The broadening Iran war is expected to weaken economic growth for countries in the Gulf Co-operation Council, a spokesperson for the International Monetary Fund said on Thursday.
The effective closure of the Strait of Hormuz and Iranian attacks on major energy sites across the Middle East have roiled global energy markets, with Brent crude prices touching $110 per barrel on Thursday, an increase of more than 50 per cent within the last month.
“Our preliminary assessment is that growth is expected to weaken,” IMF Communications Director Julie Kozack told reporters during a press briefing.
She also said fiscal and external imbalances will also be affected by the war, while the economic impact for some countries will depend on their ability to resume exports.
A Goldman Sachs report last week warned that Gulf economies would bear the brunt of the economic damage from the war, forecasting the UAE's economy would contract by 3 per cent if the conflict runs through April. Goldman analysts said Saudi Arabia's GDP would see a 5 per cent contraction, while the Kuwaiti and Qatari economies would plunge 14 per cent under this scenario.
Economists are in broad agreement that the true economic impact of the war is highly dependent on the scale and duration of the conflict.
Gulf countries have undertaken various efforts to strengthen their economic buffers in recent years by diversifying their economies to improve technology and tourism sectors, as well as upgrading their logistics infrastructure.
“All of this has helped enhance resilience in these countries,” Ms Kozack said.
Ms Kozack said lower production could be “fully or partially offset” by higher oil prices for some countries.
Global economic effects
In a LinkedIn post earlier on Thursday, Dr Sultan Al Jaber, Minister of Industry and Advanced Technology and managing director and group chief executive of Adnoc, warned attacks on energy infrastructure would lead to drastic economic consequences.
Dr Al Jaber said the effects are already being felt domestically and globally, as consumers and firms grapple with volatile oil prices.
“The reality is simple: energy security is global economic stability,” he wrote.
The IMF said for every 10 per cent sustained increase in oil prices could lead to an increase of 40 basis points in global inflation and lower output by 0.1 to 0.2 per cent.
Ms Kozack said the IMF is examining the broader economic impact through commodity prices, inflation and inflation expectations, and financial channels.
The threat of inflation is being felt by central banks. The Federal Reserve and European Central Bank held interest rates steady this week, citing uncertainty over the Iran war.
“The overall impact, of course, is going to depend very much on the duration and intensity of the conflict,” she said.
The fund is due to update its latest projections for the global economy next month.
Ms Kozack said the fund has not received any formal requests for emergency economic assistance.
Conflict exacerbates Lebanon struggles
The war is also putting new focus on at-risk countries whose economies are already struggling.
“The conflict is compounding the humanitarian crisis in Lebanon, and … it's further exacerbating Lebanon's already fragile macroeconomic situation,” Ms Kozack said.
The fund is currently in discussions with the Lebanese government on a pathway to a potential economic reform programme. IMF staff are currently holding discussions with officials in Paris on the conflict's economic impact and a potential programme, Ms Kozack said.
Egypt showing resiliency
So far, the Iran war's impact on Egypt's economy has “remained relatively contained”.
“We have seen that the authorities have taken a proactive, timely and well co-ordinated response to to the conflict and to the economic impact,” Ms Kozack said.
She added that Cairo's flexible exchange rate regime has helped its currency act as a shock absorber to some of the pressures its economy might otherwise have faced, while also helping Egypt preserve its international reserves.
Egyptian President Abdel Fattah El Sisi's government recently raised domestic energy prices by 30 per cent, pointing to a spike in oil prices from the regional conflict. He said doing so was necessary to buffer against the fallout from the Iran war, and that the price increase would be temporary.
The IMF last month completed its reviews of two Egyptian reform programmes, which unlocked roughly $2.3 billion in funding for Cairo.
