Regional Economic Outlook: Middle East and Central Asia

Middle East and Central Asia, October 19, 2020

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Countries in the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) and in the Caucasus and Central Asia (CCA) responded with swift and stringent measures but face an uncertain and difficult environment.
Real GDP in the region is projected to fall by 4.1 percent in 2020.
This contraction is 1.3 percentage points larger than projected in April 2020.
With global recovery subdued, downside risks continue to dominate the outlook as the pandemic continues to test countries.
The coronavirus disease (COVID-19) pandemic may inflict a deeper and more persistent economic impact than previous recessions in the Middle East and Central Asia (MCD) region did.
Real GDP in the region could remain below precrisis trends for a decade.
Immediate priorities: containing the health crisis, cushioning income losses, expanding social spending, ensuring adequate resources for health systems, and correctly targeting support programs.
Near-term policy focus: secure jobs, provide liquidity to businesses and households, protect the poor, and put in place a carefully designed economic road map to recovery.

The region’s large exposure in the hard-hit services sector (including tourism), strained corporate balance sheets, low ability to work from home, and dependence on remittances will weigh heavily on recovery prospects.
Policymakers must balance preserving livelihoods, minimizing scarring, and promoting recovery without hampering necessary reallocation.
Medium-term priority: rebuild buffers to guard against future shocks and strengthen inclusion.

The pandemic required a substantial fiscal response, resulting in the largest synchronous fiscal easing in oil importers and a significant one in oil exporters.
The size of fiscal measures is slightly below that of other emerging market and developing economies.
Emergency measures, along with significant declines in revenues, will increase financing needs and raise debt and deficits, eroding fiscal space and leaving the region vulnerable to a resurgence of the virus and, for some countries, unsustainable debt dynamics.
Lower borrowing costs, reflecting large monetary easing in major advanced economies and increased official financing, somewhat mitigate adverse impacts.
Even with ambitious baseline fiscal adjustments, countries are not expected to revert to their pre-pandemic debt levels.
Policy recommendations:
- Develop medium-term fiscal frameworks.
- Adopt fiscal rules.
- Strengthen debt management.
- Expand fiscal space by enhancing tax compliance, increasing the progressivity of tax systems, and raising expenditure efficiency.
- Improve governance and gradually eliminate fuel subsidies.
- Support an inclusive recovery by enhancing social safety nets and prioritizing spending on health, education, and job retraining.

Banks began the year in a generally strong position, but the COVID-19 crisis could trigger significant increases in defaults and nonperforming loans (NPLs).
Streamlined stress-testing exercise result: potential costs from asset impairment for countries in the region could reach $190 billion.
MENAP is hit particularly hard—oil exporters face the largest losses while bank capital in several oil importers falls below regulatory minimum requirements.
Banking systems in the CCA are more resilient due to higher starting capital and low private sector credit.
Supportive financial sector policies have helped prevent some short-term financial risks from materializing and eased the provision of credit.
Going forward: carefully balance sustained provision of credit and preservation of financial stability.
As the pandemic subsides: remove regulatory easing, strengthen supervision, and continue to improve financial inclusion—including for small and medium-sized enterprises (SMEs)—to boost inclusive growth.

Statistical appendix tables contain data for 31 MCD countries; data revisions reflect changes in methodology and/or revisions provided by country authorities.
Projections are based on statistical information available through late September 2020.
Assumptions used for projections:
- Oil price will average US$41.69 a barrel in 2020 and US$46.70 a barrel in 2021.
- The six-month London interbank offered rate (LIBOR) on U.S.-dollar deposits will average 0.74 percent in 2020 and 0.41 percent in 2021.
The 2020 and 2021 data in the tables are projections and these working hypotheses add to the margin of error in the projections.

Regional Economic Outlook: Middle East and Central Asia, October 2020.

mreo1020-full-report
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Technical Annex: chapter 2: Addressing Economic Scarring from the Crisis; October 2020
- Technical Annex: chapter 2: Addressing Economic Scarring from the Crisis; October 2020 (Markdown version)
- Technical Annex: chapter 2: Addressing Economic Scarring from the Crisis; October 2020 (PDF)
Reo Stat Appendix
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