World Bank: The War in the Middle East Has Caused Severe Economic Losses

SadaNews - The World Bank has announced that the war in the Middle East has led to "severe and immediate economic losses", particularly due to the closure of the Strait of Hormuz, the destruction of energy infrastructure, and rising price levels, which have resulted in a decline in growth opportunities in a number of countries in the region by 2026.

The World Bank stated in a report issued - today Wednesday - titled "Latest Economic Updates for the Middle East, North Africa, Afghanistan, and Pakistan" that the war in the Middle East has created "an additional shock to a region already suffering from weak productivity growth, a decline in private sector dynamism, and ongoing labor market challenges".

It added that "there is an urgent need to enhance governance and macroeconomic fundamentals, and to take serious steps to support sustainable job creation and increase resilience in the long term".

The bank warned that if the conflict persists for a long time, "the current repercussions on the region will worsen due to rising energy and food prices, and the decline in trade, tourism, and remittance flows", especially in countries where tourism is a significant source of foreign currency supply like Lebanon and Egypt.

Decline in Growth Rates in the Region

Growth in the Middle East and North Africa is expected to slow from 4.0% in 2025 to 1.8% in 2026, which is a reduction of 2.4% from the World Bank's January projections prior to the outbreak of the war in the Middle East.

This decline is concentrated in the economies of the Gulf Cooperation Council and Iraq, which have been clearly affected by the conflict.

It is expected that the growth of GCC countries will decline to 1.3% in 2026, down from 4.4% according to last January's projections.

The World Bank noted that the economies of countries in the region, far from the front lines of the war, including Egypt, Jordan, and Pakistan, are suffering from widespread negative repercussions due to the Iran conflict.

Egypt, Jordan, and Pakistan, all of which import oil, have been impacted by rising oil prices, which has reflected an overall increase in transportation, manufacturing, and services costs, in addition to the negative effects of a decline in tourism and remittances from workers in the Gulf countries.

The rise in oil prices puts further pressure on public finances, with increased costs for importing oil and gas, especially if the stability of energy prices is supported through subsidies, as is the case in Tunisia.

Severe Decline in Economic Activity

Othmane Dione, Vice President of the World Bank for the Middle East and North Africa, confirmed that the challenges facing countries in the region "are not only about enduring shocks but also include rebuilding economies that are better equipped to face challenges, strengthening macroeconomic fundamentals, fostering innovation, improving governance, investing in infrastructure, and preparing sectors that provide job opportunities".

In this context, the International Monetary Fund pointed out in a report on global economic outlook that "economic activity is sharply declining in countries experiencing wars".

The IMF clarified in its report - issued today Wednesday - that on average, "output in countries that enter wars declines by about 3% initially, continues to decline for several years, with cumulative losses reaching about 7% within 5 years".

The IMF added that "losses in output due to conflicts usually exceed those linked to financial crises or severe natural disasters. Economic scars also persist even after a decade".

The report explained that the uncertainty accompanying wars leads to capital flight and reduced foreign direct investment. This forces governments in times of war to rely more on aid.

Worsening Macroeconomic Pressures

The IMF confirmed that the costs of wars lead to a sustained decline in the exchange rate, losses in reserves, and rising inflation, and in general, macroeconomic pressures worsen during wars.

Prices often rise at a faster pace than all inflation targets set by central banks, which drives monetary authorities to raise interest rates, increasing the costs of mortgages and personal loans for citizens.

The IMF warns that funding the increase in public budget expenditures through loans may stimulate the economy in the short term, but it can also place pressures on the sustainability of public finances in the medium term, especially in countries with high debt levels that allocate a large part of their revenues for debt service and its interests.

The IMF noted that fluctuations in defense spending have become more frequent, especially in emerging market economies and developing economies.

It stated that "in a typical boom, defense spending increases by about 2.7 percentage points of GDP over two and a half years, with nearly two-thirds financed through deficits". Military spending can drive short-term economic activity, but it also increases inflation and creates serious medium-term challenges.

The IMF confirmed in its report that recovery from war is often "slow and uneven and heavily relies on the durability of peace", explaining that "when peace is sustained, output recovers, but it often remains limited compared to the losses during wartime".

The IMF emphasized that "recovery efforts become more effective when complemented by internal reforms to rebuild institutions and state capacities, enhance inclusion of all groups and security, and address the enduring human costs of conflict", including learning losses and those suffering from poor health conditions and reduced economic opportunities.

Source: Al Jazeera