Lay Foundations For Jobs Now
A Commentary by Masood Ahmed, Director, Middle East and Central Asia Department, International Monetary Fund
Published in Financial Times (online 5/4/2011 and Middle East print edition 5/5/2011)
The Middle East and North Africa are going through a period of unprecedented change. These developments offer policymakers the opportunity to address long-standing obstacles to faster and more socially-inclusive growth and to provide the jobs so urgently needed for a young and restless labor force. However, the oil-importing countries in the region also confront a more immediate challenge: maintaining social cohesion, while preserving macroeconomic stability in the face of multiple pressures.
As in other parts of the world, the region’s energy importers have been hit hard by the sharp rise in oil prices, compounded with a near doubling of the price of wheat—MENA countries are among the world’s largest wheat importers. The extra cost of food and fuel imports alone will add US$15 billion (3 percent of GDP) to this year’s combined import bill of the region’s principal oil-importing countries—Egypt, Jordan, Lebanon, Morocco, Syria, and Tunisia.
On top of higher food and fuel imports, these countries are also experiencing a drop in tourism and investment flows, both held back by unrest and uncertainty. While the drop has been sharpest in Tunisia and Egypt—tourist arrivals were down by about 40 percent in the first two months of this year—the ripples are being felt across the region. And finally, the same uncertainty has caused financial markets to raise risk premiums, and hence borrowing costs, for most countries across the Middle East.
In addition to these external challenges, governments are faced with increased social pressures and chronically high youth unemployment, to which they have responded with an expansion of fuel and food subsidies, civil service wage and pension increases, additional cash transfers, and other spending increases, as well as tax reductions.
Some additional spending in the near term is understandable and necessary to ensure social cohesion, but it risks straining public finances that are already stretched by measures taken to mitigate the impact of the global financial crisis. The combined 2011 fiscal deficit of the region’s emerging markets will likely reach 8 percent of GDP, or about $40 billion. The figures for 2012 will likely be similar. Domestic capital markets can provide part of these funds, albeit at higher cost but, for some countries, timely external financial support will be key to maintaining social cohesion without risking macroeconomic and financial instability. The IMF, for its part, could allocate about US$35 billion if requested by the emerging markets of the region.
Over the medium term, widening fiscal and current account imbalances will need to be addressed so as not to hamper the longer-term job-creating growth agenda. Specifically, some of the spending will need to be reversed, other measures being taken to alleviate social inequities will have to be financed by raising more revenues from those who evade taxes, targeting subsidies towards the most needy, and reducing waste in public spending.
And while increased public spending on subsidies and transfers responds to the immediate quest for social peace, it is not a substitute for more fundamental reforms and modernization of economic policies and institutions that will generate decent jobs, better governance, and social protection of the needy and vulnerable. Moving from generalized fuel and food price subsidies—which now cost MENA governments about 8 percent of GDP—to well-targeted, and more cost-effective, social safety nets is part of that agenda.
So, too, is taking early action on reducing bureaucratic regulations that make it harder for small- and medium-sized businesses to thrive without connections or corruption. And while a new growth model that is more sustainable and inclusive will need time to develop, governments can begin now to define its elements in close dialogue with the population and—as needed—with the engagement of both regional and international partners.
The months ahead will be challenging and inevitably marked by temporary setbacks. But the Middle East and North Africa region has many strengths on which to build: a dynamic and young population, vast natural resources, a large regional market, an advantageous geographic position with access to key markets. It is vital that, during this unprecedented time of change, any threat to macroeconomic and financial stability be quickly stopped in its tracks through sound policies and, where needed, with the help of the international community. In this way, confidence will be maintained and the pursuit of a new social agenda can progress.