The Economic Impact of Conflicts and the Refugee Crisis in the Middle East and North Africa

Report
from International Monetary Fund
Published on 16 Sep 2016 View Original
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Executive Summary

Large-scale conflicts are a major challenge for the Middle East and North Africa (MENA).

Since about the middle of the last century, the region has experienced more frequent and severe conflicts than any other part of the world, exacting a devastating human toll. Yet, as conflicts intensify and spread, the region now faces unprecedented challenges. Violent, non-state groups such as the Islamic State of Iraq and the Levant have emerged as significant political and military actors, holding large areas of territory. And a refugee crisis bigger than any since World War II is affecting the MENA region, Europe, and beyond, straining economies and social systems. Given the significant political polarization, economic inequality, and rapid population growth in the region, these conflicts are unlikely to dissipate anytime soon.

Intense conflicts and human displacement have had massive and persistent economic costs

Conflicts in countries such as Iraq, Libya, Syria, and Yemen, in addition to tragic loss of life and physical destruction, have caused deep recessions, driven up inflation, worsened fiscal and financial positions, and damaged institutions. In addition, the harmful effects of the turmoil have spilled over into neighboring countries such as Lebanon, Jordan, Tunisia, and Turkey, into the broader Middle East and North Africa, and even other regions, notably Europe. To varying degrees, these countries face large numbers of refugees, weak confidence and security, and declining social cohesion that undermines the quality of institutions and their ability to undertake much-needed economic reforms.

How can economic policies mitigate the economic costs of conflicts and large refugee flows?

Recent MENA experience suggests that effective policy focuses on protecting economic institutions, prioritizing budget space to serve basic public needs, and using monetary and exchange rate policies to shore up confidence. But such policies are often difficult to implement, requiring unconventional measures. In Libya and Yemen, for example, central banks have gone to extraordinary lengths to support their economies. Once conflicts subside, successful rebuilding requires well-functioning institutions and robust yet flexible macroeconomic frameworks to absorb capital inflows and maintain debt sustainability. Countries hosting refugees must make difficult decisions about access to labor markets and social programs, as well as measures for their own nationals who often struggle with poverty and unemployment. To help prevent future violence, countries across the region should accelerate inclusive growth reforms aimed at reducing inequality.

External partners, including the IMF, have supported countries’ efforts to contain the fallout.

The top priority has been to scale-up humanitarian aid to meet the immediate needs of the people affected, both in conflict zones and in countries hosting large numbers of refugees, such as Jordan and Lebanon. The second priority is on developmental aid to help rebuild infrastructure, and, more broadly, strengthen economic and social resilience across the MENA region. Efforts to organize a wider and deeper international response recently intensified and have focused on mobilizing additional financing. As much as possible, this additional funding should take the form of grants and concessional loans to avoid overburdening countries unable to sustain the extra debt. The IMF supports these efforts, including with policy advice, sizable financing, and capacity building.