The World Bank Group’s latest Economic Update for the Middle East, North Africa, Afghanistan and Pakistan (MENAAP) says the recent conflict in the Middle East has caused a sharp and immediate economic shock across the surrounding region. The closure of the Strait of Hormuz and damage to energy and public infrastructure have disrupted markets, increased financial volatility, and significantly weakened the region’s 2026 growth outlook. This new crisis has added pressure to economies that were already struggling with weak productivity, limited private sector dynamism, and long-standing labor market challenges.
Excluding Iran, overall growth across the MENAAP region is now projected to slow from 4.0% in 2025 to just 1.8% in 2026. This marks a major downgrade from the World Bank’s January forecast, with the new estimate standing 2.4 percentage points lower. The sharpest impact is expected in the Gulf Cooperation Council (GCC) economies and Iraq, which are more directly exposed to the fallout from the conflict. Growth in the GCC has been cut by 3.1 percentage points since January and is now expected to slow from 4.4% in 2025 to 1.3% in 2026.
The report warns that risks remain heavily tilted to the downside, especially if the conflict becomes prolonged. A longer crisis could intensify the region’s economic strain through higher energy and food prices, lower trade flows, weaker tourism and remittances, greater fiscal pressure, and increased displacement. These overlapping shocks could further reduce economic activity and worsen living conditions for already vulnerable populations across the region.
Beyond the immediate crisis, the World Bank says the situation highlights the urgent need for governments to strengthen macroeconomic fundamentals, improve governance, invest in infrastructure, and support sectors that can generate sustainable employment. The report stresses that peace and stability remain essential for durable development, but it also argues that countries must use this moment to build more resilient economies that are better able to absorb future shocks while expanding opportunities for their people.
As part of this broader agenda, the report examines the role of industrial policy as a tool to stimulate economic growth and job creation. It notes that governments across the region have increasingly used industrial policy over the past decade, often through sovereign wealth funds and state-owned enterprises, but results have been mixed. According to the World Bank, industrial policy can only be effective when it is realistic, carefully targeted, and supported by strong institutions, accountability, and alignment with each country’s specific constraints and development priorities.
