IMF: Improved Middle East economy threatened by geopolitical uncertainties
In the Middle East, real Gross Domestic Product (GDP) growth strengthened in 2003, reflecting higher oil production and—in the second half of the year—the reduction in uncertainties following the Iraq war, according to the International Monetary Fund's recently released World Economic Outlook.
Although the war disrupted trade, investment, and tourism flows in the first half of 2003, economic activity recovered in the second half of the year, with firms in several countries winning reconstruction contracts and trade and tourism rebounding, the report said.
The IMF projected Iran's annual GDP growth rate to reach 4.2 and 5.2 percent annually for 2004 and 2005. Predictions for the same period for Saudi Arabia came to 0.7 and 3.2 percent, the United Arab Emirates (UAE) 2.4 and 4.6 percent, Kuwait 0.7 and 2.7 percent, Egypt 3.7 and 4.5 percent, Syria 3.6 and four percent, Jordan five and 5.5 percent and Lebanon three and three percent and Israel 2.4 and 3.4 percent.
Improved prospects for non-oil sectors were reflected in surges in equity prices. Oil-exporting countries benefited from both higher world oil prices and increased export volumes, as they raised oil output to replace the loss of Iraqi production and the demand for oil picked up as the global economy gained momentum. In these countries, the external current account and fiscal balances also improved.
Accelerating global growth is expected to underpin non-oil activity in 2004–05, but the growth of oil production in most oil exporters is projected to slow sharply as Iraqi oil output comes back on stream, projects the IMF. In Iraq, oil production has returned to its prewar level, but security conditions have deteriorated significantly, and the modalities for the transfer of power to a provisional Iraqi government by mid-2004 are not yet settled.
Geopolitical uncertainties and the unsettled security situation in some countries constitute important downside risks, the IMF warns. At the same time, unemployment rates across the region remain high, and, in some countries, fiscal imbalances are still large or are likely to reemerge as oil revenues decline. Thus, medium-term growth prospects depend crucially on structural reforms and, in some countries, fiscal consolidation to address vulnerabilities.
Among the oil-exporting countries, economic growth in Iran continues to be strong and broad based, driven by robust oil exports, fiscal stimulus, rapid credit expansion, and business optimism, which in turn reflects the easing of international tensions over Iran’s nuclear energy program and expectations of further structural reforms. However, high government spending out of oil resources is causing domestic liquidity and inflation to grow at high rates—and the recent devastating earthquake that destroyed the city of Bam is requiring additional government spending.
In Egypt, growth picked up during the course of 2003, reflecting in part the favorable impact of earlier exchange rate depreciation on manufactured exports and a recovery of tourism after the Iraq war.
Elsewhere in the Mashreq, macroeconomic conditions are also strengthening following the disruption of the Iraq war, but further reforms are needed to sustain growth in the medium term. In Syria, growth is projected to pick up in 2004, based on a rebound of exports to Iraq and some private sector response to the reforms undertaken in 2003 and expected in 2004, including recent interest rate reductions and the opening of private banks.
In Lebanon, exports have picked up and tourism has increased, helped by the substantial real exchange rate depreciation in 2002–03. However, public debt dynamics remain very difficult, underlining the importance of accelerating fiscal adjustment, including fundamental expenditure and revenue reforms.
In Jordan, exports grew and domestic demand rebounded— supported by strong fiscal stimulus—in the second half of 2003. However, fiscal measures are required—including a multiyear strategy to eliminate remaining subsidies on petroleum products—to meet the government deficit target in 2004 of 3.9 percent of GDP, and the reform of the pension system needs to be completed.
Following two years of steep decline, the Palestinian economy recovered slightly in 2003, reflecting an increase in residential construction driven by pent-up demand, improved access to the Israeli labor market, and the return of revenues by the government of Israel. However, real
GDP was still some 30 percent below its level in 1999, and the outlook depends crucially on the security situation, the associated curfews and closures, and the economic impact of the separation fence. As a result, the fiscal situation continues to be difficult, and budget support from external donors remains essential. — (menareport.com)
© 2004 Mena Report (www.menareport.com)