The Middle East and North Africa (MENA) region is witnessing a period of unprecedented change brought about by the political upheavals that began in Tunisia in January, swept through Egypt and parts of the Gulf and continue to rage today most notably in Libya and Syria.
This social unrest is weighing on investor confidence, tourism, and foreign direct investment (FDI).
However, the ultimate outcomes of the ongoing turmoil could help transform the region by tackling deep-seated problems of authoritarian rule, weak institutions and poor governance, as well as sluggish growth and chronic unemployment--thereby leading to more inclusive and accountable governments in future.
With reports and analysis by international economist Moin Siddiqi and financial specialist Pamela Ann Smith
Until late 2010, the region was on course for strong recovery. Growth had rebounded from 1.8% in 2009 to 3.8% in 2010. But then regional political upheaval and soaring fuel prices changed the outlook, improving prospects for core oil exporters (except Libya and Yemen) and diminishing them for oil importers. Faced with real threats of uncontrollable civil unrest--fuelled by decades of political oppression combined with food price inflation--the authorities have had to provide more generous social benefits and a 'safety net' for vulnerable groups. The energy exporters can afford additional fiscal stimulus, but high debt levels and weak public finances already burden oil importers.
More specifically, countries expanded food/fuel subsidies, raised civil service wages and pensions, and approved additional cash transfers to low-income groups and tax reductions to mitigate the impact of surging commodity prices, to provide support for the unemployed and alleviate housing constraints. The resulting fiscal packages range widely, from 1% of GDP in Egypt and Lebanon, to about 22% of GDP in Saudi Arabia (spread over the medium term). The kingdom is investing $130 billion to finance low-cost housing projects, salary hikes for public employees and increased spending in education and social services.
The Gulf Cooperation Council (GCC) bloc is expected to support the region, with robust growth expected at between 6-8% in 2011, thanks to continued hydrocarbons expansion and mega infrastructure investments. Despite increased spending by Gulf governments, buoyant oil prices (projected at $107 a barrel, up from $79 in 2010) and higher production to stabilise global supply should underpin fiscal and external balances. Their combined current account surplus is estimated to more than double to $292 billion in 2011, according to the Institute of International Finance. Thus, foreign assets are projected to rise by $195 billion to $1.7 trillion. By contrast, growth for oil importers as a whole could average 2% or even below, down from 4.7% in 2010 based on the International Monetary Fund figures. Output in Egypt, Syria and Tunisia is expected to drop this year.
The GCC countries (except Bahrain) are not as vulnerable as peer Arab nations because of their ample monetary assets, small indigenous populations and highly generous welfare system. Despite unabated regional instability, consumer spending and business investment in the Gulf continue to increase, compared to the previous two years. The multilateral organisations, however, stress the region's oil exporters face challenges, including the need to further diversify their economies, create jobs for their nationals, develop their financial markets to support higher growth, and improve the management of public resources.
While the majority of MENA's population have access to basic infrastructure (compared to sub-Saharan Africa), the quality and reliability of service is a problem that impedes economic competitiveness and regional growth prospects. The popular protests highlight frustrations with poor social services, but government budgets in non-oil MENA countries are under pressure and the private sector perceives high political risks, so it's difficult to finance badly needed projects.
In recent years, the Arab region's spending on basic infrastructure has averaged 5% of GDP per annum, falling well short of 15% in other developing regions (notably China), which gives them a comparative edge. The MENA economies need to double their spending in infrastructure up to 10% GDP/year (equivalent to $75-100 billion) to sustain recent growth rates, whilst improving industrial competitiveness. "With added problems of one of the world's largest youth population, clearly infrastructure is both a need and a tremendous opportunity for creating jobs and driving productivity," said the World Bank.
MENA suffers from the world's highest jobless rates. More worrying is that unemployment remains largely a "youth phenomenon"--reported at 40% in Jordan, Lebanon...