Egypt will not be spared the considerable negative economic spill over from the economic problems in Europe, according to a recently released International Monetary Fund (IMF) report.

The World Economic Outlook (WEO) report, released on Tuesday, specifies two main sources of external challenges for countries in the Middle East and North Africa region (MENA); oil prices and trade linkages with Europe.

An overall growth of 4.2 percent is projected for the region in 2012, dropping to 3.7 percent the following year.

For oil importing countries, including Egypt, strong oil prices, anaemic tourism, social unrest as well as weaker trade with Europe constitute the main sources of concern.

The WEO report indicates that GDP growth in Egypt is expected to drop to 1.5 percent in 2012, from 1.8 in 2011. In 2013, however,  the IMF estimates Egypt’s economy will grow by 3.3 percent.

Oil exporters could be undermined by a possible depression in oil prices should the crisis in Europe continue. North African countries, on the other hand, will be affected by a drop in trade, remittances, and tourism.

Inflation in the region is expected to be subdued by the weak growth outlook as well as by receding commodity prices. It is expected to fall to 8.7 percent in 2013, down from 9.6 in 2011.

Egypt’s inflation, however, is seen to contradict the inflation trend of its neighbours. Inflation is projected to surge to 12.1 percent in 2013, up from 11.1 percent in 2011. Nonetheless, 2012 inflation is estimated to drop to 9.5 percent.

Despite the relative improvement in GDP, the report does not foresee similar progression on the unemployment front in Egypt. Unemployment rate is forecast to reach 11.5 and 11.4 percent in 2012 and 2013, respectively, up from 10.4 percent in 2011.

On the policy side, the IMF puts preserving macroeconomic stability while evolving towards a model for inclusive growth as the key policy priority for MENA countries, especially those facing unrest.

Poverty reduction through productive investment is among the key medium-term policy objective highlighted by the report. The current patterns of fiscal spending, however, are unsustainable.

“Increased spending on fuel and food subsidies...along with pressures to raise civil service wages and pensions, is straining public finances,” the report read.

It indicated that an increased targeting of subsidies as well as subsidy reform is highly needed to ease the strain.