More Diversified Trade Can Make Middle East and Central Asia More Resilient
IMF Blog, May 13, 2024
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- Authors: Jihad Azour
- Published: May 13, 2024
Regional trade dynamics and recent shifts
- Dislocations from the pandemic, geoeconomic fragmentation, and Russia’s war in Ukraine have shifted world trade dynamics, creating challenges and new opportunities for the Caucasus and Central Asia.
- Since the war began, the region’s economies have shown continued resilience and trade activity in many countries has surged, fueled in part by alternative trade routes.
- In 2022, Armenia, Georgia, and the Kyrgyz Republic saw their share of trade excluding oil and gas with major partners such as China, the European Union, Russia, and the United States rise as much as 60 percent.
- Gross domestic product growth in the Caucasus and Central Asia is projected to remain robust at 3.9 percent in 2024 before picking up to 4.8 percent in 2025.
- Trade volumes between China and Europe via Central Asia (the Middle Corridor) have more than quadrupled, representing a small fraction of overall China–Europe trade but holding significant promise for economic development and integration into global supply chains.
- Countries in the Middle East and North Africa, such as Algeria, Kuwait, Oman, and Qatar, roughly doubled their energy exports to the European Union in 2022–23 to meet surging demand for non-Russian oil and gas.
Red Sea disruptions and economic exposure
- Red Sea shipping attacks stemming from the conflict in Gaza and Israel have disrupted maritime trade, increased uncertainty, and affected neighboring economies.
- Suez Canal transits are down more than 60 percent since the conflict in Gaza and Israel began as ships are rerouted around the Cape of Good Hope.
- Cargo volumes have contracted sharply in Red Sea ports such as Jordan’s Al Aqaba and Saudi Arabia’s Jeddah; some trade has been redirected within the region, including to Dammam, Saudi Arabia, on the Persian Gulf.
- Illustrative scenario from the Regional Economic Outlook:
- Countries on the Red Sea (Egypt, Jordan, Saudi Arabia, Sudan, Yemen) could lose about 10 percent of their exports and close to 1 percent of GDP on average if disruptions continue through the end of this year.
Policy levers to boost trade and resilience
- Key longstanding constraints to address: elevated nontariff restrictions, infrastructure inadequacies, and regulatory inefficiencies.
- Research findings on the potential gains from targeted reforms:
- Reducing nontariff trade barriers, boosting infrastructure investment, and enhancing regulatory quality could help increase trade by up to 17 percent on average over the medium term.
- Economic output could be 3 percent higher.
- Recommended actions for immediate and medium-term resilience:
- Short-term / operational: improve supply chain management, secure new suppliers in the most affected sectors, seek alternate shipping routes, and assess air freight capacity needs.
- Medium-term / structural: strengthen and expand regional linkages and connectivity; invest in transportation infrastructure, including developing innovative sea–land routes.
- Building a more diversified trade profile—spanning partners, products, and routes—would significantly bolster the region’s ability to withstand disruptions.
Country experiences illustrating reform impact
- Uzbekistan: eliminated currency controls and improved the business environment, enhancing attractiveness to foreign investors and deepening integration into the global economy.
- Saudi Arabia: grew its non-oil economy and attracted international businesses through its Vision 2030 reform plan, which included easing regulatory constraints on trade and investment.
- Azerbaijan: investment in the Baku-Tbilisi-Kars railway, a key segment of the Middle Corridor, increased cargo capacity between Asia and Europe and highlights the potential of infrastructure investment.
This blog reflects contributions by Bronwen Brown and other staff across the Middle East and Central Asia Department and is based on Chapter 3 of the April 2024 Regional Economic Outlook for the Middle East and Central Asia, “Trade Patterns amid Shocks and a Changing Geoeconomic Landscape.”
Content in this bundle
- Chapter 3