Middle East and North Africa: Set for a Shift in Economic Policy
A Commentary by Masood Ahmed, Director, Middle East and Central Asia Department, International Monetary Fund
Published in International Economic Bulletin, Carnegie Endowment for International Peace, November, 2010
In line with the global rebound from the Great Recession, growth in most economies in the Middle East and North Africa (MENA) region is expected to accelerate in 2010 and 2011. Helped by rising oil prices and production levels, as well as supportive fiscal policies, output for the region is projected to expand by about 4.2 percent in 2010 and 4.8 percent in 2011—up from 2.3 percent in 2009. As a result, most countries can now focus on addressing the severe structural policy challenges that continue to cloud the economic horizon, such as long-standing, high unemployment rates and dependence on hydrocarbons.
Oil Exporters: Economic Growth Accelerates Markedly
Economic activity is bouncing back in the region’s oil-exporting countries—Algeria, Bahrain, Iran, Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia, Sudan, the United Arab Emirates, and Yemen. With worldwide demand picking up, crude oil production is projected to grow from 24.5 million barrels per day (bpd) in 2009 to 25 million bpd in 2010 and 26 million bpd in 2011. Oil GDP, in turn, is expected to grow by 3.5 percent in 2010 and 4.3 percent in 2011.
Based on oil price projections of $76 per barrel in 2010 and $79 per barrel in 2011, the countries’ external balances are expected to turn around markedly. Exports are projected to increase by 19 percent in 2010, followed by a more moderate 10 percent increase in 2011, by which time they will have surpassed the $1 trillion mark. As a result, the combined current account surplus of these countries is projected to rise from $70 billion in 2009 to $120 billion in 2010 and $150 billion in 2011. The countries of the Gulf Cooperation Council (GCC) will account for close to $50 billion of this increase.
Non-oil growth, cushioned in 2009 by high levels of government spending, is projected to pick up by a more moderate 1 percentage point between 2009 and 2011. Non-oil-sector growth will continue to rely to some extent on supportive fiscal policy, given that private investment and credit remain sluggish and that capital inflows to the MENA region, unlike to some other regions, have resurged only slightly.
Although annual credit growth has picked up somewhat—rising from a low of just over 4 percent at the end of 2009 to around 7 percent in June 2010—it is nowhere near the 32 percent growth achieved right before the global financial crisis. The challenge for monetary policy will be to support credit growth while quelling the potential for inflation stemming from an increase in domestic activity and the lagged effect of rising international food prices.
The recovery in oil prices will allow fiscal balances to improve to varying degrees across the oil exporters. The improvement will be most notable in the GCC, where budget surpluses are expected to surge by almost 7 percentage points of GDP between 2009 and 2011. In countries that have ample fiscal space (particularly in the GCC and Algeria), but where private-sector activity is not yet sustaining itself and overheating has not begun, governments can continue to pursue expansionary fiscal policy through 2011. In countries where government budgets are under greater pressure, such as Iran, Sudan, and Yemen, the approach to fiscal policy will need to be more conservative.
Oil Importers: Growth Remains Too Slow to Tackle Unemployment
The region’s oil importers—Afghanistan, Djibouti, Egypt, Jordan, Lebanon, Mauritania, Morocco, Pakistan, Syria, and Tunisia—are seeing economic activity strengthen moderately in 2010, though there are a few exceptions, such as Pakistan, which experienced devastating floods earlier in the year. The group as a whole is slated to grow by 5 percent in 2010—a slight improvement from 4.6 percent in 2009, but not nearly enough to significantly curb the region’s high unemployment, which remains a major structural challenge.