A snapshot of the Middle East and North Africa (MENA) region today reveals an extremely diverse picture. Syria, Iraq, Libya and Yemen are suffering from violent conflict that has devastated people’s lives, infrastructure and national economies, with spillovers to neighboring countries such as Jordan and Lebanon. Some of the “Arab-Spring” countries like Tunisia and Egypt are in the midst of challenging political transitions that have slowed economic growth and worsened macroeconomic imbalances. The rest, oil-rich or monarchies (or both), are experiencing reasonable growth and macroeconomic stability, although they too face problems of unemployment, skills mismatches and undiversified economies.
From a development perspective, four features of the current regional context are important to emphasize. Almost all the developing MENA countries are running large fiscal and external deficits. These deficits are largely financed by transfers from the Gulf countries, with only a small amount coming from the region’s long-standing partners in Europe and North America. Secondly, the region’s structural problems, such as high civil service wage bills and distorting, regressive and costly fuel subsidies, even though they exacerbate fiscal deficits, remain largely unaddressed, although some movement on this front has been seen in countries like Egypt. Third, on a positive note, the political consensus around the constitution in Tunisia, and constitutions and legislation in Morocco, Jordan and Egypt that give greater rights to women and protect freedom of expression and information, indicate that citizens are increasingly engaging in policymaking. Finally, the war in Syria, now in its fourth year, and intensifying violence in Iraq and Libya and more recently in Yemen, and the ISIS threat have not only caused untold damage to life and property, but risk spreading to neighboring countries and regions and compromising the medium term development outlook for the region as a whole.
The global economy is set for a gradual pick up but economic prospects in the Middle East and North Africa (MENA) region remain flat. Growth in MENA is expected to slow down in 2015 and range between 3.1 and 3.3% estimated by the World Bank and the consensus forecasts respectively, below the already low growth of last year and continue on the same path in 2016. If the security situation in Libya improves and oil exports increase, the regional average could surge to 4 to 5% in 2016. The main reasons for the continued, sluggish growth are: prolonged conflict and political instability in Syria, Iraq, Libya and Yemen; low oil prices that are dragging down growth in oil exporters; and the slow pace of reforms that is standing in the way of a resumption of investment. The continuation of this situation will significantly hurt the overall unemployment rate, now standing at 12%, and poverty in the region. In the meantime, low oil prices have significantly hurt the oil-rich countries in the region.
The group of oil exporters are estimated to grow by around 2.9% in 2015 with growth stagnating in developing oil exporters, at 1%. The Gulf countries could lose about US$215 billion in oil revenues, equivalent to 14% of their combined GDP, in 2015. Growth for this sub-group is estimated to range between 3.2 to 3.8% in 2015, predicted by the World Bank and consensus forecasts respectively, lower than last year. World Bank estimates that growth in developing oil exporters in MENA, pinched by cheap oil, is expected to drop to 1% compared to 6% prior to the oil collapse. Fiscal deficits are mounting, leaving the region with a deficit of 8% of GDP in 2015, after 4 years of surpluses.
Growth in developing MENA countries will stay at 2% in 2015. While still low, this figure is about half a percentage point higher than the previous year, owing to better-than-expected growth in oil importers-- estimated at 3.7 and 4.1% in 2015 and 2016, respectively, about one and a half percentage points higher than the previous year.
If oil prices remain low for a sustained period of time and the fiscal situation in the Gulf States deteriorate, it may slow growth in remittances outflows from GCC countries to the rest of the region, mainly Egypt, Yemen and Jordan (a major source of income). The World Bank estimates that while remittances are expected to grow at positive rates, there may be a small deceleration in the growth rates. Aid flows from GCC to the rest of MENA may also decline as a result of low oil prices.
Among developing oil exporters, Iran’s economic prospects are contingent on the timing of lifting of sanctions following a nuclear agreement framework that was reached early April, as well as on fluctuations in oil prices. Under this agreement which is expected to lead to a deal by end of June, a comprehensive lifting of sanctions is envisaged. This could significantly boost economic activity and accelerate growth to an estimated 5% in 2016 , and improve Iranians’ living conditions. In this case, however, the Iranian economy will face a massive oil windfall, which if not managed carefully, could lead to an oil boom, an overvalued real exchange rate and a loss of competitiveness of the non-oil tradable sector, a major source of foreign revenues. It could also lead to an increase in unemployment, as the oil sector does not create many jobs.
For those countries already in conflict, Iraq, Libya, Yemen, and Syria, economic prospects are grim. The ISIS insurgency and large military expenditures have hit the Iraqi’s economy hard. Growth is expected to turn negative in 2015 following a contraction of 0.5% in 2014 due to the decline in economic activity in the areas occupied by ISIS. Libya is in recession, as severe disruptions in the oil sector have interrupted oil exports, a major source of government and external revenues, in addition to the impact of cheap oil. The economy is estimated to have contracted by 24% in 2014, following a contraction of about 14% in 2013.
 The P5+1 and Iran issued a joint statement on general points of agreement on April 2nd. All parties will continue negotiations aimed at achieving a comprehensive accord in June.
Last Updated: Mar 31, 2015