A renewed crisis in Europe would push down oil prices and hurt economic growth in several Middle East and North African countries, adding to the uncertainties for the region caused by rising tensions with Iran, the International Monetary Fund said Tuesday.
In its latest World Economic Outlook, the IMF said the Middle East and North African (MENA) region is especially vulnerable to an intensified European debt crisis, because it would depress oil prices and affect the close trade and tourism links between the two regions. The IMF calculated that a reemergence of the European crisis would depress growth in the whole MENA region by 3.25%, which it said was "the largest spillover effect for any region outside Europe."
Saudi Arabia and other oil exporting countries in the Middle East have greatly increased their spending on social programs in the aftermath of the Arab spring, in an effort to deter any spread of unrest, making them reliant on continued high oil prices. Even a relatively small fall in the price of oil due to a worsening crisis in Europe could create budget deficits in some oil exporting countries, the IMF said.
North African countries are vulnerable because of close trade, remittance and tourism links with Europe, thefund added."In addition to significant internal challenges in several economies in the region, and geopolitical risks associated with the Islamic Republic of Iran, there are large potential spillovers to the region from Europe," the IMF warned.On the other hand, the MENA region may have to deal with a massive increase in oil prices due to Iran tensions, social unrest or even the possibility of an actual disruption in oil supplies. "Such effects could be dramatic given limited inventory and spare capacity buffers, as well as the still-tight physical (oil) market conditions expected throughout 2012," the IMF said.
It urged the MENA countries to reform their subsidy regimes, and focus their fiscal policies on poverty reduction and the promotion of productive investment. Increased spending on fuel and food subsidies, along with pressure to increase civil service wages and pensions, "will not be sustainable over the medium term," the IMF warned.Despite these concerns, the IMF predicted growth in gross domestic product for the MENA region of 4.2% in 2012, up from 3.5% in 2011. It said growth will be helped by higher oil production in Saudi Arabia and Iraq, and a rebound in Libya's output after the disruption caused by last year's uprising.
The IMF revised up its initial Saudi growth forecast to 6% from 4%, compared with 6.8% growth in 2011.