IMF cuts Middle East growth forecast over impact of Israel-Gaza war

Fiscal dent caused by the war and loss of oil revenues means challenges for key economies

An oil refinery on the outskirts of the Iraqi city of Karbala. The IMF has revised down overall growth forecast for the GCC to 0.5 per cent in 2023, one percentage point lower than its estimates in October. AFP
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The International Monetary Fund has cut its growth forecast for the Middle East and North African region as the conflict raging in Gaza compounds challenges for highly exposed economies.

Assuming that the Israel-Gaza conflict eases after the first quarter of 2024, growth in the Mena region is projected to expand 2.9 per cent this year.

That marks a downward revision of 0.5 percentage points from the fund’s October 2023 estimates of 3.4 per cent growth for Mena economies, the IMF said in its latest Regional Economic Outlook for the Middle East on Wednesday.

The revision primarily reflects voluntary production cuts by oil-exporting nations as well as the adverse implications of the ongoing conflict, especially for the countries that are highly exposed to the war.

The fiscal dent from the war and loss of oil revenue are on top of “necessary tight policy settings in several economies, which are also weighing on growth”, the Washington-based multilateral lender said.

The IMF expects Mena economies, which expanded by 2 per cent in 2023, to grow by 4.2 per cent in 2025, as the effect of adverse factors gradually fades, and robust non-oil growth continues to support economic activity in oil exporting economies.

“The outlook for the Mena region is highly uncertain, and downside risks are resurgent,” the IMF said.

“An escalation or spread of the conflict beyond Gaza and Israel, as well as an intensification of the disruptions in the Red Sea, could have a severe economic impact, including on trade and tourism.”

The regional economies, which expanded by 6.7 per cent in 2022, faced numerous challenges last year with lower oil production, tight policy settings and natural disasters all denting growth. The Israel-Gaza war, which began in early October, was another blow.

The conflict raging in Gaza has turned into a severe humanitarian crisis as more than 24,000 people lost their lives within the first 100 days of which more than two thirds were women and children.

Almost 1.9 million people, nearly 85 per cent of the population, have been internally displaced and poverty rates have probably increased from levels that were estimated at above 50 per cent even before the current conflict, the IMF said.

The conflict is threatening to turn into a full-blown regional war and there have recently been fatal attacks in Lebanon, Syria and Jordan.

Tensions have also spilt into the Red Sea where Yemen's Houthi rebels are attacking ships passing through the main trade route connecting Asia and Europe in retaliation for Israel’s attacks in Gaza. The Houthi attacks in the Red Sea can also potentially disrupt energy supplies from Middle East producers.

On Friday, the Marlin Luanda, a petroleum products tanker vessel operated on behalf of Trafigura, was struck by a missile in the Gulf of Aden after leaving the Red Sea, according to a statement on the company's website.

The heightened security situation in the Red Sea also raises concerns about the conflict’s effect on global trade and supply chains.

During the first half of 2023, trade through the Suez Canal, which connects the Red Sea to the Mediterranean Sea, represented about 12 per cent of global trade, including 30 per cent of global container traffic and 8 per cent of global liquified natural gas shipments.

However, as of January 21, the 10-day cumulative shipping volume through the Suez Canal had dropped close to 50 per cent year-on-year, the IMF said.

At the epicentre of the conflict, the economic outlook has deteriorated sharply. In 2023, the real gross domestic product in West Bank and Gaza contracted about 6 per cent, a nine percentage-point downgrade from IMF’s estimates in October.

There has been an “almost complete collapse of activity in Gaza and … a deep contraction in the West Bank following the tightening of Israeli mobility restrictions and a deteriorating security situation,” the IMF said.

Inflation is estimated to have risen to above 15 per cent on an annual basis at the end of December and the current account deficit is sizeable.

The financial viability of the Palestinian Authority (PA) has also been compromised by the economic contraction and Israel’s decision to not transfer the full amount of monthly “clearance” revenue to the PA, the IMF said.

Overall, the outlook for the external position of economies is deteriorating, with lower expected tourism and trade receipts likely to affect current account balances.

Tourism is a lifeline in many Mena economies, accounting for between 2 and 20 per cent of GDP and between 5 and 50 per cent of goods and services exports before the pandemic, according to IMF estimates.

Oil production cuts would also affect the external position of oil exporting nations and the IMF expects the aggregate current account balance of the Mena region to shrink by about $25 billion.

The IMF has revised down overall growth forecast for the GCC to 0.5 per cent in 2023, 1 percentage point lower than its October estimate, but the economy of the six-member bloc is expected to rebound to 2.7 per cent in 2024.

Yet even with the adverse shock from the conflict and low oil revenue, non-oil growth momentum remains strong in the GCC economies.

Structural reforms by GCC members are supporting economic diversification while increased domestic demand and capital inflows are also contributing to growth, the IMF said.

“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.”

In line with global trends, inflation is expected to continue moderating in most Mena countries to 14.4 per cent this year, 0.6 percentage points lower than the estimates in October.

Across Mena oil exporters, headline inflation is forecast to average 8.7 per cent in 2024 and 7.9 per cent in 2025.

“This forecast reflects a projected decline in inflation to below 3 per cent across GCC countries, even as price pressures persist in some non-GCC countries,” the IMF said.

Consumer prices, however, will stay elevated in emerging and middle-income countries of the region at 25.6 per cent and surge to 69.9 per cent for lower income countries, especially Sudan, and Yemen, the fund added.

In addition to the adverse effects of the conflict, elevated public sector gross financing needs are expected to be a significant challenge for most emerging and middle-income nations of the region.

Total financing needs this year are projected at $186 billion, up from $156 billion in 2023, mostly attributable to Egypt and Tunisia.

Uncertainty and downside risks for the region’s economies have risen significantly since October, with the duration of the conflict and scope for escalation still uncertain, according to IMF’s regional economic outlook.

“Even if the conflict remains contained to Gaza and Israel, the situation remains fluid and highly uncertain,” the fund said.

“A protracted conflict with no clear solution would weigh heavily on the region, [while] an escalation or spread of the conflict would exacerbate uncertainty and intensify the impact through various transmission channels, including tourism, foreign direct investment, and energy and financial markets.”

Updated: January 31, 2024, 12:59 PM