IMF Warns of Narrowing Defenses Against Iran War's Economic Fallout

A senior International Monetary Fund (IMF) official stated on Thursday that while pre-war economic buffers have helped mitigate the impact of the Iran war, the region's economic outlook remains highly uncertain due to the threat of further disruptions. The prolonged closure of the Strait of Hormuz, a vital artery for one-fifth of global energy supplies before the conflict, has unsettled markets, alongside Iranian attacks on vessels and key sites in neighboring countries. Although Brent crude prices have risen 47% above pre-war levels, they have not reached the feared $200-a-barrel mark. The IMF has maintained its global growth projection at 3.1% for 2026 and slightly increased its 2027 forecast to 3.4%. Higher oil prices are partly responsible for the IMF's upward revision of its 2026 inflation forecast to 4.7%.

"The impact was more contained than the scale initially suggested," Jihad Azour, the fund's regional director, informed reporters during the IMF and World Bank annual meetings in Thailand. He noted that the UAE and Saudi Arabia have been exploring alternative supply routes, and International Energy Agency (IEA) members agreed in March to release up to 425 million barrels from reserve stocks. Mr. Azour also pointed out that increased output from non-Gulf producers and adjustments in energy demand have helped lessen the war's economic blow. "These buffers bought time but they are finite. Inventories are lower, spare capacity is tighter, and renewed disruption could generate much larger price adjustments," he cautioned.

Iranian attacks in the Strait of Hormuz have persisted this week, with at least 12 tankers reportedly attacked in and around the waterway in the past week, according to the UK Maritime Trade Operations agency. On Wednesday, Iran-backed Houthi rebels targeted Saudi Aramco's headquarters, though authorities reported no casualties. Separately, a cargo ship sank in the Strait of Hormuz after striking a naval mine, as stated by Iran's Islamic Revolutionary Guard Corps Navy. The IEA reported that crude oil exports from Gulf producers, notably Saudi Arabia, surged by 4.4 million barrels a day in September, reaching over 75% of pre-war levels. However, the agency warned that Iran's escalating attacks on Saudi Arabia and tanker traffic risk undermining these gains.

On Wednesday, Brent crude saw a 0.36% increase to $106.1 a barrel, while West Texas Intermediate rose 1.08% to $95.16 a barrel. The IMF's 2026 forecasts indicate a significant divergence between oil exporters and importers, with the latter benefiting from remittances, tourism, and government support. Regional economies are expected to experience varied trends due to the war. The IMF projects economic contractions of 11.3% for Bahrain, 16% for Iraq, 16.7% for Kuwait, 15.6% for Qatar, 3.3% for Saudi Arabia, and 3.9% for the UAE this year. Mr. Azour anticipates a rebound in growth in 2027, but output will likely remain below the medium-term trajectory projected before the conflict.

He identified a prolonged conflict as the most significant risk to the region's uncertain outlook, warning that further disruptions could weaken economic activity, exacerbate inflationary pressures, and strain fiscal positions across the region. Mr. Azour also highlighted that tighter financial conditions could increase vulnerabilities in economies with substantial sovereign financing needs. He urged regional economies to prioritize price stability, replenish fiscal buffers, and enhance their capacity to withstand future shocks. The IMF is scheduled to release its Middle East outlook next week in Dubai.

In related remarks, UAE central bank governor Khaled Balama noted on Wednesday that the region's experiences underscore the importance of rapid adaptation to changing circumstances and the strengthening of fiscal buffers for resilience, according to the state news agency Wam. Speaking at a meeting of central bankers and finance ministers alongside the IMF and World Bank gathering in Bangkok, Mr. Balama also stated that the UAE economy has demonstrated resilience, supported by robust fiscal buffers, low public debt, and substantial sovereign assets, which have bolstered investor and market confidence. He further emphasized the need to strengthen international cooperation frameworks amidst geopolitical tensions.

Saudi Finance Minister Mohammed Al Jadaan was scheduled to hold a media conference with IMF managing director Kristalina Georgieva on Saturday. The International Monetary Finance Committee (IMFC), the fund's policy advisory panel, announced this week that Mr. Al Jadaan's term as IMFC chair has been extended by another year beyond its current expiration on January 3, 2027.