By Davide Barbuscia
DUBAI, Oct 19 (Reuters) - Countries in the Middle East and Central Asia have emerged from the COVID-19 shock but the path to full recovery remains uneven and fragile, the International Monetary Fund said on Tuesday, pointing to rising inflation as a major economic headwind.
Gross domestic product in the Middle East and North Africa region is expected to expand by 4.1% this year and next after the coronavirus crisis caused a 3.2% contraction in 2020, the IMF said in its regional economic outlook on Tuesday.
Growth for the Caucasus and Central Asia region is seen at 4.3% this year and 4.1% next, after dropping 2.2% in 2020.
"With uneven vaccination rollouts, the recovery in the Middle East and Central Asia is expected to be multi-speed and fragile, and countries need to maintain focus on managing the pandemic," the IMF said.
Differing vaccination rates are set to exacerbate inequality and poverty in the region, which includes around 30 countries from Mauritania to Kazakhstan.
About 7 million more people have entered extreme poverty during the past two years than pre-crisis estimates had forecast.
Rising inflation due to higher commodity prices and pandemic-related supply shortages could limit the space for supportive monetary policies.
In the Middle East and North Africa, inflation is projected to increase to 12.9% this year from 10.4% last year, while in Central Asia it is seen at 8.5% this year compared to 7.5% last year.
"In addition to the limited fiscal policy space, countries now face the added burden of diminishing monetary space, given rising inflation ... Central banks have the difficult task of curbing rising inflation without choking the fragile recovery."
Should global inflationary pressures persist longer than expected, this could also increase financing risks for countries in the region highly dependent on external debt.
"A tightening in global financial conditions could lead to capital outflows and higher sovereign spreads, exposing particularly those with lower reserves and weaker external accounts", said the fund. (Reporting by Davide Barbuscia; Editing by Kevin Liffey)