The MENA Jobs and Growth Challenge: How Can Finance Help?

IMF Blog, May 23, 2011

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Bibliographic details

• Authors: Masood Ahmed
• Published: May 23, 2011

Overview

• Author: Masood Ahmed
• Date: May 23, 2011
• Central question: What role can the financial sector play in addressing high unemployment and raising living standards in the Middle East and North Africa (MENA)?

Key findings on financial sector performance in MENA

• Financial depth (scale of activity by banks and stock markets) in the region has been similar to the global emerging and developing country average, but important differences exist across countries.
• The region’s financial sectors vary greatly from country to country:
  • In 2008, the country with the deepest banking sector (Jordan) provided credit to the economy at a scale equivalent to 16 times that of the shallowest (Libya).
  • Countries such as Saudi Arabia exhibit levels of stock market activity similar to those in developed countries, while others lack a stock market altogether (Yemen).
• Banking systems in many MENA countries should be providing greater amounts of credit, given their ability to attract deposits:
  • Excluding the countries of the Gulf Cooperation Council, the average loan–deposit ratio in regional banking systems has been well below the global emerging and developing country average for the past 30 years.
• Access to financial services is limited relative to other regions:
  • Fewer firms receive bank financing.
  • A greater proportion of firms cite access to credit as a major constraint to their business plans.
  • A smaller percentage of the population has access to checking accounts or ATMs.
  • Bank loans tend to be concentrated among a small number of borrowers, excluding many potentially growth-enhancing firms.
• The impact of banking depth on growth in MENA is significantly weaker than elsewhere:
  • The region’s impact is at least a third lower than in other emerging and developing countries.
  • If Yemen’s banking system were to deepen to the emerging and developing country average, annual per capita growth would increase by just 1½ percentage points.
  • By contrast, a country with a similarly shallow banking system in another region (example given: Armenia) would accelerate its growth rate by a full 2⅓ percentage points.
• Conclusion: Beyond financial shallowness in some MENA countries, the region appears to suffer from a quality gap in bank intermediation relative to the rest of the world.

Policy recommendations to enhance the financial system’s contribution to growth

• Where shallowness in banking or domestic capital markets persists, take steps to:
  • Improve the conditions under which banks, households, investors, and firms participate in financial transactions.
  • Improve legal frameworks that protect creditor and shareholder rights.
  • Streamline insolvency regimes.
  • Develop primary and secondary markets for government securities.
  • Remove excessive controls on credit and/or interest rates.
• Maintain continued macroeconomic stability to increase public willingness to place funds in bank deposits or domestic capital markets.
• To address the quality gap in intermediation, boost competition in the banking sector by:
  • Removing entry barriers.
  • Improving the credit information environment.
  • Promoting the development of local debt markets.
  • Assessing—and possibly scaling back—the role of state banks where their large presence may be stifling both financial depth and banking competition.

Source: The MENA Jobs and Growth Challenge: How Can Finance Help? — Masood Ahmed, May 23, 2011