Weak financial integration and broadly adequate countercyclical policies helped the oil-importing countries of the Middle East and North Africa (OI-MENA) pull through the global economic crisis relatively unscathed. A tentative rebound is expected in 2010. Though the situation differs across countries, common features stand out, including too much dependence on industrialized countries and too little on fast-growing emerging markets; insufficient political will and administrative capacity to tackle badly needed fiscal reforms; an unfortunate combination of rapid labor force growth and inflexible labor markets; and a heavy dependence on imported food at a time when food prices are volatile.
Differentiated Impact of the Crisis
Compared to other regions, the OI-MENA countries—Egypt, Jordan, Lebanon, Morocco, Syria, and Tunisia—were less affected by the global economic crisis, but certain countries suffered more than others. Jordan was hit hardest, as GDP growth dropped from 7.8 percent in 2008 to 2.8 percent in 2009. Tunisia saw GDP decline to 3 percent, while growth in Egypt and Syria was more robust—4.7 percent and 4 percent, respectively. Morocco’s GDP grew by 5 percent and Lebanon was least affected; its GDP grew by 8 percent in 2009.
The drivers of growth and sources of contraction differed across the OI-MENA countries. The sharp deceleration in Jordan was triggered by a 20 percent drop in exports and a 15 percent decline in foreign direct investment (FDI) inflows. Morocco’s resilience was largely due to generous rainfall, which raised agricultural output by 30 percent while non-agricultural activity grew by only 1 percent in 2009. Construction and services drove Lebanon’s impressive growth. Surprisingly, Lebanon’s exports and capital inflows also expanded in 2009.
In Egypt and Syria, generous stimulus packages were essential to maintaining growth.
In Egypt—which saw FDI fall by 40 percent, exports by 14 percent, and remittances by 9 percent—and Syria—where oil exports contracted by 37 percent—generous stimulus packages were essential to maintaining growth. In Egypt, the fiscal policy package was equivalent to 3 percent of GDP, and the central bank cut lending rates six times, resulting in a cumulative easing of 375 basis points. Syria’s fiscal stimulus—which amounted to 5 percent of GDP—raised investment and civil servants’ wages and boosted domestic demand.
Stimulus packages in other countries were less successful. In hardest-hit Jordan, a 54 percent falloff in foreign grants followed by a rise in the budget deficit—which reached 8.9 percent in 2009—limited the rescue package. In Tunisia and Morocco, authorities responded with packages to preserve employment, ease credit, and support exports, but exports still fell drastically—by 20 percent in Tunisia and 25 percent in Morocco—and significant job loss occurred in manufacturing.
Both Egypt and Syria are recovering well, with growth rates of 5 percent expected in 2010 amid higher oil prices. With Syria’s regional relations improving, its non-oil exports and tourism revenues have also expanded over the first half of 2010. But agriculture, which accounts for 20 percent of GDP, suffers from recurrent droughts and remains a major concern. In three years, employment in agriculture tumbled by 27 percent as farmers migrated to the cities in search of alternative jobs.
The recovery in Jordan and Tunisia is expected to be more timid. Jordan’s growth rose to 3.5 percent over the first four months of 2010, and signs of revival are emerging in exports, remittances, and FDI. GDP in Tunisia is expected to grow by 4 percent in 2010, but it remains below its potential.
Morocco and Lebanon, on the other hand, are expected to decelerate. Unfavorable climate conditions will likely cut Morocco’s growth to 4 percent, despite the recovery in the manufacturing and services sectors. Growth in Lebanon is expected to decrease by 2 percentage points in 2010. A shorter tourist season due to the early Ramadan this year and rising security tensions may further limit prospects.
Though prospects vary across OI-MENA, the countries share many structural problems. Most do not have a sufficient number of export partners and are now vulnerable to the slowdown in advanced countries. Morocco and Tunisia, in particular, depend excessively on one partner—the European Union. In Egypt, diversification is slightly better, with a rebound in exports hinging on economic recovery in Europe and the United States. Tourism revenues and remittances, however, have already increased, helping to dampen the current account deficit. Jordan faces the consequences of a slow economic recovery in the Gulf Cooperation Council (GCC) countries, leaving it with little room for reform. With a more diversified set of trading partners, Syria is less vulnerable.
Deteriorating fiscal and current account balances also pose a threat across the OI-MENA countries, particularly in Lebanon and Egypt. In Lebanon, both budget and current account deficits exceed 10 percent of GDP. Remittances and loans, together with sound monetary policies, have kept sovereign debt sustainable so far but reforms have been sluggish and ineffective. The scale of sovereign debt, which has reached 1.5 times GDP and drains almost half of budget revenues in interest payments, poses an obvious threat. In Egypt, the budget deficit will exceed 8 percent and total government debt will reach 74 percent of GDP at the end of 2010. The fragility of government accounts leaves Egypt with little room to counter any unexpected downturn.
Most OI-MENA countries do not have a sufficient number of export partners and are now vulnerable to the slowdown in advanced countries.
In Jordan, the fiscal outlook is uncertain. Revenues rose by 7 percent and public spending shrank by 10 percent over the first half of 2010. However, this was due to an exceptional increase in foreign grants coupled with a severe reduction in capital spending. Both fiscal and external deficits will reach 7 percent of GDP in 2010 and public debt is expected to approach 66 percent of GDP.
The budget deficit in Syria is predicted to shrink to 4 percent of GDP in 2010 from 9 percent in 2009. Targeted cash transfers to vulnerable households adopted in 2009 saved the government the cost of universal oil subsidies. Syria is also in a stronger debt position, having cut debt from over 100 percent of GDP in early 2000 to less than 30 percent currently.
Morocco and Tunisia enjoyed healthy public accounts before the crisis but are now entering the deficit zone and need to be cautious. Their fiscal deficits are set to jump to 4 and 3 percent of GDP, respectively, by the end of 2010.
Macroeconomic and Structural Challenges
All OI-MENA countries face the challenge of maintaining sustainable macroeconomic balances while supporting growth and creating jobs for their expanding labor forces.
The steps necessary to address fiscal deficits vary by country. In Lebanon, fiscal revenues must expand to improve public services. Although the value added tax (VAT) rate, currently 10 percent, can be increased, an increase in direct taxes should also be considered. Egypt needs to pursue VAT reform and secure its expected benefits, as does Syria.
Egypt should also rationalize its universal subsidy system by targeting public support to the poor; Morocco should do the same. Syria must lower its dependence on oil revenues, which currently represent 20 percent of government resources. Jordan needs to secure sustainable domestic taxes and maintain sufficient capital spending to support the country’s future growth.
OI-MENA countries need to provide enough jobs to satisfy their growing labor forces. Authorities need to take firm action to ease recruitment and enhance labor market flexibility.
Diversification of economic partners is also urgently needed in OI-MENA countries. The sluggish recovery in Europe and the United States, and the gradual shift of economic power from the West to the East, provide policymakers in OI-MENA countries with an opportunity to diversify their partners.
In addition, OI-MENA countries need to provide enough jobs to satisfy their growing labor forces. Unemployment rates are approaching 15 percent in Tunisia and Jordan, and exceed 10 percent in the other countries. Authorities need to take firm action to ease recruitment and enhance labor market flexibility.
Finally, the OI-MENA countries—all net food importers—should rethink their food security policies. Rising and volatile food prices undermine their trade and fiscal balances, harm large segments of their population, and often lead to social unrest.
Lahcen Achy is a resident scholar at the Carnegie Middle East Center in Beirut.