Inflation and the Ukraine war-driven surge in commodity prices will take a significant economic toll on Middle East and North Africa oil-importing nations, the International Monetary Fund has said.
Rising prices come at a “precarious time”, given the diverging economic recovery in the region, Jihad Azour, director of the Middle East and Central Asia Department at the IMF, wrote in a blog post on Tuesday.
“Higher inflation is one of the most direct impacts of rising commodity prices,” said Mr Azour, who co-wrote the blog with senior IMF economists Jeta Menkulasi and Rodrigo Garcia-Verdu.
"Food prices accounted for about 60 per cent of last year’s increase in headline inflation in the Middle East and North Africa, excluding the countries of the Gulf Co-operation Council.”
Inflation is expected to remain elevated in the region this year at 13.9 per cent, a significant upward revision from the Washington-based lender's previous projections.
Russia’s military offensive in Ukraine has stoked the global commodities cycle, adding to economic uncertainties, denting global growth and exacerbating inflationary pressures.
Sanctions on Russia, the world's second-largest energy exporter, are also affecting global energy supplies. Oil prices, which rose 67 per cent in 2021, rallied to a notch under $140 per barrel in March before giving up some gains. They are still up 60 per cent since last year.
Average petroleum spot prices have fluctuated between $98 and $130 per barrel since the Ukraine conflict began and are expected to settle at about $107 in 2022 — an increase of about $43 compared with an October estimate, the IMF said. They are also above the 2019 average of $61.4 a barrel.
Emirates NBD expects Brent, the benchmark for more than two thirds of global crude, to average $120 per barrel in 2022.
Food prices are expected to increase about 14 per cent this year, on top of the 28 per cent gain in 2021. Russia and Ukraine collectively account for about a quarter of global wheat supply. Before the war, Russia was the world’s largest wheat exporter and Ukraine the fifth, World Bank data indicated.
Many countries in the Mena region are heavily dependent on food imports, which account for about one fifth of total imports.
Food, on average, has more than a one-third weighting in consumption baskets, which is even higher in the case of low-income countries, IMF officials said on Tuesday.
“The situation is particularly concerning for fragile and conflict-affected states, since strategic reserves cover less than 2.5 months of net domestic consumption,” they said.
“Overall, rising food prices and potential wheat shortages affect the poor more because they allocate a higher share of their expenditure to food. This will add to poverty and inequality and heighten the risk of social unrest.”
The commodities super cycle will also significantly affect Mena oil-importing economies’ external accounts, with the IMF projecting their current account balances shrinking by 1 percentage point of gross domestic product on average.
“For low-income countries, higher wheat prices alone will be a significant blow, worsening current accounts by about 1.2 per cent of GDP on average,” the IMF said.
Although the IMF revised its Mena growth forecast by 0.9 percentage points to 5 per cent in April, it only reflects improved prospects for crude exporters amid higher oil and gas prices. For oil-importing countries, the fund has marked down its growth projection.
Oil exporters will grow an aggregate of 5 per cent this year and 3.3 per cent in 2023, down from 6.5 per cent in 2021.
Iraq will be the fastest-growing oil-exporting economy this year and next, expanding 9.5 per cent and 5.7 per cent, respectively. Kuwait will be the second-fastest growing economy in 2022 at 8.2 per cent, followed by Saudi Arabia at 7.6 per cent, Oman at 5.6 per cent and the UAE with 4.2 per cent growth.
In its Gulf Economic Update, the World Bank forecasts 5.9 per cent aggregate growth for GCC oil-exporting economies in 2022. It estimates Saudi Arabia's economy to grow 7 per cent and the UAE to expand 4.7 per cent, slower than Emirates NBD’s 7.7 per cent and 5.7 per cent respective forecasts.
Some Mena countries are using targeted measures to ease the burden on people, while others have resorted to subsidies and price controls to limit inflation that will “worsen fiscal balances in the absence of offsetting measures”, the IMF officials said.
“Energy subsidies alone could increase by up to $22 billion for oil-importing countries in 2022,” the IMF economists said.
“This represents money that could otherwise have been spent on more targeted support or other priority measures.”
Although near-term policy trade-offs have become increasingly difficult for Mena oil importers, containing inflation remains a priority. The fund urged policy rate increases in countries facing rising inflation risks and broadening price pressures.
Such countries should urgently address food security risks, by protecting vulnerable households, the fund said. For low-income countries, sustained financial support from the international community is crucial.
For countries with high debt, these measures should be accompanied by offsetting measures elsewhere — for example, cutting unnecessary spending, promoting additional tax equity, or a combination of the two — to safeguard debt sustainability, the lender said.
“Co-ordinating fiscal and monetary policies and anchoring them in credible medium-term policy frameworks will help ease these trade-offs,” IMF officials said.