Kuwait economy to dip as crisis disrupts oil exports

KUWAIT CITY, May 11: Officials and economists warned that the war in the Middle East has transformed from a geopolitical crisis into a “protracted economic shock”, threatening growth, financial stability, food security and energy in the Middle East and North Africa (MENA) region, amid rising debt and inflation and shrinking fiscal space in several regional economies. They made this statement at a virtual international seminar organized by the Middle East Center for Economics and Finance of the International Monetary Fund (IMF), in collaboration with its Middle East and Central Asia Department. The seminar discussed the Regional Economic Outlook report titled “The War in the Middle East: Economic Repercussions and Policy Changes,” with the participation of Giovanni Melina, Deputy Director of the Middle East and Central Asia Department at the IMF, and John Bludorn, Deputy Director of the same department. Sheikh Ahmed Diop, Chief Economist at the Islamic Development Bank, also participated in the discussion. The session was moderated by economic analyst Basel Awad and chaired by the Director of the center, Sami Ben Nasser.

The speakers emphasized that the war has had a direct impact on energy markets, supply chains, trade routes and investor confidence at a time the region is facing one of its most sensitive economic periods since the COVID-19 pandemic, amid escalating geopolitical uncertainty. They explained that the war’s repercussions have extended to disruptions in hydrocarbon production, decline in tourism activity, increased financing costs, exchange rate volatility and capital flow fluctuations. Meanwhile, oil futures reflect market expectations that prices will remain at pre-war levels. The speakers pointed out that the baseline scenario assumes some of the disruptions will be contained by mid-year. Still, downside risks remain high, especially if the war is prolonged or expanded, which could lead to a new wave of oil and energy price hikes.

In this context, participants reviewed figures from the latest World Bank Group reports, which indicated that the conflict caused widespread disruption to energy markets and supply chains, with oil prices soaring to around $112 per barrel, an increase of nearly 60 percent. This also led to rising inflationary pressures and a decline in the region’s economic growth prospects. Furthermore, the growth of the regional economies – excluding Iran – is projected to slow down from four percent in 2025 to 1.8 percent in 2026, with growth forecasts for the Gulf Cooperation Council (GCC) countries lowered to 3.1 percent. Kuwait’s economy is expected to decline by 6.4 percent as a result of the disruptions to oil exports and the closure of the Strait of Hormuz. Melina confirmed that while higher oil prices may provide temporary financial support to some Gulf economies, the GCC countries will also be affected by a slowdown in non-oil activities, particularly tourism, financial services and trade. He explained that tourism is now a major driver of demand in Gulf economies as part of their economic diversification plans, making prolonged regional instability a significant factor putting pressure on non-oil growth. He also warned of the vulnerability of Gulf economies to food security disruptions stemming from their heavy reliance on food imports.

The seminar highlighted the close ties between the economies of the MENA and the Gulf states through energy, remittances and investments, which means the effects of war can spread rapidly throughout the region, especially in oil-importing countries. Participants pointed out that low-income and fragile states will be most affected if the war continues, due to their heavy reliance on imports of food, energy, and fertilizers, as food insecurity rates rise alarmingly. The speakers also stressed that the current crisis comes at a time the fiscal and political maneuvering room is narrower than before, due to higher levels of public debt, interest payments, and inflation compared to the pre-pandemic period. This puts governments in a difficult position, forcing them to choose between supporting growth, containing inflation, and stabilizing public finances.

Meanwhile, Diop confirmed that member economies are facing inflationary pressures and varying degrees of slowdown. He explained that uneven shocks and structural differences make it difficult to implement unified policies. Diop called for strengthening regional cooperation, developing flexible financing mechanisms, and enhancing integration in the areas of energy, food and financial liquidity. He emphasized that the MENA region is a vital area within the Islamic Development Bank’s membership, necessitating greater coordination among regional and international financial and development institutions.

By Inaas Awad Al-Seyassah/Arab Times Staff