Global trade tensions, volatile oil prices, geopolitical disorders, and domestic vulnerabilities are having a negative impact on the growth of the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) region, according to an International Monetarty Fund's report issued on Monday.
The report, titled ‘Regional Economic Outlook: Middle East, North Africa, Afghanistan, and Pakistan’, said growth remains too low to meet the needs of growing populations in the MENAP region, and risks to the outlook have risen.
Growth down for exporting countries
The report said that growth in the near term remains subdued for oil exporting countries in the MENAP region. In addition, declining productivity is dampening medium-term growth prospects.
In its outlook, the IMF said that growth for MENAP oil exporter countries, excluding Iran and conflict countries, will go down to 1.3 percent in 2019, due to lower and more volatile global oil prices, geopolitical tensions, and the global slowdown.
"With slowing productivity and rising fiscal vulnerabilities in some countries, expansionary fiscal policy would have only a modest impact on growth while imposed risks from a volatile oil market and lower projected oil prices," the report said.
The report suggested that reducing fiscal vulnerabilities combined with enhanced emphasis on structural reforms is needed to boost private activity and attract investment, thus helping to lift productivity and potential growth.
Growth in oil-importing countries in the MENAP region is expected to be muted in coming years, according to the report, as high public debt levels and associated financing costs are not only holding back growth in the region, but also pose a source of acute fiscal stress.
The growth of importing countries outlook remains flat, with growth projected at 3.6 percent in 2019 and 3.7 percent in 2020.
Increasing public debt is holding down growth in the region and creating acute fiscal stress amid global headwinds, volatile oil prices, and sustained social tensions.
"Governments confront a difficult trade-off between reducing fiscal deficits and raising growth. Growth-friendly fiscal consolidation and structural reforms can help boost growth and spur job creation," the report said.
MENAP Growth indices according to IMF report
Capital flows perform well
According to the report, economies in MENA and Central Asia have seen a recent surge in portfolio inflows, now accounting for about 20 percent of the total portfolio inflows to emerging markets, relative to merely 5 percent before the global financial crisis, which had been witnessed in 2008, while foreign direct investment (FDI) has more than halved since 2008.
Portfolio flows to the region’s economies are nearly twice as sensitive to global market sentiment compared to other emerging economies, exposing the region to abrupt shifts in such sentiments. If the volatility indices (VIX) were to double from its 2018 level, portfolio inflows to the region would be halved, with the impact being stronger on oil-importing countries, as the report mentioned.
The report said that revitalising FDI by easing restrictions and promoting macroeconomic stability can provide more stable sources of funding, thus mitigating the risk of volatile portfolio flows.
Fiscal Institutions face challenges
According the report, countries in MENA and Central Asia are facing significant fiscal challenges amid volatile oil prices, subdued growth, and conflicts.
"Weak fiscal institutions have contributed to spending inefficiencies, rising debt and deficits, and procyclical fiscal policy, especially in countries in the MENAP region," the report said.
The report suggested that improving fiscal transparency, establishing credible medium-term fiscal frameworks, strengthening public financial management, enhancing procurement, and moving toward fiscal rules would help mitigate these vulnerabilities over time.