IMFSurvey Magazine: Countries & Regions
REGIONAL ECONOMIC OUTLOOK
Middle East, North Africa Weathering Global Crisis
IMF Survey online
May 10, 2009
- Growth in Middle East and North Africa to slow to 2.6 percent in 2009
- Region affected by lower export earnings, investment flows, and remittances
- But high levels of reserves and government spending in oil exporters dampen impact
The global financial crisis has not spared the Middle East and North Africa region, but good economic fundamentals, appropriate policy responses, and sizeable currency reserves are helping to mitigate the impact of the shock, the IMF says in its latest assessment of conditions in the region.
Growth in the region could slow to 2.6 percent in 2009 from 5.7 percent in 2008 before recovering to about 3.6 percent in 2010.
"Given the global reach of the current economic crisis, countries in the Middle East and North Africa have also been impacted negatively. However, they are likely to fare better than countries in other regions of the world—in part because of prudent financial and economic management, but also because oil exporters in the region can draw upon their large reserves,” said Masood Ahmed, Director of the IMF’s Middle East and Central Asia Department, at a May 10 briefing in Dubai, which focused on the outlook for Middle East and North Africa, Afghanistan, and Pakistan.
These reserves will help “cushion the impact of the global slowdown in their own economies and the economies of their neighboring countries with which they have growing economic links,” added Ahmed. The media will also be briefed on the outlook for the Caucasus and Central Asia on May 11 in Yerevan, Armenia.
Nearly all the region’s 22 countries will be affected by the global crisis in important but different ways, the report notes.
Oil exporters slow down but continue to shore up global demand
The Middle East’s oil-exporting countries—Algeria, Bahrain, Iran, Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia, Sudan, the United Arab Emirates, and Yemen—are feeling the impact mainly through the sharp fall in oil prices and the tightening of credit conditions.
Amid high oil prices and strong investor interest the region, these countries grew by nearly 6 percent per year between 2004 and 2008. With lower global demand for oil, however, GDP growth rates are forecast to decline to 2.3 percent in 2009 from 5.4 percent in 2008.
Despite the decline in oil revenues, however, most oil exporters in the region are maintaining government spending at a high level. This spending is providing an important stimulus to both domestic and global demand. In countries with less fiscal space—such as Iran, Sudan, and Yemen—governments will need to prioritize their expenditures, especially if oil prices remain at their current level.
Lower oil prices and high spending are expected to cause a turnaround in the oil exporters’ external current account position from a surplus of $400 billion last year to a deficit of nearly $10 billion in 2009 (assuming oil prices remain at current levels).
Financial sector spillovers prompt policy response
The global financial crisis has also led to a tightening of credit conditions in oil-exporting countries, particularly in the Gulf Cooperation Council (GCC) states and other countries whose financial systems are more integrated with global markets. With asset prices falling rapidly and liquidity conditions tightening—in part from the withdrawal of speculative capital, which started earlier in 2008—governments in the region responded by taking measures to stabilize interbank markets, ease liquidity conditions, and support commercial banks.
Oil importers also face slowdown
Middle Eastern oil importers—Afghanistan, Djibouti, Egypt, Jordan, Lebanon, Mauritania, Morocco, Pakistan, Syria, and Tunisia—have largely escaped the direct effects of the crisis, because of the postive impact of lower oil prices and their limited links to global financial markets. But as the worldwide recession has deepened, these countries face weaker prospects for exports, foreign direct investment, tourism, and remittances.
As a result, real GDP growth for these countries is projected to drop to 3.2 percent in 2009 from 6.2 percent in 2008. This group has mainly been affected by slowdown in their trading partners—Europe, the United States, and GCC countries—which has led to a fall in exports and foreign direct investment, according to the report. Tourism and remittances are also likely to be affected, although the data so far show them to be quite resilient.
Oil-importing countries that trade mainly with the GCC could be protected to some degree by oil exporters’ continued spending. But a protracted recession in trading partners could have a significant impact on the growth of oil importers, and unemployment and poverty could rise, Ahmed said. The projected fall in inflation to 9.7 percent in 2009 from 14.4 percent in 2008 for this group of countries should alleviate some of the pressure on the poor.
Countries in this group represent a range of different economic structures and levels of development, and depend upon different types of foreign inflows. Some countries are better integrated with world financial markets (for example, Egypt, Jordan, Lebanon, and Pakistan), but others, such as Afghanistan, are more dependent on official development assistance.
Given the region’s unique characteristics, economic policy should concentrate on the following key measures, Ahmed stressed:
• Maintain or increase public spending where possible. Countries where public debt levels are not a concern would do well to maintain or enhance public spending. This is true for most oil exporters, but also for countries like Morocco, Syria, and Tunisia.
• Strengthen financial systems. Countries should keep a close eye on their banking systems and, where appropriate, conduct “stress tests” to assess recapitalization needs and deal with troubled financial institutions.
• Ease monetary policy as inflationary falls. As inflationary pressures recede, some countries will have more room for an easing of monetary policy to support investment and growth.
• Strengthen social safety nets. In this period of economic slowdown, it will be crucial to target government resources and develop policies to protect the poor and vulnerable segments of society.
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