A two-speed region in a three-speed world

Oil is the difference between faster and slower-growing economies in 2013

The International Monetary Fund (IMF) is not just an international emergency lender, it is also an important research institution, home to 2400 employees, many of whom are economists. Its annual spring meetings (held jointly with the World Bank) present an opportunity to learn its views and outlook for the region and the world as a whole. In this year’s meetings, which took place last week, the Fund divided the world economies into three groups: countries that are doing well (mostly emerging markets), those on the mend (like the US, Switzerland and Sweden), and others still in trouble (the Euro Area and Japan). The Fund’s classification for the region was more one-dimensional: slower-growing oil-importing economies, and faster-growing oil-exporting ones.

Outlook for oil-importing economies

Growth in this group has been held back by four factors:

1.   Political uncertainty and social unrest: Egypt is a prime example of how this factor reduced investment inflows, increased capital outflows, deterred tourism and had an overall negative impact on growth.

2.   Regional spillovers especially from the conflict in Syria: most obviously seen in Jordan where regional problems disrupted both its gas supply from Egypt and trade routes through Syria.

3.   Economic problems in Europe: which had its biggest impact on the Maghreb countries affecting their exports, tourism, remittances and foreign direct investment.

4.   High commodity prices, especially food and fuel: this and the third factor were the main reasons Morocco turned to the IMF for help.

Looking ahead, the outlook for oil importers depends largely on the turnout of the four factors, but the IMF expects members of this group to grow faster in 2013 than last year. The notable exception is Egypt where the IMF expects growth to slow down to 2%, and unemployment rate to rise to 14% in 2014 from its current level of 12%.

In terms of policy recommendation, the IMF wants the usual mix: greater exchange rate flexibility, less energy subsidies and smaller government deficits. But since many of the countries in this group (Mauritania, Jordan, Morocco, Egypt and Tunisia) are either in a programme with the Fund or discussing the possibility of one, the implementation of these policies must have formed a central part of the negotiation process.

Outlook for oil-exporting economies

This group of countries is more homogeneous, and although they are expected to grow faster this year than oil importers, the IMF predicts that both groups will converge to the same average growth rate of 3.7% in 2014 (see the table below). The slowdown that exporters are likely to experience is a result of weaker global oil demand.

Unlike importers who face short-term problems, the economic challenges that this group faces are mostly medium term. To overcome them, oil exporters need to diversify their economies to develop non-oil economic activities and to create enough jobs to absorb their young populations.

However, a prolonged fall in oil price can turn medium-term challenges to short-term problems. If that happens, countries in this group may end up joining oil importers in seeking the IMF’s help.