This adjustment follows the recent escalation of the Israel-Gaza conflict, which has severely impacted economic activities in the affected areas. The IMF highlighted the significant economic disruptions in Gaza and the West Bank, where economic activities have plummeted due to the conflict. In Gaza, economic activity has decreased by 80% compared to the previous year, while the West Bank has seen a 22% decline. The conflict has also led to the withdrawal of work permits by Israel, further exacerbating the economic challenges faced by Palestinians.
The IMF's report also emphasizes the broader regional implications of the conflict. Neighboring countries have experienced a downturn in tourism and increased freight costs due to attacks in the Red Sea. The Iran-aligned Houthi group in Yemen has been targeting commercial vessels, leading to disruptions in global trade routes and prompting some shippers to divert their traffic away from the Suez Canal.
Oil production cuts agreed upon by oil-exporting countries have also contributed to the slower growth. These cuts are part of efforts to stabilize global oil prices but have had the side effect of reducing economic activity in oil-dependent economies in the region. Inflation remains a persistent issue, further complicating the economic outlook.
In addition to these immediate challenges, the IMF report outlines longer-term structural issues that need to be addressed. These include the need for economic diversification and reforms to enhance fiscal sustainability and economic resilience. The IMF has called for the gradual phasing out of energy subsidies, which it argues would save billions of dollars and enable better-targeted social spending. In the MENA region, fossil fuel subsidies constituted 19% of GDP in 2022. Phasing out these subsidies could significantly improve economic stability and support social programs.
The geopolitical landscape and economic policies remain pivotal in shaping the region's economic future. Policymakers are urged to focus on maintaining economic stability, addressing vulnerabilities, and implementing reforms to foster long-term growth. The IMF has stressed the importance of a durable peace in Gaza and political solutions to fundamentally change the region's economic trajectory. As the global economy shows resilience, the IMF suggests that the MENA region can also achieve stability and growth through careful policy calibration and structural reforms.