Inflation will take a toll on oil-importing Mena states, IMF says

Inflation and the Ukraine war-driven surge in commodity prices will take a significant economic toll on oil-importing nations of the Mena region, the International Monetary Fund has said.

Rising prices came at a “precarious time”, given the diverging economic recovery in the region, said Jihad Azour, director of the Middle East and Central Asia Department at the IMF.

“Higher inflation is one of the most direct impacts of rising commodity prices,” Mr Azour said in a blogpost he wrote with senior IMF economists Jeta Menkulasi and Rodrigo Garcia-Verdu.

“Food prices accounted for about 60 per cent of last year’s increase in headline inflation in the Middle East and North Africa, excluding the countries of the Gulf Co-operation Council.”

Inflation is expected to remain elevated in the region this year at 13.9 per cent, a significant revision from the Washington-based lender’s previous projections.

Russia’s military offensive in Ukraine has stoked the global commodities cycle, adding to economic uncertainties. It has also dented global growth and exacerbated inflationary pressures.

Sanctions on Russia, the world’s second-largest energy exporter, are also affecting global energy supplies. Oil prices, which rose 67 per cent last year, rallied to a notch under $140 per barrel in March before giving up some gains. They are still up 60 per cent since last year.

Food prices are expected to increase about 14 per cent this year, on top of the 28 per cent gain in 2021.

Russia and Ukraine together account for about a quarter of global wheat supply. Before the war, Russia was the world’s largest wheat exporter and Ukraine the fifth, World Bank data showed.

Many countries in the Mena region are heavily dependent on food imports, which account for about one fifth of total imports.

“The situation is particularly concerning for fragile and conflict-affected states, since strategic reserves cover less than 2.5 months of net domestic consumption,” the IMF officials said.

“Overall, rising food prices and potential wheat shortages affect the poor more because they allocate a higher share of their expenditure to food. This will add to poverty and inequality and heighten the risk of social unrest.”

The commodities super cycle will also significantly affect Mena oil-importing economies’ external accounts, with the IMF projecting their current account balances shrinking by 1 percentage point of gross domestic product on average.

“For low-income countries, higher wheat prices alone will be a significant blow, worsening current accounts by around 1.2 per cent of GDP on average,” they said.