Middle East Conflict Risks Reshaping the Region’s Economies

IMF Blog, December 1, 2023

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Economic activity in the region was expected to slow, falling from 5.6 percent in 2022 to 2 percent in 2023.
The extent of the impact is highly uncertain and depends on the conflict’s duration, intensity, and spread.
Forecasts for the most directly exposed economies will be downgraded; policies to buffer economies against shocks and preserve stability will be critical.
Elevated uncertainty is eroding consumer and firm confidence, which could drive a drop in spending and investment if uncertainty persists.

Israel and the West Bank and Gaza are hardest hit.
Neighboring countries already experiencing reverberations include Egypt, Jordan, and Lebanon.
Tourism is a critical source of foreign exchange and employment:
- Tourism accounted for 35 percent to almost 50 percent of goods and services exports in these economies in 2019.
- Lebanon saw hotel occupancy rates fall by 45 percentage points in October compared to a year ago.
Fragile and conflict-affected states (Somalia, Sudan, Yemen) could see declines in critical aid flows if donor focus shifts and international aid envelopes do not expand.

Impact on energy and financial markets has been limited and temporary to date.
Oil prices: after an initial surge, oil prices retreated and are now below pre-conflict levels, reflecting changes in global demand conditions (as there was no disruption to oil production).
Natural gas prices: large spike followed by decline, but still about 25 percent above pre-conflict levels.
Government bond yields have climbed for some economies, but the broader impact has so far been minimal.
Net portfolio flows to the region were on a downward trend that accelerated with the crisis but have since reverted to pre-conflict levels.
Rising risk premia could push up borrowing costs, which could quickly impact highly indebted economies.

An escalation could quickly spread beyond immediate neighbors to economies such as Iraq, Iran, Syria, and Yemen.
Prolonged conflict would increasingly affect tourism, trade, investment, and other financial channels.
Potential for significant refugee flows, adding social and fiscal pressures in recipient countries and possibly causing more protracted weakness.
Regional energy context:
- The region produces 35 percent of the world’s oil exports and 14 percent of gas exports.
- If production disruption occurred, oil producers in the region can tap ample spare capacity to quickly boost production, mitigating impact relative to past episodes.

Near-term: prudent crisis management and precautionary policies are critical where economic impact is acute or risks are elevated.
Fortify policy buffers where needed and ensure fiscal and external sustainability.
Maintain focus on reform and resilience agendas to support near-term and longer-term growth, with appropriately designed and sequenced structural reforms as highlighted in the Regional Economic Outlook.
Stronger, more resilient economies are more likely to withstand sudden shocks.
IMF engagement and support:
- The IMF is closely engaged to help mitigate adverse spillovers and is revising the economic outlook for the Middle East and North Africa.
- Countries with IMF-supported program engagements include Egypt, Jordan, Mauritania, Morocco.
- In Egypt, staff is engaged with the authorities to move forward with the program reviews.
- A recent staff-level agreement on a Fund-supported program for Jordan—in train since mid-2023—sets the path for continued shelter against the storm.
- Morocco’s Flexible Credit Line arrangement reflects very strong fundamentals and policy settings and serves as a buffer against adverse shocks.
The IMF stands ready to step up needed support through policy advice, technical assistance, and financing.

This blog reflects contributions by Bronwen Brown and other staff across the Middle East and Central Asia Department.