Will Europe’s Economic Problems Affect the Middle East and North Africa? A Commentary by Masood Ahmed, Director, Middle East and Central Asia Department, International Monetary Fund

February 23, 2012

A Commentary by Masood Ahmed, Director, Middle East and Central Asia Department, International Monetary Fund

Published in Asharq Alawsat, 2/23/2012

With daily reports of economic problems in Europe, and high-level meetings to solve them, people in the Arab World are wondering how much these problems could spill over and impact their own economic prospects. The short answer is that the economic slowdown in Europe is already dampening economic activity in a number of MENA countries, and this downward pressure is likely to continue for at least the coming year. However, the impact varies greatly from country to country and, in many MENA countries, the prospects for the coming year will be even more affected by how their own political and economic transition unfolds.

In today’s interconnected world, there are many channels for transmitting the effect of economic changes in one region to another region or country. One of these—and one which can have a rapid and disruptive effect—is through links among banks and financial markets. Fortunately, such financial spillovers are likely to be quite limited in the MENA region. By and large, banking systems in MENA obtain their financing from domestic sources, and are not very reliant on borrowing from European banks, although some may be exposed through deposits held in Europe.

Of course, turmoil in financial markets has not been helpful: sovereign debt difficulties encountered in the euro area have contributed to widening sovereign and credit default swap spreads across the MENA region. This translates into higher borrowing costs for those MENA countries that need to access capital markets in the coming year. But, overall, the implications of financial sector linkages are likely to remain manageable.

In contrast, the slowdown in euro area growth is taking a bigger toll through other channels. A number of oil-importing countries in MENA, especially in the Maghreb, rely heavily on Europe as a market for exports, tourism, workers’ remittances, and foreign direct investment. Nearly 60 percent of exports from the Maghreb are destined for Europe, and Europe is the source of 80–90 percent of Maghreb tourism revenues and about 80 percent of total direct investment. Morocco and Tunisia, most notably, depend on Europe for more than 80 percent of their remittance inflows. As European businesses and households tighten their belts, the impact is quickly transmitted. Investment flows and exports to Europe are also slowing down. Remittances from Maghrebi workers in Europe, however, have held up well as family obligations have taken precedence, even as incomes have fallen for the workers.

Other oil-importing countries in MENA are less connected to Europe and, so, less affected by its economic difficulties. Jordan, for example, sends only about 4 percent of its exports to Europe, and many more Jordanian expatriates work in the GCC. Overall though, partly as a result of difficult external conditions, and also because of heightened domestic uncertainty, growth in the region’s oil-importing countries (excluding Syria) is projected to remain stagnant at around 2 percent in 2012. This is a source of great concern, since a much higher growth rate is needed to prevent already high youth unemployment from rising further.

As for the region’s oil-exporting countries, rising global uncertainty affects their economies mainly through the impact on global demand for oil and associated prices. For these countries, an expected slowdown in global oil demand will translate into lower overall economic growth, but many of them can use their accumulated reserves to maintain government spending and sustain growth.

The weakness in euro area—and global—economic activity comes at a challenging time for the MENA region. The Arab Spring has begun a transformation that, over time, should lead to higher rates of growth that are better shared across society and bring down the unacceptably high joblessness rates in the region, particularly among the youth. At the moment, however, many countries continue to struggle with increasing social demands, high levels of unemployment, and limited fiscal space to react to additional economic and social pressures. A less favorable international economic environment adds to these challenges.

Governments will need to find the right balance to manage through this period to continue delivering needed social services while maintaining macroeconomic stability and laying the groundwork for a rapid growth takeoff once worldwide conditions improve. The International Monetary Fund, for its part, is committed to supporting MENA countries to overcome these challenges and improve the lives and prospects for the people of the region.

IMF EXTERNAL RELATIONS DEPARTMENT

Public Affairs    Media Relations
E-mail: publicaffairs@imf.org E-mail: media@imf.org
Fax: 202-623-6220 Phone: 202-623-7100