The Institute of International Finance (IIF) has lowered the growth forecast for MENA oil importers, including Egypt and Lebanon, due to the following:
- Lower growth in exports of goods and services due to weaker demand by main trading partners
- Higher headline inflation that will curb private consumption
- Reduced private confidence and elevated investor uncertainty that will weigh on asset prices and lead to capital outflows
The Washington-based association for the global financial industry said the war between Russia and Ukraine and the resulting higher fuel and food prices will weigh on growth.
"Amid significant reliance on tourism income, and the high share of imports of fuel and wheat in total imports, the war and surging oil and food prices will limit private consumption and exports of goods and services," said Garbis Iradian, Chief Economist, MENA in a new report on Tuesday.
Higher oil and wheat prices will widen current account deficits by raising import bills.
In Egypt, the war has aggravated its external vulnerabilities and led to devaluation of the pound by 14 percent. The loss of Russian and Ukrainian tourists, which account for 25% of total tourist arrivals, is likely to widen the current account deficit by 0.8 percentage points of GDP to 5.3 percent of GDP in FY 2021/2022. The external financing requirement will increase by additional of $6 billion.
In Lebanon, the current account deficit will remain large around 30% of GDP due to higher imports of fuel and wheat, the report said. IIF's baseline scenario assumes that urgent economic reforms will be endorsed fully by the parliament and lead to an IMF agreement by June 2022. Despite the external shock of higher oil and food prices, real GDP could grow by around 2% in 2022, albeit from a very low base.
No GCC impact?
Morocco’s and Tunisia’s main trading partners in the Euro Area will be adversely affected by the spike in energy prices and supply chain disruptions, leading to lower foreign demand for goods and services.
However, stronger growth in the GCC (due to the surge in oil prices) could mitigate the downside risks, particularly in Egypt and Jordan, as their growth cycles are closely linked to Saudi Arabia and the UAE, it said.
Bilateral trade, tourism, remittances, grants, and FDI flows from the GCC to Egypt and Jordan remain large and may more than offset the adverse impact of higher oil prices on private consumption. Remittances from Egyptians, Jordanians, and Lebanese working in the GCC are an important source of national income (equivalent to 8-14 percent of GDP).
According to IIF, in general, the elevated government debt burden in all MENA oil importers will limit the ability of the authorities to pursue countercyclical fiscal policy. Also, stronger economic activity will remain constrained by the lack of deeper structural reforms.
(Writing by Brinda Darasha; editing by Seban Scaria)