Egypt, Jordan, Iraq, and Lebanon are the most vulnerable to war shocks, EBRD warns

The war is beginning to filter down to revised-down growth forecasts — and the damage to GDPs is unlikely to be reversed even if the war had ended yesterday. This was the key takeaway from the European Bank for Reconstruction and Development’s (EBRD) regional economic update (pdf), which said EBRD regions — including those outside MENA — are looking at a “growth forecast … revised down by up to 0.4 percentage points” if oil prices remain above the USD 100 threshold.

Net energy importers in our region will be the hardest hit from the conflict. Lebanon, Jordan, and Egypt — as well as Iraq, which was the only net energy exporter in the list — are the most vulnerable, with impacts felt through a combination of surging energy and raw materials prices, disrupted trade, and a debt-servicing burden increasing fiscal pressure.

Even with a welcome quick end to the war, gas prices are still expected to remain high “as European and Asian buyers scramble to refill storage while LNG production takes weeks to restart,” according to the report. A lot also depends on how damaged energy infrastructure in the region is when the war ends and how long it takes to first repair and then restart operations — a particularly lengthy process for LNG facilities.

The extent of the impact will be determined by an “individual economy’s ability to cushion the terms-of-trade shocks based on their existing fiscal and external buffers,” the update said. Egypt, Lebanon, Jordan, Iraq, Turkey, and Tunisia (alongside a few other non-MENA economies) were flagged as having the most limited buffers.

But many of these governments have stretched their monetary and fiscal policies thin due to successive crises — think of the high interest rates and a surge in the debt-to-GDP ratios that these economies have accumulated in the wake of the covid-19 pandemic and the Ukraine war. That means interest rate hikes as a policy tool to respond to inflation would be an extremely painful option, given the already very high debt servicing bill in many of these countries — reaching as much as 89% of the country’s revenues, in the case of Egypt.

Remittances as the elephant in the room: Egypt, Lebanon, and Jordan rely on the GCC for 4-8% of their GDP via remittances. Although “remittance flows tend to remain stable in times of crises,” the longer-term concern is that “prolonged conflict could reduce demand for foreign labour in the GCC economies.”