EBRD forecasts SEMED region growth of 2.5 per cent in 2026
Economic growth in the southern and eastern Mediterranean (SEMED) region is expected to slow to 2.5 per cent in 2026 from 3.1 per cent in 2025, before picking up to 4.2 per cent in 2027, according to the European Bank for Reconstruction and Development’s (EBRD) latest Regional Economic Prospects (REP) report.
Conditions were stronger at the start of 2026, with growth picking up in Egypt and Morocco, recovery under way in Lebanon, and continued expansion in Jordan and Tunisia. However, Iraq’s economy contracted as lower oil production reduced its exports and government revenues. Tourism and remittances have continued to bring in foreign currency to the region, helping to offset pressures from higher import costs.
Conflict in the Middle East has since intensified strains, disrupting trade routes, pushing up energy prices and fuelling inflation. The largest forecast revisions compared with the February 2026 edition of REP are for Lebanon and Iraq, which are most directly exposed.
Uncertainty remains high. A prolonged conflict could keep oil and gas prices elevated, weaken investment and tourism, disrupt supply chains and raise borrowing costs, particularly for countries with high debt and large financing needs. Governments have introduced measures to curb energy demand and shield households and businesses from rising fuel costs. Egypt and Jordan have implemented multiple steps, including restrictions on public-sector travel and energy use.
The impact of regional tensions is expected to be uneven. Economies with stronger financial buffers are better positioned to withstand external shocks, while countries exposed to conflict spillovers and financing pressures face greater risks. Prolonged instability could weaken investment, tourism and trade, while driving up borrowing costs.
Economic growth in Egypt remains strong but is expected to decline slightly from 5.1 per cent in 2025 to 4.9 per cent in 2026 and 2027.
Structural pressures persist. Oil and gas production has declined in most recent quarters, increasing reliance on imported gas, which now meets around one-third of domestic demand. Inflation rose to 15.2 per cent in March 2026, driven by higher energy and food prices.
The Central Bank of Egypt kept its policy rate unchanged at 19.5 per cent in April 2026. International reserves reached US$ 52.8 billion in March, while continued International Monetary Fund (IMF) support has helped underpin external stability.
Economic contraction in Iraq is expected to deepen from -0.4 per cent in 2025 to -1.5 per cent in 2026, before growth rebounds to 4.0 per cent in 2027.
The downturn reflects severe disruptions to oil exports following the closure of the Strait of Hormuz, with only 12-15 per cent of shipments rerouted. Given that oil accounts for over 90 per cent of exports and government revenues, the economy remains highly exposed.
Energy supply constraints, including reliance on imported Iranian gas, have added to pressures, while inflation turned positive, reaching 2.2 per cent in March 2026. Despite relatively strong reserve coverage, sovereign outlooks have been placed on negative watch, with prospects closely tied to developments in the regional conflict and oil markets.
Growth in Jordan is expected to slow slightly from 2.8 per cent in 2025 to 2.6 per cent in 2026, before returning to 2.8 per cent in 2027.
The moderation reflects the impact of regional instability on tourism and investment. Temporary disruptions to natural gas supplies were mitigated by existing fuel reserves, helping limit broader economic fallout.
Fiscal and external pressures remain elevated, with the budget deficit at 5.2 per cent of GDP and public debt at 108 per cent of GDP. Inflation edged up to 1.9 per cent in March 2026, while foreign exchange reserves continue to provide a buffer.
After recovering by 3.5 per cent in 2025, the economy in Lebanon is expected to contract by 2.0 per cent in 2026 before rebounding to 4.0 per cent in 2027, assuming an easing of regional tensions.
Renewed hostilities in 2026 have significantly disrupted economic activity and damaged infrastructure, particularly in the south, with large-scale displacement. Inflation rose sharply to 17.3 per cent in March amid higher energy costs.
Macroeconomic imbalances remain severe, with large current account and fiscal deficits. The outlook is highly uncertain and depends on the security situation, reconstruction efforts and the pace of reforms needed to unlock international support.
Morocco’s economic growth is expected to moderate slightly from 4.6 per cent in 2025 to 4.4 per cent in 2026 and 4.0 per cent in 2027.
Strong tourism and remittances have continued to support external balances, helping offset a wider trade deficit. Inflation remains low, with slight deflation recorded in early 2026 as food prices declined.
The central bank has kept its policy rate unchanged at 2.25 per cent, while reserves remain at comfortable levels, covering close to six months of imports.
Economic growth in Tunisia is projected to slow from 2.5 per cent in 2025 to 2.2 per cent in 2026 and to remain at that level in 2027.
While disinflation progressed in 2025, rising food prices have slowed the pace in early 2026, highlighting renewed price pressures.
Fiscal and external vulnerabilities persist, with a targeted deficit of 6.0 per cent of GDP in 2026 and reserves covering around 3.5 months of imports. Higher energy and food import costs continue to weigh on public finances and the external position.
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Growth in EBRD regions slows as Middle East conflict sparks energy shock and disrupts supply chains
03.06.2026.17:10
The European Bank for Reconstruction and Development (EBRD) expects aggregate growth across its regions to slow from 3.4 per cent in 2025 to 3.1 per cent in 2026, before recovering to 3.6 per cent in 2027, according to its latest Regional Economic Prospects report. The 2026 forecast marks a downward revision of 0.5 percentage point relative to the outlook published in February 2026, while the projection for 2027 is 0.1 percentage point lower.
Entitled “Strai(gh)t talk”, the new report identifies the escalation of conflict in the Middle East as the principal shock to the regional outlook. Rising oil and gas prices, disruptions to shipping through the Strait of Hormuz, and the widening gap between European and US energy costs – now exceeding a factor of five for gas – have weighed on competitiveness and damped economic momentum.
Electricity prices in Europe also remain significantly higher than in the United States of America, reinforcing longer-term structural shifts in industrial production towards less energy-intensive sectors. The weak performance of energy-intensive industries has persisted across both advanced European Union (EU) economies and EBRD economies in the EU.
Year-on-year growth across the EBRD regions in the first quarter of 2026 is estimated at 2.9 per cent, with weaker-than-expected performances recorded in Egypt, Kazakhstan, Romania, Türkiye and Ukraine.
In response to the energy price shock, nearly two-thirds of the EBRD economies have introduced at least one policy measure to support consumers or conserve energy, including energy tax reductions, fuel price caps and targeted subsidies.
The conflict has compounded an already difficult external environment. Even prior to the escalation of hostilities, purchasing managers' indices pointed to weak manufacturing momentum amid rising global trade tensions.
As US import tariffs rose sharply in 2025, prompting a significant reorientation of global trade flows, US imports from China dropped and imports from the Association of Southeast Asian Nations (ASEAN) rose. Meanwhile, changes in US imports from the EBRD regions remained modest, on average. The expansion of artificial intelligence (AI)-related supply chains continued to underpin growth globally, with EBRD economies also recording faster growth in AI supply-chain exports relative to other exports.
Inflation across the EBRD regions, which had moderated in late 2025 on the back of positive real interest rates and slower nominal wage growth, reversed course in early 2026. Average inflation jumped by 1.2 percentage points to 6.4 per cent between February and April 2026. This was driven primarily by higher energy and food prices, which account for larger shares of consumer baskets in the EBRD regions than in advanced economies. Currency depreciation against the US dollar has added further pressure in some economies and inflation is now expected to remain higher for longer than previously anticipated.
“The conflict in the Middle East has delivered a new shock to regions already navigating weakness in manufacturing industries and fragile fiscal positions,” said Beata Javorcik, EBRD Chief Economist. “Higher energy costs are squeezing competitiveness, reigniting inflation and tightening fiscal space at a time when many economies can least afford it.”
The fiscal outlook has also deteriorated. The Middle Eastern conflict is intensifying pressure on public finances, particularly in the southern and eastern Mediterranean region and sub-Saharan Africa, where debt-to-gross domestic product (GDP) ratios and interest-payment burdens were already elevated. Tighter global financing conditions have pushed up borrowing costs, particularly in economies with higher levels of debt. The report also examines the European Commission's proposed Industrial Accelerator Act, published in March 2026, which aims to strengthen industrial competitiveness and reduce foreign dependency in strategic sectors. Within the EBRD regions, industrialised economies in emerging Europe are best placed to benefit from the Act's provisions, though the extent of opportunities for third countries will depend on eligibility rules that remain to be determined.
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