A perfect storm for Middle East oil importing countries: IMF

Dubai: The outbreak of COVID-19 across the region is turning out to be a perfect storm for oil importing countries of the Middle East, according to the International Monetary Fund’s (IMF) Regional Economic Outlook.

“Besides the potentially large humanitarian impact, the long-lasting economic impact of the crisis — including via an increase in unemployment rates which stood on average at 9.5 per cent in 2019 — would worsen the already high unemployment in many countries,” said Jihad Azour, Director, Middle East and Central Asia Department, IMF.

Although lower oil prices may provide some near-term support, weaker domestic activity, exacerbated by lower confidence and public debt vulnerabilities in some countries, could heighten risks to the outlook, the IMF Regional Economic Outlook said.

Economic imbalances

The onset of the pandemic has dramatically altered the outlook for 2020. Average growth in 2020 is expected to contract by 1 per cent that is 4.5 percentage points below 2019.

“In addition to the pandemic, additional demand and supply shocks — through trade, tourism, remittances, tighter global financial conditions, and spillovers on domestic credit conditions, along with confinement measures — would severely curtail trade and tourisms sectors,” the IMF said.

Most MENAP oil importers rely heavily on imports to serve their domestic demand and exports. Possible disruptions in the supply of consumption goods and currency depreciations could push domestic prices upward.

“Lower oil prices may help reduce MENAP oil importers’ fiscal and external imbalances, but reduced capital and remittance flows from oil-extracting countries may also affect the impact on economic activity,” said Azour.

Funding deficits

The IMF expects the rising fiscal deficits across oil importing countries in the region to prove difficult in the context of the sharpest portfolio flow reversal on record for emerging markets. This may increase pressure on some countries’ foreign reserves and exchange rates. Substantial bond and equity outflows — $380 million by end of March — have already been observed, with sovereign spreads deteriorating, the report said.

In some countries, financing needs may increase reliance on domestic financial markets and crowd out private credit. Furthermore, increase social unrest in some countries such as Lebanon and Sudan, constrain policymakers further.

Fragile and conflict-affected states remain particularly vulnerable because sanitary and economic conditions in these states may be conducive to a rapid spread of the pandemic, the IMF said.