As the war in Ukraine and related sanctions weigh on the economic outlook for countries in MENA region, the crisis is a good opportunity for governments to upgrade and modernise their policy management tools to tackle some of the structural issues, said Jihad Azour, director of the Middle East and Central Asia Department at the IMF.

In an event organized by the London-based think-tank Chatham House on Thursday, Azour said the current conflict comes just as the regional economies were beginning to recover from the COVID-19 crisis.

“This comes on top of some of the structural issues like the high level of unemployment that the region is facing and in certain countries the high level of debt. 2022 is a very important year…policies are going to be very important…,” he said.

IMF’s  latest World Economic Outlook expects that as a fall-out from the Ukraine conflict and the sanctions on Russia, oil prices will settle at an annual average of around $107 in 2022, up $38 from 2021.  Similarly, food prices are expected to increase by an additional 14 percent in 2022, after reaching historical highs in 2021.

Azour said the managing the inflation--driven mainly by rising prices of food, basic commodities and energy--is adding to the complexity of managing the macroeconomic stability in 2022. The region’s capacity to pass through price increases is limited because of the subsidy regime, he said, adding that while subsidies limit the price increase, it is not the best utilisation of resources.

“This is why we recommend countries to allow a pass-through while redirecting their social spending to be more targeted, and to focus more on low-income groups and vulnerable groups.”

He recommended differentiating between subsidies on food and subsidy on energy.  Food subsidy is driven by different dynamics especially where it affects the very poor. Energy subsidy, on the other hand is “regressive, because high income consumers of energy benefit more from the subsidy than the low income because they have lower level of utilization of gasoline, their consumption of electricity is lower…”

This could be better diverted to more targeted income support for the poor and vulnerable sections of the society, he said.

A recent IMF blog pointed out that energy subsidies alone could increase by up to $22 billion for oil-importing countries in 2022.  Even in oil exporting nations energy subsidy could cost upto 4 percent of GDP.

Structural reforms

Azour highlighted the need for structural reforms--particulary for the oil importers in the region--that would focus on developing local financial markets, having equitable tax regimes, developing efficient spending policy and proactive debt managemant strategy, reform of state-owned enterprises among others.

He said this was going to be a very challenging year for most of the decision decision makers in the region. “But it could be also a foundation year whereby by fixing some of those important dimensions and economic management, you could be secure that whatever the tide of the winds will be, you are protected.”

According to the IMF, oil exporters in MENA will grow an aggregate of 5 percent this year and 3.3 percent in 2023, down from 6.5 per cent in 2021.

Oil exporters of the region need to become agents of transformation in the energy market transition to net zero by using the windfall of over $1 trillion they stand to gain from massive rise in oil price, Azour said. 

(Writing by Brinda Darasha; editing by Seban Scaria)