MENA states at the crossroads.

Author:Siddiqi, Moin
Position:Business/MENA - Middle East and North Africa - Essay

Without reforms and significant capital inflow from both private and official sources, the MENA region risks being trapped in a vicious cycle of economic stagnation and sociopolitical strife. Some of the ways in which such a calamity might be averted are presented in this report, written exclusively for The Middle East by international economist

THREE YEARS INTO THE ARAB SPRING the citizens of countries in transition have yet to see any tangible dividends from turbulent socio-political reforms and remain largely pessimistic about their future.

The post-revolution era could see one of two scenarios: We could see economic deterioration, if political instability hinders stabilisation let alone reform--thus condemning the region to prolonged stagnation or at best tepid growth; or we could see a new economy emerging, as newly elected but inexperienced governments gradually find a way of ending economic disruption and begin genuine democratic reforms geared at enhancing opportunities for their people. What is needed now is a clear agenda.

In fact, political risks in the Middle East and North Africa (MENA) are among the highest across emerging and developing regions. "The Arab countries in transition face a predicament. Political uncertainty makes it difficult to introduce far-reaching and comprehensive reforms. At the same time, a lack of improvement in economic conditions could reinforce socio-political frictions and deal further setbacks to transitions in many countries, further delaying a broader return of confidence and private investment," said the International Monetary Fund (IMF) Middle East Department Director Masood Ahmed.

The divergence in performance between oil and non-oil countries is striking despite moderation of overall growth in the former due to levelling-off oil production. Among the latter, political disorder, deteriorating internal security, and rising socioeconomic tensions continuing to weigh on commercial activity. Available indicators point to continued sluggish growth of 2.8% in 2013 (excluding Syria) or 1.6% if Syria is included, well below the average growth of 5.7% over 2006-10, thus pushing more people below the poverty line.

Moreover, external and fiscal buffers of many countries are running low. Soaring public spending (mostly on subsidies) and depleting budgetary receipts amid growing instability further hiked already high fiscal deficits and public debt to an unsustainable path. "Over the past three years, in response to growing social demands and higher food/fuel prices, governments in most oil-importing countries have expanded spending on generalised subsidies, public employment, and wages, while revenues have fallen due to the economic downturn," the IMF noted. The weighted average fiscal deficit and government debt is expected to remain elevated at about 10% and 86%, respectively, of GDP in 2014. Gross budgetary financing...

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