Wars and depressed crude oil prices have diminished growth prospects for the Middle East and central Asia, and private sector productivity gains are needed to avoid a "new mediocre" for the region, the International Monetary Fund (IMF) said.

In a new paper, the IMF said that all emerging markets are facing diminished growth prospects over the next five years, but those of the Middle East and Central Asian countries are expected to be 1.25 percentage points below the emerging market and developing country average.

Six years after the Arab Spring movement promised more economic inclusiveness and higher living standards, much of the Middle East remains mired in conflict, weighing on economic activity across the region as millions of refugees flee, IMF Middle East director Masood Ahmed said in the document.

"At the same time, the new 'lower for longer' oil price reality has dampened oil-exporting countries' longer-term growth prospects and rendered their oil-centered economic growth models untenable," Masood said.

The region's oil exporters are being forced to cut spending and shrink bloated public sector employment that had been fueled by oil revenues, weighing on living standards and growth prospects, the IMF said.

In the paper, it called for fostering a more competitive business environment to boost productivity growth, including streamlined regulations and tax codes, and reduced dominance for state-owned enterprises.

It said boosting worker education, skills and professional networks is also critical for raising productivity. The paper suggests that the region's countries can leverage "extensive and potent" diaspora networks to help improve productivity by conveying global business knowledge and expertise and helping to raise funds for training and education.

Improving the quality of education by working with the private sector to develop a curriculum focused on the skills needed for private sector jobs can also help close the gap in worker talent.

The IMF said financial market development was also vital for accumulating capital - and the region had fallen behind its global peers. Easing access to finance can help develop small and medium enterprises and ensuring adequate protection of legal rights can help raise growth.

Closing gaps with global peers in regulation, education and financial market development could help lift potential growth by 1.5 percentage points in the Gulf Cooperation Council countries, by 1 percentage point in the Caucuses and Central Asian countries.

But the paper noted that security and stability are a precondition for such reforms to succeed. – Reuters