Economies in the Middle East and Central Asia will shrink by 4.7 per cent this year due to Covid-19 and lower oil prices, the International Monetary Fund said.
The contraction is two percentage points more than what it forecast in April, the fund said in its latest economic outlook for the region.
It is also in line with the revised outlook for the world economy, which will shrink by 4.9 per cent this year, according to the IMF.
The fund said the pandemic will continue to test the resilience of Middle Eastern and Central Asian economies, given the “unusually high uncertainty” of its impact on businesses and the risk posed by potential oil market volatility.
Although the region’s response to the pandemic was swift and saved lives, the fund said the impact on domestic economic activity was significant.
“A sharp decline in oil prices, together with production cuts among oil exporters and disruptions in trade and tourism added further headwinds,” it said.
Oil prices, which fell by more than 70 per cent this year, recovered after the Opec+ group of oil exporters, led by its biggest producers Saudi Arabia and Russia, agreed to output cuts to curtail supply.
However, crude prices remain significantly lower than the peak they reached last year.
While several countries in the region have begun to reopen their economies, the fund said rising infection numbers could pose risks.
The virus has infected more than 12.8 million people worldwide and killed more than 568,000, according Johns Hopkins University, which is tracking the outbreak.
The fund projects a cumulative loss of more than $12 trillion (Dh44tn) to the global economy, which is expected to slide into its deepest recession since the 1930s.
Governments worldwide, including Saudi Arabia and the UAE – the two biggest Arab economies, have pumped in an additional $11tn (Dh40.4tn) into their economies to limit the economic damage caused by the pandemic. The size of fiscal support stood at $8tn (Dh29.38tn) in April.
Despite this, the IMF said downside risks remain. It expects a sluggish global recovery of 5.4 per cent next year.
Within the broader Middle East and Central Asia region, the pull back is largely driven by economies in the Middle East, North Africa, Afghanistan and Pakistan, where growth this year is expected to be two percentage points weaker than what the IMF forecast in April.
The fund expects the Menap region's real gross domestic product to shrink by 5.1 per cent this year, before expanding next year by 3.1 per cent.
In contrast, growth in the Caucasus and Central Asia region was revised down by half a percentage point on the back of strong policy responses in some countries and lower oil production cuts than those observed in the Menap region, the fund said.
“Despite supportive policies, growth revisions appear to be linked to lockdowns and mobility,” the IMF said.
“Countries with the highest lockdown stringency or lower workplace mobility also showed bigger real GDP revisions since the April 2020 [estimates].”
The fund said the economies of oil-exporting nations in the Menap region are expected to contract by 7.3 per cent this year and expand by 3.9 per cent in 2021.
The downward revisions reflect the “double whammy” caused by oil price fluctuations and pandemic-linked restrictions.
The non-oil sectors of these economies also had their growth forecasts lowered due to Covid-19 restrictions that disrupted the tourism, hospitality, transportation and retail sectors, the fund said.
The economies of oil-importing nations in the Menap region are projected to contract by 1.1 per cent as forecast in April. However, there are substantial differences across countries.
This year's growth forecast has been lowered for several economies including Afghanistan, Djibouti, Jordan, Morocco and Sudan as sluggish growth in their trading partners is expected to have a “stronger-than-previously-projected impact on manufacturing and tourism exports”, the fund said.
Economic conditions in Lebanon, which is facing its worst financial crisis in three decades, continue to deteriorate, with a double-digit contraction expected this year, the IMF said.
Lebanon's annual inflation rate stood at 56 per cent in May while its currency has lost about two thirds of its value against the US dollar despite the imposition of informal capital controls.