Coronavirus set to shock Middle East's most fragile economies

The Middle East faces mounting pressure due to shocks from the coronavirus, adding to political turbulence caused by ongoing conflict in the region and economic disruption due to the fall in oil prices, says a recent forecast from think-tank RAND.

More than three-quarter of countries in the Middle East have reported at least one case of Covid-19. Beyond the toll on human health, the pandemic has caused supply chain disruptions and significant demand shocks.

Small and medium-sized enterprises (SMEs) across the region are at risk of collapse, as experienced in China. Although Saudi Arabia and the UAE have followed China’s example by setting up stimulus packages for their SMEs, countries such as Egypt, Jordan and Lebanon may have greater difficulty in providing the necessary support for these companies.

Iran has been one of the countries hardest hit by the pandemic, both in number of casualties and economically. The economy contracted by 9.5% last year according to the IMF, and the coronavirus is expected to fuel a further fall in output. Iran’s economy minister, Farhad Dejpasand, told the Financial Times that 15% of the country’s gross domestic product (GDP) has been damaged by the crisis.

Covid-19 will challenge the resources of conflict-torn states in the region, such as Iraq and Lebanon, which both have strong links with Iran. Lebanon is also facing financial shocks from the closure of businesses, shops and restaurants, exacerbating an economic crisis that began during nationwide protests in late 2019. 

As one of the region’s major oil exporters, Iraq faces the additional shock of plummeting oil prices, which hit an 18-year low in March 2020, trading at around $20 a barrel. This puts major pressure on government budgets for the country, which depends on crude sales for 90% of government revenues, according to the Financial Times. The oil-rich Gulf Cooperation Council countries have also been hit by the oil collapse, but are protected by their deeper financial reserves. 

The pandemic has already heavily impacted regional tourism, especially to Egypt, where the border closure is forecast to cost $1bn a month. Travel and tourism contributed 11.9% to Egypt’s GDP in 2018, and accounted for one in 10 jobs, according to the World Travel and Tourism Council. Consequently, the number of foreign investment projects to Egypt’s tourism is likely to fall from the all-time high of 2019 recorded by investment monitor fDi Markets.

The global economic impact of Covid-19 is set to be as bad as the 2008 financial crisis, in which GDP contracted by more than 2% globally, and by more than 11% in the Middle East. Global FDI flows are expected to drop by 30% to 40% across all sectors, according to the United Nations Conference on Trade and Development.