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Middle East, North Africa Region Urged to Stay on Course with Reforms

Ongoing construction at the King Abdullah Financial District in Riyadh, Saudi Arabia. Oil exporters need to accelerate reforms to diversify away from hydrocarbons, says the IMF (photo:Fayez Nureldine/AFP/Getty Images)

By Neil Hickey IMF Middle East and Central Asia Department

October 18, 2016

  • Low oil prices, ongoing conflicts weigh on region's growth prospects
  • Oil exporters should continue to adjust to lower oil prices, diversify their economies
  • Oil importers need structural reforms to create jobs and inclusive growth

The slump in oil prices and ongoing conflicts continue to weigh on growth prospects of the Middle East, North Africa, Afghanistan and Pakistan, said the IMF in its latest regional assessment.

With these challenges expected to persist, the IMF said the region needed to continue the progress they have already made toward strengthening their fiscal balances, and instituting structural reforms, which would help to ensure inclusive and sustainable growth.

The IMF’s Regional Economic Outlook for the Middle East and Central Asia, released on October 19, projects that growth for the region this year will be a modest 3½ percent, with little improvement expected in 2017 (see table). Sluggish economic growth is hurting progress in improving living standards. Structural transformations towards more dynamic private-sector driven economies, plans for which are being formulated in a number of countries, are needed to boost growth and create private sector jobs, the report said.

“The countries of the Middle East and North Africa 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 IMF Middle East and Central Asia Department Director Masood Ahmed at the report’s launch in Dubai. “To their credit, these countries have made progress in dealing with these challenges.”

Despite staging a recovery over recent months to reach more than $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.

Conflicts, meanwhile, are continuing to cause a severe humanitarian crisis in several of the region’s countries—with higher numbers of refugees than at any other time since World War II—as well as disruption to economic activity and confidence across the wider region.

Modest outlook for oil exporters and oil importers

In the oil-exporting Gulf Cooperation Council (GCC), the IMF projects non-oil growth to be 1.8 percent in 2016 and 3.1 percent in 2017, much lower than the 7 percent average between 2000 and 2014, 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 materializing 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 percent in 2016 and 4.2 percent in 2017.

Over the medium term, growth will be too low to improve living standards significantly or cut into high unemployment, which stands above 10 percent for the general population, and as high as 25 percent for young people.

Adjusting to cheaper oil

The entrenched nature of low oil prices and conflicts underlined the need for the region’s countries to continue several crucial policy adjustments, the report emphasized.

“Oil exporters are facing the difficult task of growing their economies in a climate of lower budget revenues and spending cuts,” Ahmed said. “Therefore, the challenge now and into the future will be to find alternative sources of revenues and economic growth to maintain the level of prosperity many of them have become accustomed to,” he emphasized.

"And for the oil importers, the key challenge is boosting job creation via more dynamic private sectors," he added.

The report highlights the significant progress many countries had made over recent months in adjusting to this new economic environment, particularly in the area of spending and new revenues. For example, oil exporters and importers alike have started to rationalize government spending and have cut back on their expensive general subsidy programs, for petrol, electricity, gas, and water, which have tended to benefit mostly the rich.

Despite these improvements, prices for these utilities are still well below international standards, so policymakers could go further in reforming their energy pricing frameworks, the report noted.

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.

“These are all welcome moves and underline how committed these countries are to adjusting to the current difficult economic environment,” Ahmed said.

However, he added that over the next 12 months, and well into the future, more needs to be done.

A key challenge would be not only boosting growth while tightening budget expenditures, but also maximizing the returns from what room countries have available for public spending.

Investment in infrastructure, education, and health care would continue to be three key areas where public expenditures could be most effective in building sustainable, long-term growth, Ahmed said.

Diversifying drivers of growth

However, more broadly, the report recommends that given the environment of lower oil prices, countries need to make greater progress toward more diversified, dynamic, private-sector driven economies.

Many countries have announced such plans, including Saudi Arabia whose Vision 2030 emphasizes private sector development, commits to a balanced budget in five years, and envisages a partial privatization 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 labor 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,” Ahmed said.

“The economic transformations that are made now will have the potential to provide resilient and inclusive growth for generations to come,” he added.

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