In the midst of a global economic crisis that has left no country untouched, the Middle East and North Africa (MENA) region has so far emerged among the relatively less affected.  However, by the same token, governments can continue to avoid enacting the deep economic and governance reforms required for long-term economic growth in the region. 

At a discussion hosted by the Carnegie Endowment, Masood Ahmed, director of the Middle East and Central Asia Department of the International Monetary Fund, outlined how the MENA region is weathering the global downturn.  Marina Ottaway, director of the Carnegie Middle East Program, shed light on the political implications of the crisis.  Uri Dadush moderated.

Oil Exporters Use Reserves to Weather the Crisis

Oil exporters, which accumulated sufficient reserves pre-crisis, are now drawing down those reserves, Ahmed explained, enabling them to maintain high public spending despite severely diminished revenues from the drop in oil prices. As a result, these economies are faring relatively well through the downturn, as public spending has propped up domestic activity in the face of declining exports and despite declining government revenue. 

Policy measures have not relieved all crisis-driven strains; asset prices have fallen, financial sector indicators (such as credit default swap spreads and corporate profits) have worsened, and, despite monetary easing, credit to the private sector has decreased.  Further, Ahmed noted that the continuation of the oil exporters’ relative success is subject to two conditions: first, that the balance sheets of financial institutions do not face further deterioration; and second, that the global recession and the resulting low oil prices does not become deeper and protracted, such that oil-exporters deplete their reserves and become unable to spend their way through the downturn. 

Ahmed recommended that countries with large reserves and small populations, predominately Gulf Cooperation Council members, continue to fund high public spending through the crisis.  However, for those countries that have large populations relative to oil reserves, such as Iran, Sudan, and Yemen, he encouraged policy makers to be selective and specifically prioritize expenditures to provide a safety net for the poorest.  Ahmed also noted that, in time, all oil exporters would need to diversify their economies away from just the oil and gas sector to achieve long-term economic growth.

Oil Importers Benefit from the Relative Success of Their Neighbors

Oil importers in the MENA region face more challenging conditions, as they have been more exposed to plunging foreign investment, which resulted in growth slowing from between 4 and 6 percent in 2008 to an expected 2 to 4 percent in 2009.  With lower reserves, these countries have been less able to spend their way through the crisis, Ahmed explained.  Unemployment, which was high before the downturn, has since been exacerbated. 

However, largely through so-far resilient remittances, tourism and exports, these countries have benefited from the economic stamina of their oil-exporting neighbors and have therefore weathered the crisis relatively well compared the countries outside the MENA region.  Remittances from migrants living in the oil-exporting countries have held up not only because of the relative economic stability of their destination countries, but also because migrants typically maintain the amount of money that they send home, even when their income drops. Oil importers have also benefited from resilient tourism revenue, which may be the result of travelers substituting Middle East destinations for more expensive European ones. 

Ahmed recommended that policy makers in these nations quickly make use of any limited scope for counter-cyclical policies. He also suggested that oil importers protect their most vulnerable, noting the uneven safety net coverage among these nations.  Finally, like for oil-exporters, Ahmed encouraged governments to press ahead with growth-enhancing reforms.

Reluctance to Enact Economic Reforms Remains in Oil Exporting Countries

Despite their relative economic stability, oil exporters in the MENA region still face some worrisome challenges, stressed Marina Ottaway.  Although they may be able to buy their way out of some of the crisis’ fallout, this may have enable policy makers in these countries to avoid long-term economic reforms.  She noted that the crisis is unlikely to drive oil exporting economies to take desperately needed steps towards diversifying their economies and better preparing their citizenry for existing jobs.

Effects of Decreased Remittances

Oil importers are vulnerable to a potential future drop in remittances, which would directly injure recipient families and indirectly hamper the informal sector that remittance flows often fund.  Migrants working in construction are particularly in danger of losing their source of income, as the sector faces severe contractions. Ottaway predicted that these countries have not yet seen the worst in terms of declines in remittances.

Despite the increase in social tensions that dropping remittances might precipitate, Ottaway predicted that the fallout from the crisis will not inspire oil importing governments to enact long-needed economic reforms.  Instead, they have hunkered down in response to the crisis, oppressing opposition groups rather than attempting to cooperate with them.  Perhaps even more disheartening, opposition groups have missed the opportunity to organize a concerted response to the social unrest resulting from the crisis; they have failed to generate a cogent agenda for reform.

Ottaway outlined two potential paths for oil exporting countries: one in which the increase in social distress forces the governments to reform, and the other in which the economic situation deteriorates while the government continues to do nothing.  Ottaway predicted that the second situation would emerge, leading to an extremely unsettled political situation.

Question & Answer

When asked about the role of regionalism, Ahmed noted the trends towards greater regional cooperation, citing the increasing cohesion of the Gulf Cooperation Council (GCC) members.  However, he reminded the audience of the challenges facing regional cohesion, as exemplified by the UAE’s recent rejection of the GCC’s single currency initiative.  Ottaway also noted the inherent limitations of regionalism among GCC countries, because their economies, which are mostly based on oil exports, make for poor trading partners.

In response to concerns that his recommendation for expanded public spending among oil exporters might lead to inappropriate government intervention into the market, Ahmed highlighted the large role that governments already play in MENA economies.  Oil rents enter the market predominately through the government, and much of the private sector depends on government contracts for business.  Ottaway noted that the government is so involved in these economies that it is often difficult to define where the public sector ends and where the private sector begins.