The Middle East and North Africa region is undergoing a period of unprecedented change, marked by social unrest and surging commodity prices. The unrest is weighing on investor confidence, tourism, and foreign direct investment. Meanwhile, higher oil prices are strengthening the region’s oil exporters, but—combined with rising food prices—weakening its oil importers.
Throughout the region, countries must create more jobs and generate inclusive growth. Their immediate challenge is to maintain social cohesion and macroeconomic stability. Aiming for the former, governments have understandably increased spending, but this is not a long-term solution. Each country must develop its own approach for political, social, and economic transformation, while the international community needs to support these changes with technical assistance and financial aid.
Until late 2010, the MENA region was on track for recovery. Growth had accelerated from 2.1 percent in 2009 to 3.9 percent in 2010. But then social unrest and surging commodity prices changed the outlook, improving prospects for oil exporters and diminishing them for oil importers.
|IMF growth projections for the Middle East, North Africa, Afghanistan, and Pakistan (MENAP)|
|(real GDP growth, percent change)|
|Gulf Cooperation Council (GCC) growth||0.2||5.0||7.8|
|Sources: National authorities; and IMF staff estimates and projections.|
|112011 data exclude Libya.|
|2Oil exporters include Algeria, Bahrain, Iran, Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia, Sudan, United Arab Emirates, and Yemen.|
|3Oil importers include Afghanistan, Djibouti, Egypt, Jordan, Lebanon, Mauritania, Morocco, Pakistan, Syria, and Tunisia.|
Higher food and fuel prices and social unrest also led governments to increase spending. More specifically, countries expanded food and fuel subsidies, raised civil service wages and pensions, and approved additional cash transfers and tax reductions to offset the impact of rising commodity prices, provide support for the unemployed, and alleviate housing constraints. The resulting fiscal packages range widely, from 1 percent of GDP or less in the oil-importing countries of Egypt, Lebanon, and Pakistan, to about 22 percent of GDP in the oil-exporting country of Saudi Arabia (spread over several years). Some countries can easily afford this spending, but others will find public finances and debt levels strained.
Advantage for oil exporters
Driven by rising oil prices and expanded oil production, average growth in the region’s oil exporters (excluding Libya, owing to the country’s uncertain economic situation) is expected to increase from 3.5 percent in 2010 to 4.9 percent in 2011.1 The Gulf Cooperation Council (GCC) countries2 in particular are racing ahead as they expand oil production to stabilize global supply. Qatar, for one, is expected to register the highest growth (20 percent), underpinned by continued gas expansion and large public investments.
Increased government spending is also expected to push up growth, raising non-oil GDP growth in the GCC countries from 4.2 percent in 2010 to 5.3 percent in 2011. In the oil exporters as a whole, however, non-oil GDP growth is expected to remain flat at 3.5 percent.
Notwithstanding this increased spending, rising oil prices (projected to increase from $79 per barrel in 2010 to $107 per barrel in 2011) and increased production are expected to strengthen oil exporters’ fiscal and external balances. Their combined current account surplus (excluding Libya) is estimated to more than double to $380 billion in 2011.
Despite this overall positive outlook, the region’s oil exporters continue to face challenging structural issues, including the need to further diversify their economies, create jobs for their populations, develop their financial markets to support economic growth, and improve the management of public resources.
Test for oil importers
Meanwhile, the outlook for the region’s oil importers is mixed.3 Growth for the group as a whole is set to slow to just over 2 percent in 2011, down from 4.7 percent in 2010, and even this rate is subject to mostly downside risks.
For Egypt and Tunisia, growth is expected to be 2.5–4 percentage points lower in 2011 than in 2010, reflecting disruptions to economic activity during the protests, a decline in tourism, lower foreign and domestic investment, and uncertainty ahead of upcoming elections. Political uncertainty is also weighing on Lebanon’s economy, and the effects of last year’s floods are holding back growth in Pakistan. In most other countries, however, growth has continued to pick up, with Jordan, Mauritania, and Morocco benefiting from high prices for commodities such as phosphate and iron ore.
Higher food and fuel prices will inflate import bills by (on average) about $15 billion—or nearly 3 percent of GDP—thereby either raising inflation or worsening fiscal balances (depending on the extent of a country’s subsidies). Meanwhile, political turmoil is expected to constrain tourism and investment. This, along with higher interest rates and demands for greater government spending, will add to fiscal pressures.
In the short term, governments with limited fiscal space will need to consider offsetting some of the additional spending with cuts elsewhere. In the medium term, deficits cannot continue to finance policies to alleviate social tensions. Instead, measures will be needed to raise revenues and reduce waste in public spending. In addition, well-targeted social safety nets will have to replace general subsidies.
Throughout the region, the slow-growth equilibrium of past years failed to generate enough jobs for the growing labor force, with youth unemployment rates ranging from 21 percent in Lebanon to 30 percent in Tunisia and 32 percent in Morocco. Moreover, there was an increasing sense that business environments were unfair, set up to benefit a privileged few. The region’s unfolding protests make it clear that reforms—and even rapid economic growth, as exhibited periodically in Tunisia and Egypt—will not succeed unless they create jobs and are accompanied by social policies that support the most vulnerable.
Much work remains to be done to boost job creation and enhance the employability of young people. In the short term, policy makers should bring forward labor-intensive infrastructure investments, provide tax incentives to small- and medium-sized enterprises, and introduce well-designed training programs. But these measures are no substitute for a comprehensive employment strategy. Such a strategy must reorient education to better equip graduates with the skills that employers seek, improve the business climate, and dismantle labor market rigidities that discourage firms from hiring.
For growth to be sustainable, it must be inclusive and broadly shared. At the same time, a socially inclusive agenda cannot survive without macroeconomic and financial stability. Therefore, it is all the more vital for countries to contain rising fiscal imbalances, growing debt and debt-servicing costs, inflation, and capital flight right now. These threats to macroeconomic and financial stability—if not arrested quickly—could undermine confidence and derail any new social agenda.
It is equally important for the international community to support the region’s transformation by providing technical assistance and helping to meet countries’ financing needs to contain the buildup of debt. The International Monetary Fund, for example, could allocate about $35 billion to the region if requested.
Each country will need to find its own, homegrown path for development, but all need to accomplish some common goals, including: stabilizing the macroeconomic environment to provide confidence and attract investment; generating enough private-sector jobs to absorb those currently unemployed and a fast-growing labor force; giving citizens access to economic opportunity; providing the most vulnerable with social protection; and creating strong, transparent institutions that ensure accountability and good governance. It will be equally important that the international community provide technical and financial assistance to support the region’s longer-term political, social, and economic transformation.
While the months ahead will be challenging and inevitably marked by setbacks, the region has many strengths upon which to build: a dynamic and young population, vast natural resources, a large regional market, an advantageous location, and access to key markets. These—along with astute policymaking and international assistance—will help it navigate the current challenges and emerge stronger economically as a result of the Arab Spring.
Masood Ahmed is director of the IMF’s Middle East and Central Asia Department.