IMF warns Middle East on need to reform

(Financial Times) — Economies across the Middle East need to introduce fiscal restraint and deeper reform to safeguard their futures, says the International Monetary Fund.

The IMF’s biannual regional economic outlook projects growth in the Middle East and north Africa of 5.1 per cent in 2012 — up from 3.3 per cent in 2011. But next year, growth is forecast to slow to 3.6 per cent as oil production remains flat.

The IMF urged both the region’s wealthier oil exporters and struggling oil importers, including transitional states recovering from revolutions of the “Arab spring”, to make policy changes to strengthen their economies and deliver more equitable outcomes for their people.

Oil exporters, such as the Arab Gulf states, will need to reform to allow the private sector to grow enough to produce jobs for their swelling youth populations.

The six-member Gulf Co-operation Council is expected to see this year’s growth of 5.5 per cent slow to 3.7 per cent next year, the lowest level since 2009 when the global financial crisis hit oil prices.

The “buoyant” oil exporters have used excess revenues to boost public spending and subsidies to blunt unrest in the wake of the Arab spring, says the IMF.

Masood Ahmed, director of the IMF’s Middle East and Central Asia Department, said it was time to curtail fiscal spending and build “more resilience” to cope with a sustained oil price decline.

“Move forward with programmes to improve the match between skills and job requirements,” he said.

Gulf states have been spending oil revenues, some of which could be saved for future generations, while also “crowding out” the private sector via sprawling public sector spending.

The IMF continues to project an average oil price in excess of $100 a barrel this year and next, resulting in a combined current account surplus of $400bn across oil exporting economies this year.

But several oil-exporting states, including Iraq, Iran, Algeria and Bahrain, are already living beyond their means, spending more than they earn. The IMF gives warning that more states could see their “break-even oil price” — the point at which the oil price produces revenues sufficient to cover the budget — rise above current oil prices.

The IMF says that a sustained oil price downturn would put other oil exporters at risk of having to draw on reserves to finance current spending.

Nonetheless, non-oil gross domestic product — a more even measurement of overall economic health — is forecast to remain steady. Slowing from 7 per cent to 5.9 per cent in 2012, the non-oil sector is expected to grow at about 5.5 per cent next year.

Libya has witnessed a “faster-than-expected” recovery, says the IMF. As oil production returns to pre-war levels, GDP is forecast to rise by more than 100 per cent this year, after dropping 60 per cent in 2011.

Meanwhile, the oil importing states remain “under strain”. Overall growth is expected to rise from 1.2 per cent this year to 3.3 per cent in 2013, but this recovery is subject to “heightened downside risks”.

Having drawn heavily on state reserves to fund their way through 2012, the oil importers face a challenging year in 2013, with growth “far below what is required to address chronic and growing unemployment”, the report says.

The slowdown in Europe has hurt exports from north Africa, tourism has yet to recover to pre-Arab spring levels and industries have been affected by industrial unrest.

The oil importers, especially those damaged by unrest, have been focusing on managing social pressures in the wake of unrest, rather than curing the underlying problems.

“Living standards are stagnating, with unemployment up, leading to frustration in countries where there has been a political transition, and people are looking for a quick transition dividend,” said Mr Ahmed.

Structural reforms, such as labour market and educational reform, would need to be pondered alongside better governance and easier finance to boost the private sector.

“The agenda to address those issues is still largely ahead of us,” he said. –Simeon Kerr, FT.com