Emerging Markets

Major contraction in Iran is driving the Middle East's growth slowdown: IMF

Key Points
  • Trade wars, oil price volatility, the risk of a disorderly Brexit and rising social unrest — and in the short term, a massive economic contraction in Iran — are shaping the Middle East's economic outlook, the IMF says.
  • Iran is projected to have a growth contraction of 9.5% this year.
  • High debt, low employment and inadequate governance across the region are contributing to rising social unrest.
Workers cross walkways between zones aboard an offshore oil platform in the Persian Gulf's Salman Oil Field, near Lavan island, Iran, on Jan. 5. 2017.
Ali Mohammadi | Bloomberg | Getty Images

The International Monetary Fund's latest regional outlook report for the Middle East and Central Asia, published Monday, paints a picture of uncertain economies weighed down by global factors like trade tensions as well as internal and regional turmoil.

Trade wars, oil price volatility, the risk of a disorderly Brexit and rising social unrest — and in the short term, a massive economic contraction in Iran as it buckles under heavy U.S. sanctions — are the biggest factors shaping the region's outlook, according to the IMF.

"The outlook for the MCD region (Middle East and Central Asia) is driven by a large contraction in Iran in the short-term followed by a rebound in 2020," the report said. "The risks around the forecast are skewed to the downside and are highly dependent on global factors."

The IMF expects Iran to have a fiscal deficit of 4.5% in 2019 and 5.1% in 2020, and projects its growth to contract by a whopping 9.5% this year. The country of 80 million and third-largest OPEC producer has seen its currency go into free fall and inflation approach 40% after being hit by wide-ranging sanctions following the Trump administration's withdrawal from the 2015 Iranian nuclear deal. The sanctions have slashed Iran's crude exports by about 80%, according to Reuters estimates.

Broader international factors are also impacting the region's growth, the report said.

"The region is this year growing at a slower pace than last year. And this is due to the various shocks or factors that are affecting the output of the region," Jihad Azour, the IMF's director for the Middle East and Central Asia, told CNBC's Hadley Gamble in Dubai.

Azour said that oil importing countries should expect a growth slowdown from 4.3% to 3.6%, mainly driven by Pakistan and Sudan, while oil exporters — excluding Iran and countries impacted by war — should expect growth of 1.3% in 2019 compared to 1.6% the year before.

"For the oil exporting countries, non-oil growth is gradually picking up thanks to the reforms that they have introduced," Azour said. "Yet the overall growth declined because of the volatility and the slowdown in the production due to the OPEC+ agreement (to limit oil output) and the negative growth in Iran and Libya."

Low oil prices and high unemployment

Oil prices remain depressed, with international benchmark Brent crude trading at between roughly $58 and $65 per barrel for the last three months, save for a brief spike to nearly $70 following attacks on Saudi Arabia's largest oil facilities in mid-September.

But thanks to a demand slowdown resulting from the U.S.-China trade war and rising protectionism in several major economies, not even terrorism or war-related disruptions have managed to keep oil prices up.

"Despite rising geopolitical tensions, including those related to Iran, recent disruptions to Saudi Arabia's oil production, and ongoing conflicts in the region (Libya, Yemen), global oil prices have remained low and financial conditions relatively loose," the report said.

Meanwhile, high debt, low employment and inadequate governance across the region are contributing to rising social unrest as citizens demand more from their leaders. Massive popular protests are gripping Lebanon and Iraq and have taken place to varying degrees of intensity in Egypt, Algeria, Jordan and Sudan in response to higher taxes, a lack of jobs and basic public services, corruption and abuses of power.

"The evolution of these events highlights the urgent need for reforms to deliver higher and more inclusive growth, and will shape policymakers' options for addressing the economic challenges faced by the region," the report said.

"Unemployment averages 11% throughout the region versus 7% across other emerging market and developing economies. Women and young people are particularly likely to be out of work, with more than 18% of women... without jobs in 2018."

Economic growth needs to be 1% to 2% higher to even begin to tackle joblessness, according to Azour.

Despite the largely negative overview, "there are good spots in the region," Azour said. "I think first is the resilience of the region. Despite all the region has been subjected to, it's still growing at a level of 3.6%, which is on average not far from where growth is at the EM level."

"Egypt has done well over the last few years," the director added, when asked to name a positive example of economic reform in the region. "They need to continue the reform path in order for the economy to be more productive, to create more jobs… and (there is) potential in certain sectors like technology," which Azour described as "very promising for the future."

Unemployment in Egypt recently hit its lowest in 30 years, reported at 7.5% in the second quarter of 2019 compared to 9.9% the year before. Still, discontent in the Arab world's most populous country is widespread: more than 2,000 people have been arrested following short-lived anti-government protests in September over the soaring prices and subsidy cuts that characterize the Egyptian government's austerity measures – the very measures being praised by the IMF.