Pandemic worsens challenges of fragile states in Middle East and Central Asia, IMF says

The coronavirus has led to remittances declining by as much as 25% in some countries during the first half of 2020

The International Monetary Fund said the pandemic risks amplifying the weakness of fragile states. EPA

The coronavirus pandemic risks exacerbating the humanitarian and economic challenges faced by fragile states in the Middle East and Central Asia, a region whose growth rate is set to contract by 4.1 per cent this year, according to the International Monetary Fund.

The pandemic is expected to amplify the weaknesses of countries such as Afghanistan, Iraq, Libya, Somalia, Syria, Yemen and Lebanon, as well as the West Bank and Gaza, the fund said in its regional economic outlook on Monday.

"It is an important issue ... fragile and conflict-affected states face more daunting challenges," said Jihad Azour, the IMF's Middle East and Central Asia Department director, in an interview with The National.

He said fragile states with very weak healthcare infrastructure had fared better than expected in curbing the spread of the virus.

However, poor infrastructure, limited fiscal space, a dependence on remittances and the challenge of hosting internally displaced people or refugees are expected to weigh on them in the long run, he said.

The fund also said the top priority is ensuring that there are adequate resources to prop up healthcare systems and other support programmes.

“The pandemic is likely to increase the risk of social unrest for this group of countries,” the Washington lender said.

The fund said large informal sectors in vulnerable countries have been hit particularly hard by coronavirus containment measures.

It said the effectiveness of central bank policies in these countries remains constrained due to weak financial markets, dollarisation, explicit or implicit exchange rate pegs or a lack of a domestic currency altogether as in the West Bank and Gaza.

The fund said most governments activated social safety nets but their effectiveness was reduced as a result of poor designs and insufficient information about recipients, given the presence of internally displaced people and refugees.

It expects a decline in incomes to lead to high unemployment and poverty.

Despite providing emergency financing and debt relief, the fund called for international support to ensure that countries with limited fiscal capacity have access to vaccines, once they are available.

“With [a] global recovery subdued, downside risks continue to dominate the outlook as the pandemic continues to test countries,” the IMF said.

Mr Azour said the effects of the health crisis will be felt over the long run in the Middle East and Central Asia.

"The pandemic may inflict deeper and more persistent economic scarring than previous recessions in the region, given severe vulnerabilities entering the crisis," he said.

"It estimated that the output in the region [will] return to [the normal] trend only after a decade."

The fund said lockdowns across the Middle East and Central Asia have come at a cost, with each country affected differently.

The restrictions underpin this year's steep economic contraction for a region that grew by 1.4 per cent on average last year.

“In particular, the region’s large exposure in the hard-hit services sector [including tourism], strained corporate balance sheets, [a reduced] ability to work from home and dependence on remittances will weigh heavily on recovery prospects,” it said.

Economic growth in the region could remain below levels recorded before Covid-19 for a decade, the fund said.

The IMF provided emergency funds to 10 countries in the Mena region and increased its exposure by $15 billion, Mr Azour said.

Remittances, which some countries depend on heavily, recorded a drop of between 6 per cent and 25 per cent during the first half.

The drop in remittances “could have a sizeable impact on poverty and inequality”, the fund said.

The cumulative outflows from the region since the crisis began have remained negative at more than $5bn, it said.

The pandemic is expected to hit the labour market harder than past recessions have, the fund said, citing data from the International Labour Organisation.

Working hours in Arab states fell by about 1.8 per cent during the first quarter of this year, compared to the period before Covid-19. The decline is equal to about a million full-time jobs.

They declined by a further 10.3 per cent during the second quarter, equal to about six million full-time jobs.

“The toll on employment could be much more severe than after the global financial crisis, with about one third of [people] in the Arab region employed in sectors that are considered most at risk from the Covid-19 shock,” the fund said.

Lebanon's economy is expected to contract by 25 per cent this year after unemployment and inflation increased. The country is experiencing its worst economic crisis in decades and has reached out to the fund for assistance.

“A piecemeal approach cannot solve the problem of Lebanon anymore,” Mr Azour, who once served as the country’s finance minister, said.

“The problem has now reached a different dimension. Therefore, you need a set of reforms that are comprehensive, tackle both fiscal and financial real economy social issues and address the loss-making public entities.”

Iran’s economy is expected to contract by 5 per cent this year, with inflation projected at 30.5 per cent, the fund said.

The country faces the worst Covid-19 outbreak in the Middle East and its economy is weighed down by US sanctions.

“This is a third consecutive year of negative growth [and] even more challenging ... because in addition to the US sanctions, you have the ... pandemic,” he said.

“It was compounded by the drop in oil prices. The economy is suffering and this is [affecting] the social system, [with] an inflation rate that is high and a currency that is depreciating."

The IMF called on policymakers in the Middle East and Central Asia to balance the preservation of livelihoods, minimise scarring and promote recovery, without hampering the necessary reallocations.

It called for a rebuilding of buffers in the medium term to protect economies from future shocks.

Most countries have unveiled fiscal and monetary support measures to soften the blow of the pandemic, with about half of the region’s central banks loosening their policies, the fund said.

Central banks have relaxed their capital requirements, liquidity ratios, capital adequacy requirements and, in some countries, loan classification and provisioning rules.

“In the near future, governments and policymakers need to continue to act decisively to secure jobs, provide liquidity to businesses and households, protect the poor and put in place a carefully designed economic road map to recovery,” the fund said.

“Further action will be necessary to address pressing vulnerabilities in countries with limited fiscal space to ensure a smooth recovery while maintaining macroeconomic sustainability.”