IMF Sees Varied Outlook For Mideast, With Oil-Importing Countries Facing Continued Economic Pressures

The economic outlook for countries across the Middle East and North Africa region varies markedly, with the oil-exporters seeing a mild pickup in growth in 2011 on the back of higher oil prices, and the oil-importers experiencing a dramatic slowdown, the IMF says in its latest assessment of the region. The IMF’s Regional Economic Outlook for the Middle East and Central Asia, released today, projects growth in the Middle East and North Africa region, including Afghanistan and Pakistan, at 3.9 percent in 2011, down from 4.4 percent in 2010.

The region’s oil-exporting countries (excluding Libya)—Algeria, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, Sudan, the United Arab Emirates, and Yemen—are forecast to expand by 4.9 percent in 2011, thanks to higher oil prices and oil production. But growth among the region’s oil importers—Afghanistan, Djibouti, Egypt, Jordan, Lebanon, Mauritania, Morocco, Pakistan, Syria, and Tunisia—will register just under 2 percent (see table).

“Since the beginning of this year, a deterioration in the international economic outlook and the buildup of domestic social pressures have resulted in an economic slowdown in many of the region’s oil-importing countries. But we should not lose sight that the ongoing historical transformation holds the promise of improved living standards and a more prosperous future for the people in the region,” Masood Ahmed, Director of the IMF’s Middle East and Central Asia Department, said at the launch conference of the report in Dubai today.

Higher oil prices benefiting oil exporters

Economic activity in the region’s oil-exporting countries has clearly improved, bolstered by continued high energy prices. This expansion is driven by the high level of activity in the countries of the Gulf Cooperation Council (GCC), where growth is projected at 7 percent in 2011, the report shows. Several countries—Saudi Arabia in particular—have stepped up oil production temporarily in response to higher oil prices and shortfalls in production from Libya. “The decision to increase oil production in the wake of disruptions in Libya was an essential contribution toward global energy market stability and enhanced activity,” Mr. Ahmed noted.

Increased oil revenues have created additional room for government spending in the GCC. Several countries announced spending programs early in the year, covering a wide spectrum of measures, such as subsidies, wages, and capital expenditure. At current projected oil prices and levels of production, revenue gains will more than offset the high levels of public spending. In 2011, the oil exporters’ combined external current account balance is expected to increase from $202 billion to $334 billion (excluding Libya), and from $163 billion to $279 billion for the GCC.

But fiscal vulnerability has also increased substantially, as break-even oil prices have risen steadily and are now approaching observed oil prices (see Chart 1). “Oil-exporting countries have understandably increased fiscal spending to address social needs. Looking forward, the widening of non-oil fiscal deficits makes many countries more vulnerable to swings in oil prices, at a time when the world economy is facing heightened risks,” Mr. Ahmed added.

In the near term, such spending measures are appropriate to lessen the impact of the downturn. But from an efficiency and equity standpoint, it is better for governments to gradually replace universal subsidies with social safety nets that are targeted at the less well-off part of the population, the IMF report states. Resources can then be used for critical investments in infrastructure and education and for supporting much-needed reforms.

Meeting the rising demands of the population will not be easy, the report notes—particularly as most countries have already used their fiscal and international reserve buffers to respond to deteriorating economic conditions in the wake of the Arab Spring, and have less room left to respond to future shocks. Regional partners and the broader international community can facilitate this transition through financing and greater market access for exports.

Conflict has taken a massive human toll in addition to its enormous economic costs in Libya, Syria, and Yemen. The immediate priority for these countries is to avoid further humanitarian crisis and, post conflict, to pursue an agenda of reconstruction and reform.