DUBAI, Oct 19 Reuters - Countries in the Middle East and Central Asia have emerged from the COVID -19 shock but the path to full recovery remains uneven and fragile, the International Monetary Fund said on Tuesday, pointing to rising inflation as a major economic headwind.
Gross Domestic Product in the Middle East and North Africa region is expected to grow by 4.1% this year and following the coronavirus crisis, a contraction of 3.2% in 2020, said the IMF in its regional economic outlook on Tuesday.
Growth for the Caucasus and Central Asia region is seen at 4.3% this year and 4.1% next, after declining 2.2% in 2020.
Recovery is expected to be uneven with uneven vaccination rollouts in the middle east and central Asia, and countries should keep focus on managing the pandemic, the IMF said.
Malnutrition rates are set to exacerbate inequality and poverty in the region, which includes about 30 countries from Mauritania to Kazakhstan.
Some 7 million more people have entered extreme poverty than they had originally anticipated.
If inflation was caused by higher commodity prices and pandemic-related supply shortages, higher commodity prices would limit the space for supportive monetary policy.
In Central Asia and Middle East inflation is projected to increase to 12.9% this year from 10.4% last year, while in the Middle East inflation is seen at 8.5% this year compared to 7.5% last year.
In addition to shrinking monetary policy space, countries now face the added burden of diminishing monetary space, given rising inflation Central banks have the difficult task of curbing rising inflation without choking fragile recovery. Should external pressures persist longer than anticipated, this could also increase the financing risks for countries in the region highly dependent on global debt.
A tightening of global financial conditions could lead to higher sovereign spreads and capital outflows, exposing particularly those with weaker reserves and lower external accounts, said the fund.