(Bloomberg) -- The International Monetary Fund warned that a prolonged war between Hamas and Israel risks impacting economic activity and the inflation outlook in neighboring countries such as Egypt, Lebanon and Jordan.
“What is happening in the Middle East is happening at a time when growth is slow, interest rates are high, the cost of servicing debt that has gone up because of Covid and the war,” Kristalina Georgieva, the fund's managing director said on the second day of the Future Investment Initiative in Riyadh on Wednesday.
“What we see is more jitters in what has already been an anxious world,” she said, “on a horizon that had plenty of clouds, one more and it can get deeper.”
Violence between Hamas and Israel started early in October when the militant group launched an unprecedented attack that left 1,400 Israelis dead. Israel has responded with airstrikes on the Gaza Strip, killing thousands, and is threatening a major ground war to eradicate Hamas, which is designated a terrorist group by the US and the EU.
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The Washington-based fund is concerned about the “tragic loss of lives but also destruction and reduction of economic activity,” in nearby countries. “Uncertainty is acute for tourist inflows,” she said, “investors are going to be shy to go to that place, the cost of insurance, if you want to move goods they go up.”
In its latest economic regional review that was published before the war, the IMF projected economies across the Middle East and North Africa would expand at a slower pace of 2%, down from its previous forecast of 3.1%.
This week, Israel's credit outlook was cut to negative by S&P Global Ratings, which cited risks that the war could spread more widely and have a more pronounced impact on the country's economy than expected.
‘Too High, Too Quickly'
In other comments, Georgieva reiterated the fund's stance on interest rates, saying they have gone too high, too quickly, while calling for a normalization in monetary policy.
“We have spent the last 20 years living frankly in terms of interest rates in fantasy lane,” she said, “it is actually going to normal to have interest rates that are in positive territory.”
The fund had lifted its global inflation forecast for next year to almost 6% and called for central banks to keep policy tight until there's a durable easing in price pressures.
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“The tightening that we have witnessed over the last five plus years is working,” Georgieva said on Wednesday, “inflation is going down,” but the bad news is “it is not going down fast enough.”
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