The war in Ukraine and sanctions on Russia are aggravating the divergence in recovery prospects for the Middle East and Central Asia (ME&CA), according to the International Monetary Fund in its latest Middle East and Central Asia Regional Economic Outlook.
Despite better-than-expected upside momentum in 2021, 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 report stated.
While prospects for oil exporters in the MENA region have improved, countries in the Caucasus and Central Asia (CCA) region face a challenging outlook given their ties to Russia and Ukraine.
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 report indicated.
The IMF’s Middle East and Central Asia Department director, Jihad Azour, said: “Looking ahead, the war in Ukraine is expected to dominate the 2022 outlook, compounding the headwinds from faster-than-expected normalisation of monetary policy in advanced economies and the slowdown in China, which is a significant market for exports for many of the region’s oil-exporting countries.
“We project real GDP growth in the MENA region at 5 percent in 2022. While this is a 0.9 percentage point upgrade from October, this forecast masks significant differences across countries, with oil exporters upgraded due to higher energy prices and production in line with the OPEC+ agreement, and most emerging market and middle-income countries and low-income countries downgraded,” he continued.
MENA oil importers are being hit by higher commodity prices and tightening financial conditions, fuelling inflation and worsening external and fiscal accounts.
In contrast, oil and gas exporters, particularly in MENA, will benefit from higher energy prices, more than offsetting the impact of tightening financial conditions and lower tourism revenues, the report outlined.
On average, oil revenues and external current account balances are projected to increase by 5.3 and 7.2 percentage points of GDP, respectively, in 2022 compared to 2021.
“This difficult environment and the uncertainties ahead have created extraordinarily complex policy trade-offs, especially for oil-importing countries with limited policy space. So how can countries manage these trade-offs while maintaining focus on tackling long-term challenges?” Azour said.
“In the near term, there are several policy priorities countries should consider. First, adjusting monetary policy based on country circumstances to control inflation and avoid derailing the recovery. Given market volatility, exchange rates should be allowed to adjust, with interventions used only to prevent market disruptions.”
On fiscal policy, oil exporters have the opportunity to rebuild buffers. In emerging market and middle income countries where fiscal space is limited, growth-friendly fiscal consolidation prioritising health, social spending, and investment will be critical.
Azour added: “Tackling rising global food and energy prices is vital. While allowing domestic prices to gradually to increase, countries should compensate vulnerable households and firms with transparent, temporary, and targeted transfers.
“Garnering international cooperation to prevent a food crisis that could exacerbate the already-dire conditions facing low-income countries will be equally important. With the limited policy space, structural reforms have become even more important to prevent scarring from the pandemic and war and ensure a private sector-led inclusive recovery.”
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