The report raised its projection from Egypt’s real GDP growth during the current FY2025/2026 to 4.6 percent from 4.3 percent projected in April, while downgrading the country’s growth in the upcoming FY2026/2027 to four percent from 4.8 percent projected in April.
As per the report, the conflict has inflicted severe humanitarian and economic costs across the region, triggering a slowdown in economic activity and intensifying inflationary pressures through higher energy prices and rising shipping costs. Although ceasefire agreements have periodically eased fears of further escalation, uncertainty surrounding the conflict remains elevated.
Among hydrocarbon importers, including Egypt, growth is projected to weaken in 2026 due to higher hydrocarbon prices, disruptions to shipping and tourism, and weaker remittance inflows. Primary fiscal surpluses are expected to narrow as several economies increase subsidies and social protection spending to mitigate the effects of higher prices and supply shortages.
However, growth in hydrocarbon-importing economies is forecast to recover in 2027 and 2028, supported by lower energy prices and improvements in shipping, tourism, and remittance flows. Inflationary pressures are expected to ease, paving the way for monetary policy loosening. Fiscal consolidation efforts are projected to widen primary surpluses, particularly in Egypt, Pakistan, and Tunisia, although job creation is expected to remain subdued due to weak labour market conditions, structural rigidities, and limited female labour force participation.
Across the wider MNA region, economic growth is forecast to slow to 1.6 percent in 2026 from 4 percent in 2025, reflecting the adverse impact of the regional conflict. The projection marks a downgrade of 2.7 percentage points from estimates released in January. Excluding forecasts for Iran because of exceptionally high uncertainty, regional growth is expected to rebound to an average of 4.5 percent during 2027-2028, assuming conflict-related disruptions ease by the end of this year.
Hydrocarbon-exporting economies have been among the hardest hit. The conflict has compounded already weakened economic activity in Iran amid intensified sanctions and heightened social unrest. Restrictions on shipping through the Strait of Hormuz and damage to energy infrastructure have disrupted oil and natural gas production in Iraq and Gulf Cooperation Council countries. Some economies have also continued to face tight financial conditions and weak non-hydrocarbon activity.
Growth in hydrocarbon exporters in the Middle East is projected to slow to 0.3 percent in 2026, representing a downgrade of 4.3 percentage points from January forecasts. The slowdown reflects declining hydrocarbon production, disruptions to trade and foreign investment, and weaker services activity, including tourism and aviation.
Inflation challenge
Inflation is expected to accelerate in these economies, partly due to higher food import prices and increased shipping costs. Although higher hydrocarbon prices could support revenues, the fiscal benefits remain uncertain as spending pressures rise, particularly on defence.
The economic impact is expected to vary according to the degree of exposure to hostilities, the scale of damage sustained, and the strength of policy buffers.
Iraq, Kuwait, and Qatar are projected to experience sharp slowdowns accompanied by worsening fiscal and current account balances as hydrocarbon revenues decline and military spending rises in some cases. Oman is expected to see a more moderate deceleration because its major ports are located outside the Strait of Hormuz, while Saudi Arabia's slowdown is projected to be less severe due to its ability to reroute oil exports through the East-West pipeline.
Growth among hydrocarbon exporters is forecast to strengthen in 2027 and 2028, supported by recovering hydrocarbon production, infrastructure investment, and continued expansion in non-hydrocarbon sectors. As trade normalizes and cost pressures ease, inflation is expected to decline. Current account surpluses are projected to narrow due to lower energy prices, while fiscal balances are expected to improve as hydrocarbon revenues grow faster than expenditure.
Meanwhile, Algeria and Libya, which are not directly involved in the conflict, have seen their 2026 growth forecasts upgraded since January, largely because of higher energy prices. Improved hydrocarbon revenues are expected to strengthen fiscal and external balances in 2026 before weaker energy prices reverse some of those gains in 2027 and 2028.
The conflict has also intensified challenges in fragile and conflict-affected economies, including Afghanistan, Lebanon, and Yemen. In Lebanon and Syria, exports and tourism are expected to suffer further setbacks while food insecurity worsens.
Fragile recovery in Gaza
In Gaza, the October ceasefire created a fragile opportunity for economic stabilization after unprecedented losses. However, the strip continues to face near-total destruction of physical infrastructure and extensive reconstruction needs, while economic activity remains well below pre-October 2023 levels amid severe labour market disruption. This is largely due to systemic Israeli violations of the ceasefire framework, killing nearly 1,000 Palestinians, injuring thousands of others, and creating an aid bottleneck that has made recovery impossible.
The outlook for Yemen remains weak, reflecting ongoing domestic unrest, institutional fragmentation, and the broader impact of the Middle East conflict through higher food and energy prices and worsening food insecurity. In Afghanistan, economic prospects will depend largely on the labour market's ability to absorb returning migrants.
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