Regional Economic Outlook for the Middle East and Central Asia, October 2023
Regional Economic Outlook, October 2023
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- Published: October 12, 2023
Overview
- Across the Middle East and Central Asia, the combined effects of global headwinds, domestic challenges, and geopolitical risks weigh on economic momentum, and the outlook is highly uncertain.
- Growth is set to slow this year in the Middle East and North Africa region, driven by lower oil production, tight policy settings in emerging market and middle-income economies, the conflict in Sudan, and other country-specific factors.
- In the Caucasus and Central Asia, migration, trade, and financial inflows following Russia’s war in Ukraine continue to support economic activity, but growth is set to moderate slightly this year.
- Looking ahead, economic activity in the Middle East and North Africa region is expected to improve in 2024 and 2025 as some factors weighing on growth this year gradually dissipate, including the temporary oil production cuts.
- Growth is expected to remain subdued over the forecast horizon amid persistent structural hurdles.
- In the Caucasus and Central Asia, economic growth is projected to slow next year and over the medium term as the boost to activity from real and financial inflows from Russia gradually fades and deep-seated structural challenges remain unsolved.
- Inflation is broadly easing, in line with globally declining price pressures, although country-specific factors—including buoyant wage growth in some Caucasus and Central Asia countries—and climate-related events continue to make their mark.
- Despite some improvement since April, the balance of risks to the outlook remains on the downside.
- Expediting structural reforms is crucial to boost growth and strengthen resilience, while tight monetary and fiscal policies remain essential in several economies to durably bring down inflation and ensure public debt sustainability.
Chapter 1: Building Resilience and Fostering Sustainable Growth
- Restates regional assessment: global headwinds, domestic challenges, and geopolitical risks weigh on momentum and create high uncertainty.
- Key near-term dynamics:
- Middle East and North Africa: lower oil production, tight policy settings, conflict in Sudan, and country-specific factors → growth slows this year.
- Caucasus and Central Asia: migration, trade, and financial inflows following Russia’s war in Ukraine → support activity; growth moderates slightly this year.
- Medium-term outlook:
- MENA: improvement in 2024 and 2025 as temporary headwinds dissipate (including temporary oil production cuts) but growth remains subdued due to structural hurdles.
- Caucasus and Central Asia: projected slowdown next year and over the medium term as inflow-driven boost fades and structural challenges persist.
Chapter 2: From Setbacks to Comebacks: Reforms to Build Resilience and Prosperity
- Policy context:
- Policy space in many countries has diminished following an extended period of shocks, particularly among emerging market and middle-income countries.
- Amid high public debt and inflation, fiscal consolidation and tight monetary policy are needed in many countries in the region.
- Role and impact of structural reforms:
- Structural reforms can increase potential growth and accrue near-term growth benefits.
- Most structural reforms help lift output, with the impact growing over time.
- Governance reforms—enhancing the rule of law and government effectiveness—are especially important and can generate positive output effects during periods of weak growth or limited policy space.
- Improving government capacity to implement policies and regulations promotes private sector development via improved investment and productivity.
- Prioritizing governance reforms before other reforms can magnify overall growth dividends.
- Strategic packaging of reforms (for example, combining external sector and credit market reforms) can amplify positive output effects.
- The design of structural reforms will need to include political considerations and distributional impacts.
Chapter 3: Higher for Longer: What are the Macrofinancial Risks?
- Policy challenge:
- Central banks face difficult trade-offs as core inflation, though gradually declining, remains above central bank targets in many countries.
- A prolonged period of tighter monetary policy to reduce inflation could have unintended consequences for financial systems.
- Banking sector assessment:
- The chapter assesses state and resilience of banking sectors to credit and liquidity risks in a “higher-for-longer” interest rate environment.
- Results suggest banking systems would be resilient in an adverse scenario of higher interest rates, corporate sector stress, and rising liquidity pressures.
- Pockets of vulnerability exist in some countries, particularly among state-owned banks.
- Capital losses could emerge that, while manageable, could limit lending and add to downside risks to output.
- Policy recommendations to mitigate downside risks:
- Strengthen macroprudential frameworks.
- Contain vulnerabilities stemming from the sovereign-bank nexus.
- Enhance clear and timely communication.
- Establish emergency liquidity tools to stem systemic financial stress.
- Develop resolution regimes to reduce the buildup of zombie firms.
Special Issue: In Pursuit of Stronger Growth and Resilience (Africa)
- Context:
- On the occasion of the World Bank-IMF Annual Meetings’ return to the African continent after 50 years—specifically to Marrakech, Morocco—this Special Issue on Africa discusses economic developments for the entire continent.
- Recent shocks and vulnerabilities:
- The devastating earthquake in Morocco, severe floods in Libya, and the impact of Cyclone Freddy in Malawi underscore ongoing vulnerability to natural disasters and the need to build resilience.
- Near-term signs and ongoing challenges:
- Tentative signs of improvement: inflation is generally easing, economic activity is starting to pick up, and fiscal imbalances are gradually moderating.
- Significant challenges remain: for too many countries, inflation is still too high, debt vulnerabilities remain elevated, and medium-term growth rates are too low.
- Policy implication:
- The international community should maintain and enhance a cooperative approach to the provision of global public goods.
- In the case of Africa, it is essential to support the region’s most vulnerable climate- and conflict-affected states.
Regional Economic Outlook for the Middle East and Central Asia, October 2023 (IMF).
Content in this bundle
- Africa: Special Issue
- Chapter 1
- Chapter 2
- Online Annex. From Setbacks to Comebacks: Reforms to Build Resilience and Prosperity: October 2023
- Chapter 3
- Online Annex. Higher for Longer: What Are the Macrofinancial Risks?; October 2023
- Jihad Azour Speaking Points Reo Press Conference
- Key Messages — October 2023 Regional Economic Outlook: Middle East & Central Asia
- Statistical Appendix
- Full Report