The Fragile Recovery of the Middle East and Central Asia

Since the beginning of this year, the Middle East and Central Asia region has made good progress, and the recovery continues despite new outbreaks of coronavirus infection. However, recovery is uneven and incomplete. In addition, the general environment remains uncertain and new challenges are emerging.

An analysis of the current situation in the economy of the Middle East and Central Asian regions was presented at the end of October at the thematic section of the annual meeting of the IMF. The results of expert research were presented by Jihad Azur, Director of the IMF's Middle East and Central Asia Department.

In this publication, we will present the key points of the report - a brief overview of the overall prospects for the region.

Experts predict that the real GDP of the Middle East and North Africa (MENA) will grow by 4.1% in 2021 and 2022 after contracting by 3.2% in 2020. Real GDP growth in the Caucasus and Central Asia (CCA) is projected at 4.3% this year and 4.1% in 2022, after contracting 2.2% in 2020.

Going forward, concerns remain about the economic impact and diverging prospects for recovery: over the medium term, real GDP is expected to remain below pre-crisis projections by about 2½% in MENA and by about 7% in CCA.

Countries that have managed to recover faster will also have lower production losses. At the same time, the employment recovery remains weak, and rising inflation reduces the scope for monetary policy to stimulate growth.

Since the beginning of this year, the countries of these regions have made significant progress. In addition to the Gulf Cooperation Council countries, several oil-exporting and emerging market countries (such as Azerbaijan, Jordan, Kazakhstan, and Morocco) have made progress in rolling out vaccination.

In addition, the data available for the first half of 2021 shows that the recovery is continuing despite new outbreaks.

The outlook for oil-exporting countries has improved due to higher oil prices and a gradual decline in production.

However, the recovery is uneven and incomplete, and new challenges are emerging:

A new wave of the pandemic is hitting countries with little progress on vaccination. Low-income countries and fragile and conflict-affected states rely on multilateral vaccine access initiatives and fall behind.

Rising inflation and shrinking space for macroeconomic policy. Higher inflation reduces monetary policy space, exacerbating concerns about limited fiscal space. In addition, rising food prices increase the risks of food insecurity, especially for low-income countries and fragile and conflict-affected states.

Diverging upswings continues with concerns about the economic impact, with real GDP expected to remain below pre-crisis forecasts by about 2.4% in the MENA region and by about 6.9% in the CCA region over the medium term.

Inequality is growing. Low-skilled, young, women and migrant workers have been hardest hit by the pandemic, as well as smaller firms, especially in contact-sensitive sectors.

Risks and vulnerabilities are accumulating as uncertainty grows about how quickly the pandemic will be overcome. Risks include delayed vaccinations; tighter global financial conditions; premature withdrawal of political support; constant inflation; social unrest, geopolitical and security risks; and climate shocks.

• Debt stabilization: An increase in debt and contingent liability ratios in 2020 has dampened the prospects for debt stabilization for some countries, especially if the recovery drags on, interest rates rise  and fiscal adjustment is delayed.
• Weak employment recovery: The average unemployment rate in the Middle East and Central Asia region rose to 10.7% in 2020 – 11.6% in the Middle East and North Africa and 8.7 percent in the CCA, well above the rates observed during other recent crises.
• Impact on the corporate sector: The corporate sector has recovered to pre-pandemic levels, but smaller firms and businesses in contact-sensitive sectors are lagging behind. Firms with digital technologies, as well as companies with strong pre-crisis fundamentals and liquidity buffers, have been able to partially cushion the impact of the pandemic. Depending on the strength of the recovery and political support, between 15 and 25 percent of companies may need to be restructured or liquidated. This could have side effects on the banks associated with these firms and limit credit in the coming years.

IMF experts are encouraged by the fact that several countries are planning to invest in their future by refocusing the role of the state on health and education, expanding social safety nets, and promoting digital and climate-resilient technologies.

The IMF continues to work closely with countries in the region, providing policy advice and technical support, and providing $20 billion in financing since the crisis began.

The Fund also provided $49.3 billion in special drawing rights to replenish the region's reserve assets, which will help countries navigate difficult policy trade-offs and accelerate their recovery. For more information, see the IMF's Regional Economic Outlook Report.