MENA region grapples with lower oil prices and conflicts
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Regional Economic Outlook
Middle East and Central Asia
Chapter 1. MENAP Oil-Exporting Countries: Grappling with Lower Oil Prices and Conflicts
Intensifying conflicts and depressed oil prices are weakening growth prospects and raising risks across the region, a situation compounded by the recent bout of global financial market volatility. Growth is expected to decelerate over the near term, but only moderately, as countries use fiscal buffers and financing options where possible. Faced with lower oil revenues, many countries have initiated fiscal consolidation, but the measures are unlikely to be adequate for ensuring medium-term fiscal sustainability and intergenerational equity, and rebuilding the necessary buffers to deal with future oil price shocks. Early formulation of comprehensive fiscal adjustment plans and good communication are necessary to maintain confidence. Fiscal pressures also highlight the need for private sector-led growth, job creation, and diversification. The prospective easing of sanctions on Iran is likely to have a mixed effect on other oil exporters in the region, with countries facing possible further declines in oil prices, while benefiting from higher investment and non-oil trade.
- The New Environment: Lower Oil Prices
- Fiscal Consolidation and Conflict Weighing on the Economy
- Diverging Inflation Trends
- Risks to the Outlook Remain Elevated
- Lower Oil Prices Call for Further Fiscal Consolidation
- Financial Sectors Sound, With Pockets of Vulnerabilities Mainly In Non-GCC Countries
- Wanted: A Diversified Private Sector
Chapter 2. MENAP Oil Importers: Growth Trending Upward Yet More Reforms Needed To Create Jobs The recovery in the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) is gaining strength thanks to progress towards political stability, economic reforms, improving euro area growth, and lower oil prices—with growth rising to 4 percent in 2015 and 2016, broadly in line with May 2014 REO projections. However, greater momentum is being held back by continued spillovers from conflicts, security risks, and social tensions, while supplyside bottlenecks and strong currency valuations continue to hamper competitiveness and productivity growth. In a climate of persistently high unemployment, low living standards, and limited inclusiveness, the need for strong reform initiatives—especially in the areas of business, trade, and labor and financial markets—is imperative for fostering private sector expansion and job creation. Greater exchange rate flexibility and gradual fiscal consolidation—which would achieve sustainable debt profiles and strengthen buffers for dealing with adverse shocks—are also critical.
- Strengthening Recovery
- Serious Headwinds Hold Back Greater Recovery
- Fiscal, Monetary, and Structural Reforms
- International Support
Chapter 3. Caucasus and Central Asia: Reforms Needed to Weather Commodity, Russia Shocks A wave of large external shocks, particularly lower commodity prices and the slowdown in Russia, has weakened growth prospects and raised vulnerabilities in the Caucasus and Central Asia (CCA) region. Increases in public spending have helped soften the immediate impact on economic activity, but fiscal consolidation remains a priority for the medium term. Exchange rate depreciations have supported competitiveness and helped preserve fiscal space, but they have also increased pressure on inflation and created challenges for the heavily dollarized financial sectors. Greater exchange rate flexibility will help protect external buffers, but it needs to be accompanied by strengthened financial supervision to safeguard financial stability. Accelerating the pace of structural reforms remains key to improving the medium-term outlook for economic growth and job creation.
- Economies Hit by External Shocks
- Risks Tilted to the Downside
- Exchange Rates Under Pressure
- Fiscal Policy: Supporting Near-Term Growth While Rebuilding Buffers, and Keeping Debt Sustainable in the Medium Term
- Monetary Policy Faces Complex Tradeoffs
- External Vulnerabilities Have Risen
- Spillovers from the Economy to the Financial Sector
- Improving Medium-Term Economic Prospects and Creating Jobs
Chapter 4. Fiscal Adjustment to Lower Oil Prices in MENA and CCA Oil Exporters Facing a sizable and persistent drop in oil prices, MENA and CCA oil exporters have started a process of fiscal adjustment. Although many countries have accumulated sizable buffers that will permit budget deficit reduction to take place gradually, faster progress is now needed to develop specific plans that would put fiscal positions on a stronger footing. Priorities include streamlining expenditures in the context of comprehensive tax, energy pricing, and public investment management reforms, increasing non-oil taxation, and gradually rebuilding buffers. These objectives should be supported by binding medium-term fiscal frameworks and a strong communication strategy.
- Lessons from Previous Oil Price Drops
- Adjustment Policies at Present
- Desirable Fiscal Policy Actions
- Complementarities with Other Policies
Chapter 5. Economic Implications of Agreement with the Islamic Republic of Iran The recent agreement between the P5+1 and Iran2 allows for the removal of most economic sanctions and for a significant improvement in Iran’s economic outlook. Economic spillovers to the rest of the world are also likely to be a net positive, for two reasons. Iran’s return to the global oil market is expected to result in increased global supply of oil, and the removal of the sanctions will open up new trade and investment opportunities. Traditional economic partners such as Europe, Turkey, and the United Arab Emirates stand to gain, as do China and India, whose trade with Iran increased during the sanctions period. The CCA countries could also benefit, especially if over time they become transit hubs for increased trade between Iran, Asia, and Europe. How large these effects will be, and how quickly they will materialize, is unclear because of considerable uncertainty about precisely when the sanctions will be removed and for how long, how quickly Iran will be able to ramp up its oil production and how other oil producers will respond, and whether much-needed reforms to re-ignite the domestic economy will accompany the removal of the sanctions.
- The Current State of Iran’s Economy
- How Will Lifting Sanctions Affect the Iranian Economy?
- The Agreement’s Effect on Global Oil Prices and Economic Activity
- How Will Iran’s Non-Oil Trade with the Region Be Affected?
Chapter 6. How Might the Sustained Decline in Oil Prices Affect MENA and CCA Banking Systems? The slump in oil prices, through its adverse impact on oil-dependent economies, has raised questions about financial sector stability in the Middle East and North Africa (MENA) and the Caucasus and Central Asia (CCA). The risks are more pronounced in the CCA and non- GCC oil exporters, where the impact of the oil price shock has been compounded by spillovers from Russia and other shocks against the backdrop of already elevated bank vulnerabilities. As low oil prices persist, some banks may become distressed, especially in countries where the policy space is limited and regulatory and supervisory frameworks are weak. Maintaining sound macroeconomic policies, increasing supervisory oversight, strengthening prudential and crisis management frameworks, and reducing bank vulnerabilities, particularly dollarization, are key to reducing financial stability risks.
- How Can Low Oil Prices Affect Banking Systems in MENA and the CCA?
- How Has Bank Soundness Been Affected So Far?
- How Vulnerable Are MENA and CCA Banks to Sustained Low Oil Prices?
- How Can Policies Help Mitigate Financial Stability Risks?
Chapter 7. Spillovers from Russia to the Caucasus and Central Asia (CCA) Countries In the face of sharply lower oil prices and geopolitical tensions and sanctions, economic activity in Russia has rapidly decelerated, resulting in negative spillovers on CCA countries. The extent of the impact is commensurate with the level of each country’s trade, remittance, and foreign direct investment (FDI) links with Russia. So far, policy action by affected countries has focused on mitigating the immediate consequences of spillovers. However, given the likely persistent effects of the shocks, stronger and more urgent medium-term oriented policy responses are needed.
- Outlook for Russia and Channels of Spillovers
- Current and Expected Impact on CCA Countries
- Policy Responses
- How Can Policies Help Mitigate Financial Stability Risks?
The IMF’s Middle East and Central Asia Department (MCD) countries and territories comprise Afghanistan, Algeria, Armenia, Azerbaijan, Bahrain, Djibouti, Egypt, Georgia, Iran, Iraq, Jordan, Kazakhstan, Kuwait, the Kyrgyz Republic, Lebanon, Libya, Mauritania, Morocco, Oman, Pakistan, Qatar, Saudi Arabia, Somalia, Sudan, Syria, Tajikistan, Tunisia, Turkmenistan, the United Arab Emirates, Uzbekistan, the West Bank and Gaza, and Yemen.
The following statistical appendix tables contain data for 31 MCD countries. Data revisions reflect changes in methodology and/or revisions provided by country authorities.
Somalia is excluded from all regional aggregates due to a lack of reliable data.
2011 data for Sudan exclude South Sudan after July 9; data for 2012 onward pertain to the current Sudan.
All data for Syria are excluded for 2011 onward due to the uncertain political situation.
All data refer to the calendar years, except for the following countries, which refer to the fiscal years: Afghanistan (March 21/March 20 until 2011, and December 21/December 20 thereafter), Iran (March 21/March 20), Qatar (April/March), and Egypt and Pakistan (July/June) except inflation.
Data on consumer price inflation in Table 1 relate to the calendar year for all aggregates and countries,
except for Iran, for which the Iranian calendar year (beginning on March 21) is used.
Tables 1, 3, 4, 6, 7, 8, and 9 include data for West Bank and Gaza.
In Table 1, “oil GDP” includes “gas GDP .” In Table 5, “oil” includes gas, which is also an important resource in several countries.
REO aggregates are constructed using a variety of weights as appropriate to the series:
- Composites for data relating to the domestic economy (Table 1, Table 2: Oil and Non-Oil Real GDP Growth, Tables 3–5) and monetary sector (Table 8: Credit to Private Sector) whether growth rates or ratios, are weighted by GDP valued at purchasing power parities (PPPs) as a share of total MCD or group GDP. Country group composites for the growth rates of broad money (Table 8: Broad Money Growth) are weighted by GDP converted to U.S. dollars at market exchange rates (both GDP and exchange rates are averaged over the preceding three years) as a share of MCD or group GDP.
- Composites relating to the external economy (Tables 6 and 7) denominated in U.S. dollars are sums of individual country data after conversion to U.S. dollars at the average market exchange rates in the years indicated for balance of payments data and at end-of-year market exchange rates for debt denominated in U.S. dollars. Composites relating to the external economy (Tables 6 and 7) denominated in percent of GDP/months of imports are sums of individual country data divided by sums of dollar denominated GDP/sums of imports denominated in U.S. dollars.
- Composites in Table 2 (Crude Oil Production) are sums of the individual country data.