The countries of the MENA region are still facing two of the world’s most pressing economic and geopolitical issues: the slump in oil prices and the intensification of conflicts, said the IMF in its latest regional assessment “Regional Economic Outlook for the Middle East and Central Asia”. It projects that growth for the region this year will be a modest 3.5%, with little improvement expected in 2017.
Despite staging a recovery over recent months to reach more than US$50 a barrel, oil prices – the key driver of growth for the region’s oil exporters – are projected to remain low over the coming years. The IMF projects prices to barely reach $60 a barrel by 2021, far removed from the highs of more than $100 a barrel just two years ago.
In oil-exporting GCC, the IMF projects non-oil growth to be 1.8% in 2016 and 3.1% in 2017, owing to the dampening effect from fiscal consolidations and a broader weakening of private sector confidence in the face of lower oil prices.
Non-oil growth outside the GCC is likely to be almost non-existent this year due to the conflicts in Iraq, Libya, and Yemen. In Iran, oil production has picked up strongly yet a broader growth dividend from the easing of the sanctions is materialising only slowly as international companies remain cautious and domestic reforms are proceeding gradually.
For the region’s oil importers, spillovers from slower growth in the GCC and conflicts – as well as deep-rooted domestic structural impediments – are weighing on growth. These economies are projected to expand by 3.6% in 2016 and 4.2% in 2017.
Adjusting to cheaper oil
The challenge for oil exporters will be to find alternative sources of revenues and economic growth, said IMF Middle East and Central Asia Department Director Masood Ahmed at the report’s launch in Dubai recently. “And for the oil importers, the key challenge is boosting job creation via more dynamic private sectors,” he added.
Significant progress has been made in many countries over recent months in adjusting to the new economic environment. For example, oil exporters and importers alike have started to rationalise government spending and have cut back on their expensive general subsidy programmes, for petrol, electricity, gas, and water, which have tended to benefit mostly the rich.
Some countries have also started to find cost savings in their public wage bills. For example, Saudi Arabia recently announced a number of measures to trim its government wage bill, including by reducing allowances and limiting overtime. The GCC is also planning the introduction of a value-added tax.
Mr Ahmed added that over the next 12 months, and well into the future, more needs to be done.
Investment in infrastructure, education, and healthcare would continue to be three key areas where public expenditures could be most effective in building sustainable, long-term growth, he said.
Diversifying drivers of growth
More broadly, the report recommends that countries make greater progress toward more diversified, dynamic, private-sector driven economies.
Many countries have announced such plans, including Saudi Arabia whose Vision 2030 emphasises private sector development, commits to a balanced budget in five years, and envisages a partial privatisation of ARAMCO, the world’s largest oil and gas company.
“For oil exporters, this will include relying less on oil revenues while creating job opportunities for new labour market entrants in the private, rather than public, sector, while for oil importers, this will mean relying less on remittances. But, for both these groups of countries the goal must be an economic model that depends less on state spending and more on the private sector,” Mr Ahmed said.