IMF Survey : Cheap Oil Means a New Reality for Middle East, North Africa Region

IMF News, April 25, 2016

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Growth in the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) region remains subdued owing to persistently low oil prices and deepening regional conflicts, according to the IMF’s regional assessment released on April 25, 2016.
The modest pick-up in 2016 largely reflects increased oil production in Iraq and post-sanctions Iran; however, most oil exporters are projected to see slower growth as they tighten public spending.

The IMF’s Regional Economic Outlook Update for the Middle East and Central Asia projects that growth in 2016 will be about 3 percent.
Growth in most MENAP oil exporters has been downgraded relative to projections made last October.
Growth in oil importers is projected to slow to 3.5 percent in 2016 because of adverse spillovers from slowing growth in oil-exporting neighbors and intensifying regional conflicts.
The report notes the recovery among MENAP oil importers remains fragile and uneven.

Conflicts—particularly in Iraq, Libya, Syria, and Yemen—are intensifying, resulting in massive numbers of displaced people and severe economic damage.
Since October 2015, more than 600,000 people have fled Syria alone, bringing the total number of Syrian refugees to almost five million.
Mounting conflict costs have:
- Put enormous pressure on government budgets and infrastructure.
- Driven up inflation.
- Diverted resources away from social spending.
- Caused repercussions in neighboring countries hosting refugees and disrupted trade and tourism, worsened security, and decreased investor confidence.
The IMF emphasizes the need for the international community to scale up and better coordinate support, noting "large financing needs, with host countries requiring additional financing on affordable terms to fund crisis-related projects."

The fall in oil prices led to large export revenue losses: a staggering $390 billion last year and the expectation of a further $140 billion this year.
Many countries have focused fiscal consolidation on capital expenditure cuts and substantial energy price reforms.
Fiscal deficit projections:
- For Algeria and the Gulf Cooperation Council (GCC), fiscal deficits are expected to average 12¾ percent of GDP in 2016, and remain at 7 percent over the medium term.
- The deficit for other oil exporters in the region is projected to be 7¾ percent of GDP in 2016.
The report states that “further and substantial deficit-reduction measures will be needed over a number of years to ensure that fiscal positions are sustainable and oil wealth is shared equitably with future generations.”

Reduce dependence on oil and accelerate reforms to manage the new reality of low oil prices.
Implement reforms to promote economic diversification and non-oil sector growth, including:
- Reducing the public-private sector wage gap.
- Better aligning education and skills with market needs.
Continue and widen energy pricing reforms.
Design broad-based tax systems, including value-added taxes; the GCC countries are already planning to introduce such taxes in the coming years.
Ensure that the private sector can create enough jobs for a young and growing population through deep structural reforms to improve medium-term growth prospects.

Oil importers saw a pickup in growth from 3 percent in 2011-14, to 3¾ percent in 2015.
Growth is expected to remain around that level in 2016-17.
Contributing factors to the recovery include lower oil prices and improved confidence from recent reforms; downside pressures include security disruptions, adverse spillovers from regional conflicts, and lower remittances, trade, and financial assistance from the slowdown in the GCC.
Fiscal positions:
- The effects of energy subsidy reforms, coupled with low oil prices, have helped reduce government deficits to about 6½ percent of GDP in 2016 from a 2013 peak of 9½ percent.
- The report recommends additional fiscal consolidation measures designed in a growth-friendly way to put public debt on a sustainable path and preserve macroeconomic stability.
For some countries, greater exchange rate flexibility would support fiscal consolidation and improve external positions by strengthening competitiveness.

Medium-term growth prospects are still insufficient to address high unemployment.
Unemployment statistics:
- Overall unemployment remains high at 10 percent.
- Youth unemployment is 25 percent.
The IMF encourages policymakers to:
- Step up structural reforms that strengthen the quality of education.
- Improve the functioning of labor and financial markets.
- Increase trade openness to boost economic growth and create jobs.

IMF Survey : Cheap Oil Means a New Reality for Middle East, North Africa Region — April 25, 2016.