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The Calculus of Conflict in the Middle East

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As world leaders head to New York this week for the United Nations General Assembly, there is still no end to the heart-breaking images of war-torn cities in the Middle East and North Africa, and of a massive exodus of people looking for sanctuary and opportunities to sustain a livelihood.

Within the region, more than 20 million people are displaced, and a further 10 million are refugees—a scale not seen since the end of World War II. The immense humanitarian costs that these conflicts inflict are difficult to grasp.

The economic consequences are also significant. Much of the productive capital in conflict zones has been destroyed, personal wealth and income losses are enormous, and human capital deteriorates with the lack of jobs and education.

The Fund, along with the international community, will be called upon to assist in rebuilding the economy once the conflicts end. We have therefore looked more deeply into the economic challenges brought about by these conflicts, as well as into options for policymakers on managing the post-conflict recovery.

Let me highlight three key findings that were published in an IMF staff paper today.

First, the economic costs of conflicts are massive. In addition to tragic loss of life and physical destruction, war and internal strife in countries such as Iraq, Libya, Syria, and Yemen have exacerbated already high levels of poverty, unemployment, and pushed countries further into fragility erasing previous development gains for a whole generation. For example, in Syria school dropout rates reached 52 percent in 2013 and life expectancy fell to 56 years from 76 years before the conflict.

Conflicts have also driven up inflation, weakened fiscal and financial positions, caused deep recessions and damaged institutions. For example, after four years of intense fighting, Syria’s output is now estimated to be less than half its level in 2010, before the conflict, while inflation surged by almost 300 percentage points in May 2015, the latest available month of data. Yemen lost an estimated 25-35 percent of its GDP in 2015 alone. These are staggering numbers. Conflicts leave deep marks on economies. We estimate that even with a relatively high annual growth rate of 4.5 percent, it would take Syria more than 20 years just to rebound to its 2010 pre-conflict GDP level.

md-refugee-chartYet, the impact of conflicts is not confined to national borders. There are also powerful spillovers to neighboring countries, such as Jordan, Lebanon, Tunisia, and Turkey, and beyond (see Chart). To varying degrees, these countries are exposed to the challenges of hosting large numbers of refugees, weaker confidence and security, and declining social cohesion. All this affects the quality of institutions and their ability to undertake much needed economic reforms.

A second major finding is that appropriate policies can limit the immediate impact of conflicts. This means:

  • Protecting economic institutions. Experience has shown that keeping core government institutions functioning in times of conflict—such as fiscal agents and central banks – is key to maintain life-saving services to people. Such institutions provide wages and salaries, health, and other services.
  • Prioritizing spending. Conflicts are associated with greater fiscal pressures. Spending on security and military increase just as government revenues drop. In such an environment, prioritizing spending is critical to ensure that essential services, including shelter, are maintained to protect the most vulnerable groups.
  • Ensuring macroeconomic stability. Fiscal and external imbalances increase during conflicts, and central banks tend to take on a greater role in financing governments and facilitating economic activity—as happened in Yemen and Libya. The resulting rise in inflation and loss of currency reserves may require the use of nontraditional tools and administrative measures to maintain some degree of macroeconomic control.

Third, external partners, including the IMF, all have a role to play in helping countries to confront, and eventually overcome, conflict. The priority is first and foremost to alleviate human suffering and meet the immediate needs of those affected by conflicts.

The IMF has been an important partner in these efforts—for example, by accommodating refugee or security-related outlays in our programs with Iraq, Jordan and Tunisia, as well as through our policy advice and capacity building activities throughout the region.

We are also hoping to catalyze additional donor support for countries hosting refugees. At the London Conference for Supporting Syria and the Region in February, donors committed to funding humanitarian and development activities to the tune of $5.9 billion and $5.5 billion for 2016 and 2017–20, respectively. Even if all these pledges were fulfilled, they would not be enough given the magnitude of the crisis. Moreover, any financing should come through grants and concessional loans to reduce the financial burden on recipient countries.

Over the longer term, the priority is to provide scaled-up development aid to help rebuild infrastructure and institutions, and, more broadly, strengthen economic and social resilience across the region. Here too, the IMF stands ready to help with a macroeconomic toolkit and experience gained from many years of working in post-conflict zones around the world.

The international community has a major responsibility in helping countries in the region overcome this situation. We are ready to do our part.