Slow Growth in the Middle East and North Africa Region Calls for Bold Approach to Economic Reform

February 7, 2014

A short term focus on political and security concerns has stood in the way of the structural reforms needed for growth and stability.

WASHINGTON, February 7, 2014 – Ongoing regional tensions, together with a challenging external environment, have hit the economies of the Middle East and North Africa (MENA) region hard. Economic growth is slowing, fiscal buffers are depleting, unemployment is rising, and inflation is mounting in seven transition countries in the region. Long overdue reforms, that could help spur growth and create jobs, have continued to be delayed to avoid further social and political discontent. The World Bank Group’s latest Quarterly Economic Brief argues that these countries should seize the opportunity to advance structural reforms needed to break the vicious circle of slow growth and political instability.

“Governments in these countries cannot afford to continue short term policy actions such as increasing public sector wages and subsidies”, says Shanta Devarajan, World Bank Chief Economist for the Middle East and North Africa region.  “These policies exacerbate a situation which is driven by long-standing structural weaknesses, including labor market rigidities, complicated and opaque regulations, infrastructure deficiencies, regressive and inefficient subsidies, and inadequate social safety nets”.

The report, entitled Middle East and North Africa: Growth slowdown heightens the need for reforms, assesses the macroeconomic situation in seven of the region’s most vulnerable economies-- Egypt, Tunisia, Iran, Lebanon, Jordan, Yemen and Libya -- post Arab Spring and emphasizes the urgency of the reforms needed to reverse the downward spiral of these economies.  The report outlines reform priorities and challenges for these countries. It cautions that raising general subsidies and public sector wages will impose fiscal pressures on the government and reduce the fiscal space available for spending priorities on health, education and investment in infrastructure.

Policymakers have resisted reforms lest they increase social discontent.  But reforms can both create fiscal space and help restructure the economy towards job creation and inclusive growth”, argues Lili Mottaghi, World Bank MENA Economist and principal author of the report.

Oil-importing countries, Egypt, Tunisia, Jordan and Lebanon suffer from years of underinvestment, especially in industry and infrastructure. In Egypt, the barriers to doing business are numerous and cronyism dominates the private sector.  In Tunisia, social and economic disparities across regions remain key economic challenges. The Lebanese economy suffers from inadequate public services, overcrowded public schools and limited access to government clinics and hospitals for low income people, especially in rural areas. In Jordan, urgent reforms including streamlining business regulations, removing labor market rigidities, and improving the efficiency of public spending, are needed for macroeconomic stability. And the influx of Syrian refugees has stretched all of these sectors to the limit.

The mismanagement of petroleum resources heightens the urgency for economic diversification in oil exporters in order to address long-term financial and economic stability in Iran, Yemen and Libya.  Public and quasi-public sectors are large and hindering private sector development in these countries. “The lack of access to financing, uncertainty in the legal environment and a fragile security situation are preventing private sector growth“, says Devarajan.  Streamlining general subsidies is urgent because of their large share in the government budget which reduces space for pro-poor and pro-growth expenditures. Governments’ fiscal positions in Yemen and Libya are deteriorating and short and medium term financing needs remain large.

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