The International Monetary Fund (IMF) has further downgraded its projections for the Middle East and North Africa (MENA) region’s economic growth to -5.7% in 2020 due to the novel coronavirus (COVID-19) pandemic.
This represents a 2.4 percentage points decline on the institution’s April forecast of -3.3% for the current year.
In its latest regional economic outlook released on Monday, the fund stated that in 2021, the region’s gross domestic product (GDP) growth is expected to recover to 3.4%. The amended projections represent a lowering of 0.8 percentage points on the April forecast of 4.2%.
In late June, the IMF released an update of its World Economic Outlook (WEO), in which it anticipated a 4.9% contraction in global GDP over 2020, 1.9% below the WEO’s April forecast.
According to the IMF, the COVID-19 pandemic has had more negative impact on economic activities in the first half (H1) of 2020 than expected. The economic recovery is projected to be more gradual than previously forecast.
As for the MENA region, the fund projected that the inflation will reach 8% over the course of 2020, in comparison to the 8.1% reported in 2019. It also anticipated that regional inflation will rise again to 9.1% in 2021.
The Washington-based fund expected that the current account balance in MENA will stand at -5.8% and -4.8% in 2020 and 2021, respectively, compared to 1.4% in 2019.
“The overall fiscal balance in the MENA region will reach -10.8% and – 8.9% in 2020 and 2021, respectively, compared to -3.6% in 2019,” the IMF noted.
Weaker outlook for MCD region
The IMF’s Middle East and Central Asia Department (MCD) countries have reacted to the global coronavirus pandemic with swift and stringent measures that have saved lives. However, these policies have also had a large impact on domestic economic activity.
“With several countries in the MCD region beginning to reopen in past weeks, and a recent uptick in activity, rising infection numbers may pose risks,” the IMF said. “A sharp decline in oil prices, together with production cuts among oil exporters and disruptions in trade and tourism, added further headwinds. As a result, growth in the region is now projected at -4.7 % in 2020, 2 percentage points lower than in April 2020.”
The IMF explained that these changes are mostly driven by the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) region. In 2020, growth in this region is expected to weaken by 2 percentage points compared to April, reflecting subdued activity in oil exporters.
It added that, despite supportive policies, growth revisions appear to be linked to lockdowns and mobility. Countries with the highest lockdown stringencies or lower workplace mobility, as measured according to the Google index, also showed bigger real GDP revisions since the April 2020 Regional Economic Outlook (REO). These included countries such as Kuwait, the Kyrgyz Republic, Oman, Saudi Arabia, and the UAE.
“For oil exporters, the decline is also seen in non-oil GDP,” the report noted. “However, there is unusually high uncertainty around these forecasts as well as around the speed of recovery thereafter.”
“With output projected to shrink by 13%, on average, for 2020 (compared to an average growth of 2.6% in 2019), countries that are fragile and in conflict situations are expected to witness a significant decline in GDP per capita, from $2,900 in 2018/19 to about $2,000 in 2020,” the report continued. “This is a dramatic downturn that will aggravate existing economic and humanitarian challenges and raise already-high poverty levels.”
In an environment of weaker demand, inflation is projected to remain low in the MCD region. The exception to this is Lebanon, where year-on-year (y-o-y) inflation increased to 56% in May, as the Lira lost nearly two-thirds of its value despite the imposition of informal capital controls.
Amid the erosion of tourism and remittances receipts and oil supply cuts, current account balances are projected to deteriorate further in 2020. The GDP growth among oil exporters in the Middle East, North Africa, Afghanistan, and Pakistan (MENAPOE) will see a downturn of -5.4% in 2020 versus 3.2% of GDP in 2019.
Moreover, the Caucasus and Central Asia (CCA) region will also see a downturn, projected at -6.4% of GDP in 2020 against -1.5% of GDP in 2019, reflecting stronger policy responses to COVID-19 in Georgia, the Kyrgyz Republic, and Tajikistan.
The IMF stressed that these large and growing deficits elevate debt sustainability concerns as debt-to-GDP levels are now projected to reach, on average, 95% of GDP by the end of 2020 for MENAP oil importers and 61% of GDP for CCA oil importers.
“For oil exporters, the fiscal picture is mixed, as in about half of the countries, policy packages were accompanied by adjustments in non-priority expenditures and revenue measures, leading to improved non-oil fiscal balances in 2020, compared to 2019, namely in Algeria, Bahrain, Oman, Qatar, and Saudi Arabia, the last of which tripled its value-added tax,” according to the IMF. “Among the rest, non-oil fiscal balances in 2020 worsened on average by 4 percentage points of non-oil GDP over the same period, with large deteriorations in Azerbaijan, Kuwait, and the UAE. Fiscal balances are projected to worsen across the board in 2020, compared to 2019.”
MENAP oil importers and exporters
MENAP oil exporters growth is projected at -7.3% in 2020, rebounding to 3.9% in 2021.
“The large downward revisions for this group for both 2020 and 2021, 3.1 and 0.8 percentage points, respectively, compared to the April 2020 REO, reflect the ‘double whammy’ from oil price fluctuations and supply cuts, and the pandemic-linked lockdowns,” the IMF noted. “Downward revisions in oil GDP reflect a sharper-than-anticipated drop in crude production, and oil export receipts are now projected to decline by more than $270bn in 2020 relative to 2019.”
The report mentioned that non-oil GDP in these economies has also been marked down. This is on the back of stay-at-home rules and other coronavirus-related containment measures, which are causing larger-than-expected disruptions to the tourism, hospitality, transportation, and retail sectors.
“For MENAP oil importers (MENAPOI), the benefits from lower oil prices are mostly being offset by hampered trade, tourism, and remittances and tighter global financial conditions and spill-over on domestic credit conditions, which, along with confinement measures, continue to depress growth,” according to the report.
The report added that although 2020 growth among MENAPOI is projected to be nearly unchanged from April, standing at -1.1%, there are substantial differences across countries.
It mentioned that the growth in 2020 has been revised down for several economies, namely Afghanistan, Djibouti, Jordan, Morocco, and Sudan. This is off the back of sluggish growth among trade partners, which is expected to have a stronger-than-previously-projected impact on manufacturing and tourism exports.
“Markdowns in growth during H2 of 2020 are also reflected for Egypt and Pakistan, both of which lowered their fiscal year (FY) 2020/21 [which starts July 2020] projections by about 1 percentage point, driven by weaknesses in the second half of 2020,” the IMF wrote.
The fund stated that Lebanon’s economic conditions continue to worsen, amid a generalised economic and financial crisis, with a double-digit contraction projected for 2020.
The IMF projected MENAP region inflation to reach 8.3% and 8.9% in 2020 and 2021, respectively, compared to 7.9% in 2019.
Countries urged to prioritise health systems
The IMF has warned that its forecasts faced a number of uncertainties concerning the pandemic’s evolution and persistence, and urged countries to prioritise ample resources for the health system.
“Going forward, the economic outlook and balance of risks will be subjected to elevated uncertainty around the evolution and persistence of the pandemic,” the IMF said. “The downturn could be less severe than forecast if, for example, there is an earlier-than-expected availability of a vaccine or if country authorities find a way to maintain activity and health systems without stringent lockdowns in the face of any subsequent waves.”
It added that beyond pandemic risks, continued declines in oil prices or production could further erode oil exporters’ policy space and potentially affect these countries’ banking systems.
The IMF noted that any tightening of financial conditions could complicate debt rollovers for MCD firms and sovereigns, which faces about $21bn in maturing external sovereign debt in H2 of 2020.
“A more protracted recovery in remittances and tourism, which are key foreign exchange flows to the region, could also pose risks to both growth and external financing,” the IMF said. “In addition, the potential decline in expatriate workers, who account for more than 70% of the labour force in some oil-exporting countries, could dampen recovery.”
The IMF reported added that governments need to continue ensuring health systems are adequately resourced, strong, and resilient, regardless of where the country is in regarding the pandemic.
It assured that multilateral, regional, and bilateral assistance through the global financial safety net can help cushion the impact of funding shocks. In that regard, the IMF is actively supporting the region and has already approved nearly $17bn to MCD countries since the beginning of 2020.
It mentioned that Egypt, Jordan, the Kyrgyz Republic, Pakistan, and Tunisia have received emergency assistance under the Rapid Financing Instrument (RFI). Afghanistan, Djibouti, Mauritania, Tajikistan, and Uzbekistan have accessed the RFI’s concessional counterpart, the Rapid Credit Facility.
The IMF said that the pandemic has highlighted the importance of strong and far-reaching social safety nets. These should be broadened and more targeted going forward, regardless of whether the countries remain locked down or are carefully reopening. In addition, the fund said that the pandemic has weighed heavily on informal and migrant workers not covered by traditional social safety net delivery methods.
“Given the high levels of informality in the region, establishing digital payment systems and building social protection databases to ensure the timely identification and support of targeted beneficiaries should be key priorities once the immediate crisis abates,” the IMF stressed. “Beyond the pandemic and immediate recovery, the focus should shift toward rebuilding buffers, in particular by lowering public debt and increasing reserves, and promoting a resilient and equitable economy.”
