Gulf economies face contraction nearly as acute as COVID shock, IMF warns

Non-oil output recedes in four countries as regional conflict takes its economic toll

By LineZotpaper

Published23 October 2026

Read Time2 min

Gulf economies are expected to contract by 4.8 percent this year, a blow almost matching the shock of the COVID-19 pandemic, according to the International Monetary Fund. The regional conflict has disrupted energy production, shipping, tourism and trade, driving a reversal in non-oil output across four countries.

Jihad Azour, director of the IMF's Middle East and Central Asia Department, told reporters in Dubai that "this conflict has disrupted energy production, shipping, tourism, trade, and confidence."

Non-oil activity, a crucial indicator for businesses in the region, is expected to rebound to 4.5 percent growth in 2027 if the conflict is resolved.

The financial buffers that Gulf states have built up are weakening. The region's combined current-account surplus is expected to narrow to 1.3 percent of GDP, down from 5 percent last year. The combined fiscal deficit is projected to widen to 2.3 percent of GDP, from 0.8 percent, according to the IMF's estimates.

The impact varies significantly across the Gulf. Oman is the outlier, having implemented economic reforms before the war and remaining relatively unscathed by the conflict.

The worst-hit is Bahrain, the smallest Gulf oil exporter. Its debt levels now exceed 150 percent of GDP, and foreign reserves have dropped 50 percent since March. Asharq Bloomberg reports the kingdom is in talks for a cash infusion led by the United Arab Emirates.

Analysis

Why This Matters

The Gulf region is a critical node in global energy markets and shipping. An economic contraction of this scale risks influencing global oil prices, disrupting supply chains, and reducing the region's capacity for outward investment.
The weakening of fiscal buffers across the Gulf reduces the ability of governments to spend their way out of the downturn, increasing the risk of localized debt strains such as the one facing Bahrain.
The IMF's 2027 recovery forecast for non-oil activity is conditional on a resolution to the conflict, tying the region's economic outlook directly to the geopolitics of the war.

Background

The Gulf Cooperation Council states have for years pursued economic diversification to reduce their reliance on oil revenue, and the IMF has consistently urged further fiscal reforms. The current economic shock is driven by a regional conflict that has directly hit oil production, shipping lanes vital to world trade, and sectors such as tourism and aviation in which the Gulf states have invested heavily.

Key Perspectives

The International Monetary Fund: Assesses the contraction as a severe but potentially temporary shock, driven entirely by the conflict. Its forecast of a rebound to 4.5 percent non-oil growth in 2027 offers a conditional path to recovery, but only if peace returns to the region. Gulf Governments (the divergent bloc): The varying impacts across the Gulf reveal deep internal disparities. Oman's pre-war reforms have provided it with relative shelter from the economic storm. In contrast, Bahrain's acute fiscal crisis lays bare its dependency on regional patronage for survival. Regional Risk Analysts: The conditional nature of the 2027 recovery, combined with the shrinking of fiscal buffers across the board, suggests a period of prolonged economic vulnerability for the region regardless of the conflict's immediate trajectory. Bahrain's debt sustainability remains a long-term question even with a potential bailout.

What to Watch

The trajectory of Bahrain's foreign reserves and the final terms of any cash infusion from the UAE.
Whether the regional conflict escalates or de-escalates, as this directly governs the timeline for any economic rebound.
Fiscal and monetary policy responses from Gulf central banks as they attempt to manage a widening of deficits and narrowing of current-account surpluses.

Sources

Gulf faces economic contraction nearly as acute as COVID shock · Semafor

Checked

12 claims in this story checked against 1 source: 9 supported.

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Partly supportedThe IMF warns that Gulf economies face a contraction nearly as acute as the COVID shock.Semafor: “Gulf economies as a whole are expected to shrink 4.8% this year, almost matching the COVID-19 shock”
Partly supportedThe regional conflict is driving the reversal in non-oil output across four countries.Semafor: “Gulf economies as a whole are expected to shrink 4.8% this year, almost matching the COVID-19 shock, with non-oil output receding in four countries.”
SupportedGulf economies are expected to contract by 4.8% this year, almost matching the COVID-19 shock.Semafor: “Gulf economies as a whole are expected to shrink 4.8% this year, almost matching the COVID-19 shock”
SupportedAzour told reporters in Dubai, “this conflict has disrupted energy production, shipping, tourism, trade, and confidence.”Semafor: ““This conflict has disrupted energy production, shipping, tourism, trade, and confidence,” Jihad Azour, director of the IMF’s Middle East and Central Asia Department, told reporters in Dubai.”
SupportedNon-oil activity is expected to rebound to 4.5% growth in 2027 if the conflict is resolved.Semafor: “Non-oil activity, a key metric watched by businesses in the region, is expected to rebound to 4.5% growth in 2027 if the conflict is resolved.”
SupportedThe region’s current-account surplus is expected to narrow to 1.3% of GDP, from 5% last year.Semafor: “the region’s current-account surplus expected to narrow to 1.3% of GDP, from 5% last year”
Partly supportedThe combined fiscal deficit is projected to widen to 2.3% of GDP, from 0.8%.Semafor: “the combined fiscal deficit is expected to widen to 2.3%, from 0.8%, according to the IMF.”
SupportedOman implemented economic reforms before the war and remained relatively unscathed by the conflict.Semafor: “Oman is the outlier, having implemented economic reforms before the war and remaining relatively unscathed by the conflict.”
SupportedBahrain is the worst-hit Gulf country and the smallest Gulf oil exporter.Semafor: “Worst-hit has been Bahrain, the smallest Gulf oil exporter”
SupportedBahrain’s debt levels now exceed 150% of GDP.Semafor: “With debt levels now at more than 150% of GDP”
SupportedBahrain’s foreign reserves have dropped 50% since March.Semafor: “foreign reserves down 50% since March”
SupportedAsharq Bloomberg reports that Bahrain is in talks for a cash infusion led by the UAE.Semafor: “the kingdom is reportedly in talks for a cash infusion led by the UAE, according to Asharq Bloomberg.”