Growth in the Middle East and North Africa (Mena) took a dive in 2011 because of the Arab Spring protests and resulting political upheaval, the International Monetary Fund said on Tuesday.
Gross Domestic Product (GDP) in the region, stretching from Iran to Mauritania, grew by 3.5 per cent last year, down from a healthy 4.9 per cent in 2010, the IMF said in its World Economic Outlook.
However, the IMF projected that the region would grow by 4.2 per cent this year, up 0.6 per cent on its January estimates, and by 3.7 per cent in 2013, down 0.2 per cent on earlier projections.
The report said social unrest that swept the Arab world negatively impacted tourism and capital flow, both badly needed by the region's poor nations.
Besides internal challenges and geopolitical risks associated with Iran, there are also large potential spillovers from the European debt crisis on oil prices and trade links with Arab Maghreb states, the IMF said.
"A more intense recession in Europe could further undermine the already shaky tourism sector," which could also spill over into slower global growth, negatively impacting oil prices, said the IMF.
The economies of oil exporters, which include some of the world's main crude producers Saudi Arabia, Iran, Libya and other Gulf countries, grew by just 4.0 per cent despite exceptionally high oil prices, the IMF said.
Growth in oil-importing nations, such as Egypt and Tunisia which saw their long-time leaders toppled, was up a modest 2.0 per cent even after excluding violence-hit Syria, the IMF said. They grew by 4.5 per cent in 2010.
"This low growth is a direct reflection of the effects of social unrest... Regional spillovers from the social unrest have been large, particularly on tourism and capital flow, which have declined throughout the region," the report said.
GDP in Tunisia, the North African nation where the region-wide protests began, shrank by 0.8 per cent for the first time in many years, the IMF said. The Tunisian economy grew by 3.1 per cent in 2010.
The economies of the Arab Maghreb, consisting of Tunisia, Libya, Algeria, Morocco and Mauritania, contracted by 1.7 per cent in 2011, apparently because of low performance by Tunisia and Libya, which was hit by a violent rebellion.
No separate figures for Libya were provided.
However, the IMF projected the Maghreb's economy to rebound by as high as 11.0 per cent in 2012 and 5.9 per cent next year.
In Egypt, the most populous Arab nation hit by revolution, the economy grew by 1.8 per cent last year, far below the trend of previous years.
Egypt's economy is projected to grow by 1.5 per cent and 3.3 per cent in 2012 and 2013 respectively, but it will have double-digit inflation and a negative current account balance, the IMF said.
The region will continue to face serious policy challenges mainly to "secure economic and social stability," but there is a "short-term need to place public finances on a sustainable footing," it said.
In the medium term, the IMF called for the "reorientation of fiscal policies toward poverty reduction and the promotion of productive investment."
The economy of non-Arab oil-exporting Iran grew by just 2.0 per cent last year. It is forecast to grow by a meagre 0.4 per cent in 2012 and by 1.3 per cent in 2013 with inflation rates above 20 percent.
Growth in the energy-rich Gulf Cooperation Council (GCC) states and Iraq remained strong, led by gas-rich Qatar with a massive 18.8 per cent, the IMF said.
Qatar's economy, however, is projected to slow to 6.0 per cent this year and 4.6 per cent in 2013.
Growth in Saudi Arabia, the world's leading oil producer and exporter, was 6.8 per cent last year and is forecast to slow slightly to 6.0 per cent in 2012 and 4.1 per cent next year, the IMF said.
The UAE economy, the second largest in the GCC, grew by 4.9 per cent and Kuwait by a strong 8.2 per cent last year. They are forecast to grow by 2.3 per cent and 6.6 per cent respectively in 2012.
The IMF warned oil exporters about rising government expenditure, mainly on salaries.
"Government expenditures have risen to such a degree that a relatively modest fall in the price of oil can lead to budget deficits," the IMF said.
Iraq's economy grew a massive 9.9 per cent in 2011 and the strong growth is expected to continue over this year and the next with projections at 11.1 per cent and 13.5 percent, the IMF said.
The economy of war-torn Sudan shrank by 3.9 per cent last year. It is forecast to contract by 7.3 per cent this year and 1.5 per cent in 2013, coupled with high inflation.