(EnergyAsia, October 29 2014, Wednesday) — Against the odds, the International Monetary Fund (IMF) has predicted that the world’s most politically volatile region will experience faster economic growth over the next two years.

The fund expects the combined economies of the Middle East, North Africa, Pakistan and Afghanistan to grow by 2.7% this year and 3.9% in 2015, up sharply from 2.5% last year.

With military conflicts spreading and intensifying across the region, the IMF did hedge its call for 2015 that economic growth “could pick up …if security conditions improve.”

Most of the growth will come from the six politically conservative hydrocarbon-rich members of the Gulf Cooperation Council (GCC) comprising Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and UAE. Relatively stable and unscathed by the turmoil and conflicts in the rest of the region, the GCC economies are expected to grow by a collective 4.4% in 2014 and 4.5% in 2015, compared with 4.1% last year.

“Intensifying security problems, including from the deepening conflicts in Iraq and Syria, pose downside risks to the outlook,” said IMF Middle East Department Director Masood Ahmed who unveiled the report in Dubai this week.

“The regional economic impact has been limited so far, but an estimated 11 million of displaced persons are already putting pressure on budgets, labour markets, and social cohesion in neighboring countries.”

IMF urge oil exporters to develop new growth model

The sharp decline in oil and gas prices in recent months coupled with weakening global energy demand growth are emerging as a new source of threat to the oil exporting economies of the Middle East and North Africa. At it stands, the deterioration of security conditions, mainly in Iraq and Libya, will limit the group’s projected economic growth to 2.5% this year.

The region’s 12 oil exporters include Algeria, Bahrain, Iran, Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia, Syria, the UAE and Yemen.

“Growth could pick up next year, but a possible further deterioration in security conditions in Iraq, Libya or Yemen, could deepen economic disruptions and derail the projected recovery,” said the IMF.

And it could get worse. Based on current fiscal policies, the IMF expects all 12 oil exporters to lose their fiscal surpluses by 2017. Seven of them — Algeria, Bahrain Iran, Iraq, Libya, Syria and Yemen — are already running fiscal deficits.

“If oil prices stay at current lows for a prolonged period, oil exporters on aggregate could move from fiscal surplus to deficit already next year,” Mr Ahmed told a news briefing. For countries that have buffers, it will be important to adjust their fiscal positions gradually to limit the drag on economic growth, he added.

The IMF said the countries’ large energy subsidy and wage bills are weighning heavily on their fiscal and external balances.

As they have been relying heavily on rising government spending tied to high oil prices, these countries must diversify their economic base and turn to the private sector for future growth.

Even with the best laid plans and efforts to develop the region’s economies, the IMF acknowledged that its political instability and military conflicts will remain the overriding concern.

“Spillovers from regional conflicts, setbacks in political transitions, as well as lower-than-expected growth in key trading partners could undermine even the modest recovery that we are expecting for the region,” said Mr Ahmed.