High oil prices likely to amplify fiscal pressures

Recent rises in oil prices are expected add to the fiscal pressures in many oil importing countries across the Middle East and North Africa region, according to the latest regional economic outlook report from the International Monetary Fund (IMF).

For oil-importing countries in MENA, growth is expected to continue at a modest pace of 4.5 per cent in 2018, before dropping back to 4 per cent next year, the IMF said.

“These averages mask great variation across countries. For instance, while growth in Egypt is projected to be more than 5 per cent in 2018-19, reflecting payoffs from reforms, many oil-importing countries from the region are expected to grow at less than 3 per cent,” said Jihad Azour, director, Middle East and Central Asia Department of the IMF.

According to the IMF, this level of growth is not sufficient to create the required jobs for a region marred by instability and civil strife.

Oil importers who are behind the curve in fiscal reforms, particularly energy reforms are expected to face higher energy subsidy bills resulting from higher crude prices.

The rising fiscal pressures combined with slowing growth and rising global interest rates are expected to increase the cost of credit for these countries.

“Sovereign spreads for oil-importing countries have widened between 40 to 260 basis points since April. This poses a challenge given high levels of public debt in oil importing countries, 85 per cent of GDP on average in 2018,” said Azour.

Rate impact

With the US interest rates expected to rise further, financing conditions of region’s oil importers are expected to worsen. A potential sharp deterioration in emerging market sentiment is expected to add to the region’s financing challenges.

Rising trade tensions, according to the IMF, are expected to have a secondary impact on the region although many countries are not directly exposed to the US markets. If trade tensions reduce growth in the region’s key economic partners, such as China or the Eurozone, export demand and foreign direct investment in the region could decline. Additionally, the IMF expects a global economic slowdown could result in lower commodity prices.

Given the rising domestic and external risks that could impact the regional economies, the IMF has urged MENA oil importers to work on creating more fiscal space and robust monetary policy framework wherever exchange rate flexibility is available. “Countries in the region can do more to streamline current expenditures including public wage bills and subsidies to make room for high quality and targeted spending on education, health care and infrastructure that is critical for growth,” Azour said.