Full Breakdown
Middle East Conflict Sends Shockwaves Through Israel and Pakistan Economies
5/2/2026, 4:22:34 AM
War-Driven Economic Outlook for Israel
Since Hamas’s Oct. 7, 2023 attack and subsequent Israeli strikes on Iran, Hezbollah and Houthi forces, Israel has been on a near-continuous war footing, prompting the Bank of Israel to cut its growth outlook.
Fiscal Strain and Growth Projections
The central bank now sees 3.8 % GDP growth in 2026, versus the IMF’s 3.5 % estimate. War spending has risen to about 8 % of GDP, up from 4.5 % before Oct. 7, pushing the debt-to-GDP ratio to roughly 70 %. Unemployment is 3.2 % and inflation 1.9 % within the 1-3 % target.
Policy Responses and Official Statements
Bank of Israel Governor Amir Yaron told CNBC that ending hostilities could lift growth to 5.5 % next year. Finance Ministry deputy Tamar Levy-Bon warned that rising interest rates, debt and defense outlays have reversed a decade of fiscal consolidation. Pakistan’s State Bank raised its policy rate to 11.5 % and cited the Middle-East conflict as a key macro risk.
Criticism and Opposition
Levy-Bon described a ‘trilemma’ where security spending forces cuts to social programs and erodes living standards. Economist Joao Gomes flagged labor shortages and a tourism collapse as revenue drags. Pakistani analysts Kamran Butt and Kaiser Bengali argue that the government’s failure to subsidise fuel fuels inflation and heightens reliance on external financing. Opposition leader Aslam Ghauri called the policies an ‘economic war on the people.’
Conflicting Projections and Data Gaps
The IMF’s 3.5 % growth forecast for 2026 differs from the Bank of Israel’s 3.8 % estimate, reflecting war-related uncertainty. Debt-to-GDP is reported as 69.8 % by the IMF and “approximately 70 %” by the Finance Ministry. Pakistan’s fuel import bill is said to have risen from $300 million to $800 million, but the time frame is unclear.
Verbatim Quotes
"In the past, we had an economy that lowered interest rates, reduced debt, cut taxes, and restrained defense spending, but everything I described has turned upside down: interest rates are rising, debt is rising, defense spending is increasing, and expenditures are declining due to interest costs." — Tamar Levy-Bon, Deputy Budget Commissioner for Macroeconomic Affairs, Israeli Ministry of Finance
"We are facing huge expenditures from the war. Through 2023, 2024 and 2025, Israel’s spending was running around 8 % of GDP, which requires the government to issue debt." — Zvi Eckstein, Head, Aaron Institute for Economic Policy
"High-tech goods and service exports have been the main factor behind the past two decades of strong growth and wealth creation but the economy has grown strongly in other areas, including developing gas resources and defense exports." — Keren Uziyel, Senior Analyst, Economist Intelligence Unit
"Conventional economics tells us that oil price hikes trigger a chain reaction across the economy." — Kamran Butt, Economist
"We are in a state of absolute dependency, where even a $1 bn tranche, which is a microscopic amount in global fiscal terms, can make the difference between survival and collapse." — Kaiser Bengali, Former Adviser for Planning and Development, Sindh Chief Minister
