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Based on the International Monetary Fund’s (IMF’s) latest World Economic Outlook, MENA countries have little choice than to accelerate plans for diversification away from oil, according to Aberdeen Standard Investments (ASI).

Released in mid-October, the IMF report downgraded its outlook for a Middle East and Central Asian economic recovery. It predicted a 4.1% contraction for the region as a whole this year – 1.3 percentage points worse than its assessment six months earlier.

Unfortunately, the situation looks unlikely to improve any time soon. The IMF assumes the price of oil will average just under $42 barrel in 2020, and less than $47 a barrel in 2021. It forecasts the region will see a $224 billion shortfall in revenue this year and the economies of the six GCC states will fall by 6% in 2020.

The IMF pinpointed three immediate priorities for the Middle East and Central Asia more broadly: contain the health crisis; cushion income losses; and expand social spending. It added that governments must also begin to lay the groundwork for recovery and rebuilding, including by addressing legacies from the crisis and strengthening inclusion.

Commenting on the IMF report, Edris Alrafi, Head of Middle East & Africa for ASI, said:“It is inevitable that the double-whammy of drastically lower oil prices and the pandemic would take a heavy toll in the Middle East overall, given the region has some of the world’s largest crude exporters and therefore tends to overly depend on oil to fuel domestic economies.

“Economic diversification is the most realistic way that MENA’s economies can lift themselves out of this crisis.It is essential for countries to plan for the future and tap into trends that will lead investment and consumer behaviour. Embracing digitalisation and other new and emerging drivers of economic growth is needed to shift reliance from oil to non-oil sectors.

“This work is well underway in many GCC countries led by the overall country visions that focus on creating more diverse and sustainable economies, but the pandemic has stressed the importance of this diversification and the need to accelerate it at all levels.”

The pandemic has had a devastating impact on some of the region’s most successful, and reliable, providers of existing non-oil revenue, such as tourism, transportation, retail and real estate.

In addition to MENA’s large exposure in the hard-hit services sector, the IMF also pointed to strained corporate balance sheets, challenges in working from home and dependencies on remittances askey factors that will weigh heavily on recovery prospects.

To try to avoid real GDP remaining below pre-pandemic trends for several years to come, the IMF suggests policymakers must carefully balance preserving livelihoods, minimising scarring, and promoting recovery, while not hampering necessary reallocation.

In the medium term, it will be key to rebuild buffers to guard against future shocks.

Going forward, the IMF is looking for authorities to carefully balance the sustained provision of credit and the preservation of financial stability.

As the pandemic subsides, it said efforts should focus on “removing regulatory easing, strengthening supervision and continuing to improve financial inclusion to boost inclusive growth”. This includes for small and medium-sized enterprises (SMEs).

In response to increased fiscal vulnerabilities, the IMF is looking to governments to mitigate fiscal risks by developing medium-term fiscal frameworks, adopting fiscal rules and strengthening debt management. At the same time, the IMF wants more fiscal space by, for example, enhancing tax compliance, increasing the progressivity of tax systems and raising expenditure efficiency, including through improving governance and gradually eliminating fuel subsidies.

Meanwhile, policymakers must also seek to support an inclusive recovery by enhancing social safety nets and prioritising spending on health, education and job retraining, according to the IMF.