## Middle East Conflict Risks Reshaping the Region’s Economies

_IMF Blog, December 1, 2023_

## Source details

**Canonical URL:** [Middle East Conflict Risks Reshaping the Region’s Economies](https://www.imf.org/en/blogs/articles/2023/12/01/middle-east-conflict-risks-reshaping-the-regions-economies)

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## Bibliographic details
- Authors: John Bluedorn, Taline Koranchelian
- Published: December 1, 2023

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### Regional outlook and immediate impact
- 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.

### Impact on directly affected and neighboring countries
- 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.

### Energy, financial markets, and investor sentiment
- 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.

### Risk of escalation and transmission channels
- 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.

### Policy priorities, IMF engagement, and recommendations
- 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.*

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## References

- [Regional Economic Outlook](http://www.imf.org/mena)

_Source: https://www.imf.org/en/blogs/articles/2023/12/01/middle-east-conflict-risks-reshaping-the-regions-economies_