I am honored to be here among you tonight to discuss an important issue for the Arab world. What I propose to discuss is the ongoing regional unrest and its implications. I will divide my talk into two parts. In the first part, I will sketch out the economic repercussions of the ongoing unrest. In the second part, I will dwell on some long term development challenges highlighted by the unrest.
Economic Impact of the Unfolding Developments
Just prior to the political turmoil, the Middle East and North Africa (MENA) region was on a path of economic recovery as the global economy rebounded. The World Bank projections, undertaken in last quarter of 2010, for the MENA region foresaw a relatively robust performance for the period 2011-12. MENA was projected to grow at 4.2% and Tunisia and Egypt, just to single out the two countries which saw their political leaders toppled, were projected to grow at 5% and 6%, respectively. These rates are higher by about one percentage point than the growth rates observed in 2010.
For the countries currently being affected by the unrest, namely Tunisia, Egypt, Yemen, Libya and Bahrain, slippages in economic growth, fiscal revenues and tourism and FDI receipts are now inevitable. Since events are still unfolding it would be premature to project with any precision the economic outlook for 2011 or 2012. However there are few trends which capture well the impact of the economic disruptions and swift policies responses announced.
Fiscal and external pressures are likely to be high. A number of developments are likely to complicate macroeconomic management particularly in countries facing high public debt/GDP ratio and deficit on external account. To preempt public and under pressure of unions, most Governments have announced generous wage increases, enhanced subsidies, generated more public sector jobs, and are in process of preparing a range of development programs to generate additional employment and address poverty concerns. Some preliminary estimates suggest that cost of these concessions could be anywhere around $500 million or so for vulnerable economies like Yemen and $5 billion in Kuwait. While this spending is affordable for oil exporting countries benefiting from rising oil prices in wake of the decline in Libya’s oil production, such expenses are likely to result in significant slippages in fiscal deficit that have added financing burden of rising oil bills. On external front, the slowdown in FDI is quite significant for a number of countries, and in some instances outflows have resulted in drawdown of reserves for now.
Inflationary pressure will rise depending on trends in international fuel and food prices. This will impose strain on the poor. Evidence in the region already indicates that number of people living under the poverty line is highly sensitive to the choice of poverty line.
Impact on Tourism sector of current events is likely to be sizeable. First, tourism is an important part of GDP for most MENA countries –at 13% and 16% respectively for Egypt and Tunisia in 2010. Second, tourism has been for sometime central for employment generation for these two countries – responsible for 11% and 15% of the total employment in 2010 and a disruption to has implications for people which are already afflicted by double digit unemployment rates. Third, the sector is also a main provider of hard currency revenues (for Egypt, these were estimated at over $14 billion in 2010, close to 30% of all exports). Any prolonged instability can carry serious adverse short-run effects for this key economic sector—as tourists can easily switch to alternative holiday destinations.
Rising Spreads in debt markets. The turmoil in the MENA region and the consequences of a possible civil war in Libya dominated debt and stock markets around the region in February. Credit Default Swap (CDS) spreads increased to a varying degree in a number of countries, with Bahrain and Saudi Arabia experiencing the most increase. There has been a number of sovereign credit rating downgrades in the region, notably Tunisia, Egypt, Bahrain and Libya. The stability of domestic financial systems and capital flight in the MENA region are of potential concern, beyond higher financing costs as represented by the increase in spreads via financial markets. On the other hand, the risk for an increase in risk premium for developing countries in general is low.
Volatility in stock prices in the MENA region and around the world increased significantly as the effect of higher oil prices outweighed positive news about the recovery in the US. For instance, in MENA region, the stock exchange in Egypt remains closed after falling 16 percent and implications of its opening have yet to emerge. In Tunisia, trading was suspended twice and the overall drop was 11 percent. In Saudi Arabia, the stock market fell by nearly 20 percent since mid-February. The political turmoil may also be dampening the recovery of credit activity in several countries.
The critical concern for the global economy and the region lies in the potential for the spread of instability to large oil exporting economies. We have already seen the impact on oil prices of the events unfolding in Libya. Oil prices–the most immediate channel of transmission of this regional shock to the global economy – have clearly risen in the past three weeks. It should be noted, however, that a pre-existing trend rise in oil prices started already in the second quarter of 2010—way before the political unrest.
Beyond these short term effects lie some longer term challenges. Let me now turn to these.
Long Term Development Challenges Highlighted by Unrest
The recent political turmoil in the Arab world has highlighted several deep-rooted development challenges. I would like to preface my remarks here by noting that the challenges I am about to discuss are not new, these have lingered for decades and several agencies and analyst have discussed these. What is new is the salience and prominence assigned to these challenges following the intense public reaction. No one however envisaged that prolonged frustration with delays in addressing these challenges would prompt a Youth revolution in Tunisia which would have spread so rapidly and widely across the Region. In the spirit of setting priorities, I will focus on the most significant challenges (though this is by no means an exhaustive list). In order of significance these challenges can be grouped under four categories: weak governance; inequitable growth, high unemployment, and food insecurity.
Weak governance: It is easy to justify the inclusion of weak governance as a development challenge for the Arab world. Above all else, recent political events in the region seem directly linked to a demand among the citizenry for freedom, greater political accountability and more transparency from public officials. Among the measures being called for by an aroused citizenry are democratic elections. For accountability to be sustained, of course, more will be needed. In particular, it will be important to ensure a freer media, and independent NGOs; to have clear conflict of interest regulations for public and elected officials; to allow greater access to information through freedom of information laws; and to reduce economic concentration (which inevitably leads to political power) by reducing barriers to entry and fostering competition and anti-trust policies.
Inequitable growth: The Arab world has had moderate levels of growth in the last two decades but this growth has not been equitable. There are several manifestations of this including high levels of poverty and inequality, high levels of unemployment, and unequal rates of regional development. Of course, some countries do better than others in this regard. Nevertheless, recent protests and demonstrations have shown that the tolerance for inequality is low and brittle. Going forward, Arab governments will have to be more mindful of such concerns. All should focus on establishing sustainable social protection systems. This means that social protection should not rely on fiscally-wasteful universal subsidies but carefully targeted subsidies that protect mostly the poor and the vulnerable.
High unemployment: Employment generation will have to be a big part of any future growth strategy as not only is average unemployment high but it is steep among Youth and women have not been absorbed in work force. To address this daunting challenge would require conducive labor market policies that emphasize job mobility, a revision of social security systems (including tax wedges, social contributions, and pensions), and liberalization of professions. Emphasis will have to shift from protecting jobs to protecting workers’ income with more social support, unemployment insurance, and active measures to assist workers during periods of transition. According to recent enterprise surveys, high labor taxes (social contributions) and rigid labor regulation are among the top reasons why firms in countries like Tunisia, Egypt, Lebanon, and Syria do not expand employment.
Of course, employment generation will also require more attention to the following:
- Higher rates of private investments in labor intensive sectors;
- Increased access to finance for underserved segments like mortgage and student borrowers to better address the needs of youth and lower-income groups;
- Better quality of post-secondary education services (especially technical and vocational education) to meet the needs of the private sector and reduce youth frustrations.
Food insecurity: The protests and demonstrations of recent months have also been linked to rising food prices and the insecurity felt in this regard by vulnerable segments of the population. Rising food prices are of particular concern for Arab countries because of their rapidly growing populations, limited water and arable land resources, and significant dependence on international food markets.
A long term strategy to cope with food security should have three pillars. The first pillar consists of strengthening safety nets so that people with low incomes do not have their access to food severely impaired when prices rise. The second pillar consists of enhancing domestic food supply by focusing on agricultural productivity and yields. In practice, this involves increased investment in R&D and more efficient management of water and arable land, both scarce resources. The third pillar consists of reducing exposure to market volatility by improving supply chain efficiency and better management of agricultural risk. In practice, this involves country level diagnostic studies of agricultural supply chains followed by investment and policy measures to address inefficiencies. The Bank is working closely with 10 Arab countries on a diagnostic study for wheat import supply chains. It is expected that the study will lead to recommendations pertaining to investment in critical infrastructure such as strategic grain reserves, port facilities and roads.
The food price shock of 2008 was a wake-up call not just for specific countries but also for the Bank. In its aftermath, we have devoted additional financial and technical resources to improving food security. For the MENA region, we have increased our lending in the Agriculture and Rural Development area from $0 in FY2008 to $359 million in FY2011. Globally, our lending in this sector has grown from an average of $3 billion per year during FY06-08 to $4.7 billion during FY09-10. We aim to increase our lending in this sector to some $6-8 billion a year in the medium term.
Let me stop here. I would be happy to take any questions on the remarks I have just made or on related issues. Thank you very much for your time.