Gulf Recession Forecast Puts Pakistan's Remittance Lifeline at Risk

IMF sees the Middle East, North Africa and Pakistan region shrinking in 2026 as the Iran war cripples Gulf energy exports. Pakistan, an oil importer leaning on Gulf paychecks, faces dearer fuel and inflation near 10%

LAHORE: The International Monetary Fund (IMF) expects the economies of the Middle East, North Africa, Afghanistan and Pakistan to shrink 1.3% this year, with Gulf economies sliding into a steep recession as the war involving Iran chokes oil and gas exports through the Strait of Hormuz.

The forecast, in the Fund’s Regional Economic Outlook for the Middle East and Central Asia published on Thursday, carries a sharp warning for Pakistan. The country is not among the economies hit directly by the fighting, but it is exposed on two fronts: it imports most of its energy, now priced at close to $96 a barrel, and it relies on workers in Saudi Arabia, the United Arab Emirates and other Gulf states for nearly half of its record remittance inflows.

The escalation of the war “has delivered a substantial shock through disruptions to energy production, shipping, tourism, trade, and confidence,” the report says. “A more prolonged conflict remains the principal risk to the outlook,” Jihad Azour, director of the IMF’s Middle East and Central Asia Department, told reporters at the launch.

A region split in two

For the MENAP group, which includes Pakistan, the Fund now sees a contraction of about 1.3% in 2026 after 3.3% growth in 2025. In April it had forecast 1.4% growth, so the downgrade amounts to 2.7 percentage points. A rebound to 6.6% is projected for 2027, but only if hostilities end after the first quarter and flows through Hormuz recover gradually.

The damage is concentrated among oil and gas exporters. Gulf Cooperation Council economies are forecast to contract 4.8% in 2026, a downgrade of 6.8 percentage points from April, before rebounding about 9.1% in 2027. Bahrain, Iraq, Kuwait and Qatar all face double-digit contractions: Kuwait is projected to shrink 16.7%, Iraq 16.0%, Qatar 15.6% and Bahrain 11.3%. Iran’s economy is expected to contract 7.6%. The UAE and Saudi Arabia face milder recessions of 3.9% and 3.3%, as alternative pipelines cushioned part of the blow, though in April the Fund had expected both to grow 3.1%. Oman, with limited exposure to Hormuz, is the only Gulf economy forecast to grow, at 4.1%.

war splits the region 2026 real GDP growth forecasts — The Iran war has driven Gulf exporters into deep contractions while oil importers such as Egypt and Pakistan keep growing. Pakistan’s figure is for fiscal year 2025-26, as listed in the IMF’s 2026 column.

Gulf oil and gas output fell from about 33 million barrels a day in February to roughly 19 million in May, according to the IMF, with Qatar’s production down by as much as 86% at the worst point. Output recovered somewhat over the summer but stayed about 30% below February levels, then fell again in August when disruption to pipelines and shipping through Bab el-Mandeb pushed Saudi production to its lowest since the war began. By July, cumulative supply losses had reached 1.8 billion barrels, more than in the 1973 oil shock or the 1990 Gulf War.

Oil importers have held up better, supported by remittances, tourism, domestic demand and policies that shielded consumers from higher prices. The IMF expects emerging and middle-income oil importers in the MENAP group to grow 4.2% this year, up from 3.9% in 2025. Egypt is projected to grow 5.1%, about a point above April’s forecast. Countries in the Caucasus and Central Asia are expected to grow 5.2% this year and 5% next, with Kyrgyzstan the region’s fastest-growing economy at 9%.

Contraction now rebound in 2027 if the war eases — *The IMF’s baseline assumes the conflict eases in early 2027, allowing a sharp rebound, though output would remain below pre-war projections.*

Pakistan’s numbers

The regional report’s country table puts Pakistan’s growth at 3.6% for the 2025-26 fiscal year and 3.5% for 2026-27, both unchanged from April, rising to 4.5% by 2031. The 3.5% forecast is below the government’s 4% target. In the World Economic Outlook released last week, the Fund raised its 2026-27 inflation forecast to 9.9% from 8.4% in April, well above the official 8.2% target, and projected a current account deficit of 1% of GDP, about $4.4 billion, after a small surplus. The regional report confirms the 1.5-point upward inflation revision for Pakistan.

“I am still quite clear that we should clock north of 4%,” Finance Minister Muhammad Aurangzeb said, disputing the growth forecast.

Pakistan slower growth faster prices — *The IMF expects Pakistan’s growth to hold near 3.5% while inflation climbs towards 10%, driven largely by higher energy costs.*

Prices are already running ahead of that forecast. The report says inflation in Egypt and Pakistan rose more sharply than anywhere else among the region’s oil importers, reaching 11.1% year on year in Pakistan in August, driven by higher food and energy prices. Pakistan was the only MENAP country with a flexible exchange rate to raise interest rates after the war began. Even so, the IMF names Pakistan and the Kyrgyz Republic as the clearest cases where inflation is above target and real policy rates sit below neutral, and says such countries “should stand ready to tighten monetary policy”.

The pressure comes mainly from outside. The Fund now assumes oil will average $95.74 a barrel in 2026, up from $82.20 in its April forecast, peaking near $110 late in the year, then $87.39 in 2027 and about $70 by 2031. Wheat and diammonium phosphate, the fertiliser Punjab’s farmers rely on, are each up about 25% since late February, and the IMF expects global food prices to rise 5% this year.

Pakistan's import bill the IMF's oil price assumptions — *The IMF has raised its oil price assumptions sharply since April. In its adverse scenario, crude would average about $130 a barrel in 2027.*

The remittance question

Pakistan’s biggest exposure is human. Workers’ remittances reached a record $41.6 billion in the 2025-26 fiscal year, with $9.78 billion from Saudi Arabia and $8.81 billion from the UAE, according to State Bank figures. Those two countries alone supplied about 45% of inflows, before counting Qatar, Kuwait, Oman and Bahrain.

Gulf paychecks sources of Pakistan's record remittances — *Saudi Arabia and the UAE, both forecast to contract in 2026, supplied about 45% of Pakistan’s record remittances last fiscal year.*

So far, the money has kept coming. Remittances surged over the summer, helping narrow the current account deficit to $98 million in August. The IMF counts remittances among the main reasons oil importers have proved resilient, and its data show Pakistan’s net remittances so far in 2026 broadly stable as a share of GDP. The risk lies in what follows. Over the medium term, the report expects Pakistan’s external position to weaken “as imports rise and remittances moderate”. Gulf non-oil activity is projected to shrink 0.8% this year, and construction, hospitality and services, the sectors that employ most Pakistani workers, are typically the first to slow when governments and companies conserve cash. The GCC’s fiscal deficit is forecast to widen to 2.3% of GDP, and its current account surplus to narrow to 1.3% of GDP from 5%.

For Punjab, which sends a large share of Pakistan’s Gulf workforce and whose households depend heavily on those transfers, a slowdown in hiring or wages would feed directly into consumer spending, housing and small business activity. The provincial government has been courting Gulf money in other ways, including a Rs500 billion food export target agreed with Saudi Arabia’s new envoy this week.

Felt in Lahore

The war’s effects are already visible in the city. Delayed Qatari LNG cargoes left gas-fired power plants idle and caused nightly power cuts across Lahore this month, after warnings in September that winter LNG supplies were at risk. LPG is selling at nearly double the official price, and Lahore families were already squeezed by rising prices for petrol, milk and vegetables before the IMF raised its inflation forecast.

The government’s response is constrained by its IMF programme. Under a staff-level agreement reached this month for the fourth review of Pakistan’s $7 billion Extended Fund Facility, the Fund pressed Islamabad to wind up the Rs100-a-litre petrol relief scheme for motorcycles, rickshaws and small cars, calling it costly and poorly targeted. Its regional advice is the same. All countries “should refrain from introducing broad-based subsidies” and instead use “targeted, temporary, and budget-neutral cash transfers”, the report says. The Fund estimates fuel subsidies trimmed the war’s impact on regional inflation by 0.4 percentage point this year but added about 0.5% of GDP to fiscal costs.

The report also flags Pakistan among countries with large gross financing needs, alongside Algeria and Egypt, and notes that Pakistani banks hold large stocks of government securities, a link that could transmit any jump in borrowing costs to private lending. It projects a restrictive fiscal stance for Pakistan this year, and says exchange-rate flexibility can help Egypt and Pakistan preserve reserves, at the cost of some imported inflation.

“These buffers bought time, but they are finite,” Azour said.

Opportunities and the AI angle

The report is not uniformly gloomy for Pakistan. Gulf states are expected to rebuild rapidly in 2027 once shipping normalises, which could lift demand for Pakistani labour, food and construction materials. Qatar, Saudi Arabia and the UAE announced roughly $120 billion in artificial intelligence investments in 2025, more than 5% of their GDP, mostly in data centres. The IMF estimates AI adoption could add 0.1 to 0.6 percentage points a year to growth across the MENAP and CCA regions over the medium term, though it cautions that AI readiness is “not a substitute” for broader reform. Pakistan’s technology sector and Punjab’s export plans, including a Rs1.995 trillion industrial and export programme, are pitched at exactly that kind of demand.

But foreign investors remain cautious. Foreign direct investment has fallen 32% to $1.7 billion, according to recent central bank data, and tighter global financing conditions, which the IMF warns could follow if markets reassess AI-driven productivity hopes or interest rates rise, would raise Pakistan’s borrowing costs.

What comes next

Everything in the IMF’s baseline hinges on the conflict easing after the first quarter of 2027 and trade through the Strait of Hormuz normalising by the end of that year. “Uncertainty remains exceptionally high, and risks are firmly tilted to the downside,” the report says.

Its adverse scenario shows what that means for countries like Pakistan. If the war lasts until mid-2027, oil would average about $130 a barrel next year, roughly 45% above the baseline. Oil importers in the region would face stagflation, with output about 0.5% lower and inflation about 1 percentage point higher than in the baseline.

For Pakistan, the near-term test will be whether remittances hold up as the Gulf contracts, and whether inflation, already 11.1% in August, can be brought back into single digits once fuel relief ends and the IMF board approves the next disbursement. With food insecurity already rising, the margin for error is thin.