Despite a series of shocks, the economies of the Middle East and North Africa, including the GCC, proved resilient in 2022. However, this year and next, growth is expected to slow reflecting tight policies to restore macroeconomic stability, agreed OPEC+ oil production cuts, and the fallout from the recent deterioration in financial conditions. The outlook depends on external and global factors. Amid continued uncertainty, policy tradeoffs remain complex, and striking the right policy balance will be critical. Oil exporters should carefully manage oil revenues, avoid expanding current expenditures, improve budget transparency, and strengthen medium-term fiscal frameworks.
“Given the importance of oil production to the economies of the Gulf Cooperation Council countries, the OPEC + cuts will affect overall growth,” says Jihad Azour, Director of the Middle East and Central Asia Department at the International Monetary Fund, in an exclusive interview with “Economy Middle East.” Oil will remain the primary driver of economic activity for the GCC in 2023 and 2024, with an average annual growth rate of around 4.0 percent. Azour emphasized that oil contributes to more than two-thirds of the total growth in the GCC countries.
The significance of oil production extends beyond the GCC countries, affecting the entire MENA region. As the IMF revises its economic prospects for MENA countries, it becomes crucial to understand the challenges and opportunities faced by these nations in light of the evolving global economic landscape.
In this article, we delve with Jihad Azour into issues that influence the outlook for MENA. including insights on the impact of oil production cuts, the key economic and financial challenges facing countries in the region and policy recommendations that help address them. We will explore the importance of holding the largest economic gathering – the IMF and World Bank Annual meetings – in Morocco in October this year, as well as the IMF’s role in the upcoming COP28 conference. By understanding these factors, we can gain valuable insights into the path towards economic recovery and resilience for the MENA region.
Regional Economic Outlook
The International Monetary Fund has recently revised its economic prospects for MENA countries, reflecting the impact of tightening policies and reduced oil production, among other issues. In its latest April report, the IMF lowered its forecast for economic growth in the region by 0.1 percent for 2023 and 2024 compared to its previous estimates in January. It now expects the growth rate to reach 3.1 percent and 3.4 percent, respectively, down from 5.3 percent in 2022.
“Our revisions reflect the impact of tighter monetary and fiscal policies. While these policies were critical in safeguarding macroeconomic stability, they are expected to dampen domestic demand in the region’s emerging market economies. At the same time, the growth slowdown in oil exporters reflects lower oil production in line with the October OPEC+ agreement,” Azour said.
Looking specifically at the Gulf Cooperation Council countries, the IMF forecasts a real annual GDP growth of 2.9 percent by 2023. “Given the importance of oil production for the GCC economies, OPEC+ cuts will weigh on overall growth. Going forward, however, we expect that non-oil growth will be the main driver of economic activity in 2023 and 2024 at about 4.0 percent annual growth on average, and contribute more than two-thirds of these countries’ total growth,” Azour added. This positive momentum is driven by retail and services sectors, as well as rapid private investment growth.
The impact of reduced oil production in the GCC countries extends beyond their borders, affecting the rest of the MENA region. According to Azour, lower growth in the GCC countries can lead to reduced trade and remittances, which could weigh on the economic growth of other countries in the region. On the flip side, lower oil prices resulting from the current futures curves may help alleviate energy costs for oil-importing countries in the MENA region.
Challenges and Policy Recommendations for the MENA Region
MENA countries face multiple challenges and risks in 2023/24, which require strategic measures to mitigate their impact. One of the primary challenges is addressing inflation. According to Azour, it is crucial for authorities, particularly in countries where inflation is high, to adopt a tight monetary approach to rein in inflation. “This will imply further tightening for countries where the current monetary stance is loose. For countries where headline inflation has peaked, and the monetary stance is tight, central banks should be cautious to avoid premature loosening until there are clear signs that core inflation is on a downward trajectory,” he said.
Another significant challenge is ensuring financial sustainability in a global environment of high-interest rates. MENA countries are encouraged to intensify their efforts to preserve fiscal sustainability. This requires implementing tight fiscal policies that support the fight against inflation and mitigate debt sustainability risks. Authorities should focus on prudent fiscal management, such as avoiding the expansion of current expenditures, improving budget transparency, and exploring medium-term fiscal frameworks with risk management strategies, including greater transparency and accountability.
Accelerating reforms is essential to enhance growth potential and strengthen resilience against recurring shocks. Policymakers should prioritize implementing reforms at an accelerated pace, aiming to promote structural transformation, foster private sector development, and increase access to opportunities for the population. “In practical terms, the authorities should consider a wide range of reforms to promote the structural transformation of their economies. These reforms range from fostering private sector development including downsizing the state footprint in the economy as to attract investment, to medium-term fiscal frameworks that adopt risk management strategies including greater transparency and accountability,” Azour said.
Global financial conditions pose a potential risk to debt sustainability in the region. A further tightening of global financial conditions could prompt investors to reassess the sustainability of high debt levels in certain countries. This could lead to increased fiscal pressures and hinder private-sector investment and growth. According to Azour, to mitigate this risk, MENA countries should focus on implementing consistent and sound macroeconomic policies that preserve fiscal sustainability and price stability. Additionally, structural reforms that accelerate the transformation and inclusion of their economies can help enhance resilience and mitigate the potential negative consequences of tightening global financial conditions.
Banking Sector Turmoil and its Implications
The banking sector turmoil has been a significant concern, and the IMF has assessed its implications for the MENA region. Despite the challenges posed by the COVID-19 pandemic, the banking sectors in the region have shown resilience, thanks to supportive measures and diligent supervision. However, it is crucial for authorities to maintain a high level of vigilance and closely monitor the situation.
The IMF’s Role in Addressing Economic Challenges
The Annual Meetings of the IMF and the World Bank in Marrakech in October this year present an opportune platform for global leaders and policymakers to come together and address the pressing economic challenges facing the MENA region and the world. These meetings serve as a crucial forum for discussions, knowledge sharing, and coordination of efforts to promote global economic stability and sustainable development.
Global cooperation plays a pivotal role in addressing economic challenges effectively. The interconnectedness of economies means that no country or region can tackle these challenges in isolation. Cooperation among nations, international organizations, and financial institutions like the IMF is essential to pool resources, share expertise, and coordinate policy actions.
The proposed themes for the Annual Meetings emphasize the need to build resilience, promote structural transformation, and foster global cooperation, Azour said. These themes reflect the recognition that addressing economic challenges requires a multifaceted approach that combines short-term measures to tackle immediate crises with long-term strategies for sustainable growth.
Building resilience is crucial in the face of ongoing uncertainties and potential shocks. The IMF advocates for policies and measures that strengthen countries’ ability to withstand economic disruptions, including enhancing fiscal and monetary frameworks, improving financial sector resilience and implementing social safety nets. By building resilience, countries can better navigate economic challenges and minimize their adverse impact on growth and development.
Promoting structural transformation is another key aspect emphasized by the IMF. Structural reforms that enhance productivity, foster innovation and diversify economies are vital for long-term sustainable growth. The IMF encourages countries in the MENA region to undertake reforms that improve the business environment, enhance labor market flexibility, and invest in education and skills development. These reforms can help unlock the region’s potential and create opportunities for inclusive and sustainable economic growth.
In terms of policy recommendations, the IMF encourages countries in the MENA region to prioritize structural reforms, invest in human capital, and enhance governance and transparency. These measures can promote economic diversification, attract investment, and create an enabling environment for private sector development. The IMF also emphasizes the importance of inclusive growth and social protection measures to ensure that the benefits of economic development are shared equitably.
“The IMF remains a steadfast partner of MENA countries through policy advice, financing, and capacity development. On policy advice, we are engaging very closely with country authorities in our role as trusted and confidential advisors, in line with our mandate to foster global macroeconomic and financial stability, through sound policymaking,” Azour said.
“We have also been very active in providing financial support. Since January 2020, the IMF has approved $25 billion of new financing for MENA countries, including recent programs for Egypt Mauritania and Morocco. This is in addition to the 2021 SDR allocation which increased MENA’s reserves by over $42 billion,” he added.
“Lastly, to help countries face emerging challenges, our capacity development has been strengthened, with increased presence on the ground in Beirut, Kuwait City, and a new regional office in Riyadh that will be opened later this year.”
The IMF’s Contribution to COP28
The IMF has placed a significant emphasis on climate-related issues and has forged a strategic partnership with the United Arab Emirates (UAE) in preparation for COP28, the 28th Conference of the Parties to the United Nations Framework Convention on Climate Change (UNFCCC). This partnership highlights the IMF’s commitment to supporting global efforts in addressing climate change and its recognition of the UAE’s leadership in promoting sustainability.
As part of its contribution to COP28, the IMF plays a crucial role in providing analytical support and evaluating progress in achieving climate goals. Its expertise in macroeconomic analysis and policy advice allows it to assess the economic implications of climate change and the transition to a low-carbon economy. Through its research and analysis, the IMF helps policymakers understand the potential risks and opportunities associated with climate change and develop strategies for a sustainable and resilient future.
One of the key initiatives of the IMF in supporting countries’ efforts to address climate change is the establishment of the Resilience and Sustainability Facility. This facility aims to provide financial and technical assistance to member countries in implementing policy reforms and investments for climate change mitigation and adaptation. The facility supports countries in designing and implementing climate-related policies, such as carbon pricing mechanisms, renewable energy transition plans, and climate resilience strategies.
According to Azour, the Resilience and Sustainability Facility also assists countries in mobilizing and leveraging additional sources of climate finance, including public and private sector funding. By helping countries access financial resources, the IMF contributes to the scaling up of climate investments, particularly in vulnerable and developing economies. The facility works in close collaboration with other international organizations, development banks, and stakeholders to ensure coordinated support and maximize the impact of climate-related initiatives.
Through its strategic partnership with the UAE for COP28, the IMF aims to strengthen the global response to climate change by promoting dialogue, knowledge sharing, and capacity building. The partnership facilitates the exchange of best practices, lessons learned, and innovative approaches to climate action. By leveraging the UAE’s expertise and experience in sustainable development, the IMF can enhance its analytical work and policy advice in the context of climate change.
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