75214 December 2012 – Number 77 AN THE MIDDLE EAST AND NORTH AFRICA: A YEAR IN TRANSITION Caroline Freund, Elena Ianchovichina, Christina Wood, much quicker, with parliamentary and presidential Lili Mottaghi1 elections concluded within the 18 months following the fall of the Mubarak regime. However, the Introduction: This Quick Note is based on the country lacks a full constitution and parliament, and longer report entitled “Looking Ahead after a Year the transition framework remains uncertain, having in Transition� that was issued by the Chief been reshaped multiple times by a series of Economist’s Office of the Middle East and North constitutional declarations, laws, decrees, legal Africa region of the World Bank.2 Egypt, Libya, challenges and court rulings. More worrisome has Tunisia, and Yemen are given special attention been the recent political violence over a because each of them experienced a revolution and a controversial decree issued by President Morsi and major political change in 2011 and is undergoing a continuing turmoil over the constitutional process of political transition toward democracy. referendum set for December 15, 2012. Note that other MENA countries are covered as well, though not with the same level of attention. Libya held elections in July 2012 with the National Assembly assuming power shortly thereafter. In each of the four focus countries, the transition Despite sporadic violence, the country and its new authorities have been charged with implementing Prime Minister Ali Zeidan are working on agreed time-bound actions leading to democratic developing a process for drafting the new Libyan elections for new constitutions, presidents and/or constitution. The country, barring major disruptions, parliamentary bodies. The process is underway with appears to be on track to adopt its new constitution varying degrees of speed. in 2013. In Tunisia, the process of conducting an election for In Yemen the GCC brokered an agreement for an a Constituent Assembly to preside over the orderly transition and the new government led by transition and draft a new constitution to govern the President Hadi is overseeing a two year transition conduct of presidential and parliamentary elections period that is to end with elections. Still there is is underway and Tunisia’s new elections are now much work to be done, including establishing a expected to be held no later than June 30, 2013. National Dialogue Conference, a new constitution, a referendum to ratify it and a decision on a new In Egypt, the transition to elected government (itself electoral system. Though the process is delayed it transitional) underpinned by a new constitution was continues apace. The Economics of the Transition: Egypt, Tunisia, 1 Caroline Freund, Chief Economist, Middle East and North Libya and Yemen are recovering after a period of Africa Region, The World Bank. Elena Ianchovichina, Christina economic growth decelerations accompanying the Wood, Lili Mottaghi all work in in the Office of the Chief Economist, The Middle East and North Africa Region (MNACE), Arab Spring uprisings of 2011 (see Figure 1). The World Bank. Economic recovery was relatively quick, with 2 World Bank. 2012. Looking Ahead After a Year in Transition industrial production recovering in a matter of Middle East and North Africa Region, Economic and months and, in the cases of Egypt and Tunisia, the Development Prospects, World Bank, Washington D.C. 2011 growth dips were smaller than the average uprising, with negative consequences for growth declines observed around the year of unemployment and poverty outcomes. transition during past transitions to democracy. Importantly, the growth decelerations and recovery Macroeconomic Fundamentals and the Transition: have taken place in a weak global environment, with Macroeconomic fundamentals weakened in the four events in the Eurozone posing particular challenges countries as growth declined and governments to Tunisia, and to a lesser extent, Egypt. responded to social demands with expansionary Figure 1 fiscal policies that have driven up fiscal deficits to unsustainable levels, increased the government debt burden and put upward pressure on real interest rates. Official foreign exchange reserves declined, in some cases steeply, in a move by governments to avoid currency depreciations, as exports, especially tourism receipts, contracted and investors remained on the sidelines. High oil prices helped Libya and Yemen, but have exacerbated current account imbalances and fiscal deficits in Egypt and Tunisia. Other Oil Importers: Domestic pressures coupled with a challenging global environment and spillovers from regional events weighed heavily on the 2012 economic performance of some oil importers such as Jordan, Lebanon, and Morocco. Sluggish global growth, particularly in the Euro area, adversely affected export receipts, tourism revenue and FDI flows, and coupled with high international oil and food prices, weakened their external balances. Notably, Jordan and Lebanon have been affected by the conflict in Syria, whereas Morocco has been impacted by a weak harvest season. Fiscal deficits are expected to persist as growth decelerates and fiscal commitments inflate government expenditures. The transition process in these countries started in late 2010 with the uprising in Tunisia, followed Oil Exporters: High oil prices have supported quickly by protests in the other three countries in economic growth in the GCC countries and Iraq. In early 2011. In each of the four economies the 2012 economic growth of the GCC oil exporters will uprisings were rooted in dissatisfaction over lack of average 5.1 percent and of Iraq it will reach slightly voice and accountability, lack of jobs and above 11 percent. As a group, developing oil opportunities, especially for young people, and a exporters other than those recovering from unrest multitude of governance problems, particularly are expected to grow at a much weaker pace of just corruption, hampering opportunities for half a percent, reflecting the impact of export unconnected businesses. The transition process is restrictions on Iran. Rising public spending however now underway with varying degrees of speed and is has increased considerably the fiscal breakeven price far from complete. Uncertainty about the reform of oil, leaving the GCC economies’ fiscal positions process and outcomes remains a binding constraint vulnerable to varying degrees to a negative oil price to private investment. shock. Consequently, in most post-revolutionary Regional Economic Growth Prospects: The regional economies of the region, growth remains below growth prospects for 2013 reflect weaker global potential and is lower than growth during the economic activity, especially in the EU, and period immediately preceding the Arab Spring moderating oil prices (see Table 1). Regional December 2012 · Number 77· 2 economic activity is expected to grow on average by and trade, particularly trade in services. Services 5.5 percent in 2012 and 3.5 percent in 2013.1 The exports have been an area of relative strength for growth deceleration into 2013 largely reflects much MENA and the sector was booming prior to 2011, weaker activity in oil exporting countries, which will but concerns about security have triggered a major grow at an estimated average of 3.4 percent in 2013 contraction in tourist arrivals to the region, leading down from 6.5 percent in 2012. Libya is expected to to a jump in unemployment in countries such as grow faster than the average for the oil exporting Egypt and Tunisia. Unemployment has also group, but its growth will also decelerate in 2013 increased in these countries as migrant workers relative to 2012. By contrast, oil importers’ economic returned home from places in unrest, notably Libya. growth will accelerate from an estimated 2.6 percent Strengthening fundamentals to bolster in 2012 to an estimated 3.7 percent in 2013, but macroeconomic stability will also be crucial to Egypt and Tunisia will be growing slower than the growth throughout developing MENA, while average for the group. elevated international food commodity prices Risks to Growth: Prolonged political and policy remain a concern. uncertainty and political and social unrest are serious downside risks to this macroeconomic outlook. Uncertainty is a key obstacle to investment Table 1 December 2012 · Number 77· 3 Contact MNA K&L: Laura Tuck, Director, Strategy and Operations. MENA Region, The World Bank Regional Quick Notes Team: Omer Karasapan, and Roby Fields Tel #: (202) 473 8177 The MNA Quick Notes are intended to summarize lessons learned from MNA and other Bank Knowledge and Learning activities. The Notes do not necessarily reflect the views of the World Bank, its board or its member countries. December 2012 · Number 77· 2