World Financial institution says Center East financial system to contract 2.1% in 2026 on Iran battle
The World Bank on Tuesday lowered its 2026 forecast for the economies in the Middle East, saying the region’s overall GDP will contract by 2.1 per cent for this year.
The revision was the latest downgrade the World Bank has forecast for the region as the Iran war continues to constrain energy supplies. Economists had previously lowered their 2026 forecasts from 3.6 per cent in January to 2.1 per cent in April.
The seven-month conflict has affected a wide variety of sectors as the closure of the Strait of Hormuz initially choked off much of the region’s energy supplies. This also led to setbacks in tourism, ahe World Bank said in its latest Economic Update for the Middle East, North Africa, Afghanistan and Pakistan (Menaap)
“This conflict is very painful and it has concentrated the losses of the conflict in our region while the global economy and other regions are upgrading their forecasts, and we are downgrading significantly,” said Roberta Gatti, Menaap chief economist at the World Bank.
Economies in the Gulf Co-operation Council are projected to contract by an average of 4.3 per cent for 2026, down 5.7 percentage points from April, driven by lower export volumes due to the Strait of Hormuz’s closure, leading to significant losses in output and government revenue.
Economies in the UAE and Saudi Arabia are set to slow from 4.6 and 6.2 per cent in 2025 to minus 1.6 and minus 2.0 per cent in 2026, respectively, the World Bank said.
Qatar is forecast to have its weakest economic performance in five decades, slowing from 1.8 per cent growth in 2025 to minus 20.9 per cent this year after its average monthly gas production fell by about 67 per cent between March and July due to damage sustained at its sites.
Kuwait’s economy is forecast to contract by 14.6 per cent, a downwards revision of 8.2 percentage points from April.
The war has hit oil exporters particularly hard, with the closure of the Strait of Hormuz and attacks across the region. Oil production in the Gulf dropped from its prewar average of 26 million barrels a day to about 16 million in March, the World Bank said. The IMF’s PortWatch monitor showed just three tankers moved through the strait in the seven-day moving average ending September 27.
“It’s a volume story. It’s a quantity story for us. It’s a price story for the world,” Ms Gatti said.
Oman, which is less reliant on the Strait of Hormuz, is the only GCC member projected to experience positive growth this year, at 3.1 per cent.
Iraq’s growth prospects also faced a downwards revision of 3.8 percentage points since April with a negative growth rate of 12.4 per cent. Iraq, which is Opec’s second-largest producer, depends on oil for about 90 per cent of its government revenue. Iran’s economy also expected to shrink by 7.7 per cent in 2026.
The World Bank report works on the assumption that the Strait of Hormuz will gradually reopen beginning on December 31. Under this scenario, economic activity in 2027 for the UAE will rebound to 8 per cent, Saudi Arabia by 6.1 per cent, Qatar by 25 per cent, Kuwait by 20.5 per cent and the GCC as a whole by 8.6 per cent.
The UAE has embarked on a “Zero Hormuz” strategy to diversify its supply chains, while Saudi Arabia has relied on its East-West Pipeline to move oil to Yanbu Port on the Red Sea.
Oil prices have swung wildly since the onset of the war on February 28, with global benchmark Brent crude trading at about $118 a barrel in March and in May. Saudi Aramco chief Amin Nasser credited the East-West Pipeline for keeping oil prices at about $100 a barrel. Mr Nasser also warned it could take up to two years to refill global inventories that were reduced under emergency measures. He was speaking at an energy conference in London on Monday.
Oil importers, by contrast, are expected to fare better in what Ms Gatti described as a “reversal of fortunes” compared to the 2022 energy shock after Russia’s invasion of Ukraine.
The World Bank anticipates Egypt’s economic activity to pick up at a 5.1 per cent pace after growing by 4.4 per cent last year. It also raised its 2026 forecast for Morocco by 0.2 percentage points to 4.4 per cent, and 0.7 percentage points for Pakistan at 3.7 per cent.
Its projection for Jordan remained unchanged at 2.7 per cent, while Tunisia received a slight downgrade of 2.3 per cent growth, 0.2 percentage points lower than its April forecast.
Compounding effect
Ms Gatti said the Iran war is placing a compounding effect on economies already mired in conflict, harming recovery prospects and contributing to long-term economic pain.
Renewed hostilities between Israel and Hezbollah are reversing Lebanon’s economic recovery of 4.2 per cent growth in 2025 to a contraction of 6.4 per cent this year.
Forecasts for growth in Afghanistan and Yemen were also lowered to 3 per cent and 1 per cent respectively, while the World Bank anticipates Syria’s economy to pick up between 8 and 10 per cent this year.
The World Bank estimates GDP growth in the West Bank and Gaza will slow from 4.3 per cent in 2025 to 1.5 per cent this year, a downwards revision of 3 percentage points compared to April. The poverty rate in the area remains an estimated 41.9 per cent.
Show caption: Palestinian women prepare food inside a damaged building at …
It also said Gaza’s economy is still in a state of “near-total collapse” despite the October 2025 ceasefire, owing to flare-ups in tensions, continued restrictions and stalled reconstruction preventing recovery efforts.
“There were ongoing fragilities and now we see less humanitarian aid. We see a need to keep the attention,” Ms Gatti said.
She said the economic costs of fragility were being compounded by the conflict, with reduced humanitarian aid making it important to maintain attention and investment in affected countries to prevent the consequences from being felt by future generations.
AI productivity gains
The report also said that, despite the conflict, artificial intelligence remains a key avenue for opportunity in the region. Economists said it could boost the productivity of up to 20 per cent of the region’s jobs.
The World Bank has previously urged developing countries to quickly adopt AI or risk falling behind on the economic gains it can deliver. It said developing economies can avoid mistakes by adopting available tools, adapting them to local conditions and advancing towards frontier AI development.
“Some of the complements that are needed to fit the benefits of AI might not require money, but they require political will and vision. You need regulation and ethical regulation for AI to operate well,” Ms Gatti said.
Source: www.thenationalnews.com
