The Arab Spring is bringing about a political, social, and economic transformation in the Middle East and North Africa (MENA) where new democratic regimes now have unprecedented freedom to map out a brighter future for the people who fought so hard to put them there.
With change comes uncertainty, and with current economic pressures, both externally and internally, the new governments will have to carve out an economic reform agenda that is conducive to inclusive growth while maintaining macroeconomic stability.
Despite the political turmoil in the MENA region, economic growth was a healthy 4% in 2011 and is forecast to fall only slightly in 2012 to 3.6%. Oil exporters lead growth in 2011 at 5% which is expected to moderate at around 4% in 2012. Qatar, in particular, is growing aggressively (6% in 2012) due to an increase in natural gas exports, along with Iraq and Saudi Arabia. High oil prices, coupled with an increase in oil production to compensate for shortfalls from Libya, have bolstered the fortunes of oil exporters.
Governments in oil exporting countries will need to use this additional fiscal space to move towards more diversified economies. In many such countries, large public investment has been increasing. Though government services are responsible for a large portion of jobs, its contribution to GDP is small. The oil sector, in contrast, contributes a relatively large portion of value added but has relatively few jobs. The government will need to include an agenda that will stimulate private sector activity alongside its efforts to diversify the economy. With the current account surplus expected to exceed $300 billion in 2012, oil-exporting countries should have plenty of room to manoeuvre.
The outlook for oil importers is more subdued given the political and economic uncertainty clouding the region over the past year. Egypt and Tunisia are in the process of forming a new roadmap for economic and political reform while Syria is still in the midst of a revolution. Given the upheaval in many oil-importing countries, real growth was a mere 1.4% in 2011 and is only projected to increase to 2.6% in 2012.
Signup to our newsletter and follow us on Facebook and Twitter!
The financial and external environment has worsened for oil importers who have been hard hit with substantial declines in capital inflows and tourism. Current account deficits are expected to widen due to such declines. The Mashreq region will be hit badly in 2012 with large current account deficits projected in Syria (-6.1%), Jordan (-8.4%), and Lebanon (-13.8%).
Access to international markets has also deteriorated -- an international issuance of securities declined by 40 per cent in the first half of 2011. Borrowing costs have increased for governments and corporations due to widening sovereign bond and credit default swap spreads. High oil prices, while benefiting oil exporters in the region, are depleting external reserves for oil importers -- Egypt saw a decline of nearly 40% in foreign exchange reserves. Foreign Direct Investment (FDI) and portfolio inflows have also declined in many countries.
Oil importers will have to focus on fiscal consolidation. Governments have been under pressure to increase social spending and food and fuel subsidies to address social problems alongside pressures to raise wages and pensions. Current spending will not be sustainable in the long term. Governments will need to have more targeted subsidies so that additional financing is available for the private sector. Excessive government financing from domestic banks is crowding out much needed private investment. In 2011-2012 alone, oil importers’ financing needs are estimated to reach about US $50 billion.
Given the deteriorating financial and external environments and the pressure for governments to increase spending, the way forward will not be easy. Governments may find partial relief in the form of external financing from the international and regional community but long-term growth will only come about once a comprehensive reform agenda is put in place and implemented. High youth unemployment has long been an issue faced by the entire region and is partially responsible for the start of revolutions in the Middle East. Labour reforms addressing the mismatch between education and demand in the private sector should be a priority and will help in reducing social inequality. Governments will also have to address inefficient business environments where the cost of doing business is high and level the playing field so that government services are easily accessible to all. In Egypt it takes some firms 6 months to obtain an operating license while it takes others only 2 weeks. Finally, it is essential to provide access to finance especially with small and medium sized enterprises. This will only occur if a concerted effort is made to improve corporate governance and transparency.
Though there are large downside risks given the charged political environment in the region and sluggish global growth, there are reasons to be optimistic. Egypt and Tunisia have held successful elections and the governments seem committed to change. Reforms will take time and the road ahead will be rocky but in time it could lead to a region with democratic accountable governments working towards thriving economic and business environments. If future growth is inclusive, the people of Middle East and North Africa will prosper.