Non-oil growth momentum remains strong in Gulf Cooperation Council (GCC) economies and, notably, structural reforms by GCC members are supporting economic diversification while increased domestic demand and capital inflows are also contributing to growth, an IMF report says.
The IMF Middle East and North Africa Regional Economic Outlook Update says non-oil growth remains robust in most oil exporters in the region, but additional voluntary oil production cuts are putting a damper on overall growth.
Reform momentum has allowed some oil exporters, especially GCC countries, to continue diversifying their non-oil sectors. Yet, overall GCC growth has been revised down markedly to 0.5 percent in 2023 (1 percentage point lower than in the October 2023 Regional Economic Outlook: Middle East and Central Asia), reflecting oil production cuts, before moderately rebounding to 2.7 percent in 2024 as the drag from oil production cuts gradually fades.
In particular, growth in Saudi Arabia -- an economy that accounts for about 55 percent of the most recent Opec+ voluntary cuts -- has been revised down to -1.1 and 2.7 percent for 2023 and 2024, respectively. In contrast, growth has been revised up for some non-GCC oil exporters, including Iran and Libya, mainly reflecting higher-than-projected oil production.
MENA GROWTH
Assuming that the Gaza conflict eases after the first quarter of 2024, growth in the MENA region is projected to improve moderately to 2.9 percent in 2024 (from 2.0 percent in 2023), a downgrade of 0.5 percentage points from the October 2023 Regional Economic Outlook: Middle East and Central Asia.
This downgrade reflects mainly (i) the adverse implications of the conflict, which are compounding challenges for highly exposed economies, and (ii) additional voluntary oil production cuts, the report says.
Moreover, these developments come on top of necessary tight policy settings in several economies, which are also weighing on growth. As the impact of these factors gradually fade and robust non-oil growth continues to support activity in oil exporters, growth in the MENA region is projected to strengthen to 4.2 percent in 2025.
At the same time, the outlook for the external position among MENA economies is deteriorating. Lower expected tourism and trade receipts are likely to weigh on current account balances. Meanwhile, oil production cuts provide a drag on the external position among oil exporters. Consequently, and driven in large part by the negative contribution from oil production cuts among GCC members, the aggregate current account balance of MENA economies in 2024 (a surplus of 3.9 percent of MENA GDP) is expected to shrink by about $25 billion (0.7 percentage points of MENA GDP), compared to the projections in the October 2023 Regional Economic Outlook: Middle East and Central Asia.
CHALLENGES
Economies in the MENA region endured a multitude of challenges in 2023. The October 2023 Regional Economic Outlook: Middle East and Central Asia projected slowing growth, driven by lower oil production, tight policy settings in many MENA emerging market and middle-income economies (EM&MIs), and the conflict in Sudan.
In addition, natural disasters, such as floods in Libya and the earthquake in Morocco had devastating human and physical impacts. The conflict in Gaza and Israel, which began in early October 2023, is yet another blow to economies contending with existing challenges and heightened uncertainty.
Since the beginning of the Gaza conflict, a severe humanitarian crisis has unfolded in Gaza, where more than 24,000
people have lost their lives within the first 100 days of the conflict—of which more than two-thirds were women and
children, and almost 1.9 million people (nearly 85 percent of the population) have been internally displaced.2 Food
and water insecurity is widespread, and essential infrastructure has been destroyed. Poverty rates have likely increased—from levels that were estimated at above 50 percent even before the current conflict (IMF 2023).
Moreover, international assistance to support the humanitarian response to the conflict remains limited. In
the West Bank, restrictions on the movement of people, goods, capital, and access to resources (especially land)
have been tightened, with a severe deterioration of both security and economic conditions, the report notes.
The conflict has adversely impacted tourism in neighbouring economies. Although hotel and flight indicators for the
region had returned to 2019 levels before October, trends in hotel room occupancy rates following the onset of the
conflict worsened sharply in Lebanon and Jordan, relative to the corresponding period in the previous year
(Figure 1).
Since tourism is a lifeline in many MENA economies -- accounting for between 2 and 20 percent of GDP and between 5 and 50 percent of goods and services exports before the pandemic -- it is also an important shock transmitter, and such adverse developments will inevitably dampen growth, it says.
Despite some initial pickup in volatility amid the onset of the conflict, energy and financial markets have remained broadly stable.
Financial markets have remained broadly stable, even though market participants initially priced in heightened geopolitical risk in the MENA region. Despite widening at the conflict’s start, sovereign spreads have generally narrowed and are tighter compared to levels in early October before the conflict. After an initial acceleration in international portfolio outflows, net outflows from debt and equity funds in the region have reverted to preconflict levels.
RED SEA CONFLICT
The heightened security situation in the Red Sea has raised concerns about the conflict’s impact on trade and shipping costs. Several major shipping companies have announced they are diverting cargo through alternative shipping routes, with potential implications for global supply chains and commodity trade. In this respect, during the first half of 2023, trade going through the Suez Canal, connecting the Red Sea to the Mediterranean Sea, represented about 12 percent of global trade, including 30 percent of global container traffic, 10-15 percent of global seaborn cargo, and 8 percent of global liquified natural gas shipments. However, as of January 21, 2024, the 10-day cumulative shipping volume through the Suez Canal had dropped close to
50 percent relative to the previous year. In addition, freight costs for routes between Europe/Mediterranean Sea and China have surged by more than 400 percent since mid-November, likely reflecting a combination of increased insurance costs amid elevated security risks and higher transportation costs associated with longer shipping routes.
Meanwhile, the broad-based regional decline in inflation is a positive development. Inflation continues to ease in most
MENA economies, including as monetary policy has remained tight, roughly in line with global developments.
Specifically, estimates of natural policy interest rates suggest that the monetary policy stance was tight in many
MENA economies in 2023. Moreover, month-on-month inflation—an indicator of inflationary momentum—is
steadily declining (Figure 6), and core inflation has approached pre-pandemic historical averages for some oil
exporters. Still, inflation is proving persistent in some economies, largely because of country-specific factors,
including those related to foreign exchange shortages (Egypt) and monetary financing and cost-push pressures
(Sudan). While inflation remains elevated in Lebanon, inflationary pressures have been moderating since mid2023, supported by the end of monetary financing, which forced a balanced budget, and a stable exchange rate.
SURPLUSES COMPFORTABLE
Moreover, despite a moderation in oil prices, slower global trade, and a boost to imports from rebounding domestic demand, current account surpluses remained at comfortable levels in 2023 after reaching historical highs in 2022. Fiscal balances
also stayed healthy, supported by still-elevated oil prices and fiscal reforms (including expenditure restraint and
continued efforts to bolster non-oil revenue).
The Gaza conflict’s immediate neighbours face a challenging outlook:
* So far, Egypt’s tourism sector has been less severely impacted than that of some other economies (Jordan, Lebanon). However, high-frequency tourism data show signs of a possible deterioration. In addition, with several shipping companies halting transit through the Red Sea, Egypt’s foreign exchange flows may be adversely impacted, as Suez Canal revenues are an important source of foreign exchange for Egypt.
Moreover, heightened uncertainty is expected to weigh on investor sentiment and net foreign direct investment inflows. Coupled with the sustained adverse impact of foreign exchange shortages on private sector activity, these factors are projected to negatively impact the external sector and economic growth. In turn, real GDP growth is projected to decline from 3.8 percent in 2023 to 3 percent in 2024 (a downward revision of 0.6 percentage point relative to the October 2023 Regional Economic Outlook: Middle East and Central Asia).
* Reflecting positive underlying fundamentals, the Jordanian economy is growing, albeit at a moderate pace. However, the conflict has had an adverse impact on tourism arrivals and consumer spending. Against this background, growth in 2023 and 2024 is projected to be held back at around 2.6 percent in both years, compared to earlier projections of closer to 3 percent growth in 2024. In addition to the conflict’s adverse effects on tourism-related sectors, these projections also reflect lower investment and slowing regional import demand. As a result, the current account deficit is expected to narrow less than previously projected (to
6.3 percent of GDP), mainly due to lower travel receipts and higher energy imports.
* In Lebanon, the conflict is deepening complex challenges. Tourism, driven by the large diaspora, is expected to remain weak. Moreover, agricultural output—concentrated in the country’s south, which is directly impacted by the conflict—is also being negatively affected. Consequently, real GDP growth is projected to have contracted further in 2023, before rebounding slightly in 2024, while the current account deficit is widening. -TradeArabia News Service
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