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Director of the Middle East and Central Asia Department at the International Monetary Fund Jihad Azour indicated that the expected MENA GDP growth is 5%, but masks “important differences across countries with oil exporters upgraded.”
According to the International Monetary Fund in its latest Middle East and Central Asia Regional Economic Outlook, the conflict in Ukraine and sanctions against Russia are exacerbating the divergence in recovery prospects for the Middle East and Central Asia (ME&CA).
The report also stated that despite better-than-expected upside momentum in 2021, the economic environment in 2022 is defined by “extraordinary headwinds and uncertainties, particularly for commodity importers, with higher and more volatile commodity prices, rising inflationary pressures, faster-than-expected monetary policy normalization in advanced economies, and a lingering pandemic,” the report stated.
While oil exporters in the Middle East and North Africa (MENA) have improved their prospects, countries in the Caucasus and Central Asia (CCA) face a tough outlook due to their ties to Russia and Ukraine.
Furthermore, according to the research, a prolonged war and further sanctions against Russia, tighter-than-expected global financial conditions, possible de-anchoring of inflation expectations, a steeper recession in China, and new pandemic outbreaks are among the downside risks.
Azour then stressed that “looking ahead, the Ukrainian war is expected to dominate the 2022 outlook, compounding the headwinds from faster-than-expected normalization of monetary policy in advanced economies and the slowdown in China, which is a significant market for exports for many of the region’s oil-exporting countries.”
He continued by saying that they project real GDP growth in the MENA region at 5% in 2022, explaining that “while this is a 0.9 percentage point upgrade from October, this forecast masks significant differences across countries, with oil exporters upgraded due to higher energy prices and production in line with the OPEC+ agreement, and most emerging market and middle-income countries and low-income countries downgraded.”
Higher commodity prices, tighter financial conditions, fueling inflation and hurting external and fiscal balances are wreaking havoc for MENA oil importers.
In contrast, oil and gas exporters, particularly in MENA, will benefit from higher energy prices, more than offsetting the impact of tightening financial conditions and lower tourism revenues, the report outlined.
On average, oil revenues and external current account balances are projected to increase by 5.3 and 7.2 percentage points of GDP, respectively, in 2022 compared to 2021.
“This difficult environment and the uncertainties ahead have created extraordinarily complex policy trade-offs, especially for oil-importing countries with limited policy space. So, how can countries manage these trade-offs while maintaining focus on tackling long-term challenges?” Azour said.
He went on to say that in the near term, there are several policy priorities countries should consider, as adjusting monetary policy based on country circumstances to contain inflation and avoid derailing the recovery, exchange rates should be allowed to adjust with interventions used only to prevent market disruptions.
Moreover, on fiscal policy, oil exporters have the opportunity to rebuild buffers. However, in emerging market and middle-income countries where fiscal space is limited, growth-friendly fiscal consolidation prioritizing health, social spending, and investment will be critical.
Azour also pointed out that “tackling rising global food and energy prices is vital, countries should compensate vulnerable households and firms with transparent, temporary, and targeted transfers, while allowing domestic prices to gradually to increase.”
“Garnering international cooperation to prevent a food crisis that could exacerbate the already-dire conditions facing low-income countries will be equally important. With the limited policy space, structural reforms have become even more important to prevent scarring from the pandemic and war and ensure a private sector-led inclusive recovery,” Azour said.
