Mideast Braces Itself for a Multi-Year Transition

IMF Blog, October 27, 2011

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Underlying optimism in the promise of the Arab Spring persists, but there is growing recognition that managing the short-term transition will be more difficult given persistent economic pressures and rising social expectations.
The short-term transition is only the first phase of a multi-year transformation to make economic systems more inclusive and institutions more accountable and transparent.

IMF projection for the region’s oil-importing countries (Afghanistan, Djibouti, Egypt, Jordan, Lebanon, Morocco, Pakistan, Syria, and Tunisia): growth of 1.9 percent in 2011 and 3.1 percent in 2012.
These growth rates are well below historical averages for the region and below the growth rate needed to prevent further increases in already high unemployment.
Government deficits are widening on average by about 1.5 percent of GDP in 2011–12.
External reserves have dropped markedly in 2011:
- nearly 40 percent in Egypt
- 5–10 percent in Jordan, Syria, and Tunisia

External financing needs of the oil importers are estimated to exceed $50 billion in 2012.
Capital markets will likely provide only a small part of these funds—and at a higher cost.
Regional partners and the broader international community will be called upon to provide financial support.
The IMF announced it could make available upon request about $35 billion to support the home-grown economic programs of the region’s oil importers.

The key challenge for the coming year is to ensure social cohesion while maintaining macroeconomic stability.
Financing can facilitate difficult policy decisions needed during transition, but is only part of the answer.
Examples of policy measures under consideration:
- Limiting butane gas subsidies to households who really need this support (Egypt).
- Fostering short-term job creation without creating long-term public commitments that would be difficult to unwind when the economic situation improves.

Most oil-exporting countries (Algeria, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, Sudan, the United Arab Emirates, and Yemen) are showing solid growth, partly because of high oil prices and partly because they have stepped up oil production in response to Libya’s shortfalls.
IMF growth estimate for these economies (excluding Libya): 4.9 percent in 2011 and 3.9 percent in 2012.
Increased oil production is contributing to global energy market stability amid wider global challenges.
Main risk: a possible sharp downturn in global economic activity resulting from advanced economies’ difficulties in addressing debt and fiscal challenges; such a downturn would likely hit oil exporters via a fall in oil prices.

Higher oil prices have enabled many oil exporters to expand spending and support non-oil sector diversification, and to address pressing social needs (for example, offsetting higher food prices or filling gaps in housing and health).
The flipside is a widening of non-oil fiscal deficits among oil exporters, increasing vulnerability to oil price swings.
Several oil-exporting countries should consider some degree of fiscal consolidation in the medium term—measures to rein in spending or increase non-oil revenue to bring down the non-oil fiscal deficit.

Masood Ahmed, October 27, 2011 — Mideast Braces Itself for a Multi-Year Transition