Middle East economic activity remains 'resilient' despite global headwinds, IMF says

Estimated $1tn oil windfall for regional crude producers in five years to 2026 will allow them to invest in projects to support their future economic growth

Jihad Azour, IMF's director of the Middle East and Central Asia Department, speaking at the launch of the fund's regional economic outlook in DIFC. Pawan Singh / The National

Economic activity in the Middle East and Central Asian (Meca) region remains resilient so far, despite global economic geopolitical headwinds, according to the International Monetary Fund.

However, inflation has “surprised on the upside” and uncertainties are mounting amid divergent economic recovery in the region, the fund said on Monday.

The multispeed recovery is evident in economic activity in oil exporting and non-oil exporting nations of the broader region, Jihad Azour, director for Meca Department at the IMF, said at a press briefing.

“[Economic] activity in oil exporters is benefiting from still-high energy prices, while the pace of expansion in emerging market and middle-income economies appears to be slowing, as these economies face a deep terms-of-trade shock, higher sovereign spreads and eroded market access,” Mr Azour said.

The estimated $1 trillion oil windfall for crude producers, such as the UAE, in five years to the end of 2026 will allow them to invest in projects to support their future economic growth, the IMF said.

Primary non-oil fiscal balances are also set to help improve economies in the six-member economic bloc of GCC. Most Gulf nations are expected to continue to save a substantial share of their oil revenues.

The fund expects real gross domestic product of the wider Meca region to grow at 5 per cent this year, up from 4.1 per cent in 2021, and moderate to 3.6 per cent in 2023.

With robust momentum in non-oil economic activity and higher oil prices offsetting food and energy prices, the Washington-based lender expects GDP growth of 5.2 per cent for oil exporters in the region this year, up from 4.5 per cent in 2021.

Growth will be likely to soften to 3.5 per cent in 2023 amid expected decline in global crude demand and as the Opec+ super group of producers lowers production to stabilise markets.

The increase in oil and gas prices that recovered strongly last year were exacerbated by the war in Ukraine this year.

Brent, the benchmark for two-thirds of the world’s oil, rose as much as $140 per barrel in March. Though crude has given up most gains since then on waning global demand concerns, it is still trading in the $95 per barrel range, adding to the windfall of oil exporting nations.

Efforts to diversify their economies over the past five to six years, measures put in place to protect lives and livelihoods during the Covid-19 pandemic and investment in climate and technology have also built solid foundations for Gulf countries to continue growth momentum, Mr Azour told a panel discussion at the Dubai International Financial Centre.

Stronger financial muscle has also allowed oil exports to offset the impact of rising inflation, driven by food and energy prices.

However, the sharp rise in consumer prices for emerging and middle-income economies that have limited fiscal and monetary policy headroom is a major concern, Mohamad Al Ississ, Jordan’s Minister of Finance, told the panel discussion.

Efforts to curb inflation by central banks globally through increase of interest rates is likely to further slow the economic momentum, which will add to pressure on Middle Eastern economies that are already facing high food and energy price-driven inflation, he said.

Headline inflation for Mena region, excluding Sudan, is expected to remain in double digits in 2023 for the third consecutive year. The IMF expects Mena inflation to average 12.2 per cent this year, slowing marginally to 11.2 per cent in 2023.

This level reflects “the lagged effects of higher food prices and, in some cases, exchange rate depreciations with broadening inflationary pressures”, the fund said.

The IMF expects 4.9 per cent growth in emerging and middle income economies this year, up from 3.6 per cent in 2021. GDP expansion is expected to soften to 3.9 per cent in 2023.

Despite high commodity prices and the global slowdown, current account deficits of these countries are projected to remain “roughly at their 2021 levels this year, reflecting robust remittance flows and resurgent tourism in some countries”, the fund said.

However, lower foreign exchange reserves amid global financial tightening indicate an increase in their external vulnerabilities, it added.

Lower income countries that are expected to grow only 0.8 per cent in 2022, are likely to face a large deterioration in their external accounts, with “higher imports concentrated on essential food and energy items”, according to the IMF.

“They are likely to experience severe food security challenges. With limited access to financing and drought in some [geographies], these countries will need international aid to secure staple food imports,” the fund said.

Mr Azour said that global economy is facing “extraordinary challenges” and “despite performing better than what we have seen in the other parts of the world”, Mena economies have not felt the full impact of global headwinds.

However, uncertainties are mounting as the persistently high food and energy prices pose major risks to many regional economies, especially low-income countries and those facing conflicts.

“Tighter-than-expected financial conditions risk fuelling a funding crunch in the region’s emerging markets that could tip the balance towards financial instability and debt distress in weaker starting positions,” Mr Azour said.