Mideast Faces Diverging Economic Prospects

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

Published in Asharq Alawsat, 11/22/2011

For many countries in the Middle East and North Africa, 2011 has not been an easy year. The region is witnessing unparalleled uncertainty and economic pressures from both domestic and external sources, which have triggered a marked downturn in economic activity. While the economies of the oil-exporting countries have seen a mild pickup in growth in 2011, oil importers are experiencing a dramatic slowdown.

Steps to increase inclusiveness and participation in response to popular demands are promising. Nonetheless, prolonged conflict in some countries has taken a massive human toll and uncertainty across the region has contributed to enormous short-term economic costs. The key challenge is to meet short-term social needs while maintaining medium-term macroeconomic stability and developing and implementing home-grown plans to harness the region’s promising potential.

Oil exporters benefit from high oil prices amid growing risks

Driven by rising oil prices and stepped-up oil production, the region’s oil-exporting countries, excluding Libya, are continuing to register solid growth, estimated at an average of close to 5 percent in 2011. The Gulf Cooperation Council (GCC) countries, most notably, have raced ahead, with a projected growth rate of about 7 percent in 2011, on the back of increased oil production in response to shortfalls in production from Libya.

Increased oil production has made an important contribution toward global energy market stability at a time when the world economy is facing many challenges, and increased oil revenues have created additional room for government spending. Several GCC countries announced spending programs early in the year covering a wide spectrum of measures, including subsidies, wages, and capital expenditure to offset the impact of higher food prices and to fill gaps in such critical services as housing and health.

This higher spending has also allowed GCC countries to further develop economic activity outside the oil sector, in addition to contributing to global economic activity and providing neighboring countries with greater investment, remittance, and trade flows.

At current projected oil prices and levels of production, revenue gains will more than offset the high levels of public spending. In 2011, the oil exporters’ combined external current account balance (excluding Libya) is expected to increase from $202 billion to $334 billion and from $163 billion to $279 billion for the GCC.

At the same time, however, some risks cloud the outlook. In particular, a possible sharp downturn in global economic activity resulting from difficulties in Europe and other advanced economies in addressing their debt and fiscal challenges could spill over to the region. If these risks materialize and global growth deteriorates sharply, oil exporters would be adversely affected, most likely through falling oil prices.

Oil exporters are also seeing widening non-oil fiscal deficits, making these countries more vulnerable to a prolonged drop in oil prices. In particular, fiscal break-even oil prices—the price levels that ensure that fiscal accounts are in balance at a given level of spending—have been trending upward in most countries. Consequently, in several countries, some degree of fiscal consolidation—measures to rein in spending and bring down the government deficit—will need to be considered to bring fiscal balances down to a more sustainable level.

The region’s oil exporters also continue to face challenging structural issues, including the need to create jobs for their growing working-age populations, further diversify their economies, and develop their financial markets to support economic growth.

Growth alone will not solve the growing unemployment problem, particularly in the GCC, where a high rate of unemployment among nationals has not resulted from insufficient job creation, but from skills mismatches, expectations of high wages, and the attractiveness of public-sector employment. Measures to better align education and equip prospective job-seekers with the skills demanded by the marketplace, alongside training and placement services and other initiatives already in place in most GCC countries, could help boost employment among nationals.

Oil importers face a difficult year ahead

A deteriorating global environment and longer-than-expected political transition in several of the region’s oil-importing countries have increased uncertainty, leading to a sharp economic downturn in 2011 and pressures on already high unemployment and economic stability. As a result, this group of countries is forecast to grow at a mere 1.4 percent in 2011, followed by a pickup to 2.6 percent in 2012.Many countries will also enter 2012 with less of a margin for maneuver, having drawn down some of their reserve cushions in 2011.

The oil importers have seen a sharp drop in their external reserves as heightened uncertainty has led to a marked decline in capital inflows. Remittances have remained fairly robust, except in Tunisia, where large numbers of workers have returned from conflict-ridden Libya. But tourism, an important source of foreign exchange, has fallen, with Egypt, Jordan, Lebanon, Syria, and Tunisia registering double-digit declines in tourist arrivals during the first half of the year.

Moreover, high commodity prices are pushing up import bills, particularly those of region’s most oil-import-dependent economies—Djibouti, Lebanon, Jordan, Mauritania, and Morocco. Uncertainty has also constrained access to international capital markets, and direct investment and portfolio inflows have fallen, especially in Egypt.

Government budgets are also under stress. To help cushion the impact of the economic downturn and high commodity prices, governments have significantly expanded subsidies and transfers. While some additional spending to protect the vulnerable is necessary, it has also put strains on government finances. Oil importers’ fiscal deficits are widening to an average of over 8 percent of GDP in 2011–12. At the same time, governments are increasingly relying on domestic bank financing, which is squeezing the availability of credit to the private sector.

The key challenge for the coming year will be to ensure social cohesion while maintaining macroeconomic stability. To that end, ensuring adequate financing is a top priority. The external financing needs of the oil importers are likely to exceed $50 billion in 2012. Capital markets will likely provide only a small part of these funds—and at a higher cost.

As such, many of these countries will need official financial support. As announced earlier in the year, the IMF could make about $35 billion available to the region’s oil importers, if requested, in addition to the $38 billion pledged by international and regional financial institutions. It will be equally important for the international community to provide support in the form of technical assistance, policy advice, and market access for the region’s exports.

Navigating the challenges

Despite the trying times ahead, the Arab Spring holds the promise of improved living standards and a more prosperous future for the peoples of the region. The immediate priority for countries troubled by conflict is to avoid further humanitarian crisis and, once the conflict is over, to pursue an agenda of reconstruction and reform.

For others, the main challenge in the short-term is to build confidence and anchor expectations while maintaining economic stability. To that end, better-targeted subsidies and transfers will help free resources for investment in infrastructure, education, and health care for the neediest.

Beyond the short term, demands for access to opportunities and jobs call for an ambitious economic reform agenda. Overcoming longstanding high unemployment will require a faster pace of economic growth and increased competitiveness, which will entail both additional investment and improved productivity. To achieve this, the private sector will have to take the lead, including by attracting foreign direct investment.

Government policies, in turn, should support an enabling business climate in which the private sector can flourish. Putting in place modern and transparent institutions that encourage accountability and good governance will also help address important concerns among the population.

Each country will define its own reform strategies, but to cement the longer-term benefits of the ongoing transformation in the region, all will need to be comprehensive, bold, and aimed at fostering inclusive and job-creating growth.



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