Last month, the IMF released its World Economic Outlook report in which it predicted that “the global economy is projected to shrink by 1.3 percent in 2009, with a slow recovery expected to take hold next year.” For emerging and developing economies, the report forecasted overall positive growth of 1.6 percent in 2009, climbing to 4.0 percent in 2010. However, the IMF's outlook for the Middle Eastern and Central Asian countries is somewhat less optimistic.

Yesterday, the IMF released a report outlining its economic outlook for the Middle East and Central Asia. The report concludes that the “global crisis is now affecting the countries in the Middle East and Central Asia region, and economic and financial vulnerabilities are rising" within countries in the region. In a related survey , the IMF specifically noted that economic growth in the Caucasus and Central Asian region is anticipated to fall to 0.9 percent in 2009, from 6.8 percent in 2008.

This latest IMF report was prepared by the IMF's Middle East and Central Asia Department (MCD), and provides a “broad overview of recent economic developments in 2008 and prospects and policy issues for the remainder of 2009 and 2010” for 30 MCD countries. Specifically the report divides the MCD countries into the following three groups: “Middle Eastern oil-exporting countries, Middle Eastern oil-importing countries, and Caucasus and Central Asia countries.” The report notes that, unlike the United States and Europe, the MCD’s regional economy has not been affected significantly by "direct exposure to financial stress (and 'toxic' assets)." The crisis, however, has had a direct affect on the region’s oil prices, “global demand, trade, and related activity." Overall the region has experienced a sharp “tightening of international credit markets and lower investor appetite for risk, which is affecting capital inflows, depressing local asset prices, and reducing investment.”

Few Middle Eastern oil exporting countries have experienced instability within their banking systems, due to the implementation by authorities of timely “capital injections and liquidity measures.” However, many Middle Eastern oil-importing countries “that have high debt levels” lack “sufficient fiscal space to undertake countercyclical expenditure and thereby cushion the impact of lower external inflows.” The report predicts that, in the case of Middle Eastern oil-importing countries, “rising unemployment will likely intensify poverty and other social pressures, and increase the need to enhance social safety nets.” The report also notes that countries in the Caucasus and Central Asia “are suffering from lower commodity prices and adverse economic developments in Russia,” and need to adopt more flexible exchange rates due to the depreciation of the Russian ruble.

The report concludes that MCD countries may in the near future need to implement measures designed to “support domestic demand for a longer period, strengthen financial systems further, and develop crisis management frameworks,” while low-income countries in the region will need to increase donor financing in order to “maintain needed economic development.”