51789 January 2009 . Number 1 THE GLOBAL FI A CIAL & ECO OMIC CRISIS: TRA SMISSIO CHA ELS & POLICY RESPO SE I THE ARAB WORLD Daniela Gressani and Auguste Tano Kouame1 some financial institutions have shown clear signs of weakness. Introduction: - Global and Economic Aspects of the Crisis: Two aspects of the current crisis Many countries, however, are already are important to stress. The first is its global experiencing the impact of the crisis on the nature. As you know, this crisis started last real economy. Most Arab countries face a year in the US and European financial markets decline in export growth as a result of the but spread quickly to developing countries. global economic downturn and, for oil The second is its economic impact. Before the producing countries, lower oil prices. In crisis erupted, many countries, and many addition, lower tourism revenues, lower developing countries in particular, were remittances, lower foreign direct investment already suffering from the impact of very and possibly also lower foreign aid will substantial food and fuel price increases, weaken their economic performance. which had translated into higher inflation and current account deficits. As a result, the The nature and importance of the links financial crisis has quickly become an between the different parts of the Arab World economic crisis, and already many developed and the global economy will be very countries are in recession, and developing important in determining the impact of the countries are seeing weakening growth. crisis; but so will their initial fiscal and current account positions. Governments with The World Bank predicts that this global stronger fiscal and external positions will be financial and economic crisis will see GDP better able to respond to the impact of the growth decline from 2.5% in 2008 to 0.9% in crisis. 2009 in the world economy; and in developing countries, from 6.3% in 2008 to 4.5% in 2009. Transmission Channels: To better understand Global trade volume is expected to decline in the transmission channels between the global 2009, for the first time since 1982 (by -2.1%), financial and economic crisis and individual and job creation will also slow down. Global country performance, it may be useful to poverty may well increase again, after the group Arab countries in four groups: accumulated impact of high food and fuel prices pushed some 100 million more into 1. Countries with strong economic links to the poverty last year. GCC. Lebanon, Jordan, Yemen and to some extent, Egypt will be more affected Impact on Arab Countries: Financial markets through lower tourism, remittances and in Arab countries have been less affected than FDI from the GCC economies. elsewhere, but stock markets have experienced declines in their indices, and 2. Oil-producing countries with large social needs and comparatively weaker fiscal 1 Daniela Gressani, Vice-President, MNA and Auguste Tano balances. Algeria, Libya, Iraq, Syria and Kouame, Acting Chief Economist, MNACE. Sudan have significant oil revenues, but entered the crisis with fiscal deficits and is closely linked to their ability to increase large social commitments, which makes it public spending or introduce measures to difficult to adjust expenditures during the encourage private spending in the short term, downturn. the size and speed of their policy response will be affected by their fiscal space. As can be seen 3. Countries with strong economic links to from the preceding graph, there is a very large Europe. Morocco, Tunisia and to some variation among Arab countries in this extent Egypt will feel the strongest impact dimension. of the crisis through depressed European demand for imports but also through The Private Sector and the Business lower tourism, remittances and FDI. Environment: There is strong evidence from earlier crises that improving the business 4. The GCC economies. These countries have environment, so that the private sector can entered the crisis in very strong fiscal and adapt to changing opportunities, is one of the external balances, and are in the best most important factors needed for a country to position to absorb the consequences of the come out successfully from an economic crisis. crisis. They will however suffer from This is also one of the most important factors lower oil prices as long as the global determining the ability of an economy to take downturn affects demand. advantage of the next global recovery. Arab Countries, Fiscal Balance as % of GDP, As can be seen from the graph below on the 2007-08 Doing Business indicators, this is an area where most Arab countries can make great progress. While these indicators do not assess Arab Countries Fiscal Balance as % of GDP, 2007-08 the full picture of the business environment, 40 which also includes well-functioning 30 institutions and availability of basic services, 20 the Doing Business indicators are very helpful in identifying the strengths and weaknesses in % of G DP 10 a country's business regulations, property 0 rights, access to credit and enforcement of C o m o ro s T u n is ia M o ro c c o E g y p t, A r ab R e p . S au d i Jo r d a n K u w ait O m an S udan Y em en A lg e r ia B a h ra in L eb a n o n M a u rita n ia S yr ian A ra b R e p u b lic -10 contracts. -20 2007 2008 Source: World Bank data Due to data limitations, the West Bank and Gaza, Qatar, Libya, Iraq, Somalia, and UAE, Djibouti were not included. Policy Response: Many Arab countries have already responded to the crisis with measures to support their financial systems and ease monetary policy. Several countries have also announced fiscal stimulus packages that are tailored to the relative importance of the different transmission channels discussed earlier. For example, Egypt has announced a stimulus package geared towards infrastructure investment, which could help offset declining FDI. Tunisia has announced measures to support SMEs, which are facing declining demand from Europe. As the ability of countries to address the impact of the global crisis on their economies January 2009 Number 1 2 As the graph above shows, some countries In addition, in recent months, the Bank has and especially the GCC economies have made mobilized some $900 million in grant support remarkable progress in the ease of doing for countries hit especially hard by large business, and are now comparable to OECD increases in food and fuel prices. countries. However, several other countries in the Arab World, even those that have recently Support is also accelerating for private made outstanding progress, for example investment through new programs in trade Egypt, still have a large amount of room for finance, bank recapitalization, infrastructure improvement. Furthermore, as a group, the financing and SME support by the IFC. MIGA economies of the Arab World lag significantly is also stepping up its activities. Perhaps most behind many other parts of the world. important, the World Bank has been working with countries to help identify specific Trade Policy: An important factor in vulnerabilities to the global financial economic determining the success of different crisis, and measures to address them. economies in overcoming the crisis will be their trade policies. In the Arab World and elsewhere, the global crisis is affecting Contact MNA K&L: countries that are more closely integrated in Nadir Mohammed, Director, MNA Operational the world economy faster. Yet, rolling back Core Services Unit David Steel, Manager, MNA Development the still incomplete integration of Arab Effectiveness Unit countries with one another and with the world economy will not help coming out of the Regional Quick Notes Team: crisis. Omer Karasapan, Dina El-Naggar, Roby Fields, Najat Yamouri, and Aliya Jalloh The World Bank Group and the Crisis: The Tel #: (202) 473 8177 Bank is working with its partners in the Arab World and elsewhere to help in overcoming The MNA Quick Notes are intended to summarize the crisis. It is focusing its efforts on lessons learned from MNA and other Bank Knowledge and Learning activities. The Notes do not necessarily accelerating financial support to developing reflect the views of the World Bank, its board or its countries, both through lending and through member countries. the concessional support provided by IDA. January 2009 Number 1 3