Middle East and Central Asia
Regional Economic Outlook: Middle East and Central Asia November 2018
November 2018
A modest growth recovery continues for countries in the Middle East, North Africa, Afghanistan, and Pakistan region. Higher oil prices are providing support for oil-exporting countries but are adding to pressures facing oil-importing countries.
Meanwhile, growth in the Caucasus and Central Asia region exceeded expectations in 2017, but momentum is set to fade. At forecasted growth rates, it will take the region nearly two decades to reach the per capita income levels of emerging Europe. Faster-than-anticipated tightening of global financial conditions and rising trade tensions cloud the outlook for both regions.
The increasingly challenging global environment underscores the need for both regions to build resilience and accelerate reforms that build dynamic private sectors and promote inclusive growth.
Global Developments
Global growth for 2018–19 is projected to remain steady at its 2017 level of 3.7 percent (see table). However, this projection is 0.2 percentage point lower than the April 2018 World Economic Outlook, with the growth outlook marked down for a number of major economies. In the United States, while the outlook for 2018 is unchanged at 2.9 percent, the forecast for 2019 has been revised down due to recently announced trade measures. Growth projections have also been marked down for the euro area and the United Kingdom, following surprises that suppressed activity in early 2018. The outlook for emerging and developing economies is also weaker, reflecting downward revisions for some large emerging market economies due to country-specific factors, tighter financial conditions, geopolitical tensions, and higher oil import bills. For instance, China is projected to experience somewhat weaker growth in 2019 in the aftermath of recently announced trade measures.
Chapter 1 - MENAP Oil-Exporting Countries: Higher Oil Prices Providing Temporary Support
Supported by higher oil prices, oil exporters in the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) region will experience visible improvements in external and fiscal balances in 2018–19. Non-oil activity is expected to continue its recovery, supported by a slower pace of fiscal consolidation, while oil production picks up where spare capacity is readily available. Risks remain skewed to the downside over the medium term. These include a faster-than-anticipated tightening of global financial conditions, escalating trade tensions that could affect global growth and put downward pressure on oil prices, geopolitical strains, and spillovers from regional conflicts. While a slower pace of fiscal consolidation may be justified in the short term, consolidation efforts should continue over the medium term. This will enable countries to mitigate the potential impact of shocks and ensure a sustainable use of hydrocarbon revenue. Continued structural reforms will facilitate private sector development and strengthen long-term resilience. Any delays on the structural reform agenda could curtail economic diversification and inclusion.
Chapter 2 - MENAP Oil-Importing Countries: Safeguarding the Growth Recovery Amid Rising Risks
Growth among oil-importing countries in the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) region is expected to continue at a modest pace in 2018 and to strengthen slightly over the medium term. However, growth is uneven and likely to remain low relative to previous trends, while unemployment remains elevated. Furthermore, higher oil prices are weighing on already weak external and fiscal balances. The outlook is increasingly clouded by tightening global financial conditions, bouts of financial market volatility, and mounting global trade tensions. Continued strengthening of policy frameworks is needed to alleviate vulnerabilities and enhance economic resilience against rising risks. Moreover, to achieve higher, sustainable, and broad-based growth countries need to sustain their implementation of structural and institutional reforms aimed at improving competitiveness, boosting investment and productivity, and fostering a dynamic job-creating private sector.
CCA Highlights
Growth in the Caucasus and Central Asia (CCA) region exceeded expectations in 2017, but momentum is set to fade, according to the IMF’s latest Regional Economic Outlook (REO). The report highlights the importance of raising medium-term growth in the CCA region, outlining how growth-friendly fiscal policies, increased private activity, and improved resilience to global shocks are essential to delivering this goal.
Chapter 3 - Caucasus and Central Asia: Unlocking the Region’s Growth Potential
After a recovery in 2017, GDP growth in the Caucasus and Central Asia (CCA) region is expected to stabilize in 2018 and in the medium term. However, at forecast growth rates, it will take nearly two decades to raise CCA living standards to the current levels of emerging Europe.1 To ensure that citizens benefit from the catching-up process, countries in the region need to move to a private-sector-led growth model by reducing the large state footprint in the economy, while creating an enabling business climate for the private sector and promoting competition. Meanwhile, buffers that were heavily depleted during the 2014 external shock need to be rebuilt to address the risks stemming from continued weaknesses in the financial sector and high public debt. Stronger buffers will also help if risks to global growth, including from escalating trade tensions, materialize.
Chapter 4 - Fiscal Policy for Durable and Inclusive Growth in the Middle East and Central Asia
Middle East and Central Asia policymakers face the challenge of boosting inclusive growth amid limited fiscal policy space. Further fiscal consolidation is needed across the region to secure debt and fiscal sustainability. While some adverse impact on growth may be unavoidable, the composition of adjustment can mitigate this impact. Currently, countries are adopting a mix of spending cuts and revenue-boosting measures that may not necessarily foster durable and inclusive growth. To ensure that future fiscal adjustment is as growth-friendly and equitable as possible, countries need to (1) rebalance the composition of expenditure toward growth-enhancing and high-quality capital investment, while fostering well-targeted social spending; and (2) move to a more progressive tax structure, diversify the revenue base, and eliminate distortions. Embedding the adjustment in a well-defined medium-term fiscal framework, coupled with greater fiscal transparency, would make fiscal consolidation more durable.
Chapter 5 - Private Investment for Inclusive Growth in the Middle East and Central Asia
Between 2000 and 2017, annual private investment in Middle East and Central Asia countries averaged 15.6 percent of GDP, the second lowest worldwide after sub-Saharan Africa. Since the global financial crisis, investment ratios have declined markedly relative to peers. A more dynamic private sector, underpinned by robust private investment, is needed to foster greater job creation and boost inclusive growth. Increasing access to finance, investing in education and infrastructure, reducing the role of the state in the economy, and improving government effectiveness and governance would unlock private investment, laying the foundation for higher and more inclusive growth. These efforts would enable a transition from the current state-led economic growth model, which has inhibited private sector development, to more dynamic private-sector-led growth.