Oil and wars continue to be the bane of the Middle East.
In the most recent regional economic outlook published by the IMF, two main factors--low oil prices and ongoing geopolitical conflicts in the region--continue to weigh on Middle East, North Africa, Afghanistan and Pakistan (MENAP). As a result, (with much uncertainty due to these factors) MENAP's growth will be modest at 3.5 per cent this year, with little improvement (slower than last year) expected in 2017.
Uncertainties arising from conflicts in Iraq, Libya, Syria, and Yemen continue to weaken confidence, while lower oil prices take a toll on exports and economic activity in oil exporting countries. On the other side of the spectrum, oil importing countries benefit from lower oil prices although declining remittances from oil exporters are partly offsetting these benefits. Therefore, it has been suggested that structural transformations are needed across the region to raise medium-term prospects and create jobs.
Dr. Masood Ahmed, Director, Middle East and Central Asia Department at the IMF said that there are two challenges facing oil exporters. They are--the need to reduce spending and job creation in the government and oil and gas sectors. Additional concerns to these challenges are the possibility of growth being too low for too long; interest rates also being too low for too long impacting profitability for the financial sector; and the continuously low commodity prices.
"Despite recent increases, oil prices are projected to remain low over the coming years. Oil exporters are making strides in adjusting their fiscal positions, but much remains to be done. For oil importers, macroeconomic stabilisation has advanced thanks to sound policies and lower oil prices, yet reforms need to be accelerated to be able to further boost inclusive growth and jobs," he said.
Oil exporters in the region--Algeria, Libya, Saudi Arabia, Iraq, Iran, Yemen, Oman, UAE, Qatar and Bahrain--are in an adjustment phase to cheaper oil. Despite the slight increase this year (the key driver of the MENAP outlook), oil prices are projected to remain low over the coming years--between $50- 60 per barrel. Economic activity across the GCC is projected to remain slow this year despite continued expansion in hydrocarbon output.
Fiscal tightening and declining liquidity in the financial sector are projected to reduce non-oil growth in the GCC to 1.75 per cent in 2016, down from 3.75 per cent last year. GCC non-oil growth is projected to pick up to three per cent next year as the pace of fiscal consolidation eases. Over the medium term, less fiscal drag and a partial recovery in oil prices are projected to raise GCC non-oil growth to 3.5 per cent, well below the seven per cent average during 2000-2014.
According to the IMF, the negative impact of fiscal consolidation and tightening liquidity on growth could be larger than anticipated--regional conflicts could intensify, a deeper slowdown in China could further weaken commodity prices, while a faster-than-expected US monetary tightening could increase global financial volatility, thereby reducing the availability of international financing, especially for lower-rated issuers. One of the main priorities for countries in the region should be the ability to sustain growth over the medium term. In this context, authorities could make faster-than-expected progress in implementing structural reform plans. However, considering the scope of the economic transformation, such plans could run into obstacles, which could lead to reform fatigue.
The significant deficit-reduction efforts which began last year are continuing, with the aggregate 2016 non-oil fiscal deficit expected to improve by more than five per cent of non-oil GDP. Despite recent consolidation measures, including welcome reforms to domestic energy prices, deficits are projected to remain large--all countries are anticipated to record fiscal deficits this year, and only Iraq, Kuwait, and the UAE are set to post surpluses by 2021. Further fiscal adjustment is needed, which will require difficult policy choices and the adoption of well-calibrated measures to protect the vulnerable.
On top of that, the IMF has urged countries to accelerate structural reforms to diversify their economies away from hydrocarbons, boost the role of the private sector, and create jobs for their rapidly growing labour forces. The envisaged economic transformation, as reflected in country diversification plans, will take time.
The key to a successful implementation is to conduct it in a cautious and steady manner. As economic diversification proceeds, new skills will be required for new and existing workers to succeed. Upgrades to education and training programmes should focus on reducing skill mismatches, while anticipating future needs of the private sector.
Operating in a challenging environment, oil importing countries--Mauritania, Morocco, Tunisia, Egypt, Sudan, Jordan, Lebanon, Syria, Djibouti, Somalia, Afghanistan and Pakistan--are called upon to foster inclusive growth. Although recent reforms and lower oil prices have helped improve macroeconomic stability in these countries, growth remains weak and fragile, projected to be 3.5 per cent this year before strengthening to 4.25 per cent in 2017.
Continued progress in reforms, lower fiscal drag, and stronger external demand, especially from the Euro area, are expected to support the recovery. However, amid lingering structural impediments, medium-term growth is likely to remain too low to tackle high unemployment and improve inclusiveness. Furthermore, risks such as slow improvement in job creation and living standards could aggravate sociopolitical frictions, and setbacks to political transitions and reform implementation could undermine the recovery.
On top of that, global macro-external factors such as intensified regional conflicts could deepen the adverse spillovers. Tighter global financial conditions--amid China's rebalancing, the normalisation of US interest rates, and/or the fallout from Brexit--could reduce the availability of financing. Looking at the other side of the coin, exports could rise faster if, for example, more progress is made on trade pacts with the EU. China's rebalancing may also expand opportunities for consumption-oriented exports. Stepping up reform momentum is crucial in this challenging environment, said the IMF. Energy subsidy reforms and revenue-enhancing initiatives have created more room for spending on infrastructure, health, and education, as well as targeted social assistance. Yet investment and productivity growth are still too low to boost growth, fiscal space is limited by high debt service costs and large wage bills, and, in some cases, external vulnerabilities are still high.
Continued fiscal consolidation is needed to improve public debt profiles and strengthen buffers. It can focus on targeted revenue measures-- eliminating tax exemptions, making income taxes more progressive, and strengthening tax collection--as well as the continued reprioritisation of spending from general energy subsidies toward targeted social assistance, investment, and other growth-enhancing areas. Moreover, greater exchange rate flexibility would help enhance competitiveness. Structural reforms--especially in the areas of business, trade, labour and financial markets--are needed to foster private sector expansion and job creation.
In oil importers, macroeconomic stabilisation has advanced thanks to sound policies and lower oil prices, yet reforms need to be accelerated to be able to further boost inclusive growth and jobs -- Dr. Masood Ahmed, Director, Middle East and Central Asia Department, IMF
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