A snapshot of the Middle East and North Africa (MENA) region today reveals an extremely diverse picture. Syria, Iraq, Gaza and Libya 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. The “Arab-Spring” countries of Tunisia, Egypt and Yemen 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 and Yemen. Third, on a positive note, the political consensus around the constitution in Tunisia, the successful completion of the National Dialogue in Yemen, 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 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 economic outlook for the MENA region in 2015 is slightly more favorable than in 2013-2014, when the region grew at 3% a year. The optimistic scenario is that growth will pick up to 5.2% in 2015 based on an increase in public and private consumption from expansionary fiscal policies, easing political tensions in Egypt and Tunisia, subsidy reforms in Egypt, and Jordan, and a resumption of oil production in Libya. The more likely outcome will be a more modest improvement (to 4.2%), as the region grapples with a civil war in Syria, the Islamic State’s (ISIS) control of large swathes of Syria and Iraq, a devastating war in Gaza, ongoing insurgencies in Libya and Yemen; largely unfinished transitions in Egypt and Tunisia (that have kept output well below potential), and uncertainty about world oil prices and shrinking surpluses in the GCC countries. Budget surpluses are expected to disappear in Saudi Arabia and shrink by half in Qatar in 2015, thanks to lower oil revenues and markedly expansionary fiscal policies.
Egypt and Tunisia will see a slight pickup in their 2015 growth rates, to 3.1 and 2.7% respectively. However, macroeconomic imbalances and a huge and unfinished reform agenda—including subsidy reform, business climate improvement, public sector reform and greater inter-regional equity—stand in the way of attracting domestic and foreign investment to trigger sustainable growth. Tunisia’s budget is skewed in favor of current spending (large wage bill and subsidies) at the expense of investment spending. As for the other countries, including Morocco, Algeria, Iran and the GCC, a combination of macroeconomic imbalances, political uncertainty, potential weaknesses in the world oil market, and a comparable set of policy distortions limit their ability to register high growth rates that could then bring the rest of the region along. In Iran, current spending is set to rise by 11% in the new budget and Kuwait is foreseeing a large increase in the housing subsidy, and an upward standardization of the public sector pay scale.
MENA’s medium term prospects are particularly grim considering the impact of the crises across the region affecting more than ten million people. A World Bank impact analysis estimated that the regional conflicts in Egypt, Tunisia, Syria, Yemen and Libya, with their spillovers into Lebanon and Jordan have cost the region roughly US$168 billion during 2011-13, the equivalent of 19% of their combined GDP. Syria’s real output is 40% lower than its pre-crisis level in 2010. It is estimated that around 75% of Syria’s population have fallen into poverty, with 54% in extreme poverty. Since the start of the war in 2011, unemployment has increased more than four-fold reaching 35% in 2013. In Gaza, a large number of people have fallen into poverty as food prices have increased sharply due to a halt in local food production and lower food imports in an economy where half of the population were already living in poverty. The unemployment rate in Gaza has jumped to 45%, with youth unemployment rate at 63% as of June 2014.
It is estimated that the Syrian war has cost Lebanon about US$7 billion in 2011-13 (about 23% of its GDP in 2010), lowering growth by 2.9 percentage points annually and worsening public finances in a country suffering from double-digit fiscal deficits. The spread of ISIS crisis has blocked trade between Iraq, Jordan and Lebanon. Iraq is the destination for about 20% of total Jordanian exports, and the closing of the cross-border has severely affected Jordan’s exports to Iraq. For Lebanon, Iraq is both a trading partner and a transit route to the Gulf, and the ongoing Iraqi crisis has blocked Lebanese exporters’ access to Gulf markets. Oil production recovery in Libya could take a long time due to the extensive repairs and maintenance that would be needed. Finally, in Yemen, crude oil production and export revenues continue to decline due to sabotage in the oil fields.
Last Updated: Sep 30, 2014