Anthony Rowley

Special to Arab News

Political elites in some parts of the world have been slow to recognize and act upon coronavirus but the International Monetary Fund (IMF) is being speedy in its diagnosis and treatment of the economic fallout from the crisis, not least in the Middle East region.

As Jihad Azour, Director of the IMF's Middle East and Central Asia Department, noted this week, "the impact of COVID-19 and the oil price plunge in the Middle East and the Caucasus and Central Asia has been substantial and could intensify."

Relief on one front appeared to be in sight on Thursday when crude oil prices rallied sharply on hopes of a supply deal among major oil producers, led by Saudi Arabia and Russia, to alleviate the price collapse triggered by the coronavirus.

But as Azour noted in a special IMF Blog, "travel restrictions following the public health crisis have reduced the global demand for oil" and so recovering oil prices do not imply full recovery in producer revenues.

The coronavirus challenge "will be especially daunting for the region’s fragile and conflict-torn states — such as Iraq, Sudan," said Azour a former finance minister of Lebanon who now oversees the IMF's work in the Middle East, North Africa, Central Asia and Caucasus.

In conflict-torn states "the difficulty of preparing weak health systems for the outbreak could be compounded by reduced imports due to disruptions in global trade, giving rise to shortages of medical supplies and other goods and resulting in substantial price increases," he observed.

"Beyond the devastating toll on human health, the pandemic is causing significant economic turmoil through simultaneous shocks, a drop in domestic and external demand, reduction in trade, disruption of production, a fall in consumer confidence, and tightening of financial conditions."

Travel restrictions following the public health crisis have reduced the global demand for oil, and the absence of a new production agreement among OPEC members has led to a glut in oil supply, Azour noted.

"As a result, oil prices have fallen by over 50 percent since the start of the public health crisis. The intertwined shocks are expected to deal a severe blow to economic activity in the region, at least in the first half of this year, with potentially lasting consequences."

Measures to contain the pandemic’s spread are hurting key job-rich sectors, Azour said. "Tourist cancelations in Egypt have reached 80 percent, while hospitality and retail have been affected in the United Arab Emirates and elsewhere.

"Given the large numbers of people employed in the service sector, there will be wide reverberations if unemployment rises and wages and remittances fall."

Production and manufacturing are also being disrupted and investment plans put on hold, the IMF executive added." These adverse shocks are compounded by a plunge in business and consumer confidence, as we have observed in economies around the world.

"In addition to the economic disruptions from COVID-19, the region’s oil exporters are affected by lower commodity prices. Lower export receipts will weaken external positions and reduce revenue, putting pressures on government budgets and spilling over to the rest of the economy."

Sharp spikes in global risk aversion and the flight of capital to safe assets have led to a decline in portfolio flows to the Middle East and Central Asia region amounting nearly $2 billion, Azour reported.

Equity prices have fallen, and bond spreads have risen. Such a tightening in financial conditions could prove to be a major challenge, given the region’s estimated $35 billion in maturing external sovereign debt in 2020.

"The immediate policy priority for the region is to protect the population from the coronavirus," Azour stressed." Efforts should focus on mitigation and containment measures to protect public health."

In Iran, Azour noted "where the virus outbreak has been particularly severe, the government is ramping up health spending, providing additional funding to its Ministry of Health."

Fiscal measures at this time should be targeted at reducing the pain of worst-hit sectors rather than on generalised economic stimulus, the former finance minister suggested.

"Many countries are already introducing targeted measures. For example, several countries — Kazakhstan, Saudi Arabia, and the United Arab Emirates, to name a few — have announced large financial packages to support the private sector.

"These packages include targeted measures to defer taxes and government fees, defer loan payments, and increase concessional financing for small and medium-sized enterprises."

The IMF has several tools at its disposal to help its members surmount the coronavirus crisis and limit its human and economic cost, Azour noted. "A dozen countries from the region have already approached the Fund for financial support."

Anthony Rowley is a veteran Tokyo based journalist who specializes in East Asian affairs