IMF sees strong Middle East growth this year

Despite the lingering war in Iraq, the International Monetary Fund (IMF) is optimistic about the economic prospects in the Middle East, projecting an increase in real economic growth in the region in 2003, the organisation said in its semi annual World Economic Outlook report.

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By  Massoud Derhally Published  April 10, 2003

Despite the lingering war in Iraq, the International Monetary Fund (IMF) is optimistic about the economic prospects in the Middle East, projecting an increase in real economic growth in the region in 2003, the organisation said in its semi annual World Economic Outlook report.

Economic growth in the Middle East region is projected to rise to 5.1% in 2003 up from 3.9% in 2002 and 4% in 2001.

“For 2003, GDP (gross domestic product) growth is projected to pick up across the region, underpinned by higher oil prices and oil production, the continued global recovery and the ebbing of earlier shocks,” the IMF said in its semi-annual World Economic Outlook report.

The organisation however, did warn of what it said were ”significant downside risks” to the outlook. The concern is mostly tied to the duration of the war in Iraq and the impact on oil prices. Syria and Jordan were named as the two countries likely to suffer most because of their close economic links to Iraq.

“While higher oil prices and production have benefited oil producing countries, oil importers in the region are suffering, and some countries in the region are already experiencing declines in tourism and disruption to trade and investment flows,” said the report.

The IMF gave tops marks to Iran whose economy it said had a good track record over the past two years, and sighted two successful Eurobond issues in the second half of 2002. The report did however draw attention to rising inflation and the need to encourage the growth of liquidity.

Saudi Arabia should tread carefully the IMF cautioned because of its dependence on oil. Higher oil prices would only bring temporary respite said the IMF urging the kingdom to carry on “expeditiously” with plans to balance the budget or run a small surplus by 2005 through broadening the tax base outside the oil sector and cutting back on spending.

Saudi Arabia had budgeted a US $10.4 billion shortfall for 2003, but posted a huge surplus of more than $13 billion because of the spike in oil prices and high output caused by increased tensions in the Middle East and worker strikes in Venezuela this year. Revenues were budgeted at 170 billion riyals ($45.3 billion) and expenditures at 209 billion riyals ($55.7 billion). In 2002, Saudi Arabia reduced a projected budget deficit of $12 billion to $5.6 billion on high oil prices. Revenues hit $54.4 billion and expenditures reached $60 billion. The kingdom, which derives 80% of its revenue from oil exports, has a public debt of $173 billion.

The IMF commended Egypt on floating the Egyptian pound which it said would help insulate the country from external shocks, but added that the move needs to be accompanied by a move to market-clearing exchange rate quotes by banks and stronger monetary policy framework to back up the exchange rate.
Macroeconomic development in Jordan, currently impacted seriously by the war in Iraq, was favourable and underpinned by buoyant exports. In neighbouring Lebanon, the IMF noted the country’s anaemic growth, growing budget deficit and a burgeoning debt that accounts for 175% of GDP. “The further fiscal consolidation proposed in the 2003 budget, combined with the authorities’ strategy of large-scale privatisation, seeking out concessional external financing, and negotiating reductions in the interest rate cost of government debt to domestic banks can, if fully implemented and realised be expected to substantially reduce the debt ratio over the medium term, but public debt dynamics remain very difficult,” said the report.

The central challenge that faces countries in the Middle East is the coming demographic transition as the growing population causes a rapid growth in the labour force said the IMF. “To absorb this growth, and also to reduce the very high unemployment rates across the region, employment growth will need to rise sharply—in many cases, to significantly higher rates than in the past,” said the report.

Key issues that need to be addressed, said the Fund, include: reform of institutions, liberalisation of trade, investment and prices, public enterprise reform and privatisation and labour market reforms.

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