* Growth hit by falling oil price, demand and remittances
* Expensive, inefficient energy, food subsidies "a problem"
* Second wave of financial crisis more dangerous for region
By Lesley Wroughton
WASHINGTON, April 28 (Reuters) - Economic growth in the Middle East and North Africa is set to halve to 3 percent this year with the collapse of oil prices, demand and worker remittances, a senior World Bank official said on Tuesday.
Daniela Gressani, World Bank vice president for the region, said countries outside the Gulf such as Iran, Syria and Algeria, which have expensive state subsidy programs, will be hit the hardest by lower oil prices.
"Even though they have large buffers we expect they will be affected more seriously," Gressani said, speaking after weekend meetings of the World Bank and International Monetary Fund.
The twice-yearly meetings are a chance for finance leaders to meet with World Bank and IMF officials to discuss economic and development issues. This time, a deepening global recession and the impact of the financial crisis dominated talks.
Gressani said she was encouraged to hear in meetings a commitment by ministers from the Middle East and North Africa to maintain prudent economic policies despite harsher conditions.
SOCIAL CONCERNS
The biggest concern raised was the impact the crisis will have on social conditions should it drag on longer than expected.
The issue is worrying because most of those countries have inefficient social systems for the poor, with resources locked up in the subsidy programs that are politically and socially difficult to remove.
She said the subsidies for energy and food were expensive and inefficient because they did not reach the poorest and can encourage bad consumption decisions.
"We see this as a problem," Gressani said. "On the other hand we recognize the political difficulties of addressing long-standing transfers that may not benefit the poorest, but benefit a lot of other people."
"My view is that solving this particular issue is going to be the No. 1 challenge," she said.
Poor countries like Yemen, have about 10 percent of gross domestic product tied up in energy subsidies and Iran even more.
With food and energy cost sharply lower this year, now was an opportunity to start cutting the subsidies, she said.
She said World Bank lending to the region was set to double to $2.3 billion this year versus $1.2 billion last year.
World Bank figures show that at $50 a barrel, oil exporters in Gulf states should fare better because their budgets factor in the decline in oil prices.
In non-Gulf oil exporting countries, lower oil prices mean budget constraints and less fiscal room, leading to wider deficits and in some cases the need to tap oil saving funds.
DANGEROUS SECOND WAVE
Gressani said the initial impact on the region from the financial crisis was mild, but a second wave, which hit the real economy through declines in exports, worker remittances, tourism and foreign direct investment, was more dangerous.
"Clearly economies in the region are expecting a decline in growth perhaps as much as half last year," she said. "But some 3 percent GDP growth in 2009 will still be a pretty good result compared to other developing nations, not to mention the developed world."
"How quickly they can bounce back to 7 or 8 percent next year to a large extent will depend on recovery outside the region."
She said foreign direct investment from the West, especially the United States and Europe, had fallen although the investment from within the region was holding up.
"We're not seeing yet significant declines in foreign direct investment in the region originating within the region, but its clearly a risk for the future." (Editing by Jan Dahinten)