Oil price decline must hasten policy revision, An Opinion by Masood Ahmed, Director, Middle East and Central Asia Department, International Monetary Fund

May 5, 2015

A commentary by Masood Ahmed, Director, Middle East and Central Asia Department, International Monetary Fund

Published by The National, May 05, 2015

Modest recovery continues in the Middle East and North Africa (Mena) region despite a slump in oil prices and intensifying conflicts. Growth in the region’s oil importers is picking up this year as lower oil prices are reducing vulnerabilities and adding to nascent improvements in confidence from recent reforms. Further structural reforms could transform these gains into higher, more inclusive and sustainable growth that makes a dent in the region’s high unemployment.

The slump in oil prices means large export revenue losses for Mena oil exporters – a staggering $380 billion this year, compared to what the IMF had projected before oil prices fell. Most oil exporters in the region are able to limit the immediate effect of lower oil prices on growth and living standards by dipping into their accumulated savings or borrowing to finance deficits in government budgets. As a result they are projected to grow at an average rate of about 2.5 per cent, the same as in 2014.

However, if low oil prices persist for some time, which is a strong possibility given the expected continuation of the supply glut and relatively slow growth in demand, sustaining these policies will be challenging, as our latest update of the Regional Economic Outlook shows.

Many oil exporters in the region are rightly starting to reassess their medium-term spending plans and explore ways to achieve a gradual but decisive adjustment to lower oil prices. And for some the speed of adjustment will need to be greater given their limited financial reserves.

This adjustment can be done by reining in recurrent spending, and if necessary, reducing capital spending in a phased manner. Reducing generalised energy subsidies, which remain large despite lower oil prices, would help considerably, and some progress, albeit slow, has already been made. Further steps in this direction are necessary and they need to be accompanied by developing targeted social safety nets to protect the most vulnerable groups of the population. Exploring ways to raise non-oil revenue collection will also be important.

Besides reducing the government purse, oil exporters would benefit from creating a new model that shifts the engine of growth away from government spending to a self-sufficient private sector. Such economic diversification could be spurred by an improved business environment, a review of public sector employment policies and training nationals to help them develop the skills demanded by the private sector. Countries like the UAE are leading the way in this respect.

As for the oil importing countries in the region, after four difficult years, the economic news is getting better. A combination of lower oil prices, a more benign international economic environment and their own efforts to strengthen economic policies should boost their average growth rate to four per cent. However, this is still below the level of economic growth they need to address their chronic – and worsening – youth unemployment problem.

Hence, there is heightened urgency to step up structural reforms aimed at improving the business environment and reducing red-tape, which would bolster confidence, economic growth, and job creation.

If the drop in oil prices is one big factor affecting the region, the intensification of conflicts and violence is another theme that impacts the outlook for many countries. The continuing conflicts in Iraq, Libya, Syria, and more recently Yemen, are creating large humanitarian, social and economic costs for the countries directly affected and are affecting their neighbours through large numbers of refugees, setbacks to trade and tourism, increased defence spending, and declining confidence. All of these weigh on economic activity.

The Syrian and Iraqi conflicts alone have displaced more than 12 million people – many of them fleeing to Jordan and Lebanon, where the refugees have led to increased economic, fiscal, social and political pressures. And the search for a better life is also leading an increasing number to turn to Europe, often at great risk to their own lives.

Resolute reform efforts are needed to bring about a brighter economic future and ease sociopolitical strains which, in part, underlie these conflicts. Yet, in both oil exporters and importers, conflicts or social pressures are making it harder for policymakers to launch necessary reforms.

To support the countries’ efforts, the international community also needs to scale-up financing, and enhance trade access, policy advice, and capacity building. The IMF, for its part, continues to support the Mena region’s countries, both financially and through policy and technical advice and capacity-building efforts.

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