Overview

The Middle East and North Africa (MENA) region is in turmoil. Syria, Iraq, Libya and Yemen are in civil war, causing untold damage to human lives and physical infrastructure. Fifteen million people have fled their homes, many to fragile or economically strapped countries such as Jordan, Lebanon, Djibouti and Tunisia, giving rise to the biggest refugee crisis since World War II. The current turmoil in Yemen has set that country’s development back several years. Blockades and repeated cycles of violence have made Gaza’s unemployment rate the highest in the world and with Gross Domestic Product at only 40 percent of its potential. The relatively stable oil exporters, such as Algeria, Iran and the GCC, are grappling with low oil prices alongside chronic youth unemployment and undiversified economies. On a positive note, political developments in Tunisia, Morocco, and Jordan indicate that citizens are increasingly engaging in policymaking.

ECONOMIC OUTLOOK

This year appears to be one of the toughest for the region as MENA governments face serious policy challenges. The biggest challenge for oil exporters is managing their finances and diversification strategies with oil prices below $45 a barrel. Fiscal consolidation in a difficult sociopolitical environment and spillovers from conflicts are creating challenges for oil importers as well. Persistently low oil prices, lower fiscal revenues and currency shortages have forced MENA governments to take austerity measures including cutting capital and current spending. For example, more than $20 billion of projects may be canceled in Saudi Arabia. This comes at a time when ongoing conflict and war in Syria, Iraq, Libya and Yemen are ravaging these economies and the refugee crisis is draining fiscal space in neighboring countries. Furthermore, private sector growth, a source of job creation, has slowed down making it difficult to absorb the large of number of unemployed. The latest labor market data show that the unemployment rate has remained stubbornly high Egypt, Iran, Iraq, Jordan, Morocco and Tunisia in 2016. Real GDP growth in MENA is projected to stay at its lowest level for the fourth consecutive year, at around 2.7% in 2016, half a percentage point less than that predicted in April 2016.

Regional growth is expected to improve slightly to 3.2 and 3.6 percent over the next two years, as governments across the region are consolidating their fiscal stance, undertaking reforms and trying to diversify their economies away from oil.  The regional fiscal deficit is expected to stay at 9.1 percent of GDP in 2016, unchanged from the previous year. Nevertheless, all three sub-groups (GCC countries, developing oil exporters and oil importers) are expected to record significant deficits in 2016 and the next two years but with the prospects of reducing them going forward.

Growth in oil exporters in MENA will remain subdued due to a sharp drop in growth in the GCC countries. Growth in the Gulf countries is expected to fall to 1.8 percent in 2016, half the rate seen in 2015. Prolonged low oil prices are forcing governments to take austerity measures mostly through spending cuts, concentrated on capital expenditure. Spending cuts have also lowered growth in non-oil sector. Non-oil growth in Algeria and Oman is estimated to fall to 3.7 percent in 2016 compared to 5 and 7 percent respectively a year ago. The economies of developing oil exporters in the region are doubly hit by the slump in oil prices and civil wars. Growth is expected to turn positive in 2016 from negative 0.3 percent but this is due to expectations of Iran and Iraq producing more oil. These countries are facing major fiscal and external imbalances due to the high cost of war, low oil prices and a decline in trade.

For developing oil importers, the outlook is slightly better but remains weak. Oil importers were badly hit by terrorist attacks, spillovers from conflict in the region and lower financial outflows from the Gulf. Growth is expected to fall to 2.6 percent in 2016 for the subgroup as a whole, before improving slightly to an average of 3.5 percent for the projection period.  Fiscal and external account deficits are expected to remain stubbornly high throughout the projection period. 

Last Updated: Sep 30, 2016

Given the ongoing fragility and conflict in the region, the World Bank Group launched a new regional strategy for the Middle East and North Africa in October 2015. Instead of taking conflict and violence as given and working around it, this new strategy, entitled - "Economic and Social Inclusion for Peace and Stability in the Middle East and North Africa: A New Strategy for the World Bank Group" - puts the goal of promoting peace and social stability in the MENA region at its center. The strategy is built around four pillars (“the 4 R’s”) that respond to both the underlying causes of conflict and violence as well as their consequences through development interventions that foster inclusion and shared prosperity. The four pillars of the strategy are as follows:

(i)         Renewing the social contract – to generate a new development model that is built on greater citizen trust; more effective protection of the poor and vulnerable; inclusive and accountable service delivery; and a stronger private sector that can create jobs and opportunities for MENA’s youth;

(ii)       Regional cooperation – particularly around regional public goods and sectors such as education, water, and energy so as to foster greater trust and collaboration across MENA countries;

(iii)     Resilience - to refugee and migration shocks by promoting the welfare of refugees, internally displaced persons (IDPs), and host communities by focusing on building trust and building their assets; and

(iv)     Reconstruction and recovery – through a dynamic approach that brings in external partners, leverages large scale financing, and move beyond humanitarian response to longer-term development wherever and whenever conflict subsides.

In implementing this strategy, the WBG is relying heavily on both deepening and expanding partnerships with national, regional, and global actors, especially the United Nations (UN) and the Islamic Development Bank (IsDB). With respect to financing, the WBG will continue to expand its investment in the region, but in addition to our own funds, the WBG is working with the UN and IsDB on leveraging and mobilizing global resources through a new MENA Financing Initiative to meet the extraordinary financing needs of the region. Finally, our knowledge work (including our growing RAS program) will be of prime importance in informing and mobilizing the support for the strategy and will lead (rather than follow) our lending. 

RECENT LENDING AND ANALYTICAL WORK

IBRD/IDA lending for the MENA region increased from US$2.8 billion in FY14 and US$3.5 billion in FY15 to US$5.2 billion in FY16. The increase in FY16 lending reflects a higher level of development policy lending in Egypt and Iraq, and an emergency operation for Iraq to support the reconstruction of conflict-wrecked infrastructure and restore public services in areas brought under government control. The FY17 Q1 lending (July-September) is expected to account for close to US$1 billion, including the Emergency Crisis Response Project for Yemen and operations for Lebanon and Jordan utilizing exceptional IDA allocation as part of the World Bank's response to the Syrian refugee crisis.

A number of analytical studies have been published recently addressing central themes in the region’s political transitions. Jobs or Privileges: Unleashing the Employment Potential of the Middle East and North Africa shows that policies that lower competition in MENA also constrain private sector development and job creation. Trust, Voice, and Incentives: Learning from Local Success Stories in Service Delivery in the Middle East and North Africa illustrates how the weak external and internal accountability relationships prevalent in the MENA political and administrative spheres undermine incentives toward policy implementation and performance, and how such a cycle of poor performance can be counteracted. Joint WB-UNHCR report “The Welfare of Syrian Refugees: Evidence from Jordan and Lebanon” assesses the poverty and vulnerability status of Syrian refugees living in Jordan and Lebanon, evaluates the performance of existing policies toward refugees, and determines the potential for alternative policies. In 2016, three regional reports were issued in the context of MENA Quarterly Economic Briefs on “The Economic Effects of War and Peace” that explored the economic effects on Iraq and Syria, as well as their immediate neighbors; “Syria: Reconstruction for Peace” that looked at the cost of rebuilding a peaceful Syria; and “Whither Oil Prices?” that analyzed oil markets over the next few years.

The World Bank remains engaged in a wide variety of development work but is also focusing on alleviating some of the challenges arising from the crisis gripping much of the region. In Jordan, the World Bank is supporting service delivery to the communities hosting up to 40 percent of Syrian refugees. In Lebanon, 243,000 people affected by the Syrian conflict benefited from the Municipal Services Emergency Project investments during the first 18 months of implementation. In Yemen, using the new implementation mechanism involving the WHO and UN agencies during the ongoing conflict, scheduled drug distribution campaigns for school-aged children were resumed and successfully completed under the Schistosomiasis Control Project. The US$200 million Egypt Emergency Labor Intensive Works loan approved in 2012 has resulted in rehabilitation of over 8,500 classrooms and 250 youth centers, the rehabilitation of over 170 km of rural roads, and the cleaning of more than 3,000 km of canals. In Morocco, the World Bank helped improve 13,500 km of rural roads, resulting in increased rural accessibility to the country's lagging regions from 54 percent in 2005 to 79 percent in 2015. In West Bank and Gaza, 1.7 million people representing 40 percent of the population have received access to improved water sources since 2013. Djibouti's urban electricity project in Balballa brought street lamps, transformers, and 4,000 household power lines to 27,000 residents.

The World Bank Group has stepped up its partnerships with bilateral and multilateral donors, regional development banks, Islamic financial institutions and emerging country donors. Less traditional partnerships are just as crucial: one of the sharp lessons of the recent political awakening has been the urgent need to reach out more consistently and consult across a wide spectrum of society, including civil society, academics, NGOs, and the private sector.




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