A potential repricing of sovereign debt due to the Dubai and Greek debt crises was adding uncertainty to the outlook for the MENAP region, which also includes Afghanistan and Pakistan, the IMF said in its regional economic report.
The region's gross domestic product should expand by 4.2 percent this year after 2.3 percent growth in 2009, but still short of 5.7 percent seen ahead of the 2008 global credit crunch.
The IMF expected governments in the region's oil-exporting countries such as Saudi Arabia to keep large fiscal stimulus packages in place this year, helping economies grow.
"Clouding this outlook are challenges in banking systems where credit remains sluggish and losses on non-performing loans are yet to be fully recognized," the global lender said.
"Also casting doubt on an otherwise positive outlook - for the United Arab Emirates in particular - is the Dubai World debt standstill announcement," it said.
The Gulf emirate's flagship firm reached a deal to restructure $23.5 billion in debt with its core lenders last week, but it still needed to secure backing from other creditors.
The IMF kept growth and inflation forecasts for key regional economies unchanged in the new report following a release of its World Economic Outlook last month with cash-rich Qatar well ahead of its peers with growth seen at 18.5 percent this year.
Higher oil prices and output should boost oil exports by 31 percent to around $680 billion, more than double exporters' current account surplus to $140 billion and boost oil-GDP growth to 4.3 percent in 2010, the IMF said.
The Fund's baseline forecast for the 2010 average oil price is $80 a barrel. Benchmark US crude prices fell in recent weeks to around $70 a barrel due to persistent concerns that Europe's debt woes could undermine economic recovery.
It also said unwinding of the fiscal stimulus beyond 2010 would be warranted, particularly in countries with high debt and that governments should also start withdrawing support for the financial sector when recovery becomes evident.
CAPITAL FLOWS
A majority of oil importers are also experiencing some pickup in GDP growth, the IMF said, with projected rates ranging from 3.5 percent in Morocco to more than 8 percent in Afghanistan. This is supported by rising trade and remittances that are holding up well.
However, most governments are cutting back on spending, while weak European Union demand, stronger real exchange rates and competition from other emerging markets will hamper prospects for export growth.
The IMF also said an uneven recovery of international capital flows presented a challenge for the MENAP region with investors seen mainly targeting low-risk assets and bonds.
"The region's main sources of inflows in the past - bank financing for the oil exporters and foreign direct investment for the importers - remain subdued and are not set to recover quickly," it said.
