Mena economic growth to soften on oil caps and global headwinds, IMF says

Aggregate GDP expansion in the broader Middle East and Central Asia region to reach 2 per cent this year

Workers at a bakery in Beirut. Lebanon is among regional countries facing high inflation. AP Photo

Growth in the Middle East and Central Asia will slow down this year, driven by the region’s oil-exporting economies, as they continue to maintain crude production caps to stabilise global energy markets, the International Monetary Fund has said.

Global economic headwinds and tighter macroeconomic policies also underpin the slowing growth, the IMF said in its latest Regional Economic Outlook on the Middle East and Central Asia.

The Washington-based fund expects aggregate gross domestic product expansion in the broader Middle East and Central Asia region to reach 2 per cent this year. The latest estimate is lower than the 3.1 per cent GDP growth projected by the IMF in May.

The regional economy, which expanded 5.6 per cent in 2022, is estimated to expand by 3.4 per cent in 2024.

“The need to address recurrent shocks has reduced policy space to support economic activity in many economies, and slow progress in comprehensive reform implementation is holding back investment, job creation, and inclusion while undermining resilience to shocks,” the IMF said.

“Rising climate challenges are adding to the urgency of action.”

The Middle East and North Africa region is the main driver of slowing growth for the broader region this year, according to the IMF.

“Lower oil production in oil exporters, tight policy settings in emerging market and middle-income economies, and country-specific headwinds” underpin the slowing growth momentum, it said.

The fund’s projection does not include the potential ramifications of the Israel-Gaza war on the regional economies as it prepared its economic outlook before the war broke out last week.

A sustained increase in energy prices due to the current war could affect global economic growth, although it is too early to make any assessment, the IMF said on Tuesday.

It expects a 10 per cent increase in oil prices due to the war would weigh down on global output by 0.15 per cent in the following year and will increase global inflation by 0.4 per cent.

Economic growth in Mena, this year and next, will match that of the wider Middle East and Central Asia region's growth of 2 per cent and 3.4 per cent, respectively, the IMF said.

The fund’s regional economic forecast for Mena is marginally higher than that of the World Bank, which earlier this week forecast a 1.9 per cent GDP expansion in the region this year.

The regional economies expanded by about 6.7 per cent in 2022, driven by sharp growth in the regional oil exporting economies that benefitted from higher crude prices, propped up by Opec production caps.

The 23-member oil producers’ group, led by Saudi Arabia, has enforced total crude production curbs of 3.66 million barrels per day, or about 3.7 per cent of global demand, to stabilise crude markets.

Crude prices, however, have dropped to about $86 per barrel mark from the November 2022 highs of more than $97 a barrel.

Saudi Arabia’s economy grew by 8.7 per cent last year, the highest annual growth rate among the world's 20 biggest economies. Yet, earlier this year, it received the biggest downgrade in economic growth forecast among the G20 economies by the IMF.

Earlier this month, the kingdom said it expects its real GDP to grow by 0.03 per cent this year, slower than the earlier estimate, “due to a voluntary reduction in oil production”.

The World Bank said growth in regional oil exporters is projected to slow to 2 per cent from 6.1 per cent in 2022. It will improve to about 3.4 per cent in the next but will settle “below 3 per cent in the medium term – below its pre-pandemic historical average”.

“As such, non-oil activity is set to be the main growth driver in GCC countries in 2023 and subsequent years, supported by a moderate expansion in investment,” the lender said.

Inflation in Mena is also expected to ease further, but price pressures will remain high in some non-GCC oil exporters.

Across the Mena region’s oil exporters, headline inflation is forecast to average 12.9 per cent in 2023 (unchanged from 2022) and 9.4 per cent in 2024, according to the regional economic outlook.

“These elevated levels reflect persistent price pressures in some non-GCC countries because of ongoing fiscal expansions (Algeria) and the impact of sizeable exchange rate depreciation (Iran),” it said.

Excluding Egypt and Sudan, overall "average Mena inflation is projected to peak at 13.4 per cent in 2023 before falling to 9.7 per cent in 2024", Jihad Azour, director of the IMF’s Middle East and Central Asia Department said.

In the CCA [the Caucasus and Central Asia], price pressures are "expected to continue abating, easing from 11 per cent in 2023 to 8.3 per cent in 2024”.

The IMF expects current account surpluses to almost half from 14.6 per cent of GDP in 2022 to 7.5 per cent in 2023 and contract further to 6.7 per cent 2024 for oil exporting nations as production caps remain in place.

“But they [current account surpluses] will remain in comfortable positions over the medium term – except for Iraq,” the fund said.

Growth in the CCA is projected to remain robust at 4.6 per cent this year, slightly moderating to 4.2 per cent next year as trade and financial flows from Russia gradually normalise.

“However, CCA countries face heightened uncertainty because of Russia’s war in Ukraine and rising geoeco­nomic fragmentation, which is reshaping trade,” the IMF said.

A faster-than-anticipated global decline in inflation would reduce pressure on regional central banks to raise interest rates further, and stronger-than-projected global demand would also help boost growth in the wider Mideast and Central Asia region.

Regional politicians, however, have a “pressing yet complex task of maintaining tight policies to safeguard macroeconomic stability and debt sustainability, while bolstering growth prospects”, the IMF said.

“This can be accomplished through wide-ranging structural reforms to support job creation for the more than 100 million people who are set to enter working age over the next decade,” the fund said.

“Structural reforms could help spur near-term economic activity – thus easing current policy trade-offs – while also lifting longer-term potential growth.”