Middle East and Central Asia countries face twin shocks from the coronavirus pandemic and plunging oil prices, but policymakers have been quick in rolling out necessary monetary and fiscal stimulus to support their economies.
The economic impact "will be substantial" the International Monetary Fund (IMF) said in its Middle East and Central Asia Economic Outlook report released on Wednesday. While MECA economies are projected to contract 2.8 per cent in 2020, most countries will shrink by an average of 3.1 per cent.
Oil price have slumped more than 50 per cent since the beginning of the year and most countries have revised growth down by more than 4 percentage points in one year. This equates to removing $425 billion (Dh1.56 trillion) from the region’s total output. For nearly all countries, these revisions are higher than those seen during the global financial crisis in 2008 and the oil price shock of 2015, according to the IMF report.
"This is a complex multi-layered crisis in this part of the world and while there is uncertainty on the health crisis part and how long that will play out, I think there is tremendous uncertainty about what is going to happen with oil prices now and going forward," IMF chief economist Gita Gopinath told The National.
“Our assumption is that it will be at $35 per barrel for 2020 and 2021 and then go up to about $45," she added.
"It is going to change the economic landscape and it shows the urgency and the need to diversify one’s economy. There were many countries that were already doing the diversification and I think this will accelerate that.”
Countries in the region were swift in their responses to the crisis, taking measures to contain the outbreak and support hard-hit sectors of their economies. Many countries announced fiscal support packages, comprising both revenue and expenditure measures, of an average size of 3.8 per cent of gross domestic product, the IMF said.
Regional central banks were also quick to provide relief to blunt the impact of the outbreak on the financial sector. Liquidity support measures were announced in seven countries averaging 3.4 per cent of gross domestic product. Financial regulators across the region have also eased monetary policy and used the exchange rate as a buffer where appropriate.
The global economy is facing its greatest crisis since the Great Depression in the 1930s and is projected to shrink 3 per cent in 2020, the IMF said on Tuesday. The economy will slide into the deepest recession since the end of World War I. The growth forecast for this year is marked down by more than 6 percentage points relative to the fund's October 2019 estimates and the updated January 2020 projections.
The downward revision for this year is largely a result of advanced economies shrinking 6.1 per cent this year after expanding 1.7 per cent in 2019. In the Middle East, Saudi Arabia, the Arab world’s largest economy, is forecast to shrink 2.3 per cent. The UAE's economy is projected to contract 3.5 per cent but forecast to expand 3.3 per cent in 2021. Iran’s economy is projected to contract 6 per cent with inflation estimated at 34.2 per cent this year.
The UAE was the first to roll out Dh282bn in fiscal and monetary support, providing zero interest funding to banks in addition to a variety of other initiatives that range from discounted utility bills to waivers of government fees.
Oil-exporting countries are facing a double whammy of reduced demand for crude and lower oil prices, with oil exports expected to drop by more than $250bn across the region, the IMF said.
“As a result, fiscal balances are expected to turn negative, exceeding 10 per cent of GDP in most countries,” the Washington-based lender said.
Oil-importing nations in the region would be adversely affected by a large decline in remittances and investment and capital flows they get from the region’s oil exporters.
“The large deterioration in their fiscal deficit – due to the impact of lower growth on tax revenues and scaled-up spending –is expected to raise public debt to almost 95 per cent of GDP in the Menap [Middle East North Africa and Pakistan] region,” according to the report.
Vulnerabilities, the IMF said, are rising in line with global trends and forthcoming maturing debt presents financing risks in current market conditions. High public debt levels in the region may also limit the fiscal space available to undertake additional measures, it noted.
The IMF, which has already received financial assistance requests from 11 countries in the region, said the objective for every country should be to put its economy back on track. This would require broad-based fiscal and monetary support where policy space is available and seeking external assistance where space is limited.
“The countries that are coming into this with pre-existing vulnerabilities ... they are going to be deeply affected at this time. What will help countries like that is international support,” Ms Gopinath said.