IMF: Mideast Economies Need More Gov’t Reforms

Oil-producing Mideast countries are coping with low global oil prices, yet more government reforms are needed, the International Monetary Fund’s chief for the Mideast said as the organization issued a new report Wednesday showing weak economic growth in the region.

Masood Ahmed told The Associated Press that Iran’s economy beat expectations with growth of 4.5% this year and could keep up that pace if it can modernize its industries and allow in more foreign investment after its nuclear deal with world powers.

Much of the IMF’s new report on the Mideast’s economic outlook won’t come as a surprise to those living in the region since oil prices have been halved following highs of over $100 a barrel in mid-2014.

All Persian Gulf Arab countries (Saudi Arabia, Kuwait, the UAE, Qatar, Bahrain, and Oman) have cut back on generous subsidies that kept gasoline prices low, while some have reorganized government agencies and halted construction projects.

With oil prices expected to remain low, the IMF report estimates growth across Persian Gulf Arab states to be around 1.7% this year, while regionally “little improvement” is expected in 2017. It suggests only Iraq, Kuwait and the UAE will be able to see budget surpluses by 2021, while the war against the extremist group Islamic State, Yemen’s civil war and the Syrian conflict continue to weaken confidence in the region.

“Some countries—Saudi Arabia, Bahrain and Oman—start from a position where they have to make more of an adjustment to be able to balance their budget in five years,” Ahmed said. “They all do have policies that they’re articulating that will help them get there, but they will entail difficult choices.”

Among those tough choices will be cutting public sector salaries and jobs in Saudi Arabia and Oman, he said.

 Non-Oil Growth

Fiscal tightening and declining liquidity in the financial sector are projected to reduce non-oil growth in the (Persian) Gulf Arab States to 1.75% in 2016, down from 3.75% last year, the report said.

(P)GCC non-oil growth is projected to pick up to 3% next year as the pace of fiscal consolidation eases. Over the medium term, less fiscal drag and a partial recovery in oil prices are projected to raise (P)GCC non-oil growth to 3.5%, well below the 7% average during 2000–14.

The Menap (Middle East, North Africa, Afghanistan, and Pakistan) growth will be modest at 3.5% this year, with little improvement expected in 2017. Considerable uncertainty surrounds these forecasts, however, because of the fluctuation in oil prices and the threat of regional conflicts, it said.

Structural transformations are needed across the region to raise medium-term prospects and create jobs, the report said.

The subdued growth prospects will keep underlying inflation low in the (P)GCC region. Although energy price reforms are expected to temporarily push up headline inflation to about 3.5% this year, inflation is expected to drop back to 2.5% in 2017.

Lower public consumption and investment may subtract more than 2 percentage points from the estimated (P)GCC growth outturn in 2015 and projections for 2016.

 Reform Fatigue

Authorities could make faster-than-expected progress in implementing structural reform plans. However, considering the scope of the envisaged economic transformation, such plans could run into obstacles, which could lead to reform fatigue. The significant deficit-reduction efforts which began last year are continuing, with the aggregate 2016 non-oil fiscal deficit expected to improve by more than 5% of non-oil GDP.

Despite recent consolidation measures, including welcome reforms to domestic energy prices, deficits are projected to remain large—all countries are anticipated to record fiscal deficits this year, and only Iraq, Kuwait, and the UAE are set to post surpluses by 2021.

Further fiscal adjustment is needed, which will require difficult policy choices and the adoption of well-calibrated measures to protect the vulnerable.

Careful and steady implementation will be key to success.