IMF warns of war’s growing pressure on Gulf public finances

• Fund downgrades regional prospects
• Public finances already strained
• Oil infrastructure damage limits responses

The Iran conflict is deepening pressure on already-strained public finances worldwide, hitting energy-importing economies and Gulf exporters as disruptions to oil supply and shipping curb revenues and limit fiscal gains, the International Monetary Fund has said.

Damage to oil and gas production and export infrastructure in the Middle East, and disruptions to shipping through the Strait of Hormuz, creates many losers and few winners, limiting “fiscal windfalls” and supply responses, the IMF said in its latest Fiscal Monitor, which assesses public finances globally.

Saudi Arabia registered a worsening fiscal situation in 2025 because of higher government spending and falling revenues, and is forecast to bring “sizeable fiscal deficits well into the medium term”, according to the IMF.

The kingdom ended 2025 with a nearly 6 percent budget deficit, and is projected to log a 3.5 percent deficit this year. Saudi public debt is forecast to grow from nearly 31.7 percent of gross domestic product in 2025 to 32.1 percent this year, and continue to rise above 42 percent in 2031.

Saudi Arabia’s long-term fiscal trajectory reflects an improvement from the IMF’s estimate a year ago, as oil prices have recovered from previous lows. Saudi authorities are also streamlining spending on giga-projects.

International Energy Agency executive director Fatih Birol said this week that Saudi Arabia is better equipped than most neighbours to restart energy operations quickly. He called the Saudi switch to the East-West pipeline to boost exports amid Hormuz’s closure “remarkable”.

Miguel Azevedo, Citigroup’s vice-chair of investment banking for the Middle East and Africa, said Saudi Arabia came into 2026 with low expectations and that the war-induced changes to global energy supply routes may give it a leg up. 

“You see this in the stock exchange, when you look at the numbers,” he said on Tuesday on the sidelines of the IMF’s spring meetings. “It’s the only stock exchange that is doing OK, and with net inflows since the beginning of the war.”

Disruption from the war is nevertheless expected to put pressure on Gulf public coffers, “reflecting substantial forgone revenues from energy and energy-intensive exports”, the IMF said in the Fiscal Monitor.

A prolonged conflict would have an even bigger impact, because higher energy prices would no longer counterbalance production shut-ins and lower export volumes.

In its new World Economic Outlook, the fund downgraded prospects for the region, projecting the Saudi and Emirati economies will each expand 3.1 percent in 2026, while Qatar’s and Kuwait’s will shrink by nearly 9 percent and 0.6 percent respectively. 

The UAE’s budget surplus will fall from 5.2 percent of GDP in 2025, to 4.9 percent this year and 4.8 percent in 2027, the IMF said in the Fiscal Monitor.

Citigroup’s Azevedo singled out the UAE as facing an especially complicated landscape due to the conflict, amid increasing leverage in its real estate sector and economic planning premised on relentless population and business growth. 

“I’m sure they’ll put up an incredible response, but it’s a significant challenge,” he said. 

• Saudi banks vulnerable to fallout of prolonged war
• Domestic gold demand offsets UAE tourism drop
• Global oil demand to fall for first time since Covid, says IEA

Hadi Badri, CEO of Dubai Economic Development Corporation, said at a different event in Washington on Tuesday that life and business in the Emirates continue broadly as usual.

“When we look at domestic [consumer] spending and how quickly it’s recovered… we are only a few percentage points shy of where we were before [the start of the conflict],” Badri said. “That gives us the confidence that there are people still in Dubai, staying the course, investing, spending.”

Badri said local authorities are providing incentives to private companies that want to set up manufacturing or hospitality operations there, without clarifying further.  

Dubai authorities are among those in the region that have formally initiated programmes to support businesses in the war. 

The Central Bank of Bahrain also said it will backstop $19 billion in loan deferrals and liquidity support through the financial sector. 

The IMF’s Fiscal Monitor said Bahrain’s significant budget deficit will slide from a peak of 13 percent of GDP last year to 10.6 percent this year. Its public debt will continue rising, from more than 152 percent of GDP this year to above 161 percent in 2031.