US sanctions on Iran are causing unrest in the Middle East and North Africa (MENA) and oil price volatility is dragging regional economic growth, the International Monetary Fund (IMF) has said.

The IMF warned in a biannual economic outlook report that prospects for the region are "clouded by elevated levels of uncertainty".

"Such uncertainty may increase investors' perception of risk for the whole region, leading to capital outflows and exchange rate pressure," the global lender said on Monday.

The IMF forecasts the economy in Iran, the second-largest in the region after Saudi Arabia, will shrink by six percent this year after contracting by 3.9 percent in 2018.

"Clearly, the reimposition of sanctions and the removal of the waivers will have additional negative impact on the Iranian economy both in terms of growth and in terms of inflation, where inflation could reach 40 percent or even more this year," Jihad Azour, director of the IMF's Middle East and Central Asia department said.

US sanctions against Iran have denied its government more than $10bn in oil revenue, a US official said earlier this month.

The Iranian currency, the rial, lost more than 60 percent last year, disrupting Iran's foreign trade and boosting annual inflation.

Conflict and oil price fluctuations

Overall regional economic growth was expected to remain subdued at 1.3 percent this year from 1.4 percent in 2018.

For oil exporters, growth was down at 0.4 percent for 2019, while importing countries were expected to increase at 3.6 percent this year from 4.2 percent in 2018.

The Gulf Cooperation Council (GCC) countries - Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates - were forecast to slightly buck the trend, improving to 2.1 percent growth from two percent in 2018.

The IMF said economic growth in the broader region was affected by rising conflict, corruption, slow reforms, high levels of debt and continued oil price fluctuations.

"Social tensions are rising in the context of lower growth and reform fatigue, threatening macroeconomic stability," it said.

After the first wave of Arab Spring uprisings in 2011, the region is now witnessing fresh upheaval in Algeria and Sudan and fighting has intensified in Libya and Yemen.

As a result, reforms in the region have become more urgent to decrease dependence on oil and create millions of jobs, especially for the youth.

"For oil exporters, they are important to be less dependent on the volatility of oil price and for diversifying their economies," Azour said.

He said reforms are also vital for oil importers to face a rising level of debt which has reached over 80 percent of GDP on average.

The region, in addition to Pakistan and Afghanistan, needs to create some 25 million jobs over the next five years to maintain current unemployment rates, he said. For the GCC countries, that figure stands at five million.