiscal sustainability, maintain central bank independence, and push through structural reforms to lift productivity and create jobs.
The IMF also offered a regional comparison. Growth in the Caucasus and Central Asia is moderating toward a more sustainable pace, with output forecast to rise 5.2 per cent in 2026 and 5 per cent in 2027, well ahead of the war-hit MENA region.
Pakistan’s own engagement with the Fund continues separately. The IMF recently urged Pakistan to move beyond narrow fiscal targets toward deeper tax reform, a reminder that Islamabad’s domestic reform agenda runs in parallel with the regional shock.
Frequently asked questions
What did the IMF forecast for Pakistan in 2026?
The IMF forecast a 1.3 per cent contraction in output across the Middle East, North Africa and Pakistan in 2026, caused by the US-Israeli-led war against Iran’s impact on energy, shipping, tourism, trade and confidence.
When does the IMF expect a rebound?
The Fund expects 6.6 per cent growth in 2027, assuming the conflict abates early in the year and trade gradually normalises, though output would still sit below pre-war projections.
Why are oil importers like Pakistan more resilient?
The IMF says oil importers have held up better because of remittances and tourism flows supporting domestic demand, favourable financial conditions, and policy responses that shield consumers from higher commodity prices.
What are the main risks to the forecast?
Further disruption to energy production and trade routes pushing energy prices higher, and tighter external financial conditions if investors rethink AI-driven productivity gains amid inflation and fiscal worries.
