Structural reforms key to bolstering growth amid global economic uncertainty, IMF says

Middle East and Central Asian economies that proved resilient in 2022 are expected to grow at a slower pace

Saudi Arabia’s capital, Riyadh. The Mena region's economic growth surprised on the upside in 2022 despite global economic headwinds. Bloomberg

Accelerating structural reforms to bolster growth and enhance economic resilience are necessary as governments in the Middle East and Central Asia tighten monetary policy amid uncertain global financial conditions, the International Monetary Fund has said.

The regional economies proved resilient in 2022, despite a series of global shocks, and surprised on the upside, however growth this year and potentially the next is expected to slow amid growing global macroeconomic headwinds, the IMF said in its latest Regional Economic Outlook on the Middle East and Central Asia.

“Amid continued uncertainty, policymakers should stay the course to safeguard macroeconomic stability through tight monetary and fiscal policies while being mindful of financial stability risks,” IMF economists said in the report on Wednesday.

“At the same time, they should accelerate structural reforms to bolster potential growth and enhance resilience, inclusion and social safety nets.”

In the Middle East and North Africa, real gross domestic product grew by 5.3 per cent in 2022, reflecting strong domestic demand and a rebound in oil production. However, growth is projected to decelerate this year to 3.1 per cent before picking up slightly to 3.4 per cent next year.

The slower economic growth reflects tighter policies to fight inflation, reduce vulnerabilities and efforts to rebuild financial buffers.

“For oil exporters [in the Mena region], we project growth to slow to 3.1 per cent in 2023, down from 5.7 per cent in 2022, with the main driver of growth shifting from oil to non-hydrocarbon activities in most countries,” said Jihad Azour, director of the IMF's Middle East and Central Asia Department.

The IMF’s growth projection for Mena's oil-exporting nations reflects developments prior to the production cuts outlined in the latest Opec+ agreement, Mr Azour said.

On April 2, Opec+ members announced voluntary crude output cuts of 1.16 million barrels per day, effective from May 1 until the end of December. These cuts are aimed at supporting the stability of the oil market, the producers said at the time.

“These cuts will lower growth for oil exporters but are expected to positively affect their fiscal and external positions as higher oil prices would more than offset the impact of lower growth,” Mr Azour said.

“However, higher oil prices are likely to increase fiscal and external strains on Mena oil importers and add to inflationary pressures.”

The outlook for the Caucasus and Central Asia region, which grew 4.8 per cent in 2022, depends heavily on external factors, including the impact of monetary tightening and the growth of their main trading partners, the IMF said.

The Washington-based fund expects growth in the region to slow to 4.2 per cent this year, as the impact of the initial spillover from the war in Ukraine fades, before rebounding slightly in 2024.

In April, the IMF said the global economy is facing a “rocky” recovery as geopolitics, monetary tightening and inflation continue to weigh on growth.

While the reopening of China, the world's second-largest economy, is supporting global growth and the recovery from the Ukraine war and the Covid-19 pandemic is on track, the rebound across countries is fragmented, the lender said in its World Economic Outlook.

The fund lowered its global economic growth estimate for this year by 0.1 percentage points to 2.8 per cent, down from the 3.4 per cent expansion in 2022 and the historical growth average of 3.8 per cent over the 2000-2019 period.

Inflation globally is beginning to decline and expected to drop to 7 per cent this year and 4.9 per cent in 2024, from 8.7 per cent in 2022.

It is expected to remain persistent in the wider Mena region at about 15 per cent this year, broadly in line with 2022 levels, Mr Azour said.

With projected high debt levels and gross public and external financing needs, “fiscal and external vulnerabilities are expected to remain elevated in the region’s emerging markets” this year, he added.

However, the recent financial stress on advanced economies amid a series of bank failures in the US as well as the forced merger of Credit Suisse with UBS has had “limited spillovers to the region’s banks”.

There is “no direct exposure of the region to Silicon Valley Bank [in the US] and [they have] a limited exposure to Credit Suisse”, Mr Azour said.

Despite stability, the risks to Mena economies’ baseline are high, including further financial sector instability in advanced economies that could lead to contagion, more adverse credit conditions and exacerbating financial market volatility, he said.

It could also trigger debt sustainability concerns for many emerging markets in the region.

“Tighter-for-longer global financial conditions could also prompt investors to reassess debt sustainability, pushing the most vulnerable economies to the brink of debt distress,” Mr Azour said.

Any escalation in the war in Ukraine could also trigger volatility in commodity markets that could fuel additional inflationary pressures across the Mena region, he added.

Given the growing uncertainty, “striking the right policy balance will be critical” for regional decision makers, whose monetary policies should focus on maintaining price stability.

Although the region’s central banks tightened monetary policy early on compared to advanced economies to curb inflation and there was “significant heterogeneity”, a few countries still need to tighten further, Mr Azour said.

“In several countries, monetary policy implementation is undermined by a lack of co-ordination with fiscal policy or fiscal dominance,” he said.

The IMF, which is a lender of last resort for vulnerable and struggling economies, remains committed to the Mena region.

In addition to tailored policy advice, the IMF has assisted member countries through its lending arrangements.

Since the end of March, the fund has approved $25 billion in new financing for Mena countries, which includes its financial assistance deals for Egypt, Mauritania and Morocco, Mr Azour said.