DUBAI - US sanctions on Iran, rising unrest in the Middle East and North Africa and oil price volatility are dragging regional economic growth, the International Monetary Fund said Monday.
The IMF warned in a bi-annual economic outlook report that prospects for the region are "clouded by elevated levels of uncertainty".
"Such uncertainty may increase investors' perception of risk for the whole region, leading to capital outflows and exchange rate pressure," the global lender said.
The IMF forecasts the economy in Iran, the second largest in the region behind Saudi Arabia, will shrink by 6.0 percent this year after contracting by 3.9 percent in 2018.
The bad news for Tehran comes after the United States reimposed sanctions last year following its withdrawal from a 2015 nuclear accord.
Jihad Azour, IMF Middle East and Central Asia director, said the dire projection was made before the US tightened up measures targeting Iran's oil industry last week - meaning the pain could get even worse.
Azour said that sanctions have already pushed inflation in Iran to around 50 percent.
Iran's woes have a knock-on effect on regional figures.
Overall regional economic growth was expected to remain subdued at 1.3 percent this year from 1.4 percent in 2018.
For oil exporters growth was down at 0.4 percent for 2019, while importing countries were expected to increase at 3.6 percent this year, from 4.2 percent in 2018.
Gulf Cooperation Council (GCC) countries - Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates - were forecast to slightly buck the trend, improving to 2.1 percent growth from 2.0 in 2018.
The IMF said economic growth in the broader region was negatively impacted by rising conflict, corruption, slow reforms, high levels of debt and continued oil price fluctuations.
"Social tensions are rising in the context of lower growth and reform fatigue, threatening macroeconomic stability," it said.
After the first wave of Arab Spring uprisings in 2011, the region is now witnessing fresh upheaval in Algeria and Sudan and fighting intensified in Libya and Yemen.
As a result, reforms in the region have become more urgent to decrease dependence on oil and create millions of jobs, especially for the youth.
"For oil exporters, they are important to be less dependent on the volatility of oil price and for diversifying their economies," Azour said.
He said reforms are also vital for oil importers to face a rising level of debt which has reached over 80 percent of GDP on average.
The region, in addition to Pakistan and Afghanistan, needs to create some 25 million jobs over the next five years to maintain current unemployment rates, he said.
For the GCC countries that figure stands at 5 million.