Mideast Sees Fragile Recovery Amid Conflicts and Transitions

Political uncertainty and deepening of conflicts weigh on growth

Oil exporters need to diversify further, reduce reliance on oil-funded spending

Oil importers’ modest prospects call for reforms to improve living standards

The IMF’s Regional Economic Outlook, released on October 27, projects growth to increase slightly to 2.6 percent this year (see table). Growth could pick up in 2015 if security conditions improve.

“Intensifying security problems, including from the deepening conflicts in Iraq and Syria, pose downside risks to the outlook. The regional economic impact has been limited so far, but an estimated 11 million of displaced persons are already putting pressure on budgets, labor markets, and social cohesion in neighboring countries,” said IMF Middle East Department Director Masood Ahmed who unveiled the report in Dubai.

“The region needs sustained, stronger and more inclusive growth to markedly reduce unemployment—a critical issue facing nearly all countries in the region,” Ahmed added.

Oil-exporters need a new growth model

The IMF expects overall growth of the region’s oil exporters to remain subdued at 2.5 percent this year owing to the deterioration of security conditions, mainly in Iraq and Libya. Growth could pick up next year, but a possible further deterioration in security conditions in Iraq, Libya, or Yemen, could deepen economic disruptions and derail the projected recovery.

The IMF cautioned that, on current fiscal policies, oil exporters’ fiscal surpluses are set to vanish by 2017 and noted that all countries outside the Gulf Cooperation Council and Bahrain are running fiscal deficits already (see chart 1). The marked decline in oil prices by 20 percent over the last two months adds to fiscal risks.

“If oil prices stay at current lows for a prolonged period, oil exporters on aggregate could move from fiscal surplus to deficit already next year,” Ahmed told reporters. For countries that have buffers, it will be important to adjust their fiscal positions gradually to limit the drag on economic growth, he added.

Key reasons behind weakening fiscal and external balances are large energy subsidy and wage bills. These countries need to contain government spending to ensure fiscal sustainability and to bequeath future generations an equitable share of the resource wealth, says the report.

Oil exporting countries have been relying on a growth model that was dependent on growth of government spending on the back of rising oil...