Outlook reveals a region where economic momentum is threatened by inflation and Ukraine conflict
Surging inflation and the Russia-Ukraine war are threatening economic momentum in the Middle East and North Africa through several channels, the International Monetary Fund has said.
Oil-importing and low-income countries are particularly vulnerable to commodity price pressures and supply chain disruptions, the IMF said.
The region – where gross domestic product grew by about 5.8 per cent last year – maintained economic momentum as it entered 2022, despite rising inflation and a short-lived, pandemic-induced slowdown in January. But the pace of recovery will be uneven for different country groups.
Overall, Mena GDP is projected to grow by 5 per cent this year. Although this is slower than the 5.8 per cent in 2021, it is still an upward revision of 0.9 percentage points from the fund’s October estimate, the IMF said in its Middle East and Central Asia Regional Economic Outlook.
“The upgrade reflects the improved outlook for oil exporters and better-than-expected growth in the first half of fiscal year 2022 for Egypt,” the IMF said.
But the war in Ukraine, western sanctions on Moscow, the continuing pandemic and the winding down of Covid-19 support measures by governments and central banks are creating economic challenges.
“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 normalisation in advanced economies and a lingering pandemic,” the Washington-based fund said.
“Downside risks dominate the outlook and include a prolonged war and further sanctions on Russia, tighter-than-expected global financial conditions, possible de-anchoring of inflation expectations, a sharper slowdown in China and new pandemic outbreaks.”
The war in Ukraine and sanctions on Russia have worsened global growth and inflation prospects.
Oil prices rose more than 67 per cent last year on better than forecast demand, but have remained volatile since Russia invaded Ukraine.
Average petroleum spot prices have fluctuated between $98 a barrel and $130 a barrel since the war began and are expected to settle at about $107 a barrel in 2022 – an increase of about $43 a barrel compared with the October estimate, the IMF said.
Food prices are expected to increase by 14 per cent this year – on top of a 28 per cent increase in 2021. Before the war, Russia was the world’s largest wheat exporter and Ukraine the fifth, according to World Bank data.
Inflation in the Middle East and Central Asia region will remain high this year. The IMF forecasts Mena inflation will reach 13.9 per cent – slightly lower than the 14.8 per cent recorded last year – driven by a significant increase in food and energy prices and, in some cases, exchange rate depreciations and lax monetary and fiscal policies.
It expects inflation in the Caucasus and Central Asia region to hit 10.7 per cent this year – up from 9.2 per cent in 2021.
“Higher food prices and potential supply shortages are challenging both the affordability and availability of basic food staples like wheat,” it said.
The fund said higher wheat prices alone could increase the Middle East and Central Asia region’s external financing needs by up to $10 billion in 2022.
“Supply shortages … can endanger food security, particularly for low-income countries, as they may also suffer from potential aid diversion,” according to the IMF.
Economic recovery in the Mena region will vary, with growth in oil-exporting nations projected at 5.4 per cent, the fund said.
Economies of emerging markets and middle-income countries in Mena will grow at 4.4 per cent and 1.1 per cent, respectively, amid limited policy space, inflation and higher debt, the fund forecast.
Debt in Middle East and Central Asia emerging markets and middle-income countries is expected to increase further in 2022 and stay above pre-pandemic levels in the medium term. Public gross financing needs are expected to increase to $584bn over 2022-23.
“By 2024, the impact from faster-than-expected normalisation of monetary policy in AEs [advanced economies] is projected to increase EM [emerging market] and MI [middle income] countries’ annual budgetary
Given divergent outlooks, policies will need to be calibrated carefully to countries’ circumstances, the IMF said
interest expenses by about 4.5 per cent of fiscal revenues.”
In contrast, oil exporters will have better prospects because of higher oil production in line with the Opec+ agreement, higher-than-expected crude prices and successful mass vaccination campaigns in some countries.
Growth in the GCC countries is projected to accelerate from 2.7 per cent in 2021 to 6.4 per cent in 2022 – an upgrade of 2.2 percentage points from the fund’s October projections.
The upgrade “largely reflects upwards revisions for Saudi Arabia (2.8 percentage points) and, to a lesser extent, other economies (Kuwait, Oman and the UAE), reflecting higher oil production in line with the Opec+ agreement, base effects and a recovering non-oil sector”, the IMF said.
The lender expects non-oil
GDP in the GCC to expand at a healthy 3.5 per cent to 4 per cent in 2022 and 2023, despite a gradual slowdown relative to last year.
“This will sustain the outlook for these economies as oil GDP slows down after 2022,” the IMF said.
Inflation prospects vary across Middle East and Central Asia oil exporters this year.
In the GCC, inflation is expected to peak at 3.1 per cent, from 2.2 per cent in 2021, with high inflation remaining a “concern outside GCC countries”, the fund said.
Inflation estimates have been revised significantly for Iran and Iraq by 4.8 and 2.4 percentage points to 32.3 per cent and 6.9 per cent in 2022, respectively.
These high levels capture the “pass-through from currency depreciation and loose monetary and fiscal policies (in Iran), and higher imported inflation (in Iraq)”, the IMF said.
“Inflation for CCA oil exporters [Azerbaijan, Kazakhstan, Turkmenistan and Uzbekistan] is expected to reach 10.4 per cent, on average, in 2022, largely driven by Azerbaijan.”
The windfall from higher crude prices is expected to improve fiscal and external balances for oil-exporting nations and the fund expects oil revenues reaching $818bn – an upwards revision of $320bn from its estimates in October.
Oil proceeds in 2022 are forecast to increase by an average of 5.3 percentage points of GDP, compared to 2021.
But with risk skewed downwards, policymaking has become increasingly complex, with dwindling macro policy space to deal with “extraordinary shocks amid high debt
and inflation”, the IMF outlook said.
“Given divergent outlooks, policies will need to be calibrated carefully to country circumstances to manage uncertainties, maintain macroeconomic stability, and support the recovery
while protecting the most vulnerable and ensuring food and energy security.”
Structural reforms have become even more urgent to prevent scarring from the pandemic and the effects of the war, the IMF said.