REGIONAL ECONOMIC OUTLOOK
Low Oil Prices, Conflict Weigh on Middle East’s Prospects
October 21, 2015
- Region to see modest growth this year, amid rising uncertainty
- Oil exporters face fiscal challenge and need to diversify their economies
- Oil importers see gains, but should seize opportunity provided by low oil prices to enact needed reforms
The Middle East, North Africa, Afghanistan, and Pakistan region as a whole continues to see subdued growth, owing to spreading and deepening regional conflict as well as lower oil prices, the IMF said in its latest regional assessment.
The IMF’s Regional Economic Outlook for the Middle East and Central Asia, released on October 21, projects that growth this year will be modest, at 2½ percent. Economic activity could pick up to 4 percent next year, however, if regional conflicts ease and sanctions on Iran are alleviated, the report said (see table).
The region’s current circumstances make economic diversification away from oil all the more urgent, as low oil prices are likely to persist, the report emphasizes.
“Achieving fiscal sustainability over the medium term will be especially challenging given the need to create jobs for the more than 10 million people anticipated to be looking for work by 2020 in the region’s oil-exporting countries,” IMF Middle East and Central Asia Department Director Masood Ahmed said at the report’s unveiling in Dubai.
Two key factors are shaping the region’s outlook, Ahmed said.
First, conflicts are both spreading and deepening, exacting a horrendous human toll on the region as well as a significant impact on economic activity. Syria’s GDP has declined by 45-60 percent since the start of the conflict, while Yemen’s has dropped by nearly 30 percent in the past year.
These conflicts have given rise to large numbers of displaced people and refugees, on a scale not seen since the early 1990s. In countries hosting refugees, Ahmed said, economic, social, and political pressures have risen sharply. And the conflicts are having other cross-border spillover effects, including setbacks to trade and tourism, worsening security, and deteriorating investor confidence.
Ahmed called for a “concerted effort” by the international community to help refugees and stabilize the affected countries, while providing additional financing to countries hosting large numbers of refugees.
Uncertain outlook for oil exporters
The second factor shaping the region’s outlook is the slump in oil prices, which many experts now believe will remain in place for the foreseeable future.
“For the region’s oil exporters, the fall in prices has led to large export revenue losses, amounting to a staggering $360 billion this year alone,” Ahmed told reporters. While many countries are drawing on their fiscal cushions and are starting to consolidate their budget positions, fiscal deficits are still expected to average nearly 13 percent of GDP in oil-exporting countries this year (see Chart 1).
Over the medium term, putting fiscal positions on a stronger footing will require efforts to streamline spending, reform energy pricing, and broaden non-oil revenue sources.
“The key to resolving the challenge of absorbing millions of new job-market entrants expected over the next few years lies in accelerating economic diversification by creating incentives for private firms to expand activities that do not depend on government spending or oil,” Ahmed emphasized.
Pickup in growth for oil importers
The region’s oil-importing countries should experience a pickup in growth averaging about 4 percent in 2015-16, the report said (see Chart 2). Lower oil prices have been a boon, and progress in implementing reforms, advancing political transitions, and improving euro area growth have also played important roles. But the picture is not universally rosy, as some oil-importing countries (such as Lebanon, Jordan, and Tunisia) are being profoundly impacted by intensifying regional conflicts, which are more than offsetting the benefits from lower oil prices.
Moreover, Ahmed told reporters, there are risks to the outlook for this group. Slower growth in the Gulf Cooperation Council countries could lead to lower remittances; borrowing costs—and risk aversion—are likely to increase as liquidity tightens in global and regional markets, while the likely slowdown in emerging markets could impact exports.
The report noted that although rising, current growth rates are not enough to make a serious dent in unemployment.
There are a number of steps oil-importing countries could take to seize this moment of lower oil prices and strengthen their economies. “Lifting economic prospects in a sustainable and inclusive manner will require raising public investment and implementing structural reforms to fuel private sector-led growth, especially in the areas of governance, the business climate, labor markets, and access to finance,” Ahmed said.
Finally, regarding developments surrounding the Islamic Republic of Iran, Ahmed said that “With the easing of international sanctions, the country’s economic prospects have improved substantially and, through increased trade and investment, benefits are expected to flow to its economic partners as well. The country’s growth could reach 4 percent in the medium term, or even higher if the easing of sanctions is accompanied by domestic economic reforms to ensure macroeconomic stability and promote inclusive growth.”