Middle East Outlook Sees Modest Improvement, But Risks Remain

Steady growth in oil exporters despite oil price plunge, but they will need to curb spending

Higher growth expected in oil importers; spillovers from regional conflicts pose risk

Region needs structural, fiscal reforms to create jobs and lift growth

The Regional Economic Outlook Update, released on May 5, projects that growth will increase slightly to about 3 percent in 2015 (see table). But growth rates, although rising, remain too low to reduce the region’s persistently high unemployment in a meaningful way.

“Although the region’s countries have made progress in implementing reforms, there is still more that can be done—not just to stabilize the economy but to raise economic prospects in a sustainable, inclusive manner,” Masood Ahmed, Director of the IMF’s Middle East and Central Asia Department, told reporters at a briefing in Dubai.

Moreover, he said, the recent intensification of conflicts in Iraq, Libya, Syria, and Yemen is undermining economic activity and dampening confidence, posing a significant risk to the region’s prospects.

Oil exporters see surpluses erode

According to the IMF, growth in the region’s oil-exporting countries reached about 2½ percent in 2014 and is expected to remain at this level in 2015. Next year, growth is projected to rise to 3½ percent, but this forecast is predicated on the assumption that security conditions will stabilize and oil production will recover in oil exporters outside the Gulf Cooperation Council.

Despite the fact that oil prices halved between July 2014 and April 2015, oil-exporting countries have managed to keep growth steady by using the financial cushions that they have built up over the past decade, Ahmed said.

These countries are experiencing a substantial weakening of export earnings, however. The oil price decline will turn the longstanding current account surplus of the Middle Eastern and North African oil exporters into a deficit of $22 billion in 2015, with export earnings expected to be about $380 billion lower than projected before the oil price decline.

The budgets of oil-exporting countries are also severely affected by the oil price slump, with fiscal balances deteriorating to an average deficit of 8½ percent of GDP (see Chart 1). A sharp rise in spending in recent years has made budgets vulnerable to lower oil prices, Ahmed noted. “Most countries in the region cannot balance their budgets when oil prices approach $60 a barrel,” he said.

Ahmed highlighted a number of steps...