Opinion: Time of major economic transformations in the Middle East

IMF Blog, October 27, 2021

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2021 marked a gradual recovery in the region after an unprecedented contraction in domestic product during 2020.
The countries of the region managed to varying degrees to contain the economic shocks caused by the pandemic and can look forward to 4.1 percent growth this year.
The current recovery is uneven across countries; slow vaccine rollout has held back recovery in countries facing instability, conflicts, and political volatility.
The pandemic accelerated technology investments, digitalization, adaptation of production patterns to global changes and supply chain developments, and development of social programs.

Oil priced at more than $84/barrel in mid-October 2021, compared to less than $25/barrel in April 2020.
The International Monetary Fund provided $17 billion in financing and the equivalent of $42 billion in special drawing rights in August of this year, for a total of $60 billion in support for the countries of the region.
Countries of the region have remained able to obtain financing from global financial markets.

Inflation in the countries of the region is expected to reach 13 percent in 2021.
Food and energy prices have increased significantly, posing risks to living conditions of low-income persons and vulnerable groups.
These developments could increase risks of social unrest, particularly in low-income countries and fragile economies, and create challenges for countries with high fiscal deficits.
Prospects for economic stability have become more complex, with growing risks of exposure to the repercussions of sudden financial turmoil.
Debt accumulation in 2020 increased future financing needs for the Middle East, expected to reach $1,075 billion during 2021/22, compared to $784 billion in 2018/19.
A small number of countries account for the bulk of government financing needs.

The unemployment rate in the region increased by about 1.5 per cent since the outbreak of the pandemic, after having reached 11.6 percent in 2020.
Employment changes since the pandemic outbreak:
- employment fell by 10 percent among youth
- employment fell by 4.3 percent among adults
- employment fell by 6.1 percent among women
- employment fell by 3.9 percent among men
About 15-25 percent of small businesses face the possibility of restructuring or liquidation.
The informal sector did not provide a buffer against shocks in this recession because social distancing measures caused closures and job losses in the sector.
Youth and women have been the most affected groups; inequalities between social groups are increasing.

2022 is described as the year of major economic transformations amid uncertainty due to:
- possibility of new waves of the pandemic affecting mobility and economic activity
- continued production and supply chain disruptions that could entrench inflation
- potential decline in demand in some major economies, such as China
- impact of potential interest rate policy adjustments affecting global investment flows and increasing the risk of capital flight from certain emerging markets
Higher interest rates will likely make borrowing more expensive worldwide, straining public finances.
Global developments will require delicate trade-offs in economic decisionmaking given shrinking margins of maneuver and widening social disparities.
Transforming the crisis into a springboard for sustainable, inclusive growth requires harmonizing immediate challenges with transformational action.

Urgent priority: accelerate vaccinations to protect lives, stimulate growth, and reduce social inequalities; strengthen regional and international cooperation to secure vaccines and ensure distribution to all segments of society.
Central banks should closely monitor the global rise in inflation; it may be necessary to raise interest rates as a prudential measure if global inflation expectations continue to rise.
Short-term fiscal and monetary support should be aligned with efforts to maintain macroeconomic stability and keep debt within sustainable limits.
Strengthen policy frameworks to enhance credibility in meeting stability and prosperity requirements.
Take bold steps to address inequalities, create jobs, and mitigate social risks by:
- shifting attention toward supporting the health and education sectors and strengthening social safety nets
- improving opportunities for vocational rehabilitation and providing employment incentives to help workers move to more productive sectors
- supporting job opportunities for youth and increasing women's participation in economic activity
Adaptation to climate change is critical; well-targeted investments should be made to create new, sustainable jobs and manage increasing frequency and costs of climate disasters.

The passage toward a better tomorrow is the central objective for 2022: building a more advanced and solid economy that includes all segments of society and making the recovery a pivotal moment.
Failure to take prompt strategic action will saddle the peoples of the region with heavy burdens and deprive future generations of a historic opportunity for progress and prosperity.
If used properly, 2022 could constitute a milestone on the path toward building a promising and prosperous economic future.

Opinion: Time of major economic transformations in the Middle East — Jihad Azour, October 27, 2021