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2. MENAP Oil Importers: Weathering the Storm

Author(s):
International Monetary Fund. Middle East and Central Asia Dept.
Published Date:
April 2020
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Strong headwinds—the coronavirus disease (COVID-19) outbreak, tighter financial conditions, and weaker growth prospects in oil-producing countries—exacerbate secular challenges facing oil-importing countries in the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) region. The size, duration, and recovery pattern of the outbreak remain highly uncertain. Lower global oil prices provide some relief, but large macroeconomic imbalances constrain countries’ ability to tackle immediate challenges. Despite limited policy space and high public debt in many countries, emergency health spending to contain the outbreak and countercyclical policies should take precedence. Shielding affected people and firms with temporary targeted measures will need to be calibrated, cognizant of countries’ policy space.

The Perfect Storm

The COVID-19 pandemic represents a clear threat to MENAP oil importers.1 Besides the potentially large humanitarian impact, the long-lasting economic impact of the crisis—including via an increase in unemployment rates which stood on average at 9.5 percent in 2019—would worsen the already high unemployment in many countries. Although lower oil prices may provide some near-term support, weaker domestic activity, exacerbated by lower confidence and public debt vulnerabilities in some countries, could heighten risks to the outlook.

The onset of the pandemic has dramatically altered the outlook for 2020. Average growth in 2020 is expected to contract by 1.0 percent— 4.5 percentage points below 2019 (Figure 2.1). In addition to the pandemic, this also reflects continued macroeconomic imbalances in Sudan, a temporary slowdown given stabilization policies adopted in Pakistan, a sovereign default in Lebanon, and effects from slowing growth in key trading partners and countries sourcing remittances.

  • The projected global contraction and the resulting dramatic decline in global demand have already led to large drops in international commodity prices, affecting food and non-oil commodity exporters (Afghanistan, Jordan, Mauritania, Morocco, Pakistan, Tunisia).
  • Additional demand and supply shocks— through trade, tourism, remittances, tighter global financial conditions, and spillovers on domestic credit conditions, along with confinement measures—would severely curtail trade (Djibouti, Egypt, Mauritania, Pakistan, Tunisia) and net tourism credit (Egypt, Jordan, Lebanon, Morocco, Tunisia) in the region, affecting domestic production and businesses. Furthermore, most MENAP oil importers rely heavily on imports to serve their domestic demand and exports (imports represent 57 percent of GDP versus 47 for emerging market and developing economies [EMDEs]), which, added to the generalized disruptions in global trade, could put available domestic supply at risk.
  • These challenges will be particularly daunting for countries with weaker health care infrastructures (Afghanistan, Mauritania, Pakistan, and Sudan; Figure 2.2).

Real GDP Growth

(Percent)

Sources: National authorities; and IMF staff calculations.

Note: EMDE = emerging market and developing economies; MENAPOI = Middle East, North Africa, Afghanistan, and Pakistan oil importers.

Country abbreviations are International Organization for Standardization country codes.

Health Expenditure and Infrastructure

(2017 or latest available)

Sources: World Health Organization; and IMF staff calculations.

Note: EMDE = emerging market and developing economies; MENAPOI = Middle East, North Africa, Afghanistan, and Pakistan oil importers; rhs= right-hand scale. Country abbreviations are International Organization for Standardization country codes. Private and public health expenditure data are as of 2017, and hospital beds data is as of 2015, or latest data from 2000–14 where 2015 is not available.

Possible disruptions in the supply of consumption goods and currency depreciations could push domestic prices upward. Lower oil prices may help reduce MENAP oil importers’ fiscal and external imbalances, but reduced capital and remittance flows from oil-extracting countries may also affect the impact on economic activity. In 2014, when oil prices halved, MENAP oil importers improved their fiscal balances by an average of 0.6 percent of GDP and their current accounts by 0.9 percent of GDP, but remittances and foreign direct investment decreased by 0.3 and 1.0 percent of GDP, respectively, and growth ended only marginally higher.

Fiscal expansion is expected in all countries as the fight against the virus and its economic effects is scaled up. MENAPOIs’ fiscal deficit is expected to increase on average to 8.5 percent of GDP because of the impact of lower growth on tax revenues in most countries and scaled-up spending, which would not be compensated by savings in subsidy accruing from lower international commodity prices and an increase in tax revenue in some countries (Jordan, Pakistan).

These challenges arise as growth remained weak in 2019 across most MENAP oil importers, reflecting large, accumulated macroeconomic imbalances (Lebanon, Pakistan, Sudan), persistent structural weaknesses (Tunisia), or adverse agricultural shocks (Sudan). Exceptions were those that benefited from buoyant commodity extraction (Egypt, Mauritania) and higher external demand (Djibouti, Egypt).

Current account balances are expected to improve in 2020 despite lower tourism receipts and remittance flows, with the average deficit shrinking to 4.9 percent of GDP (Figure 2.3).

MENAPOI: Import, Export, and External Demand Growth

(Percent, weighted average)

Sources: National authorities; and IMF staff calculations.

Note: MENAPOI = Middle East, North Africa, Afghanistan, and Pakistan oil importers; rhs = right-hand scale.

1. The weighted average of real GDP growth of export destination countries.

However, financing for this lower deficit may prove difficult in the context of the sharpest portfolio flow reversal on record for emerging markets. This may increase pressure on some countries’ foreign reserves and exchange rates. Substantial bond and equity outflows— $380 million by end of March—have already been observed, with sovereign spreads deteriorating (Figure 2.4). In some countries, financing needs may increase reliance on domestic financial markets and crowd out private credit. Furthermore, increase social unrest in some countries (Lebanon and Sudan, Figure 2.5) constrain policymakers further.

Sovereign Spreads

(Basis points)

Source: Bloomberg Finance L.P.

Note: rhs = right-hand scale. Country abbreviations are International Organization for Standardization country codes.

Reported Social Unrest Index1

(Index, average 2010–20 = 100,12-month moving average)

Sources: Factiva; and IMF staff calculations.

Note: MENAPOI = Middle East, North Africa, Afghanistan, and Pakistan oil importers; rhs = right-hand scale.

1. The Reported Social Unrest Index calculates the share of articles in major news sources that include key terms relating to protests, demonstrations, and other forms of social unrest.

Fragile and conflict-affected states remain particularly vulnerable because sanitary and economic conditions in these states may be conducive to a rapid spread of the pandemic.2 Conflict, capacity constraints, and deficient health systems could impede adequate policy responses to the current challenge. Likewise, refugees are dramatically exposed to the fallout of the COVID-19 pandemic—calling for strong support from the international community (Box 2.1).

Flying in Turbulent Skies

The authorities in the MENAP oil importers region have reacted proactively to addressing the pandemic. Many countries rapidly declared national emergencies, with all of them restricting domestic and international mobility to different degrees, closing schools, reducing working hours (except for Djibouti and Lebanon), and banning mass gatherings to prevent the spread of the virus. Many have begun increasing their health-related expenditure, deploying financing and supply to their health systems with a focus on immediate needs; this represents an average cost of 0.4 percent of GDP.

Additionally, many countries have increased transfers and subsidies for targeted households (Egypt, Morocco, Pakistan, Tunisia) using existing social protection programs. Others have used cash transfers to unemployed and self-employed workers (Egypt, Pakistan, Tunisia). Assistance to affected firms in the tourism or exporting sectors (Egypt, Jordan) and to small- and medium-sized enterprises (Morocco, Tunisia) has been granted through guaranteed and subsidized lending, and through tax exemptions (Egypt, Pakistan) and deferrals (Morocco). Including health costs, responses in the MENAP oil importers region to the current pandemic is thus expected to increase fiscal deficits by an average of about 1.5 percent of GDP, ranging from above 2 percent of GDP (in Egypt and Morocco) to 0.2 percent of GDP in countries with less room to maneuver (Sudan).

Some countries have reduced their monetary policy rates (Pakistan, Jordan, Tunisia) with cuts ranging from 25 basis points (Morocco) to 300 basis points (Egypt), while others have facilitated credit to small and medium firms (Egypt, Morocco, Tunisia) and intervened in capital markets (Egypt, Morocco).

In the current circumstances, the immediate priority should indeed be to save lives, protect the most vulnerable, and safeguard critical economic sectors, including through outright support to the financial sector, as needed. Fiscal policy should accommodate urgent spending needs, particularly to support emergency services and enhance health care infrastructures. Given weak health care capabilities in some countries (Afghanistan, Mauritania, Pakistan, Sudan) and reliance on private expenditure of health care in some others, scaling up health expenditure (including for migrants and refugees) is needed urgently.

Beyond this, measures should be targeted to address the nature and persistence of the shock, particularly in countries with limited policy space, such policies should be contemplated only to restart the recovery phase when the outbreak subsides.

Temporary tax reliefs and subsidies may be needed to avoid sectoral dislocations, and targeted expenditure-based incentives, such as accelerated depreciations for investment, may boost the production of undersupplied goods and services. Absent adequate social safety nets, social programs will also have to be expanded to protect the most vulnerable. Targeted cash transfers, wage subsidies, and temporary tax relief could help ensure that vulnerable households and small and medium firms can weather this temporary shock, even though the administrative capacity of MENAPOI countries to implement means-tested or temporary programs is weak. These measures should ideally be offset by postponing nonessential spending whenever possible, though with urgent spending needs met even if such offsetting measures are not available. Where fiscal space may not exist, countries may need to seek assistance from donors.

Possible losses on their credit portfolios to corporates and households may necessitate measures to aid the financial sector. Temporary and targeted financial support measures may be needed to address liquidity pressures caused by the COVID-19 outbreak, even if it involves contingent fiscal liabilities, but loan classification and provisioning rules should continue to be fully applied to preserve the credibility of the financial system. Supervisors could issue guidelines to banks supporting a prudent, constructive easing of loan terms and conditions for affected borrowers and the temporary and transparent regulatory implications (if any), while remaining cognizant of risks in countries with already large stranded financial assets (Tunisia), a banking stress (Lebanon), or weak supervisory capacities.

Countries with high inflation (Tunisia, Sudan) or low international reserves (Tunisia) may be unable to accommodate the shock with monetary policy. Conversely, they may have to tighten their monetary policy stance to avoid disorderly exchange rate adjustments, surging inflation, and financial stability implications, given the rapid tightening of global financial conditions. Macroprudential policies and temporary capital outflow restrictions could play complementary roles if they are adequately evaluated to react to near-crisis situations.

External Support Critical

A globally coordinated response to the COVID- 19 pandemic is essential to transition away from the shock. Given the limited fiscal space in many countries, with large needs adding to about $170 billion in 2020, external financing will be critical in helping governments effectively contain the adverse implications of the virus on households and firms. The IMF, other international financial organizations, and the international community have a large role to play to assist the MENAP oil importers.

The IMF has responded swiftly. Morocco has chosen to draw on its Precautionary Liquidity Line to help manage needs from the current shock. In March, the IMF Executive Board approved a new arrangement under the Extended Fund Facility for Jordan and an Extended Fund Facility and Extended Credit Facility for Somalia, after the latter successfully reached the Heavily Indebted Poor Country decision point. In April, it granted Pakistan and Tunisia financial support under its Rapid Financing Instrument. Several other countries’ requests for IMF financing are under way.

Repairs After the Storm

When the pandemic has subsided, MENAPOI will find their policy space has shrunk further, with limited policy options. The current shock is likely to result in weaker economic fundamentals and higher public and external debt vulnerabilities. Some countries may even face an increasing number of weather-related shocks induced by climate change, as already observed. Restoring growth in this environment may require financing beyond the sizable $170 billion currently envisioned for 2021, adding to the already large financing needs that some governments face (Figure 2.6). Policies would thus need to be calibrated to facilitate a recovery while restoring macroeconomic stability over the medium term. This challenging environment would require support, including from the international community.

Public Gross Financing Needs

(Percent of GDP)

Sources: National authorities; and IMF staff calculations.

Note: Country abbreviations are International Organization for Standardization country codes.

A Decade into the Syrian Refugee Crisis

The Syrian conflict is now in its tenth year. About 6 million Syrians—nearly one-quarter of the population—have been forced to leave the country and 7 million to relocate internally, making Syria the largest displacement crisis in recent times.

Lebanon hosts 1 million registered refugees, and Jordan hosts 0.7 million (about one-tenth and one-third of their pre-crisis populations, respectively), delivering critical global public good. However, the size of such inflows has exacerbated social and economic tensions. Refugees have also arrived in the context of already large fiscal and external imbalances: Jordan has been stabilizing its economy with a series of IMF-supported programs since 2012, while Lebanon has been accumulating unsustainable debts, leading to the recent decisions to impose capital controls and restructure public debt.

The COVID-19 pandemic brings about a new layer of vulnerability for refugees and their hosts that needs urgent palliative response. Refugees in camps or substandard housing have insufficient means to contain contagion risks, and even though theoretically able to access local health care services, they are unable to do so because health care facilities are either already overstretched (Jordan) or expensive (Lebanon; see Figure 2.1). Moreover, most refugees work in the informal sector with little access to credit or emergency funds, which makes them especially vulnerable to the economic impact of pandemic (Errighi and Griesse 2016).1

Host governments need to ensure their access to health care and shield them from the economic fallout. To this end, they would require foreign grant support and concessional financing to achieve these humanitarian objectives. More broadly, once the pandemic is under control, they should resume the developmental approach to the refugee crisis with the support of the international community (World Bank 2017).2 Allowing refugees to integrate into domestic markets, reach self-reliance, secure livelihood, and maintain marketable skills will ultimately foster rather than deter return (Harild and others 2015; Koser and Kuschminder 2015).3,4

1/ Errighi, Lorenza and Jörn Griesse. 2016. “The Syrian Refugee Crisis: Labour Market Implications in Jordan and Lebanon” European Economy Discussion Paper 029, Luxembourg, European Commission.2/ World Bank. 2017. Forcibly Displaced: Toward a Development Approach Supporting Refugees, the Internally Displaced, and Their Hosts. Washington, DC: World Bank.3/ Harild, Niels, Asger Christensen, and Roger Zetter. 2015. “Sustainable Refugee Return: Triggers, Constraints, and Lessons on Addressing the Development Challenges of Forced Displacement.” Global Program on Forced Displacement Issue Note Series Report 99618, World Bank, Washington, DC.4/ Koser, Khalid & Katie Kuschminder. 2015. “Comparative Research on the Assisted Voluntary Return and Reintegration of Migrants.” Geneva: International Organization for Migration.
MENAP Oil Importers: Selected Economic Indicators
AverageProjections
2000–1620172018201920202021
Real GDP Growth4.24.04.33.5-1.02.5
(Annual change; percent)
Afghanistan2.92.73.0-3.04.5
Djibouti4.45.48.47.51.08.5
Egypt4.34.15.35.62.02.8
Jordan4.72.11.92.0-3.73.7
Lebanon4.50.9-1.9-6.5-12.0
Mauritania3.53.52.15.9-2.04.2
Morocco4.34.23.02.2-3.74.8
Pakistan4.35.25.53.3-1.52.0
Somalia2.61.42.82.9-2.52.9
Sudan13.00.7-2.3-2.5-7.2-3.0
Syria24.3
Tunisia3.31.92.71.0-4.34.1
West Bank and Gaza34.41.41.20.9-5.06.5
Consumer Price Inflation3.712.712.38.19.49.4
(Year average; percent)
Afghanistan5.00.62.34.74.5
Djibouti1.10.60.13.32.92.8
Egypt0.624.619.98.34.97.2
Jordan3.33.34.50.30.21.6
Lebanon2.34.54.62.917.0
Mauritania5.32.33.12.33.94.5
Morocco1.60.81.90.00.31.3
Pakistan8.14.13.96.711.18.0
Somalia
Sudan116.432.463.351.081.391.1
Syria24.9
Tunisia3.75.37.36.76.24.9
West Bank and Gaza32.60.2-0.21.60.11.3
General Gov. Overall Fiscal Balance-5.8-6.7-6.9-7.3-8.5-7.0
(Percent of GDP)
Afghanistan4-0.61.5-1.0-4.0-2.0
Djibouti-3.0-4.5-2.8-0.8-2.7-1.7
Egypt-8.5-10.6-9.5-7.4-7.7-6.9
Jordan5-6.2-3.3-4.4-6.1-6.7-5.7
Lebanon4-8.4-8.6-11.3-10.7-15.3
Mauritania4,6-11.90.02.52.1-3.3-0.7
Morocco4-4.2-3.5-3.7-4.1-7.1-4.5
Pakistan7-4.7-5.8-6.4-8.8-9.2-6.5
Somalia
Sudan1-2.3-6.5-7.9-10.8-16.9-20.6
Syria2
Tunisia8-3.3-5.9-4.6-3.9-4.3-2.5
West Bank and Gaza3-18.2-7.3-6.6-7.4-10.7-8.1
Current Account Balance-2.4-6.7-6.4-5.4-4.9-4.4
(Percent of GDP)
Afghanistan7.113.08.64.95.8
Djibouti5.4-4.818.024.7-0.80.2
Egypt-0.6-6.1-2.4-3.6-4.3-4.5
Jordan-6.6-10.8-7.0-2.8-5.8-5.3
Lebanon-19.4-26.5-26.7-20.6-12.6
Mauritania-11.3-10.0-13.8-10.6-17.3-17.4
Morocco-3.4-3.4-5.3-4.1-7.8-4.3
Pakistan-1.3-4.1-6.3-5.0-1.7-2.4
Somalia-9.9-9.7-10.3-13.7-11.4-11.2
Sudan1-7.6-10.1-13.0-14.9-15.2-11.8
Syria2-0.4
Tunisia-5.8-10.2-11.2-8.8-7.5-8.1
West Bank and Gaza3-16.7-13.2-13.1-10.7-11.7-11.0
Sources: National authorities; and IMF staff estimates and projections.Note: Variables reported on a fiscal year basis for Afghanistan (March 21/March 20) until 2011, and December 21/December 20 thereafter, and Egypt and Pakistan (July/June), except inflation.

Data for 2011 exclude South Sudan after July 9. Data for 2012 and onward pertain to the current Sudan.

2011–20 data exclude Syria.

West Bank and Gaza is not a member of the IMF and is not included in any of the aggregates.

Central government. For Lebanon, includes transfers to electricity company.

Overall fiscal balance includes the transfers to the electricity company NEPCO until the end of 2014. From 2015 transfers were stopped.

Includes oil revenue transferred to the oil fund.

Including grants.

Includes bank recapitalization costs and arrears payments.

Sources: National authorities; and IMF staff estimates and projections.Note: Variables reported on a fiscal year basis for Afghanistan (March 21/March 20) until 2011, and December 21/December 20 thereafter, and Egypt and Pakistan (July/June), except inflation.

Data for 2011 exclude South Sudan after July 9. Data for 2012 and onward pertain to the current Sudan.

2011–20 data exclude Syria.

West Bank and Gaza is not a member of the IMF and is not included in any of the aggregates.

Central government. For Lebanon, includes transfers to electricity company.

Overall fiscal balance includes the transfers to the electricity company NEPCO until the end of 2014. From 2015 transfers were stopped.

Includes oil revenue transferred to the oil fund.

Including grants.

Includes bank recapitalization costs and arrears payments.

1

MENAP oil importers (MENAPOI) comprise Afghanistan, Djibouti, Egypt, Jordan, Lebanon, Mauritania, Morocco, Pakistan, Somalia, Sudan, Syria, and Tunisia.

2

Fragile states among MENAPOI include Afghanistan, Djibouti, Lebanon, Somalia, Sudan, and Syria.

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