Iraq Faces Double-Digit Economic Contraction as IMF Downgrades Regional Outlook

ERBIL (Kurdistan24) — Iraq is among the Middle Eastern countries facing a projected double-digit economic contraction in 2026, as the International Monetary Fund (IMF) sharply downgraded its regional growth outlook amid the ongoing war, disruptions to oil production, and prolonged restrictions on shipping through the Strait of Hormuz.

In its latest World Economic Outlook report, the IMF projected the economy of the Middle East and Central Asia would contract by 0.3 percent in 2026, reversing its forecast of 1.9 percent growth made six months earlier.

The fund attributed the deterioration partly to “a longer closure of the Strait of Hormuz, compared with the baseline assumptions in the April” report, while projecting a significant rebound in 2027 if the waterway reopens and regional production and trade normalize.

The IMF identified Iraq, Kuwait, Qatar, and Bahrain as among the countries most severely affected by disruptions to shipping and production.

All four sustained damage to oil installations during the fighting and are “projected to experience double-digit contractions of their economies in 2026, followed by double-digit expansions in 2027 as production, exports, and logistics normalise,” the fund said.

For Iraq, the forecast highlights the country's vulnerability to disruptions in the regional energy trade and damage to oil infrastructure. As a major oil-producing economy, Iraq is particularly exposed to interruptions in crude exports, logistical constraints, and instability affecting energy facilities and shipping routes.

The anticipated recovery in 2027 will depend heavily on the restoration of production, the resumption of exports, and the normalization of regional trade.

The economic deterioration comes as the war, which began in late February with US-Israeli strikes on Iran, has intensified tensions around the Strait of Hormuz, one of the world's most strategically important energy shipping routes.

Tehran has sought to impose control over the waterway, repeatedly attacking ships transiting without its authorization. The United States has responded by imposing a counter-blockade on Iranian ports and increasingly escorting friendly vessels through the strait.

The resulting disruption has placed Gulf economies under mounting pressure, particularly those whose energy exports depend on secure maritime routes.

The IMF's projections suggest that the effects of the conflict will extend beyond immediate losses in oil production and shipping, weighing heavily on overall economic activity in 2026.

Saudi Arabia, the world's largest crude oil exporter, is forecast to see its gross domestic product (GDP) contract by 3.3 percent this year before rebounding to 7.9 percent growth in 2027.

The forecast was issued before a series of deadly attacks on Riyadh's airport began last week, adding further uncertainty to the kingdom's economic outlook.

Despite the projected contraction, the IMF considers Saudi Arabia among the region's least affected economies, pointing to “an economy with more diversified export routes.”

The kingdom has used its East-West oil pipeline to transport crude to its Red Sea coast, allowing it to bypass the Strait of Hormuz and reduce its reliance on the waterway.

However, the alternative route has also faced security threats. The pipeline was temporarily shut down in September after being struck in attacks blamed on Iran-backed groups in Iraq.

Meanwhile, Yemen's Houthi movement, an ally of Tehran, has repeatedly targeted Saudi oil infrastructure and tankers in the Red Sea since the country's civil war reignited in July.

The United Arab Emirates is projected to experience a 3.9 percent economic contraction in 2026, despite having coastal access on both sides of the Strait of Hormuz.

Oman is expected to be the only Gulf country to maintain positive economic growth this year, with the IMF forecasting an expansion of 2.4 percent.

Iran's economy is also expected to contract sharply, with GDP projected to decline by 7.6 percent in 2026 as the country faces the combined effects of the war, the US blockade, and continuing American sanctions.

Other Arab economies are expected to remain “relatively resilient” in the face of energy and food price shocks, according to the IMF.

However, the broader regional downgrade underscores the conflict's potential to intensify inflationary pressures, disrupt supply chains, and undermine economic stability well beyond the countries directly affected by damage to energy infrastructure.

The IMF's projected recovery in 2027 rests largely on the reopening of the Strait of Hormuz and the normalization of production, exports, and logistics.

For Iraq and other heavily affected oil-producing economies, the pace of recovery will depend on how quickly energy operations and trade routes can return to normal amid continuing regional security risks.