IMF: Middle East economies at ‘turning point’
▶ Oil exporters set to fare better as Mena GDP is expected to grow by 4% this year after shrinking by 3.4% last year
Countries across the region face a turning point as they battle higher debt and the economic effects of the Covid-19 pandemic, the head of the IMF’s Middle East and Central Asia department told The National.
Public debt in these regions will reach $1.1 trillion this year and the next, $300 billion higher than in 2018-19.
“The level of scarring and the impact of this crisis need to be addressed and if countries don’t tackle this issue head on, we could be in a situation where growth will be slow with a high level of unemployment that existed before [with] additional weakness and fragilities,” Jihad Azour said.
The Middle East and North Africa region’s gross domestic product is projected to expand 4 per cent this year after shrinking 3.4 per cent last year. Vaccination campaigns will play an important role in defining the outlook for 2021. The greater the speed of vaccination, the greater the effect on growth, Mr Azour said. Faster inoculations could boost GDP by an additional 0.4 per cent to 1 per cent, according to fund estimates.
“Fast inoculators will recover faster, slow inoculators will face challenges,” he said. “The late inoculators will not be able to recover before 2023 or 2024.”
The Mena region fared better than other parts of the world during the Covid-19 pandemic due to the rapid use of fiscal and monetary measures, according to the International Monetary Fund.
However, countries face a “turning point” as they need to balance higher debt, economic scarring from the health crisis and a changing global outlook, the fund said.
“Everybody is focused on the immediate issues, the race between the vaccine and the virus,” said Jihad Azour, head of the IMF’s Middle East and Central Asia department.
“But the level of scarring and the impact of this crisis need to be addressed and if countries do not tackle this issue head on, we could be in a situation where growth will be slow with a high level of unemployment that existed before, [with] additional weakness and fragilities.”
Mr Azour said this could have a negative impact on the region in terms of recovery and social stability. He called for hastened efforts to transform economies and develop greater regional co-operation.
Debt across the Middle East and Central Asia has increased and its financing needs for this year and the next will reach $1.1 trillion, which is $300 billion more than the previous two years, said Mr Azour.
The Mena region’s gross domestic product is projected to expand by 4 per cent this year, up from 3.4 per cent last year, with oil-exporting economies expected to fare better than importers. The vaccine campaigns and policy responses will play an important role in defining the outlook for this year.
Mr Azour said the faster the pace of vaccinations, the higher the impact on growth. Further vaccine acceleration could boost GDP by an additional 0.4 per cent to 1 per cent, according to the fund.
The increase in oil prices, which the fund expects to hover at about $58.52 a barrel this year and $54.83 a barrel next year, is expected to markedly improve oil exporters’ external positions. Their current account balance is projected to increase by $128bn, the fund said in its regional economic outlook that was released yesterday.
“We see that [the] Opec+ agreement is holding and the management of the supply to align it with the level of demand is now under control and providing to the market a sense of stability,” said Mr Azour.
The current account deficits of oil importers are forecast to slightly widen due to higher oil prices and rising domestic demand.
Tourism is expected to remain a drag on many economies in the short term, the fund said.
Referring to the low interest rate environment and the accommodative policies of central banks, Mr Azour said countries in the region benefitted from very favourable international market conditions but need to be vigilant going forward.
“Any return in sentiment or any change in interest rate policy could have an impact on their access to finance,” he said.
“This crisis has affected sectors in a different way. It is important to address the corporate sector dimension, lessening the scarring and the access to finance and to avoid having crowding out because the large portion of the public sector financing is coming from domestic banks.”
Mr Azour said countries in the region responded rapidly to the crisis and introduced policies within three to four months that checked the spread of the virus, relative to other countries battling second and third waves.
This quick response “provided a floor to the economy”, he said.
However, he issued a warning against easing policies too rapidly, which could hinder economic recovery.
“The war between vaccines and the virus is going to be critical this year,” said Mr Azour.
“Last year, we saw that countries that introduced fiscal and monetary policies recovered faster. Maintaining those policies and targeting them and focusing them on the beneficiaries is important. You have a divergence between countries and within countries.” Sectors that have high social contact such as tourism have had more difficulty in recovering than others, whereas industry and non-contact services were able to recover the ground they lost last year.
“We are in a multi-state scenario. Fast inoculators will recover faster, slow inoculators will face challenges while late inoculators will not be able to recover before 2023 or 2024,” said Mr Azour.
“Any change in market sentiment that will lead to an increase in interest rates or capital flows will have an impact on those countries.”
The rapid pace of vaccinations and the recovery in oil prices will help support the non-oil segments of economies.
The fund estimates that the non-oil GDP of Saudi Arabia, the Arab world’s largest economy, will increase by 3.9 per cent this year while the UAE is also set to register similar growth as well, said Mr Azour.
The medium-term recovery in the region’s oil-exporting countries will also hinge on efforts to hasten the use of technology, as well as the development of greener economies and their capacity to attract additional foreign investment, he said.
Countries such as Iraq, which had to face the double whammy of the virus and dwindling oil revenue due to the Opec+ production curbs, need to press on with their reform programmes and harness the rebound in oil prices, said Mr Azour.
“Progressing and maintaining the fiscal consolidation will be critical for the sustainability of the economy in Iraq, despite the improvement in the oil price,” he said. “The budget that has been passed and the adjustment in the exchange rate were steps in the right direction. The higher oil price is an opportunity to advance on some of the structural reforms that will help to achieve a higher level of inclusive growth.”
For Lebanon, which faced its worst economic crisis before the pandemic and a devastating blast at its main port in the capital, the outlook remains uncertain and hinges largely on the formation of a government and reforms.