n M i d d l e e a s t a n d n o r t h a f r i c a r e g i o n 52226 20 Economic Developments 09 and Prospects Navigating through the Global Recession THE WORLD BANK Middle East and North Africa Region 2009 Economic Developments and Prospects Navigating through the Global Recession © 2009 The International Bank for Reconstruction and Development / The World Bank 1818 H Street, NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: feedback@worldbank.org All rights reserved. This volume is a product of the Chief Economist's Office of the Middle East and North Africa Region of the World Bank. The findings, interpretations, and conclusions expressed herein are those of the author(s) and do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Table of Contents Acknowledgements .......................................................................................................................... vii Abbreviations and Acronyms .......................................................................................................... ix Overview .............................................................................................................................................. xi Chapter 1. 2008 ­ A Year of Wild Fluctuations in the Global Economy .................................1 Introduction ........................................................................................................................1 The Triple Crisis ­ Fuel-Food-Financial ............................................................................1 Transmission of the Crisis to MENA: A Four Country-Group Typology ..........................7 The Impact of the Crisis on the MENA Region: Growing with Oil, Slowing with Oil ....10 Policy Response to the Crisis ...........................................................................................19 Chapter 2. The Global Economic Environment and MENA's 2009­10 Prospects: ............ 23 Mitigating the Impact of Global Recession Facing an Uncertain Global Economic Environment .....................................................23 MENA's Economic Prospects For 2009­10 .....................................................................25 Policies to Mitigate the Impact of the Global Recession ................................................37 Annex ...............................................................................................................................45 Country Prospects ............................................................................................................45 Gulf Cooperation Council, GCC countries.......................................................................45 Oil Exporters with Low Oil Revenue Per Capita ­ Algeria, Iran, Iraq, ..........................49 Libya, Syria, and Yemen Non-Oil Exporters Reliant on Financial Flows from GCC or Official.............................51 Development Assistance from OECD--Djibouti, Jordan, Lebanon, West Bank and Gaza Non-Oil Exporters with Strong Economic Linkages with Eurozone .............................53 and OECD--Egypt Morocco, and Tunisia Chapter 3. Policies to Reduce Vulnerability and Increase Flexbility to............................. 57 Respond to Shocks Over the Long Term Introduction ......................................................................................................................57 Major Channels for Shock in MENA ................................................................................57 Reducing Vulnerability through Structural Policies .......................................................61 Financial Sector Policies for Economic Resilience .........................................................62 Trade and Vulnerability to Commodity Price Shocks .....................................................67 Business Flexibility and Vulnerability .............................................................................74 Safety Nets and Shock......................................................................................................82 Statistical Annex .............................................................................................................................. 87 iii 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Bibliography ..................................................................................................................................... 115 List of Figures Figure i: Regional Growth Rates, % 2008­2010 .......................................................................... xiv Figure 1.1: Oil price surge unwound by plummeting global demand ...............................................2 Figure 1.2: All commodites increased sharply at the same time .......................................................2 Figure 1.3: Higher oil prices and MENA production yield windfall hydrocarbon revenues in 2008 ............................................................................................................................10 Figure 1.4: Crude oil production cuts widespread in MENA during late 2008 ...............................12 Figure 1.5: Terms of trade relief for MENA diversified economies .................................................13 Figure 1.6: MENA equity markets show general decline with mixed country results ..................16 Figure 1.7: GDP growth across MENA country groups varied, 2006­08 ........................................18 Figure 1.8: Policy responses to food crisis were widepread in MENA region ...............................20 Figure 2.1: Global GDP growth rates: %, 1981­2010 .......................................................................24 Figure 2.2: Industrial production growth, % change, 2008/01­2009/02 .........................................25 Figure 2.3: Average oil prices, US$, 2000­2010 ...............................................................................25 Figure 2.4: World export revenues, US$ million, 2007/01­2009/01 ................................................26 Figure 2.5: Regional key macroeconomic indicators, 2008­2010 ...................................................27 Figure 2.6: Growth in tourism receipts: MENA country groupings, %, 2008­2010 .......................29 Figure 2.7: Regional growth in remittances flows, %, 2008­2010 ...................................................30 Figure 2.8: FDI as a share in GDP, %, MENA country groupings, 2008­2010 ................................31 Figure 2.9: Spreads basis points delta since Sep 15, 2008, 01/01/2007­04/20/2009 ......................32 Figure 2.10: Capital expenditures: GCC, US$ billions, 2007­2010....................................................33 Figure 2.11: Projected deterioration in fiscal balance, % of GDP, (changes) in 2008­2009............38 Figure 2.12: Regional average growth rates: 1970­2008 ...................................................................41 Figure 3.1: Trade as a share of GDP, 2007 ........................................................................................58 Figure 3.2: Regional growth volatility,1960s­2007 ...........................................................................60 Figure 3.3: Unemployment and economic growth in Egypt, 1960­2007 ........................................61 Figure 3.4: Selected non-bank financial assets as a share of GDP ..................................................65 Figure 3.5: Use of bank credit by firms .............................................................................................65 Figure 3.6: Export concentration among MENA's non-oil economies.............................................68 Figure 3.7: Oil in total exports, 1980 and 2006 ................................................................................69 Figure 3.8: Food import dependency, 2007 ......................................................................................70 Figure 3.9: Growth in MENA FTA exports .......................................................................................73 Figure 3.10: Private sector as a share of non-oil GDP .......................................................................76 Figure 3.11: Median age of manufacturing firms (years) ..................................................................76 Figure 3.12: Dispersion in value-added per worker ...........................................................................78 Figure 3.13: Reform of business policies in MENA ............................................................................79 Figure 3.14: Poverty incidence at alternative poverty lines, late 1990s ...........................................84 List of Tables Table i: Real GDP Growth, %, 2008­2010 ..................................................................................... xv Table 1.1: Country group characteristics for analysis of the Triple-F crises .....................................8 Table 1.2: Exports of oil and gas in billions U.S. dollars, 1996­2010 ...............................................11 Table 1.3: Current account balance as % of GDP, 1996­2008 ..........................................................13 Table 1.4: Real GDP growth, 1996­2008 ...........................................................................................17 Table 2.1: GDP growth by demand and contribution to growth, %: MENA, 2008­2010 ................26 Table 2.2: Fiscal space projections: MENA country groupings: 2009 ..............................................39 Table 3.1: Emigration from MENA countries in 2000 .......................................................................59 Table 3.2: Decomposition of export growth into intensive and extensive margins, 1995­2005 ....69 iv Table of Contents Table 3.3: Average tariff protection in MENA, 2008 .........................................................................75 Table 3.4: Doing business indicators of labor flexibility ...................................................................77 Table 3.5: Business and regulatory environment: Most cumbersome business areas (Relative to rest of world, for those areas of the business environment) ......................81 Table 3.6: Indicators of governance in MENA, 2007 .........................................................................83 Table A1: Country group characteristics for analysis of the Triple-F crises ...................................87 Table A2: Summary of economic developments in the region, 1996­2008 .....................................88 Table A3: Assumptions about the external environment to 2010 ...................................................90 Table A4: Real GDP growth, 1996­2010 ...........................................................................................91 Table A5: Population growth, 1996­2010 .........................................................................................92 Table A6: Real GDP per capita growth, 1996­2010 ..........................................................................93 Table A7: Nominal GDP in billions U.S. dollars, 1996­2010.............................................................94 Table A8: Population in millions, 1996­2010 ....................................................................................95 Table A9: Consumer prices, 1996­2010 ............................................................................................96 Table A10: Overall fiscal balance, billions U.S. dollars, 1996­2008 ...................................................97 Table A11: Fiscal balance as a share of GDP, percent, 1996­2010 ....................................................98 Table A12: Exports of goods and services as a share of GDP, percent, 1996­2008..........................99 Table A13: Exports of merchandise in billions U.S. dollars, 1996­2010 .........................................100 Table A14: Exports of oil and gas in billions U.S. dollars, 1996­2010 .............................................101 Table A15: Imports of goods and services as a share of GDP, percent, 1996­2008 ........................102 Table A16: Worker remittances, net receipts in billions U.S. dollars, 1996­2008 ..........................103 Table A17: Worker remittances, gross receipts in billions U.S. dollars, 1996­2008 .......................104 Table A18: Worker remittances, gross payments in billions U.S. dollars, 1996­2008 ....................105 Table A19: Tourism receipts in billions U.S. dollars, 1996­2010 .....................................................106 Table A20: Tourism revenues as a share of GDP, percent, 1996­2010............................................107 Table A21: Current accounts in billions U.S. dollars, 1996­2010 ....................................................108 Table A22: Current accounts as a share of GDP (%), 1996­2010 ...................................................109 Table A23: Foreign direct investment (FDI) in billions U.S. dollars, 1996­2010 ...........................110 Table A24: Foreign direct investment as a share of fixed investment, 1996­2008 ........................111 Table A25: Foreign direct investment as a share of GDP (%), 1996­2010 .....................................112 Table A26: International reserves in billions U.S. dollars, 1996­2010.............................................113 Table A27: Reserves, months of import cover, 1996­2010 ..............................................................114 v Acknowledgements This report is a product of the Office of the Chief and editorial support, and Nadia Spivak from Economist of the Middle East and North Africa the World Bank's Development Prospect Group (MNA) region with valuable contributions from who provided statistical support. The report was Economists in the Poverty Reduction and Eco- prepared under the overall guidance of Daniela nomic Management group of MNA. The report Gressani and Shamshad Akthar respectively past has been prepared by a team led by Auguste and current Vice Presidents of the MNA region. Tano Kouame (acting Chief Economist, MNA) The team would like to thank the Peer Reviewers and comprising Jennifer L. Keller, Elliot Joseph Uri Dadush, William Maloney, and Carlos Silva- (Mick) Riordan, and Lili Mottaghi. Additional Jauregui for insightful comments and guidance. team members include Isabelle Chaal-Dabi who The team would also like to thank many col- provided valuable administrative assistance, Ma- leagues and reviewers who provided comments rie Alienor Van den Bosch who provided research on earlier versions. vii Abbreviations and Acronyms bbl Barrels BOP Balance of Payments CAB Current Account Balance CPI Consumer Price Index DECPG Development Economics Prospects Group (World Bank) EAP East Asia and Pacific ECA Europe and Central Asia EIU Economist Intelligence Unit EU European Union FDI Foreign Direct Investment FTA Free Trade Agreements GCC Gulf Cooperation Council GDP Gross Domestic Product ILO International Labor Organization IEA International Energy Agency IMF International Monetary Fund ITC International Trade Centre LAC Latin America and the Caribbean LF Labor Force LNG Liquified Natural Gas MENA Middle East and North Africa MFN Most Favored Nation MSCI Stock market index of 500 world stocks maintained by MSCI Inc NGL Natural Gas Liquids ODA Official Development Assistance Agency OECD Organization for Economic Co-operation and Development OPEC Organization of the Petroleum Exporting Countries ix 2009 Economic Developments and Prospects ­ Navigating through the Global Recession SA South Asia SAAR Seasonally Adjusted Annual Rate SSA Sub-Saharan Africa TOPIX Tokyo Stock Price Index UAE United Arab Emirates UK United Kingdom UNCTAD United Nations Conference on Trade and Development UNWTO United Nations World Tourism Organization VAT Valued Added Tax WBG West Bank and Gaza WDI World Development Indicators WTO World Trade Organization x Overview Introduction shocks and their flexibility and ability to respond to future crises. The global financial and economic crisis that began in mid-2007 in the US and has now led to The main conclusions of the report are: the first global recession since World War II is (1) the effect of the crisis depends on countries' impacting MENA countries and compounding exposure to affected markets and commodities as the impact of the generalized rise in commod- well as on their initial macroeconomic conditions ity prices that peaked in mid-2008. There is no and policies; (2) the impact of the global crisis consensus on the causes of this "once in a life- on financial sectors in MENA has been limited time" crisis. However, it is generally accepted so far to GCC countries whose financial sectors that a combination of low interest rates in the were more open to global financial centers but US, strong global demand especially in emerging also happened to be in a good position to respond market economies, and large current account thanks to the financial cushion provided by past surpluses in some countries, provided impetus oil surpluses; (3) in terms of impact on the real for the buoyancy and bubble in housing, com- economy, the MENA region held up well in 2008, modities, and stock markets. Just as they were with average GDP growth remaining steady while synchronized on the upside, these markets all other regions experienced declining growth; experienced sharp declines in prices during (4) going forward, virtually all MENA countries 2007­08. This series of events are of direct con- face a serious risk of impact on the real economy, sequence for MENA's economic developments in and countries' ability to rebound in the post-crisis 2008 and prospects for 2009 and 2010. era will be enhanced if they use the opportunity of the crisis to ease infrastructure bottlenecks The objective of this 2009 MENA Economic and restructure ineffective--yet expensive-- Developments and Prospects is to review the subsidies programs; (5) The recent crisis, as well implication of the triple food-fuel-financial as previous ones, have brought to the fore the crisis for MENA economies. Chapter 1 reviews need to implement structural reforms--many of the year 2008 and the first few months of 2009. which have been discussed in previous reports-- It discusses the impact of the global economic to reduce MENA countries' vulnerability and im- environment and MENA countries' responses to prove their flexibility to respond to future shocks. the initial impact of the food-fuel-financial crises. Chapter 2 reviews MENA countries' prospects Impact of the Crisis on MENA's for 2009 and 2010 and discusses policies that Financial Sector Was Limited can be envisaged to mitigate the impact of the global financial crisis on the region. Chapter 3 When the financial crisis hit the region in mid- goes beyond the short-term concerns about the 2008, many countries in MENA were still grap- current crisis and discusses structural factors pling with the impact of the food and fuel crisis. that affect MENA countries' vulnerability to High fuel prices benefited oil exporters, allowing xi 2009 Economic Developments and Prospects ­ Navigating through the Global Recession them to accumulate unprecedented surpluses in on average, lost 27% in portfolio value between 2008 and strengthening Gulf oil exporters' posi- December 2007 and December 2008, with losses tion as global investors. The subsequent decline reaching as high as 40% among funds that heavily of oil prices in the second half of 2008 and appar- invested in global equities. Borrowing spreads ent stabilization at around 50% of its mid-2008 increased for MENA countries as much as for peak, do not yet represent a serious threat to other emerging markets. However MENA coun- oil exporters although some of the region's non- tries were able to avoid going to the international GCC oil exporters will need a higher oil price to bond market in the latter part of 2008 thanks to reach breakeven price level due to their high generally good balance of payments positions production costs. For non-oil exporters in the coming into the crisis, or thanks to relatively region, sky-rocketing fuel prices weighed heavily resilient tourism receipts, remittances and FDI. on their import bills as well as on fiscal outlays as most countries have maintained high levels The MENA region held up well in 2008 in of fuel subsidies. The impact of high food prices terms of impact of the crisis on the real economy. was also being felt across the region. Unlike ear- The region as a whole saw a slight increase in lier commodity price booms, the recent episode GDP growth to 6.1% in 2008 compared to 5.6% (2003 to 2008) involved all commodity groups. the previous year. MENA's resilience to the crisis Commodity prices increased in a synchronized in 2008 is in stark contrast with other developing fashion starting in 2003 and continued to climb regions where growth fell from 2007 levels. The for some five years. In fact, the timing of the rise region's growth in 2008 was helped by high oil in agricultural prices points strongly to the im- price for the year on average despite the sharp pact of energy markets. Because MENA is a large decline observed in second half of the year, and importer of food, the inflationary impact of high by strong growth in the construction sector. But international food prices was higher in MENA signs of increasing weakness were apparent mov- than any other region of the world--with 25% of ing through the final quarter of the year and into inflation in MENA between December 2005 and the first months of 2009. December 2007 being caused by international food prices, more than twice the level for the MENA's Short-Term Prospects Are next affected region. High food and fuel prices Clouded by an Uncertain Global did not just strain households and governments' Environment finances; they created social tensions in some countries as consumers were reacting to high With the persistence of the crisis and the lack- inflation. luster global economic environment going into 2009 and 2010, MENA faces prospects of a high The early impacts of the global financial crisis impact of the global crisis on its real economy on MENA's financial system were visible mostly due to adverse developments or uncertainty in in the high income oil-exporting countries of the international trade, oil prices, tourism, remit- GCC due to their strong links to global financial tances and international financing conditions. markets. In most other MENA countries, the First, global trade volume is projected to decline banking sector has not been much affected to sharply by 9.7% in 2009, the first decline since date, mainly because of its limited integration 1982 and the biggest drop in 80 years. The trade into global financial markets. Stock markets in decline affects directly oil exports and oil rev- GCC countries saw sharp decline in the last two enues as well as exports of manufactured and quarters of 2008, mimicking trends in mature other products from MENA; and MENA's trade markets. Stock declines in other MENA countries related services such as the Suez Canal passage were less severe. MENA sovereign funds, mostly in Egypt and the use of the Dubai-operated port in GCC countries, have also taken some losses on in Djibouti will be affected. their investments in global financial institutions. Some early estimates by the Council on Foreign Second, oil prices are projected at $55.5 bbp Relations suggest that GCC sovereign funds have, in 2009 and $63 bbp in 2010, sufficient to avoid a xii Overview major crisis in oil producing countries, but much attracted short-term flows and had open capital lower than the boom of 2008. Oil prices in 2009 accounts. With large stimulus packages in de- are unlikely to be much affected on the upside veloped countries needing to be financed, there by factors that contributed to high prices before are fears that emerging market sovereign bonds mid-2008. Global demand is likely to remain low. will be crowded out by bonds issued by devel- With recent OPEC production cuts and with oped countries. Official development assistance Saudi Arabia having increased its production (ODA) is expected to decline somewhat in 2009, capacity to 12.5 million barrel per day (thanks with the risks that this will impose pro-cyclical to recent investments), there is sufficient slack forces in ODA dependent countries--such as to absorb any decline in supply that might be Yemen, Djibouti, and West Bank & Gaza; with caused by unanticipated supply disruptions in the synchronized global crisis, source countries, other markets. Similarly, speculation is unlikely affected by the crisis, are likely to reduce ODA to create pressure on the upside given the lack at a time when recipient countries need ODA of appetite on stock markets. As a leading indica- increases to implement counter-cyclical fiscal tor of oil prices, global industrial production is policies. projected to decline by 12% in 2009 following a sharp fall in the fourth quarter of 2008. With this backdrop, the MENA region is projected to see deterioration in its economic Third, even though tourism has been some- conditions in 2009 compared with 2008--a dete- what resilient, it has not been immune and a rioration exemplified by a sharp decline in overall decline is expected in 2009. Apart from GCC growth from 6.1% in 2008 to about 2.2% in 2009. countries which are expected to show positive This sharp decline contrasts with the situation albeit slower growth in tourism receipts in 2009 in 2008 when the region was able to maintain and 2010, other countries are likely to move to a growth rate comparable to the previous year negative territories in 2009 but are expected to (2007) while all other regions saw a decline see some improvements in 2010. in their GDP growth rates in 2008. Moreover, despite the projected sharp decline in its GDP Fourth, although remittances proved re- growth in 2009, MENA's growth rate is expected silient in 2008, they are projected to fall by to be close to the developing country average of 6.2% in MENA in 2009. Although this decline is 2.1% in 2009 and is expected to rebound mildly consistent with global trends, it is likely to have to 4% in 2010 (figure 1). MENA's GDP growth a particularly large impact in MENA given the in 2009 and 2010 is expected to be supported region's high dependence on remittances. mostly by public consumption (helped by fiscal stimulus spending) in the face of sharp falls in Fifth, like for most emerging markets and private investment and exports. Current account developing countries, external financing condi- balances and fiscal balances will deteriorate tions will remain tight for MENA in 2009 and sharply in most countries largely due to a 50% possibly 2010. Global FDI flows are projected to decline in oil prices from the previous year's level. fall sharply in 2009, and MENA will be directly Some countries will nevertheless see an improve- affected. FDI flows are low in MENA, and while ment in current account balances as sluggish they avoided a decrease in 2008, they are ex- domestic demand drives down imports more pected to decline markedly in 2009 as investors sharply than exports. Fiscal space will shrink complete large projects that started before the significantly, as MENA governments continue to global financial crisis and could not be easily pay for subsidies and wage increases committed interrupted without incurring large financial in 2008 in response to the food and fuel price losses, and as new projects get postponed, can- increases or strive to pay for additional fiscal celled or scaled back. As in many developing stimuli in response to the financial crisis. regions, short-term capital flew out of MENA quite suddenly in 2008. The phenomenon was For many MENA countries, inflation is likely more apparent in GCC countries that had both to be the silver lining of the global financial crisis xiii 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Figure i: Regional Growth Rates, % 2008­2010 2008e 2009f 2010f 10 8 6 4 2 0 ­2 ­4 MENA Developing EAP ECA LAC SA SSA Countries Source: World Bank data. in 2009 and possibly in 2010 but this will not · The GCC countries, or oil exporters with be sufficient to prevent the crisis from having high hydrocarbon revenue per capita are serious social impacts. The decline in prices highly exposed to oil and hydrocarbon price of global commodities, including food, and the fluctuations, somewhat exposed to events in strengthening of the dollar vis-ŕ-vis major inter- mature economies (through private flows), national currencies, have contributed to lowering but do have fiscal space and some institu- consumer price indices across MENA. However, tional capacity to implement macroeconomic despite easing inflation, the human impacts of and structural policies. the crisis are likely to be significant in 2009­10. · Other oil exporters with relatively less For one thing, economic slowdown has caused a hydrocarbon revenue per capita and rela- weakening of the region's already lackluster abil- tively large populations are highly exposed ity to create jobs in the private sector; and the to oil, face pressing social demands, have International Labor Organization (ILO) projects limited fiscal space, and limited institutional an increase in unemployment rate of about 25% capacity to implement macroeconomic and in the Middle East and 13% in North Africa in structural policies. 2009 compared to 2007. · Non-oil exporters with significant financial flows with the GCC economic area or depen- At the country level, the economic impact dent on foreign development assistance are of global slowdown will vary depending on the highly exposed to financial developments in degree of economic integration with highly the GCC and OECD countries (through pub- impacted regions or dependence on impacted lic flows), have virtually no fiscal space and commodities. Additionally countries' ability to limited institutional capacity to implement respond will depend upon their fiscal space as macroeconomic and structural policies. well as their institutional capacity to imple- · Non-oil exporters with diversified economies ment sound macroeconomic and structural and strong trade ties with the Euro area, are policies. With these characteristics in mind, highly exposed to European and OECD coun- the report organizes the countries in four tries (through trade), have limited fiscal space, groups for the purpose of analyzing the impact but have good institutional capacity to imple- of the crisis. ment macroeconomic and structural policies. xiv Overview In virtually all GCC oil exporters with large bubble and sharp contractions in the construc- financial capacity relative to populations tion sector and financial services. Qatar will stand (Bahrain, Kuwait, Oman, Qatar, Saudi Ara- out with a breathtakingly strong GDP growth pro- bia, and United Arab Emirates), the sharp de- jected to increase from 16.4% in 2008 to 18.2% cline in oil prices since mid-2008 and depressed in real terms in 2009, propelled by the coming on demand for oil on global markets will usher in sig- stream of major LNG plants. However, with their nificantly lower economic growth in 2009. For the significant financial reserves, GCC countries are GCC as a whole, growth is projected to decline likely to be able to maintain countercyclical fiscal sharply from an average of 5.7% during 2004­08 stances in 2009 and possibly in 2010 and ride the to 1.1% and 4.2% respectively in 2009 and 2010 storm comfortably if oil prices stay above US$50 (table i). The two MENA countries projected to bbl throughout 2009 and 2010. While their fiscal enter recession zone, Saudi Arabia and Kuwait, revenues are projected to decline by 40% of GDP are among the GCC. The UAE's growth prospects in 2009, expenditure is projected to remain at are lumbered by Dubai where the financial crisis its 2008 level, leading to a sharp decline in fiscal has coincided with the bursting of the real estate balances, financed mostly with drawdown of past Table i: Real GDP Growth, %, 2008­2010 Estimate Forecast Forecast Country 2008 2009 2010 MENA Region 6.1 2.2 4.0 GCC countries 6.3 1.1 4.2 Bahrain 6.1 2.6 4.0 Kuwait 5.2 ­1.2 2.4 Oman 6.2 3.0 3.8 Qatar 16.4 18.2 16.2 Saudi Arabia 4.6 ­0.9 3.0 United Arab Emirates 7.4 0.3 3.3 Oil exporters with large populations 5.6 2.7 3.5 Algeria 3.0 2.2 3.5 Iran, Islamic Republic of 6.9 2.5 3.0 Iraq 9.8 6.9 6.7 Libya 6.3 2.9 4.8 Syrian Arab Republic 5.2 3.0 3.5 Yemen 4.0 7.7 5.0 Diversified exporters with strong GCC links 6.1 2.5 4.2 Djibouti 5.8 5.0 5.5 Jordan 5.5 2.5 3.5 Lebanon 6.5 2.5 4.5 Diversified exporters integrated with Europe 6.5 4.0 3.9 Egypt 7.2 3.8 4.2 Morocco 5.6 5.0 3.0 Tunisia 4.5 3.0 4.0 Source: National agencies and World Bank staff estimates and projections. xv 2009 Economic Developments and Prospects ­ Navigating through the Global Recession reserves. Capital expenditures in particular are subsidies and income transfer programs) in the expected to be sustained at high levels. Inflation face of limited or lack of reserves in oil surplus is expected to ease to 7.6% and 4.7% on average funds (with the exception of Algeria and Libya). in 2009 and 2010 respectively, down from 11.4% In addition to expensive social commitments, the in 2008, partly because of a drop in world com- policy response in this group of countries is likely modity prices in 2009 and the stabilization of the to be constrained by long-delayed or hesitant US dollar--to which most GCC currencies are structural reforms. pegged--against the euro and other world cur- rencies. The external current account balance is Non-oil exporting countries with strong expected to decline sharply to 13.2% and 16.7% economic linkages with GCC and/or aid de- of GDP on average respectively in 2009 and 2010 pendent (Jordan, Lebanon, Djibouti, and West from its peak level of 33.6% in 2008 while fiscal Bank & Gaza) are seeing a stagnation of financial balances will deteriorate sharply from an aver- flows from the GCC and face the challenge of age of 26.6% of GDP in 2008 to 5.3% and 7.2% mobilizing aid at a time when source countries of GDP in 2009 and 2010 respectively. are affected by the crisis. For countries in this group, growth is projected to slow on average As for oil exporters with larger population to 2.5% and 4.2% in 2009 and 2010 compared relative to their oil wealth than GCC (Algeria, with 6.1% in 2008. Inflation will ease to 5­6% Iraq, Iran, Libya, Syria and Yemen), they will from its high level of 12.5% in 2008. Countries see sharp deteriorations in fiscal and external in this group entered the crisis with generally balances but will avoid recessionary growth in weak macroeconomic frameworks characterized 2009­10. Oil GDP will decline sharply but non-oil by high fiscal deficits, high debt levels, and tight GDP will help keep economic growth in positive external positions. The group's average fiscal territories. Real growth is projected to decline balance will remain negative in 2009 and 2010 from an average of 5.6% in 2008 to 2.7% and 3.5% (around negative 4% and 2.6% respectively, respectively in 2009 and 2010. Oil production compared to negative 8.4% in 2008). The average provides them with significantly less wealth per current account balance will remain in negative capita than GCC countries. Moreover, these oil territories but will improve over 2008 and reach exporters entered the global financial crisis with negative 9.9% and 6.9% of GDP respectively in weaker fiscal and external positions, and even 2009 and 2010. The improvements in fiscal and those with large initial fiscal or current account external balances will be driven by contraction- surpluses are expected to see a sharp decline in ary policies in the absence of space for large fiscal 2009 as trade surpluses contract with lower oil stimuli. The ability of countries in this group to prices and fiscal expenditures rise with costly fight the contractionary forces of the crisis will policy responses to high food and fuel prices be dependent on fresh external flows or rollover in 2008. Although public finances will benefit of existing debt, combined with a rationalization somewhat from declining outlays for fuel subsi- of public expenditure patterns. With stock mar- dies on account of lower oil prices, countries in ket contractions and lower oil prices ushering in this group will see large swings in fiscal balances reduced personal wealth in the GCC as well as from a group average of 5.5% of GDP in 2008 to reduced employment opportunities for migrant a projected negative 6.6% and negative 1.8% of workers, remittances and FDI from GCC coun- GDP in 2009 and 2010. Large swings will also tries are reported to be declining in some coun- be observed in current account balances from tries of this group. Moreover, return of migrant an average of 22.7% of GDP in 2008 to 2.2% workers from GCC countries could represent a and 3% of GDP respectively in 2009 and 2010. challenge from the employment and social policy Due to a shrinking fiscal space, the government point of view. response in those countries appears thus far to be generally pro-cyclical, with a reduction Diversified economies with strong trade of fiscal spending, as governments struggle to and tourism linkages with Europe and OECD meet long-term social commitments (such as (Morocco, Tunisia and Egypt) entered the xvi Overview crisis in relatively good macroeconomic posi- and necessary corrections in global consump- tions, initially saw limited impact of the crisis tion patterns. Second, unchecked protectionist on their financial systems but are now seeing a tendencies from MENA's trading partners or significant impact on their real economy as re- among MENA countries could jeopardize MENA's cession deepens in their major export markets in contribution to global recovery through trade and Europe. Growth is expected to decline to about affect MENA's growth and employment prospects 4.0% in 2009 and 3.9% in 2010. Inflation should in the short term. Third, there are risks that a be contained at about 5.2% in 2009 and 4.3% in sharp or persistent deterioration in MENA's real 2010. Recession in the EU, reduced tourism ar- economy could affect the financial sector through rivals and weaker remittance flows are likely to feedback loop effects. If the crisis persists and cause sharp contraction in manufacturing SMEs affects the financial position of export-oriented in export-oriented sectors in 2009 and 2010. SMEs and eventually other domestic firms, there The average fiscal deficit in 2009 and 2010 is is a risk that the balance sheets of domestic banks projected to remain at the 2008 level of about could deteriorate due to emergence or growth of 4.5% of GDP. However, if the crisis persists, fis- non-performing loans. cal positions could turn out to be worse because weak export demand is affecting jobs in export- In the second half of 2009 and in 2010, MENA oriented SMEs, and unemployment is likely to countries' endurance in facing the impact of the increase and put further pressure on public crisis will very much depend on the depth and finances as governments try to provide financial length of the global economic recession. The incentives to firms to maintain or to provide projections in this report assume that global re- income transfers to affected households. The covery will occur in 2010. However, this cannot current account deficit is expected to average be taken for granted. In the scenario where the about 5% of GDP in 2009 and 2010. Countries in crisis lingers on in 2010 but does not deepen, this group can build on their good track record oil prices could stay above levels that would of sound macroeconomic policies and structural help GCC countries avoid any hardship even if reforms to mobilize financing needed to imple- economic growth remains anemic. Apart from ment countercyclical policies. However, financing GCC countries, all other country groupings are is likely to be constrained by market conditions. likely to see serious hardship emerge, if the crisis Public finances are being impacted, and it is not lingers on in 2010. Not only economic growth clear whether governments will be in a position would remain low, but government's ability to to issue sovereign bonds given that spreads re- cushion the impact of the crisis on households main high (although they have declined markedly and workers would be eroded by the long crisis. from their peaks in late 2008). It is expected In the scenario where the crisis not only lingers that governments will increase their reliance on on in 2010 but deepens, all MENA countries, in- domestic borrowing and external financing from cluding GCC countries could see their endurance public sources. seriously shaken by a combination of depressed commodity prices, exports, tourism, FDI and MENA's prospects for 2009­10 remain remittances. subject to significant downside risks, and the endurance of MENA countries will be tested by Policy Options to Mitigate Impact of the depth of the global crisis and the timing of the Ongoing Global Recession global recovery. Three risks are worth highlight- ing. First, a deeper and more protracted global Dealing with Shrinking Fiscal Space recession than currently envisaged or a delayed global recovery could continue to depress de- MENA countries face diverse situations in terms mand for MENA's exports of hydrocarbon and of remaining fiscal space and therefore ability manufactures. Even if global growth turns posi- to mitigate the impact of the financial crisis in tive again in 2010, the level of GDP will remain the months ahead. The report uses the levels well below potential due to large spare capacity of fiscal deficit and public debt to assess fiscal xvii 2009 Economic Developments and Prospects ­ Navigating through the Global Recession space. This suggests that half of GCC countries Rationalizing Subsidies to (Qatar, Oman and the UAE) have comfortable Create Fiscal Space fiscal space, while the other half (Bahrain, Saudi Arabia and Kuwait) have some fiscal space but One way of dealing with shrinking fiscal space might be constrained by a moderate fiscal deficit is to rationalize existing subsidy programs. In (Kuwait) and/or a limited fiscal surplus (Saudi fact, now may be a propitious time to rational- Arabia and Bahrain). Going forward, they will ize MENA countries' high levels of subsidies and need to use their remaining fiscal surplus mod- social spending that tie up a significant share of erately. All other oil exporters (except Iraq) public resources that rarely benefit the social have some fiscal space that needs to be man- groups or sectors for which they are intended. In aged carefully going forward. Thanks to high oil the majority of countries, all fuels and electric- revenues in the recent past, they have been able ity are subsidized. While removing entrenched to maintain a low level of debt. Although they subsidies is not an easy task, and while there is are all expected to run a fiscal deficit in 2009, no ideal time to do so, the time may be ripe for they have some space to increase the level of governments in MENA to rationalize their expen- public debt in hopes that oil prices will not fall sive subsidy programs. First, the argument can be below levels that jeopardize their governments' made that the global financial crisis strengthens ability to accumulate surpluses and repay debt. the case for restructuring poorly targeted safety However, in countries where debt issuance may net programs and other social programs in order be constrained by other factors than debt level, to free up resources to finance critical social it may not be advisable to increase public debt. programs and job creation that would benefit Countries with declining oil production (Yemen, the poor and those who are deeply or directly Syria) should refrain from increasing their debt- affected by the crisis. Second, as fuel and food to-GDP ratio as their repayment capacity may be prices have come down somewhat, the restruc- constrained going forward. turing of subsidy program will not represent an inordinate increase in household expenditure Due to high fiscal deficits, most non-oil for wealthy households who may have to forgo exporters have limited or no fiscal space. Some subsidies they formerly received. Finally, in some non-oil exporters (Lebanon, Jordan and Djibouti) countries, subsidies have created heavy reliance have no fiscal space left. Lebanon in particular on imports, public companies, rent-seeking situ- suffers from a high fiscal deficit combined with ations, corruption and smuggling, which in turn a high debt-to-GDP ratio. Among non-oil ex- have stifled competition and private sector devel- porters integrated with European and OECD opment. The need to spur private sector activity markets, Morocco and Tunisia have some fiscal and growth should be an important component of space thanks to moderate levels of public debt, any stimulus package for economic recovery. So whereas Egypt has no fiscal space and will find removing the "institutional bottlenecks" created it difficult to finance additional stimulus spend- by subsidy programs is yet another reason for ing in 2009­10 over and above the package using the opportunity of the crisis to rationalize already announced by the authorities, unless it subsidies in MENA. can secure low interest financing for the fiscal deficit. With falling fiscal revenues in almost all However, subsidies should be rationalized the countries in the region and with tightening with care so as to maintain--and perhaps in- external financing conditions, domestic public crease--benefits to the poor. In some cases, debt can be an appealing alternative for financing price subsidies, especially food subsidies, do fiscal stimulus packages. However, MENA gov- reach the poor and play an important role in their ernments will need to carefully manage the risks livelihood. Beyond subsidies, countries are con- of crowding-out the private sector. Moreover, in sidering other social spending for rationalization. countries where the cost of servicing domestic Although not all the efforts are directly related debt is already high (Lebanon), the government to the global financial crisis, lessons from previ- may want to avoid adding to that cost. ous crises suggest that in restructuring social xviii Overview spending, countries should favor projects that private. In the post crisis era, countries with ad- can act as automatic stabilizers such as means- equate infrastructure and a conducive business tested social benefit programs whose extension environment will have a particular edge over will occur naturally and should be financed other countries as investors are likely to look for during downturns as more people fall below the profit opportunities while taking minimal risks in eligibility threshold, and this will reverse as the order to make up for the losses of the crisis pe- economy recovers. riod. Despite the heavy impact of the crisis, Dubai appears to be well positioned to take advantage Removing Bottlenecks to Growth of a global rebound--although it is unlikely to regain the pre-crisis level of enthusiasm--helped To benefit from global recovery once the crisis by a high level of investment and a conducive is over, MENA countries will need to use the cri- business environment. sis as an opportunity to remove infrastructure bottlenecks and institutional constraints that Policies to Reduce Vulnerability and have suppressed regional growth for decades. Increase Flexibility to Respond to MENA's pre-crisis growth rate was higher than Shocks over the Long Term historical levels but compared poorly with other regions' growth rates. Given the large needs and The current global financial crisis and economic low level of investment to date, care should be downturn is only the most recent shock to hit taken not to cut too sharply MENA's invest- MENA economies, a region confronted with ment rates as a result of the crisis as seen in large terms of trade shocks, geopolitical shocks, Argentina in the late 1980s and in 2001­02, or frequent droughts, climate change and unstable in Thailand in the late 1990s. Growth resump- security situations. tion in the MENA region is likely to be driven by an expansion of investments at home as well The region's exposure to and ability to as foreign direct investment in, and export to, rebound from economic shocks is a factor of emerging and developing economies where underlying economic structures, the channels the potential for incremental growth is larg- of integration into the global economy, and the est. Recognizing the infrastructure challenge, policies that influence them. Over the long term, some GCC countries (Saudi Arabia, Qatar and reducing vulnerability to economic shocks de- Bahrain) have committed to maintaining high pends on a structural policy framework which levels of infrastructure spending to stimulate can both lower exposure to systemic risk as well their economy. as increase the resilience of economies to cope with shocks when they occur. The role of the private sector in infrastruc- ture should be actively encouraged as part of Limited development of MENA's crisis response framework. This is par- financial sectors ticularly important given the limited or shrinking fiscal space faced by many MENA governments. MENA's weak integration with global financial In the past fifteen years, a country like Egypt has markets partially insulated the region from taken slow but steady steps towards strength- the first-round effects of the current economic ening the role of markets in the allocation of downturn. But over the longer term, the region's resources. These policy changes have yielded a ability to cope with shocks is hampered by the high return in terms of growth and employment, limited development of the financial sector, which shows that changes are possible. Tunisia limited access to financial services by house- has also had some success in private sector-led holds and firms, and limited exposure to global growth. But even in Egypt and Tunisia, and more financial markets. so in most other MENA countries, much remains to be done to create a leveled playing field for Banks dominate the financial sectors of all investors, domestic and foreign, public and non-GCC countries, with non-bank financial xix 2009 Economic Developments and Prospects ­ Navigating through the Global Recession institutions significantly underdeveloped. As a As a result, the MENA region leads the world in result, a host of financial instruments for manag- exposure to commodity price shocks. MENA also ing risk--from insurance products to financial faces terms of trade exposure on the import side, derivatives--are not available to households primarily through the region's heavy dependence and firms. Few private sector firms even uti- on food imports. lize bank credit to finance investment, relying instead primarily on retained earnings. This To deal with this food import dependency, disconnect of the financial sector from the real likely a permanent source of external shock, economy has meant the loss of one of the most MENA countries can better manage the exposure effective tools an economy has for risk mitiga- to food price fluctuations by increasing their use tion, through monetary policy. More generally, a of future markets, future contracts and other well developed financial sector, which provides modern instruments to hedge against supply diversified funding sources for both individuals risks, while ensuring that the impact of food price and enterprises for mitigating risks and insuring shocks is cushioned for those chronically food vulnerability, and in which households and firms insecure households through well-developed and can borrow to smooth the consequences of an targeted safety nets. Universal food subsidies, economic downturn is critical to the broader prevalent throughout the region, are not well economy's resilience--its ability to mitigate and targeted to those in need. But they represent a manage the impacts from shock and adjust to serious fiscal burden, limiting the fiscal scope for the changing conditions present in a dynamic other better-targeted programs. economy. On the export side, MENA countries can While global financial integration--limited best manage their vulnerability by creating outside the GCC--has implied relatively limited a trading environment which both develops financial impacts from the current crisis, over competitiveness (allowing existing firms to bet- the longer term, financial asset diversification ter withstand global demand shifts), as well as in MENA countries will benefit from financial advances export diversification in terms of prod- sector liberalization. International diversification uct quality, geography, and diversification into allowed many of GCC countries to invest their oil service exports (as the GCC has undertaken). surplus into foreign assets, thus avoiding flooding Achieving this broad level of diversification small domestic markets and avoiding overheating requires an equally broad portfolio of policies, and asset bubbles. In addition, it allowed them including improving the incentives for goods to attract foreign investments into their hydro- and services trade, lowering the cost of criti- carbon sectors and create international hubs for cal backbone services to trade, and proactive finance, trade logistics and business. policies to support trade.1 MENA countries are poorly integrated into cross-border production High exposure to terms- networks, reducing the potential for higher of-trade shocks FDI, the collateral knowledge spillovers that usually occur within production networks, and MENA also faces long-term vulnerabilities to opportunities for expanding vertical integra- shock on the trade side. Exports are highly tion. The reasons for this poor integration vary, concentrated around a few products. Among but include low levels of FDI in manufacturing, oil exporting countries, more than 85% of mer- poor regional integration (which might allow chandise exports come from fuel. Among the for important economies of scale), high logistics region's non-oil exporters, the degree of export and transport costs, and for countries outside concentration is high, with the bulk of exports the GCC, Lebanon, Jordan and Yemen, still high in either primary products or products of low trade barriers. technological structure, such as clothing, foot- wear, and textiles. Nor has export concentration fallen significantly over the past fifteen years. 1 Newfarmer, et al. 2009. xx Overview Lack of business flexibility Governance and the ability limiting shock rebound to manage shock One of the greatest weapons against external This problem points to an overarching need for shock is entrepreneurship. An economy in governance reform, not only for improving the which the private sector is able to respond to business environment, but also for reducing market changes by innovating, diversifying pro- vulnerability to shocks in general. Poor gover- duction, and adopting new technologies when nance, in particular through domestic policy circumstances change is able to rebound more mismanagement, can directly and significantly quickly after negative shocks. Several indica- contribute to volatility and the exposure to tors suggest that the private sector in MENA is shocks (through high inflation, overvalued ex- considerably less dynamic than in other regions, change rates, or sustained budget deficits, etc). in ways that are important from an economic Additionally, and related, governance sends key resilience perspective. At 19 years, the median signals about credibility of policy and the ability local manufacturing firm's age is higher than any for the economy to emerge from crisis, affecting other developing region in the world, suggesting both household and private sector responses. significantly weaker firm creative destruction in While good governance cannot ensure shocks MENA. Furthermore, private sector resilience will not hit, bad governance can arguably ensure at the firm level depends on the ability to adjust that the impacts of shocks will persist. activities to accommodate shock, and especially on the labor margin. Outside the GCC, however, Protecting the poor from shock the degree of labor flexibility in MENA is strik- ingly low, particularly from the standpoint of the Finally, MENA countries are distinctly vulnerable difficulties with worker dismissal. Both features to economic shocks from a poverty perspective. point to a more limited ability in MENA to self- Although poverty in MENA is low relative to restructure. other regions, it is characterized by a significant number of people living above but close to the While the region as a whole has made poverty line. As a result, the sensitivity of pov- progress in lowering some of the constraints to erty to external shocks is high. Additionally, few business activity, several areas of reform remain countries in the region have well-developed, well- very low by international standards and have targeted safety nets. Nor does the region have not been tackled by the region. Moreover, aside well-developed mechanisms of social insurance. from specific rules and regulations, the lack of policy certainty and discretion in implementing The importance of access to data to the rules constrains investment in the region. In- predict and respond to shocks vestors in MENA--especially managers of small and medium-sized firms-- consistently point to Perhaps most fundamental, MENA's ability to policy uncertainty and an uneven playing field respond effectively to the social impacts of that favors some incumbent firms at the expense economic shock is hindered by a general disin- of new entrants and competitors. Corruption, terest in systemic gathering and transparent dis- anticompetitive practices, and regulatory policy semination of data. The ability to design safety uncertainty all rank high in the minds of busi- nets and social insurance programs equipped ness managers. In many countries, businesses to deal with a variety of sources of household also point to reform gaps in the regulatory en- vulnerability, as well as to monitor and respond vironment, in access to finance, and in access to to economic crises which occur, depends on land. Rather than policies as they are appear on access to a variety of reliable, high-frequency paper, a large part of the problem seems to lie data. In this area especially, the MENA region with the unequal, discretionary, and preferential falls short. Data collection is limited, and there implementation of policies. are few sources which might aid in monitoring xxi 2009 Economic Developments and Prospects ­ Navigating through the Global Recession social impacts of crisis. Moreover, access to the ability for MENA to prevent future crises information throughout the region is severely and design policies to respond to all of the po- curtailed. As a result, the ability for MENA tential impacts of economic shock will depend countries to design appropriate social policies over the long run on the region's improvement to address the impacts of shock (or prevent in the collection and access to complete, timely, them) is severely constrained. More generally, and reliable statistics. xxii Chapter 1 2008 ­ A Year of Wild Fluctuations in the Global Economy Introduction years. Still, the region's economic performance was quite healthy on average for 2008, with GDP The mid-2007 crisis that started in the US advancing 6.2% in the year, a pick-up from the subprime mortgage market quickly spread to 5.7% gains of 2007. financial markets in almost all industrialized economies. Following the collapse of the invest- This MENA Economic Development and ment bank Lehman Brothers on September 15, Prospects Report for 2009 (EDP-2009) reviews 2008, the sub-prime crisis sent shock waves economic developments during 2008 and exam- through equity and bond markets around the ines prospects for 2009 and 2010 for the MENA world, serving in large part to raise the cost of region within the context of the triple food-fuel- capital for domestic companies in both advanced financial crisis. In the first chapter, Section I and emerging markets, and placing an effective discusses the Triple-F crisis; Section II addresses halt to investment outlays. Over the remainder the transmission of the crisis to the Middle East of 2008, and into the first half of 2009, these and North Africa region; Section III analyzes the events have transformed into the deepest global impact of the crisis on the region; and Section IV recession since World War II, carrying negative covers policy responses to the crisis. impacts on investment, production trade, and GDP across the globe, reinforced by the unprec- The Triple Crisis ­ Fuel-Food- edented simultaneity of the recession. Financial The global financial crisis followed the fuel The fuel-food crisis. Unlike earlier commodity and food crisis in 2008; and this combination price booms, the recent episode (2003 to 2008) of crises--the "triple F-crisis"--is clearly the involved all commodity groups. Commodity pric- most critical economic development of 2008 es increased in a synchronized fashion starting in (at the global level, potentially, of the past 60 2003 and continued to climb for some five years. years) carrying important implications for fu- Average commodity prices doubled in U.S. dollar ture economic developments--and prospective terms (in part boosted by dollar depreciation), regulatory change targeted toward world systems making this boom longer and stronger than any for finance, trade and investment. For MENA other in the 20th century. The initial acceleration countries, as in virtually all regions of the world, in prices was at first visible in oil markets, and the economic implications of these events and was quickly followed by developments in metals their effects on peoples' live are complex. In- and minerals. After increasing some 6-fold from deed, among world regions, MENA is the largest January 2002, prices peaked in July 2008 at $133/ net-exporter of oil and the largest net importer bbl1 but thereafter plummeted by 70% to trough of food. The events of 2008 will therefore carry substantial implications for the region in terms of 1 Oil prices are presented on a World Bank definition, which is economic outturns and prospects over the next the simple average of Brent, Dubai and West Texas Intermediate. 1 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Figure 1.1: Oil price surge unwound by plummeting global demand World Bank crude oil price, 2000 through December 2008 140 July 2008: $133/bbl 120 100 80 60 40 December 2008: $41/bbl 20 0 Jan­00 Jan­02 Jan­04 Jan­06 Jan­08 Source: World Bank simple avg. of WTI, Brent and Dubai. Figure 1.2: All commodites increased sharply at the same time Fertilizers Agriculture Energy Metals 700 600 500 400 300 200 100 0 2002M1 2003M1 2004M1 2005M1 2006M1 2007M1 2008M1 Source: World Bank, DEC Prospects Group. at $41/bbl in December 2008. During early 2009, stable, especially in developing countries, but moderate increases within a range of $50 to $60/ began to rise sharply in early 2007 (figure 1.2). bbl have set in, supported by a number of factors on both the demand and the supply side (figure Following the oil shocks of the 1970s and 1.1). The global financial and economic crisis also 1980s, conservation efforts and substitution occurred on the heels of a world food and fuel towards other sources of energy reduced de- crisis that saw internationally traded food prices mand for oil and depressed oil prices. With reach historic highs in the middle of 2008. The emerging market economies also seeing strong real price of agricultural products remained fairly GDP growth, between 1995 and 2005, world oil 2 Chapter 1: 2008 ­ A Year of Wild Fluctuations in the Global Economy demand increased by nearly 14mb/d, with 8mb/d part due to the increased importance of bio-fuels of that total being met by dormant capacity in in U.S. and European consumption (box 1.1). the former Soviet Union and OPEC. As a result, underlying capacity was growing less than half The cost of higher food and fuel for consum- as fast as demand throughout the 1990s, with ers in developing countries was equal to about shortfalls building with regard to any sustained $680 billion in 2008 ($400 billion related to oil increase in demand. Moreover, as energy prices and $280 to food). Internationally traded and moved higher, a distinct relationship began to dollar-denominated food prices increased by 54% emerge between energy and food/feedstocks, in between January 2005 and December 2007, and Box 1.1: The food-oil conundrum The timing of the rise in agricultural prices points in world maize production since 2004 has gone to strongly to the impact of energy markets. First, agri- meet increased biofuel demand in the United States, culture production, especially in the industrial coun- thereby reducing the quantity available for food and tries, is energy intensive. The increase in oil prices feed uses. Moreover, the increased demand for crops raised the price of fuels to power machinery and used for biofuels contributed to surges in other food irrigation systems, and fertilizers and other chemi- prices by reducing the land allocated to other crops. cals used on a widespread basis. In the United States, The relationship between agricultural and energy for example, fuel, fertilizer and chemicals accounted prices appears to depend on a threshold of energy for 34% of maize production costs in 2007, and 27% costs ($/bbl) when the production of biofuels becomes of wheat production costs. Second, high oil prices economic and begins to increase quickly (box figure sparked an increase in biofuel production in the United 1.1). At oil prices less-than $50/bbl, the relation be- States and Europe that boosted demand for certain tween maize prices and that for oil appears to random- grains and oilseeds--contributing to rapid gains in ize. However, at crude oil prices above $50/bbl, maize their price over the course of 2007 and early 2008 prices display a strong, positive correlation with oil, (Mitchell, 2008). Overall, two-thirds of the increase suggesting both that biofuels policy (in countries such Box figure 1.1: Future policy on biofuels may affect food prices Oil < $50 Oil > $50 350 350 y = 0.4246x + 86.178 y = 2.1166x - 3.3711 300 R2 = 0.0526 300 R2 = 0.7527 250 250 Maize Price ($/ton) Maize Price ($/ton) 200 200 150 150 100 100 50 50 0 0 10 30 50 50 100 150 Crude Oil ($/bbl) Crude Oil ($/bbl) Source: World Bank simple avg. of WTI, Brent and Dubai. (continued on next page) 3 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Box 1.1: The food-oil conundrum (continued) as the United States and the European Union) may ments, which impeded market forces that otherwise come to affect food prices adversely; and that the tight would have helped to attenuate the rise in prices linkage between food and fuel poses an increasing and shorten the duration of the boom. Although the risk for net food importing countries, given changes in various subsidies and price controls that were in global energy markets. place or introduced likely muted the poverty impact of The extent of food price increases during the boom higher prices, they also reduced producers' incen- was probably exacerbated by the actions of govern- tives to increase output and consumers' incentives Box figure 1.2: Internationally traded food prices boost local food CPI sharply Dev-country median food CPI (ch%, y/y) [L] Index of traded food prices [R] International food prices (ch%, y/y) [R] Domestic food price inflation (ch%, y/y) [L] 20 70 60 15 50 40 10 30 20 5 10 5 0 ­10 Jan­00 Jan­02 Jan­04 Jan­06 Jan­08 Source: World Bank. Box figure 1.3: Overall effects tied to actual food price increases ­ MENA hardest hit Percent increase in real food prices, Dec. 2005­Dec. 2007 30 25 20 15 10 5 0 ­5 East Asia Europe & Latin America Middle-East South Asia Sub-Saharan &Pacific Central Asia & Caribbean & North Africa Africa Source: World Bank, DEC Prospects Group. (continued on next page) 4 Chapter 1: 2008 ­ A Year of Wild Fluctuations in the Global Economy Box 1.1: The food-oil conundrum (continued) to substitute less costly items in their food baskets, prices hit hard directly (as well as indirectly, as noted carrying world prices higher still. On a global basis, above). The direct effects of the escalation in interna- the climb of international food prices during the crisis tionally traded food prices were higher in MENA than period worked its way into domestic price levels, in other world areas between 2006 and 2007, as the notably for agricultural commodities that were highly region is indeed the world's largest net food importer import intensive (box figure 1.2). And increases in fuel (box figure 1.3). higher food prices took a toll on poverty. For the income and developing countries alike fell abruptly MENA region, the food price shock for rural poor in the final quarter of 2008, and that trend has con- populations amounted to a boost of 25.9% over tinued into 2009. Unemployment is on the rise in the period, and with food taking up 64.5% of the industrial countries, and poverty is set to increase consumption bundle for this group, purchasing across low-and middle income countries, bringing power of households would have decreased by with it a substantial deterioration in conditions for some 17% over 2 years in the absence of govern- the world's most vulnerable. The crisis provoked ment support policies. Rough calculations suggest a number of cascading developments. A broad that, barring economic growth, a 30% increase liquidation of investments got underway, substan- in food prices in Egypt would have resulted in a tial loss in wealth was realized worldwide through 12 percentage point increase in poverty (in fact, equity market declines and falling home prices, poverty has dropped because there was sufficient bankers tended to tighten lending conditions, and economic growth). In Morocco a 14% increase in uncertainty increased to unprecedented levels. food prices would have yielded a 4 percentage point increase in poverty. These factors prompted a global flight to quality, causing firms to cut back on investment As the financial crisis emerged into the expenditures, and households to delay purchases headlines, the suddenly and increasingly fragile of big-ticket items. Funds were rapidly repatri- international environment served to accelerate ated from emerging market assets to shore-up the already sharp falloff in commodity prices. balance sheets of international investors and fi- By early 2009, oil prices were down nearly 60% nancial institutions in the high-income countries. from their July 2008 peaks, and non-oil com- This rapid increase in precautionary saving led to modity prices, including internationally traded sharp declines in GDP during the fourth quarter food commodities, were off 35%. Lower food and of 2008, a development which intensified during fuel prices have cushioned the poverty impact the first quarter of 2009 (box 1.2). of reduced activity to a degree, and helped to reduce the pressure on current accounts of oil The sharp falloff in commodity prices lessens importing developing countries. But at the same one concern for MENA policymakers--inflation- time, price changes have reduced the substantial ary pressures which had earlier escalated on the surpluses among developing oil-exporters by back of higher food and fuel costs. Nevertheless a as much as 17% of GDP in the MENA and Sub- potentially larger concern is now in play--much Saharan African regions. reduced oil revenues, contraction in oil GDP, and exceptionally sharp decline in demand from ma- The financial crisis. The crisis that erupted in jor trading partners for the diversified economies September 2008, following more than a year of of the region. Still, GDP growth during 2008 was financial turmoil, has evolved into a real-side crisis sustained at favorable levels--indeed close to and a "human" one. Economic activity in high- record rates--in the MENA region by continued 5 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Box 1.2: The global financial crisis During the worst spate of financial turmoil over late as policy actions by central banks and financial author- 2008, global equity markets dropped 40 to 50% (in U.S. ities to shore-up commercial banks and stem declines dollar terms). The MSCI-all developing index off was in lending flows came to support the a more favorable 38% from September through year-end; the GCC mar- tenor for financial markets. Notably, equities stabi- ket index down 47%, contrasted with a 22% loss for the lized toward end-2008, and stocks have shown more Dow Jones Industrials (box figure 2.1). Conditions in persistent gains in early 2009, as the freezing up of financial markets came to stabilize to varying degrees global liquidity appears to have eased. However, real- Box figure 2.1: All bourses hit hard at the worst of financial crisis Equity indexes, March 2008 =100, (U.S. dollar terms GCC TOPIX MSCI-All Dow Jones 120 110 100 90 80 70 60 50 40 30 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Source: Morgan-Stanley. Box figure 2.2: World output plummets ondecline in business investment and exports Industrial production, percentage change (saar) Developing OECD World 15 10 5 0 ­5 ­10 ­15 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Source: World Bank data through Thomson/Datastream. (continued on next page) 6 Chapter 1: 2008 ­ A Year of Wild Fluctuations in the Global Economy Box 1.2: The global financial crisis (continued) side reverberations of these events have taken to the Area continued to deteriorate during late 2008 and fore. World export volumes are anticipated to contract into 2009. Production was falling at a12% pace (saar) (by some 10%) for the first since the early 1980s, and by year-end (box figure 2.2). Across countries, the production and GDP are slated for additional declines sharpest declines in activity have been concentrated in 2009. Against this background, commodity prices among those specialized in the production of durable should, with some exceptions, remain at low levels. and investment goods and in countries with serious Private investment lies at the core of the global macroeconomic vulnerabilities. real-side downturn. Trade and production of manu- The extent of decline in global GDP is substantial. Of factures (notably capital goods) have served as a 25 low and middle income countries for which quar- critical transmission mechanism for a quick spread terly National Income Accounts data are available, 20 of the recession, first among the high-income OECD countries fell to negative growth during the final quar- countries, then to the group of developing economies. ter of 2008 and this adverse momentum is continuing Global economic activity (here measured by indus- into the first months of 2009. Among the industrial trial production) dropped at a 10% annualized rate countries, GDP declined by more than 6% in the United through December 2008 (saar)2; developing countries States during the fourth quarter of 2008, and by 5.7% witnessed a crossing of the `zero line' near the turn in the first quarter of 2009 (saar). As Europe and Japan of the year but were restrained from deeper declines experienced unprecedented double-digit GDP declines due to continuing gains in China. However, conditions in early 2009 (GDP off 9.7% in the Euro Area and 15.2% affecting output among the industrial countries (ex- in Japan (saar)) this suggests a substantially deeper port orders, unemployment, household spending and downturn in growth than had originally been antici- business investment), notably in Japan and the Euro pated by World Bank analysts and others. strong public sector current--(subsidies and remittances partners), or the degree of decline in transfers) and especially investment spending revenues and effectiveness of oil resource man- during the first portion of the year. Notably, the agement for oil dependent economies. Countries' financial fallout at the initial stages of crisis had vulnerability and ability to respond to the crises little in the way of direct effects, outside of the also depends on their initial fiscal and balance GCC countries, and financial spillovers to the of payments positions, as well as external debt remainder of the region is likely to take some and social commitments. With these character- time. Europe, the diversified economies main istics in mind, MENA countries can usefully be export market, held up better than anticipated classified into four groups for the purpose of until the first quarter of 2009. Moreover, policy analyzing the direct and indirect effects of the measures designed to deal with the food-fuel triple crisis: (i) GCC countries, or oil export- crisis for several countries, tended to shore up ers with high hydrocarbon revenue per capita, growth and consumption to rates that otherwise (ii) other oil exporters with relatively less hydro- would have further exposed the countries to the carbon revenue per capita and relatively large initial effects of the new external shocks. populations, (iii) non-oil exporters integrated with the GCC economic area or dependent on Transmission of the Crisis to MENA: A Four Country-Group Typology 2 Industrial production presented at annualized growth rates: Given the nature of the crises, vulnerability saar--`seasonally adjusted annualized rate' is calculated as to shocks for individual economies within the 3-month rolling average growth, converted to an annual basis; this provides a stronger view of momentum, and turning points region has depended on exposure to affected in the data than might be produced by year-over-year growth regions/groups of countries (e.g. key trade or comparison. 7 2009 Economic Developments and Prospects ­ Navigating through the Global Recession foreign development assistance, and (iv) non-oil United Arab Emirates. With GDP of some $800 exporters with diversified economies integrated billion in 2007, the high-income GCC economies with the Euro area (table 1.1). comprise fully one-half of MENA regional GDP. As highly oil dependent economies (exports to Group characteristics and GDP ratio of almost 60%), the GCC countries initial conditions are exceptionally exposed to the boom and bust cycle in world petroleum demand and prices The Gulf Cooperation Council (GCC): Bah- (the fuel crisis). OPEC's quota system for imple- rain, Kuwait, Oman, Qatar, Saudi Arabia, and the menting changes to hydrocarbons output in Table 1.1: Country group characteristics for analysis of the Triple-F crises Country economic GDP Fiscal Net characteristics as of GDP in growth CAB % balance as Hydrocarbons-X hydro-x % Key export calendar year 2007 USD bn 2005­07 of GDP % of GDP % of GDP of GDP % of GDP GCC countries 793.5 5.6 25.2 18.8 58.6 47.5 Bahrain 10.7 7.6 13.2 2.9 35.7 44.9 Kuwait 109.7 7.4 45.6 39.2 58.4 -- Oman 40.1 6.3 4.7 13.7 38.9 39.2 Qatar 71.0 13.1 30.9 11.4 59.1 52.8 Saudi Arabia 381.8 4.0 25.1 12.3 65.7 49.3 United Arab Emirates 180.2 5.6 16.1 25.2 49.2 42.5 Oil exporters with low 539.8 4.9 16.5 7.2 43.3 31.6 per-capita revenues Algeria 134.4 3.3 18.1 11.4 52.2 39.7 Iran 215.8 5.5 15.0 12.3 35.7 23.5 Iraq 61.7 2.3 15.6 25.2 61.8 64.1 Libya 69.7 6.1 33.9 26.2 57.1 -- Syria 39.2 4.6 2.0 ­3.5 9.1 12.0 Yemen 19.1 3.9 ­8.0 ­4.0 25.6 25.6 Diversified exporters 41.6 4.0 ­13.8 ­10.4 0.1 2.5 ..to GCC with links to GCC Djibouti 0.8 4.3 ­8.2 ­3.4 0.0 -- Jordan 15.7 6.7 ­17.0 ­7.9 0.3 ­16.8 11.8 Lebanon 25.1 2.6 ­12.1 ­12.2 -- ­9.1 15.2 Diversified exporters 241.7 5.6 ­0.3 ­4.7 1.1 ­0.5 ..to EU integrated with EU Egypt 131.9 6.1 0.3 ­7.7 0.7 3.4 47.0 Morocco 74.9 4.5 ­0.3 ­0.2 0.3 ­7.5 64.2 Tunisia 34.9 5.3 ­2.6 ­3.0 4.3 0.0 81.0 Memo items: MENA region 1,616.6 5.3 17.6 10.8 43.4 32.3 Oil exporters 1,333.3 5.4 20.0 12.3 47.1 37.8 Diversified exporters 283.3 4.5 ­4.5 ­3.6 1.2 ­0.1 Source: National Agencies, IEA, OPEC, IMF and World Bank staff estimates. 8 Chapter 1: 2008 ­ A Year of Wild Fluctuations in the Global Economy efforts to set a floor for global prices is exerting development assistance: Djibouti, Jordan, downward pressures on output in the oil sectors Lebanon, and West Bank and Gaza. This group of of the group. smaller non-hydrocarbon producing economies of the MENA region is characterized by tight Initial conditions for the GCC entering the links with the GCC through remittances, financial period of the triple-crisis were favorable, with flows and services trade, as well as by a strong recent strong GDP growth (5.6% per year over dependence on external financing, largely from 2005­2007), supported by large oil revenues official sources of assistance. Although affected (net-hydrocarbons of near 50% of GDP in 2007), directly by the run-up in food and oil prices dur- and current--and fiscal balances well in surplus ing 2007 and 2008, effects of the financial crisis in 2007 and early 2008, reflecting the build-up on this diversified group are likely to filter first in receipts over the past 5 years. through the GCC countries, in terms of growth impulses, expatriate employment opportunities Oil exporters with relatively less hydrocar- and FDI flows. bon revenue per capita-and relatively large populations: Algeria, Iran, Iraq, Libya, Syria, and In contrast with oil dominant economies, Yemen. All countries are characterized by large initial conditions for this group of economies and/or growing populations with a demographic were in a much deteriorated state moving into bulge among youth aged 16 through 24 placing the peak of the food-fuel episode, and further continuing pressures on resources. The scale of into the global financial and economic reces- social needs is highlighted for example in Algeria, sion. Current account balances in 2007 ranged where an estimated 1.2 million people are unem- from deficit of 17% of GDP in Jordan to 8.2% in ployed (an unemployment rate of 12%). Most Djibouti. All countries, save Djibouti, exhibited unemployed are young: 75% are less than 30 years substantial fiscal shortfalls--again offering less old and 90% are under 35 years. In Iraq, household fiscal space to provide countercyclical measures surveys suggest that unemployment stands near to the economic downturn. 12% as well, again much higher among younger adults. About a third of all Iraqi wage earners are Non-oil exporters with diversified economies employed by the government and public sectors. integrated with the Euro-zone: Egypt, Mo- GDP for the group is substantial, at $540 billion, rocco and Tunisia. Tight links have been forged dominated by Iran and Algeria. with the European Union by these countries over the preceding 10 to 20 years in goods trade The initial conditions for this group were (EU-Mediterranean Agreements), travaux a positive. Reflecting the increasingly favorable façon (contract work with European manufac- circumstances for oil dominant economies during turers), services flows (tourism), remittances the years leading to 2007, this group displayed and, increasingly, elements of direct investment. comfortable surplus margins on current accounts EU shares of goods exports range from 47% for (16.5% of GDP) moving into the crisis period-- Egypt to a large 81% for Tunisia, increasing the though this masks diverse situations within the exposure of these countries to economic devel- group with Libya's 34% current balance contrasting opments on the Continent. Egypt, with a more favorably with Yemen's deficit of 8% of GDP. The diversified set of export destinations with larger group's fiscal margins were substantially thinner shares for the United States, Central and Eastern than for the GCC group, reflecting expenditures Europe and East Asia (NIEs in particular) in on large scale social programs and infrastructure its export markets as well as a more diversified investments. As such, "fiscal space" to support product base (including hydrocarbons)may find economic stimulus programs would be more dif- some cushioning from the transmission effects ficult to come by, notably for Iran, Syria and Yemen. of the crisis from this mix. Non-oil exporters integrated with the GCC The profile of initial conditions for this group zone, dependent on transfers or official during 2007 appeared balanced, though Morocco 9 2009 Economic Developments and Prospects ­ Navigating through the Global Recession was suffering severe drought which required mas- large infrastructure projects. GCC growth picked sive food imports. Current account positions were up to more than 7% during 2004­05, while the within range of balance, while with the exception group of exporters with larger populations saw of Egypt, fiscal space appeared to be comfortable GDP gains increase to more than 4%, up from an to allow for prudent countercyclical measures. average 2.8% over 2000 to 2002. The Impact of the Crisis on the As the boom in all commodity prices came to MENA Region: Growing with Oil, affect the global economy in an adverse fashion Slowing with Oil over 2007 to mid-2008 and commodity demand began to falter, MENA oil receipts continued MENA hydrocarbon revenues escalated to move up to $995 billion for 2008 on average, sharply through mid-2008. Global oil prices though receipts began to decline sharply over moved substantially higher between 2002 and the second half of the year. GDP growth for the 2007, from $25-to $70/bbl, reflecting both the region's oil exporters reached a recent record supply constraints and demand build that char- high during 2008 at 6.2%. However, important acterized the period. At the same time, crude oil developments over the second half of the year production within the MENA region surged by a have set the tone for a slacking in GDP for oil cumulative 18.6% from 2003 to 2006, and output exporters, as well as the diversified economies of natural gas and natural gas liquids (NGLs) in- of the region. creased by some 13.2% per annum. These factors led hydrocarbon export receipts for regional oil Commodity prices reversed course sharply exporters to jump from $250 billion in 2003 to at mid-year 2008. Non-energy commodity an exceptional $700 billion by 2007, or from 37 prices peaked in July 2008, up 50% over the to 53% of the group's GDP (figure 1.3 and table preceding 12 months, and triple the level of 5 1.2). Such revenues were sufficient to support years earlier, while energy prices were up 85% 5.8% average GDP gains for MENA oil exporters over 12 months and 4.5 times the levels of 5 years between 2002 and 2007, as public current and earlier. Many of the factors which underpinned capital spending accelerated quickly, notably in the jump in oil prices reversed, as the slowdown Figure 1.3: Higher oil prices and MENA production yield windfall hydrocarbon revenues in 2008 MENA oil exporters revenues, billions US dollars Other MENA Other GCC Saudi Arabia 1,050 900 750 600 450 300 150 0 2003 2004 2005 2006 2007 2008 Source: World Bank and International Energy Agency. Note: "Other MENA" include all MENA countries except GCC countries. 10 Chapter 1: 2008 ­ A Year of Wild Fluctuations in the Global Economy Table 1.2: Exports of oil and gas in billions U.S. dollars, 1996­2010 Estimate Forecast Country 1996­1999 2000­2006 2007 2008 2009 2010 MENA region (incl. Iraq) 129.9 339.9 701.4 994.1 428.1 428.2 MENA (excl. Iraq) 124.3 322.5 663.2 935.0 401.5 400.9 average average GCC countries 82.6 224.1 465.1 668.8 282.0 280.0 Bahrain 1.1 2.3 3.8 4.9 2.2 2.2 Kuwait 11.8 28.8 64.1 93.9 38.0 37.0 Oman 5.5 10.2 15.6 21.9 10.6 10.8 Qatar 3.8 16.8 42.0 64.1 25.9 27.3 SaudiArabia 46.3 125.1 251.0 356.2 150.8 147.0 United Arab Emirates 14.1 41.0 88.7 127.8 54.6 55.7 Oil exporters with large 44.4 113.1 233.5 322.5 143.0 144.9 populations Algeria 11.4 32.4 70.2 96.6 42.0 42.0 Iran, Islamic Republic of 15.3 37.8 77.0 103.2 47.0 48.7 Iraq 5.5 17.4 38.1 59.1 26.6 27.3 Libya 7.9 18.3 39.8 54.7 24.3 23.9 Syrian Arab Republic 2.3 3.2 3.6 4.0 1.6 1.5 Yemen 1.9 4.0 4.9 4.9 1.6 1.5 Diversified exporters with strong 0.0 0.0 0.0 0.0 0.0 0.0 GCC links Djibouti 0.0 0.0 0.0 0.0 0.0 0.0 Jordan 0.0 0.0 0.0 0.0 0.0 0.0 Lebanon 0.0 0.0 0.0 0.0 0.0 0.0 Diversified exporters integrated- 2.9 2.6 2.7 2.7 3.1 3.3 with Europe Egypt 2.3 1.6 0.9 1.5 2.0 2.2 Morocco 0.1 0.3 0.2 0.2 0.2 0.2 Tunisia 0.5 0.8 1.5 1.0 0.9 0.9 Note: Oil-exporting countries (excl. Iraq) 123.7 321.4 661.5 933.7 400.5 399.8 Oil-importing countries (excl. 0.6 1.1 1.8 1.2 1.1 1.1 WBG) Source: National agencies, WITS database, IEA, OPEC and World Bank staff projections. in economic activity and fallout from the financial 2000 and 2007--fell slightly in 2008 (0.3%), the crisis induced massive price declines across all first annual decline since 1983. However, demand commodity sectors. By December 2008, crude plunged in the fourth quarter, falling 2.2% or oil prices dropped to $41/bbl--down nearly 70% 1.9mb/d y/y. from July peaks--while non-energy prices fell nearly 40%. World oil demand--which had grown Sharply lower prices induced deep produc- on average by 1.4% or nearly 1.4mb/d between tion curtailment (figure 1.4). OPEC's quota 11 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Figure 1.4: Crude oil production cuts widespread in MENA during late 2008 Crude oil production, kbbl/d, change (%), year-on-year Total MENA exporters Saudi Arabia Kuwait 15 10 5 0 ­5 ­10 ­15 Jan­08 Mar­08 May­08 Jul­08 Sep­08 Nov­08 Jan­09 Mar­09 Source: IEA, World Bank system for implementing changes to hydrocar- in all six economies, despite sharp increases in bons output in efforts to set a floor for global imports. The current account surplus position prices will, in today's crisis environment, exert for the GCC was close to 34% of GDP in 2008. downward pressures on output in the oil sectors of the group. OPEC announced production cuts However the fall in global oil price and choice of more than 4mb/d since September 2008 in an to restrain production to provide a support level attempt to stem the slide in prices and ballooning for prices will come at a high cost--especially of inventories, but it takes time for the cuts to be in 2009. Strong revenue gains are likely to give implemented and impact markets. Saudi Arabia way to much diminished current balance surplus moved aggressively to reduce output, and has positions, in several cases forcing the fiscal bal- stated it will cut production further if needed. ance into red ink. Substantial revenue losses and Under these circumstances, energy (and non-oil) increasing fiscal difficulties moving forward are commodity prices had come to stabilize broadly likely to put a damper on investment outlays, by early 2009. save for projects already long in implementa- tion. Flows of remittances, tourism and FDI to Effects of the massive shift in the diversified economies of the region are set commodity prices on MENA to fall sharply during 2009. GCC countries: GDP growth in the GCC coun- Other oil exporters: (with relatively less tries stepped up to 6.3% in 2008, supported by hydrocarbon revenue per capita and relatively record-high oil prices and increased oil produc- large populations) have faced particularly dif- tion, particularly in Saudi Arabia, where output ficult exposures to the run-up in global food crossed 9.2mb/d by August. As a result, hydro- prices and the later downturn in world oil prices. carbon revenues reached unprecedented levels The former elicited policies in several countries for 2008 (near $670 billion), creating substantial to safeguard the poor from substantial hikes in fiscal surpluses, and underpinning strong public basic food prices; and in some cases to respond investment. Oil export revenues in Kuwait, Qatar, to the accompanying upturn in inflation by tight- and Saudi Arabia increased by over 40% in 2008, ening monetary policy. The sharp decline in oil contributing to large current account surpluses prices has served to reduce budgetary revenues 12 Chapter 1: 2008 ­ A Year of Wild Fluctuations in the Global Economy severely in the face of continued demand for both food and fuel imports (figure 1.5). At the social--and infrastructure spending. Moreover, same time, those economies most dependent contraction of oil and gas output will place strong on flows of remittances and aid from the GCC downward pressures on overall GDP growth into (Djibouti, Jordan and Lebanon) are expected to 2009, an element unlikely to change until prices suffer a downturn in these flows as of the second find a point of stability at (likely) higher levels. half of 2008; while the recent strong trend in FDI emanating from the GCC, targeted toward Diversified exporters: experienced terms of industrial, commercial and residential projects trade relief during the second half of 2008, (and in surrounding countries appears to be easing. here pictured) 2009, as both food and fuel prices declined sharply. The larger benefits are accruing Current account balances shifting dra- to Morocco and Lebanon, highly dependent on matically. As highlighted in table 1.3 (below), Figure 1.5: Terms of trade relief for MENA diversified economies Ratio of export and import prices (in USD), change (%) Morocco Lebanon Tunisia 15 10 5 0 ­5 ­10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: World Bank, DEC Prospects Group. Table 1.3: Current account balance as % of GDP, 1996­2008 Estimate Country 1996­1999 2000­2005 2006 2007 2008 MENA region (incl. Iraq) -- 16.1 21.1 17.5 22.7 MENA (excl. Iraq) 0.8 8.5 21.3 17.6 22.6 average average GCC countries 0.7 12.1 29.1 25.2 32.2 Bahrain ­2.2 4.5 22.0 13.2 32.3 Kuwait 18.5 24.9 49.7 45.6 48.2 Oman ­6.2 9.2 14.3 4.7 16.3 Qatar ­16.5 17.1 28.3 30.9 37.1 Saudi Arabia ­2.4 10.6 27.9 25.1 35.5 United Arab Emirates 5.7 9.6 22.6 16.1 17.5 (continued on next page) 13 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Table 1.3: Current account balance as % of GDP, 1996­2008 (continued) Oil exporters with large populations 3.9 9.9 20.0 16.5 22.7 Algeria 3.1 12.1 24.8 18.1 24.2 Iran, Islamic Republic of 2.8 8.8 16.3 15.0 20.6 Iraq -- 10.5 15.3 15.6 26.7 Libya 12.3 17.5 45.8 33.9 39.2 Syrian Arab Republic 1.3 4.8 2.5 2.0 1.1 Yemen ­0.7 5.9 1.2 ­8.0 ­6.5 Diversified exporters with strong ­14.7 ­13.5 ­11.8 ­13.8 ­22.0 GCC links Djibouti 1.0 1.6 ­8.8 ­8.2 ­6.7 Jordan 0.6 3.9 ­11.3 ­17.0 ­27.5 Lebanon ­22.4 ­22.9 ­12.2 ­12.1 ­19.3 Diversified exporters integrated ­1.4 1.0 1.6 ­0.3 ­6.1 with Europe Egypt ­1.5 1.8 2.4 0.3 ­6.7 Morocco ­0.4 2.3 2.0 ­0.3 ­5.4 Tunisia ­2.8 ­3.4 ­2.0 ­2.6 ­5.4 Note: Oil-exporting countries (excl. Iraq) 1.7 10.2 23.8 20.0 25.7 Oil-importing countries (excl. WBG) ­5.2 ­3.8 ­2.8 ­4.5 ­9.9 Memorandum items: Comparator regions MENA (excl. Iraq) 0.8 8.5 21.3 17.6 22.6 All Developing countries ­0.8 1.9 4.1 3.5 2.7 East Asia and the Pacific 0.9 3.7 8.7 10.4 8.9 Europe and Central Asia ­0.1 1.9 0.9 ­1.0 ­0.5 Latin America and the Caribbean ­2.6 0.1 1.6 0.5 ­0.7 South Asia ­1.7 ­0.2 ­1.5 ­1.6 ­3.8 Sub-Saharan Africa ­1.8 0.5 1.6 ­1.7 ­0.6 Source: World Bank, IMF, National Agencies. the effects of still-high oil prices in 2008, begin- to an unprecedented 32.2% of the group's nings of improvement in the terms of trade for GDP. For the group of oil exporters with large the diversified economies, as well as the initial populations, there was a less dramatic but still negative impulses stemming from the slow- substantial step-up in surplus to near 23% of down in export markets (notably the United GDP. Diversified economies with close ties to States and the European Union) began to hold Europe have witnessed a steep escalation of sway over regional current account balances. deficits during the year, shifting from near bal- Oil exporters as a group witnessed a pickup ance in 2007 to deficit of 6.1% of GDP, a partial in the current account surplus' share of GDP reflection of the effects of the food-fuel crisis to 25.7% during 2008, led by the GCC, where of the 2006­08 period. surpluses continued to burgeon, increasing 14 Chapter 1: 2008 ­ A Year of Wild Fluctuations in the Global Economy Repercussions from the global 2008 peak in January at nearly 11,700, while the financial crisis in MENA index was in the 4,350 range in March 2009, a decline of 63%. The decline was especially sharp The impact on MENA's financial systems has between late August and late November 2008, been limited so far. Though "direct effects" of but the market has traded in a narrow range the financial meltdown in the mature markets since then, in contrast to the continued declines appear to have been minimal for the GCC (little on global stock markets. holdings of so-called "toxic assets" in local bank- ing systems), equity and real estate markets were Outside of the GCC, stock markets in other hit hard as the crisis intensified in the fall of 2008. MENA countries declined as well, though gener- As centers for employment of overseas nationals ally not as sharply as for the former group. The from many MENA countries, especially those of main factors behind the decline in other bourses the Mashreq, adverse effects on remittances for were fears of contagion from the GCC markets, home countries are now being felt. And a recent and to a degree a drying-up of short-term capital sharp step-up in GCC foreign direct investment flows from the GCC. Egypt is among the non- (FDI) across a wide range of countries in the GCC markets that saw the sharpest decline. The region may be at risk, given deterioration in fiscal Egyptian index peaked at 12,000 in April 2008 and balance of payments positions for the group. before declining sharply to 4,300 in December and further to 3,563 in February 2009 (a 66.3% GCC stock markets declined in the last quar- decline). The year's performance had taken a ter of 2008 in similar magnitude as in the major first pounding in May 2008, after the removal developed economies. The decline in GCC stock of privileges of energy-intensive companies in indices was in part a result of repatriation of short free zones. Impacted by the aftershocks of the term capital that had moved to the region on ex- U.S. market collapse which followed the demise pectations that, to avoid the inflationary effects of Lehman Brothers, the Egyptian index fell by of a weakening dollar during 2008, GCC countries almost 30% in October (month on month), as would be under pressure to discontinue their panic selling from Arab and foreign investors currency peg to the dollar. However, short-term took place. capital left GCC markets (i) as the dollar regained some ground in the latter part of 2008, and food In Jordan, the Amman Stock Exchange prices declined sharply, removing a portion of (ASE) index affected by the financial turmoil, inflation pressure; (ii) as policy statements from declined by 9% in July and August before plung- the GCC bolstered confidence in the likelihood ing 35% between August and December 2008. of a currency union in the medium term; and Tunisia and Lebanon appeared to have avoided (iii) as investors losing money on their portfo- sharp declines in stock indices. Tunisia's stock lios in developing countries decided to reduce market followed the global downturn since Oc- their short term exposures in the GCC in order tober 2008 and, as of December 2008 it had lost to rebalance their portfolios. The withdrawal of almost the entire gain realized between Janu- speculative financial inflows was less of a factor ary and September 2008. However, the Tunis in Kuwait--usually an exporter of capital on both Stock Index rose by 1.8% for the whole of 2008 public and private accounts. (figure 1.6). The outflow of short-term capital placed External financing has tightened. Sovereign, substantial pressure on GCC's financial systems. spreads increased markedly in 2008 for MENA Stock market activities declined as a good part of countries, just as for other emerging market the short-term capital had been invested in equi- economies. However, the increase was not bind- ties. Bank lending became more constrained as ing, as MENA countries were able to avoid going some foreign banks gradually withdrew or froze to the market in 2008, apart from Lebanon that new lending. For example, in Saudi Arabia, the was able to rollover maturing debt. Traditionally, benchmark Tadawul All Share index reached a MENA countries that issue sovereign bonds are 15 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Figure 1.6: MENA equity markets show general decline with mixed country results Equity indexes, January 2007 =100, (U.S. dollar terms) Morocco GCC Kuwait Egypt 200 175 150 125 100 75 50 Jan­07 May­07 Sep­07 Jan­08 May­08 Sep­08 Jan­09 Mar­09 Source: Morgan-Stanley. by and large the non-oil exporters (although Qa- sector. But signs of increasing weakness were tar and the UAE recently issued sovereign bonds apparent moving through the final quarter of the in April 2009). Tunisia's sovereign spreads (EMBI year and into the first months of 2009. Global spreads) increased dramatically to more than 600 basis points as of December 1, 2008, GDP growth in the resource rich GCC coun- reflecting higher country risk resulting from the tries stepped up from 5.6% in 2007 to a recent volatile global financial environment. Still, Tuni- high 6.3% in 2008, supported by record oil sia's sovereign spread remains below the MENA prices, increased crude oil production, public and regional average (close to 900 basis points). On private spending and rapid development in the the commercial side, spreads are known to have construction sector. In nominal terms, GDP grew risen sharply as well, though Tunisia-specific data at an unprecedented rate of 32%, as the average are not available. In Egypt, a Eurobond issuance price of crude oil for the year reached a record scheduled for the first quarter of 2008 was post- $97/bbl. Oil receipts provided considerable impe- poned to July 2008 and then postponed again tus to public spending, leading to an increase in until "international markets stabilize". investment in large scale infrastructure projects, particularly in Dubai and Doha, funded primarily Economic outturns for 2008 by GCC central governments. Private consump- tion was also strong through 2008, fueled by GDP growth held up in 2008 for several groups public spending, high levels of employment and within the MENA region, and the region as a wage increases that ranged from 5% in Saudi whole saw a slight increase in GDP growth to Arabia to 30% in Qatar and UAE. However, since 6.1% in 2008 compared to 5.6% the previous the third quarter of 2008, the global situation year. MENA's resilience to the crisis in 2008 is has altered considerably. A rapid downswing in stark contrast with other developing regions in revenues for the oil exporters and a sharp where growth fell from 2007 levels (table 1.4 and reversal in current account positions are in the figure 1.71). MENA's growth in 2008 was helped offing moving into 2009. Investment projects by high oil price for the year on average despite worth almost $2 trillion had been planned in the the sharp decline observed in second half of the 6 economies through to 2012, the large majority year, and by strong growth in the construction of which have been postponed or cancelled due 16 Chapter 1: 2008 ­ A Year of Wild Fluctuations in the Global Economy Table 1.4: Real GDP growth, 1996­2008 Estimate Country 1996­1999 2000­2005 2006 2007 2008 MENA region (incl. Iraq) -- 4.7 4.7 5.6 6.1 MENA (excl. Iraq) 3.5 5.0 4.7 5.6 6.1 average average GCC countries 3.0 5.5 4.0 5.6 6.3 Bahrain 4.0 6.0 6.7 8.1 6.1 Kuwait 1.2 7.6 6.4 4.4 5.2 Oman 2.9 4.8 6.8 6.2 6.2 Qatar 12.0 8.0 15.0 15.3 16.4 Saudi Arabia 2.0 4.0 3.0 3.5 4.6 United Arab Emirates 5.2 7.5 1.2 7.7 7.4 Oil exporters with large populations 4.4 4.0 4.6 5.2 5.6 Algeria 3.4 4.4 1.8 3.0 3.0 Iran, Islamic Republic of 3.8 5.5 5.7 6.2 6.9 Iraq -- ­70.2 6.2 1.5 9.8 Libya 1.3 4.2 5.9 6.8 6.3 Syrian Arab Republic 2.2 4.0 5.1 4.2 5.2 Yemen 5.8 4.3 3.2 3.0 4.0 Diversified exporters with strong GCC links 2.8 4.3 1.9 7.1 6.1 Djibouti ­0.7 2.5 4.9 4.8 5.8 Jordan 2.9 5.8 6.3 6.6 5.5 Lebanon 2.8 3.6 ­0.6 7.5 6.5 Diversified exporters integrated with Europe 5.0 4.2 6.9 5.9 6.5 Egypt 5.1 4.0 6.8 7.1 7.2 Morocco 4.4 4.5 7.8 2.7 5.6 Tunisia 5.9 4.5 5.5 6.3 4.5 Note: Oil-exporting countries (excl. Iraq) 3.4 5.0 4.6 5.7 6.2 Oil-importing countries (excl. WBG) 4.2 4.4 5.4 4.9 5.5 Memorandum items: Comparator regions MENA (excl. Iraq) 3.5 5.0 4.7 5.6 6.1 All Developing countries 4.2 5.4 7.7 8.2 5.9 East Asia and the Pacific 6.2 8.2 10.1 11.4 8.0 Europe and Central Asia 2.0 5.6 7.4 6.9 4.3 Latin America and the Caribbean 3.6 2.7 5.5 5.8 4.3 South Asia 5.7 6.1 9.0 8.4 5.6 Sub-Saharan Africa 3.4 4.3 5.7 6.5 5.3 Source: National agencies and World Bank staff estimates. 17 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Figure 1.7: GDP growth across MENA country groups varied, 2006­08 Growth in percent 2006 2007 2008 8 6 4 2 0 GCC Other oil exporters Diversified/GCC Diversified/EU Source: World Bank data. to the sharp narrowing of fiscal surpluses, and months, those elements which supported growth the tightening of credit markets globally. Fiscal over the last five years are anticipated to unwind: spending is likely to remain high into 2009, as oil prices to remain within a moderate range, the governments implement policies to fight off sig- European export market moving toward near nificant repercussions from the global recession collapse, and slowing of services receipts and on employment and private consumption. remittances will exact a toll on growth for both oil exporters and the more diversified economies For the oil exporters with low per-capita of the region. revenues and large populations, growth moved higher to 5.6% in the year from 5.2% during 2007 For the diversified economies, signs are on the back of strong government spending in that export volumes and values have declined Iran, a step-up in output in Iraq to an estimated sharply, down by as much as 35% in nominal 9.8% and continued 3% advances in Algerian terms since September 2008. Here the key ele- growth. GDP among the diversified economies of ment is the collapse of import demand in the the region registered mixed results in 2008. The Euro Area (as well as the United States) wherein group tightly tied to developments in the GCC the former, French import volume declined 19% economies saw growth fade by a percentage point during the first quarter of 2009, on the heels from 2007 to 6.1% in the year, as slower goods of a 12% contraction in the previous quarter and services exports, FDI inflows and construc- (saar). Exports from Morocco dropped 45% tion work in Jordan and Lebanon exacted a toll from September 2008 through February 2009; on growth. For the diversified economies with those from Tunisia by 31%, and from Jordan by close links to Europe, GDP stepped-up from 18.4%. However, industrial production has held 5.8% to 6.7%, in part tied to Morocco's recovery up better than in most other developing regions, from severe drought in the year preceding, but with output over the same period down by some also powered by continued vibrant 7.2% growth 5% in most countries in the region (notably the in Egypt. oil exporting countries) compared with 12% or more for the world as a whole. For example, These more buoyant conditions are unlikely Egyptian production stood 30% above year-- to persist however, and the onset of the financial earlier levels in November 2008; that in Jordan crisis began to exact a toll on regional growth by 26% as of January 2009. As more recent data into year-end 2008 and 2009. Over the coming becomes available for these countries dominated 18 Chapter 1: 2008 ­ A Year of Wild Fluctuations in the Global Economy by exports to Europe, they will undoubtedly an eventual turnaround in household spending, show substantial deterioration. when economic conditions become less cloudy. Decline in services, income and invest- Policy Response to the Crisis ment flows are beginning to affect the diversified economies. Countries such as Helped by their large financial reserves, and tak- Egypt, Morocco, Tunisia, Jordan and Lebanon ing advantage of declining inflation, GCC govern- derive both balance of payments support and ments have intervened in financial markets to needed supplemental domestic income through varying degrees and using various instruments to exports of services, notably tourism and busi- limit the local financial impact of the global crisis. ness services, remittance receipts from workers At the same time, many countries that earlier suf- abroad and importantly of late, much enhanced fered from the food-fuel crisis have taken policy FDI flows, helping to underpin and catalyze do- steps to mitigate adverse effects on the poor, mestic private and public capital expenditures. including subsidies, targeted income programs Such flows amount to substantial proportions of and other support measures. Eventually, in sev- GDP for these countries. In Egypt for example, eral cases, interest rates were increased to stem total flows represented 18.7% of GDP in 2007, inflationary pressures which were increasing to of which remittances 5.7%, tourism 5.5%, and worrisome levels. For these countries, including FDI 7.6%. Under current conditions in the Morocco, Tunisia, Jordan and Lebanon, among global and regional environment, such income others, initial conditions moving into the financial and investment flows are slated to decline in and real phases of the crisis were less than ideal. absolute terms in coming months and in pro- portion to GDP over the medium term, serving In general terms, countries of the region re- to widen current account deficits for recipient sponded to the triple F crisis using instruments countries, while dampening domestic demand, and focusing on sectors where they perceived as household spending and investment outlays vulnerability to shocks stemming from the exter- lose important pillars of support. nal environment, and which reflected the set of resources available to policymakers. The range Inflationary pressures ease. A brighter spot of policy actions has indeed been broad. As docu- within the generally darker tone of recent devel- mented in the 2008 MENA Economic Develop- opments is a broad easing of inflation rates across ments and Prospects report, some MENA coun- almost all countries in MENA. This is tied in large tries focused on the food/fuel problem during measure to the unwinding of the earlier escala- 2007 and 2008, through subsidies and adjustment tion in food and fuel prices, slowly coming to bear to benefits, also exploring overseas investment on "headline" inflation rates. Inflation moved into in agriculture, as grains prices reached all-time double digits in several countries linked to the highs. The number and breadth of policy changes food and fuel price increases, and authorities in MENA eclipsed those of other developing re- undertook measures to offset the most adverse gions by a wide margin (figure 1.8). Though some effects on the poor, including increased subsidies, of the adverse impacts on poverty in the region measures to boost incomes through higher civil may have been diminished to a degree through service wages, and finally a move-up in inter- these actions, food price changes globally may est rates in a number of countries to counter have been accentuated by these measures, col- the inflationary impulse. For example, Tunisian lectively across countries and regions. Some CPI inflation softened to 3.1% in February 2009 countries, notably the GCC and others, focused (year-on-year) from 4.9% during 2008; Jordan on financial system stability using monetary to 1.5% from 14.9%; and Saudi Arabian inflation policy, injecting liquidity or providing deposit has dropped to 6% from the 10% pace recorded guarantees to respond to the financial crisis in 2008. The current easing of inflation pressures (box 1.3). Some designed more comprehensive is serving to boost the purchasing power of the fiscal stimulus packages (e.g. Egypt), and others broader MENA population, setting the stage for provided targeted support to vulnerable sectors, 19 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Figure 1.8: Policy responses to food crisis were widepread in MENA region Share of developing countries implementing measures below MENA Rest of World 100% 80% 60% 40% 20% 0% Reduce foodgrain Increase foodgrain Export Price controls/ None taxes stocks restrictions consumer subsidies Source: World Bank, DEC Prospects Group. Box 1.3: Policy response to the financial impact of the crisis in GCC countries. The collapse of Lehman Brothers placed increas- bond issue, with the first $10 billion being sold entirely ing stress on GCC interbank markets. Central banks to the Central Bank of UAE. Prior to the sale, Borse responded with stepped-up liquidity provision (as Dubai indicates that it successfully refinanced $3.4 bil- did central banks worldwide), usually allowing for lion in debt. Dubai World continues to implement port & a wider range of collateral than had been accepted logistics sector investments in sub-Saharan Africa. UAE previously. banks begin converting long-term government deposits into Tier 2 capital. Abu Dhabi registers to sell as much UAE. A new $14 billion facility in UAE guarantees all as $10 billion in bonds, with pricing to be disclosed deposits and local interbank loans of UAE banks. The later. Significant ratings downgrades for Dubai compa- Government of Dubai has begun to broker the merger nies continue. Media reports indicate that the emirate's of Amlak and Tamweel (large non-bank mortgage lend- government is developing a strategy to disburse the $10 ers), and the Central Bank of UAE has undertaken loans billion loan from the central bank. to mortgage lender Tamweel. The Federal Ministry of Finance announced a $19 billion 2-year direct deposit Bahrain. Fexible dollar-dinar swap facility initiated in in local banks, while the UAE Central Bank commenced Bahrain. Central Bank of Bahrain begins accepting detailed review of local banks' balance sheets. Abu Ijara (leasing) sukuk as collateral without discount. Dhabi releases "Vision 2030", affirming a long-term Bahrain announces that it will issue a mixture of local agenda of diversification and transition to a knowledge- currency and dollars, conventional and Islamic bonds based economy. The Government of Dubai makes first for deficit financing. The central bank reduces reserve ever detailed budget presentation, which envisages a requirements. rising budget deficit (to about $1 billion) to help support local spending plans. Recurring media reports indicate Saudi Arabia: SAMA announces $40 billion liquidity significant retrenchment efforts among non-bank facility while the government provides verbal deposit financial intermediaries and property developers. guarantee; Saudi government also makes long-term Government of Abu Dhabi provides $4.4 billion in Tier 1 deposit of $2.7 billion in Saudi Credit and Savings Bank perpetual bonds to 5 Abu Dhabi commercial banks. The (SCSB, specialized credit provider for both low income Government of Dubai creates a new $20 billion 5 year households and SME mandates). SAMA cuts one of its (continued on next page) 20 Chapter 1: 2008 ­ A Year of Wild Fluctuations in the Global Economy Box 1.3: Policy response to the financial impact of the crisis in GCC countries. (continued) key interest rates from 0.75% to 0.50%. The statement ing loss. The deposit guarantee is later extended signaled that the central bank was seeking to promote by legislation to all domestic banks. Government lending by discouraging the holding of excess reserves of Kuwait sends financial sector rescue package to with it. Published data show a decline in SAMA net National Assembly; the key element of the package foreign assets, indicating that foreign liquid assets are provides guarantees to local commercial banks that being drawn upon to support domestic policy stimulus. provide refinancing for domestic companies, including investment companies. The Central Bank of Kuwait cut Qatar. The Qatar Investment Authority announces a its benchmark discount rate to 3.0% from 3.5%, the program to take a 20% stake in all local banks. Qatar 5th reduction since October 2008. The Kuwaiti financial government-linked entities provide capital to Credit firm Investment Dar defaulted on an Islamic bond by Suisse. The government of Qatar announces that it will missing a periodic $100 million payment. The central offer to purchase the financial investment portfolios of bank of Kuwait cut its benchmark lending rate by 25 commercial banks, a move apparently designed to fore- basis points to 3.50%. stall concerns about the accounting implications of the large losses on these portfolios. The government of Qa- Oman. Oman implements joint public-private stock tar announced a major expansion in the scope of its sup- market support fund. port for the banking sector, adding to previous measures which purchased capital in banks and allowed them to GCC countries agree on a bailout for Gulf International offload their investment portfolios, the government will Bank (GIB), a specialized investment/merchant bank now spend up to $4 billion (via the Central Bank) buying which was founded by the 6 countries in 1975. GIB had the real estate portfolios of banks at book value. branched into trading of residential mortgage backed securities and suffered significant losses on this Kuwait. The Central Bank of Kuwait guarantees all portfolio deposits in Gulf Bank following revelations of trad- industries or centers of employment growth (e.g. Jordan's limited integration with global finan- Morocco, Tunisia). cial markets has buffered it from recent global financial turmoil, preventing major losses among Monetary measures and banking system banks or capital flight. The Central Bank of support. With inflation easing, MENA coun- Jordan has taken pre-emptive steps to maintain tries were able to use a wide range of monetary confidence and support the domestic money measures in an attempt to stimulate the flow of market, including full guarantee of all bank de- credit and provide confidence to markets. The posits. In Morocco, Oman, Qatar, Saudi Arabia, Central Bank of Egypt (CBE) recently began Tunisia and the UAE, steps have been taken to easing monetary policy. The CBE cut policy ease monetary conditions to the degree feasible. rates by 150 bps in February and March 2009 Lower reserve requirements, moderate reduc- for the first time since May 2006, following a tions in benchmark interest rates and liquidity series of increases in these rates by 275 basis injections are planned or implemented as of points between February and September 2008, this writing. In a related matter, the relative initiated in part to stem food/fuel-import based `isolation' of Islamic finance from international inflationary pressures. The CBE notes that this markets may have served as an overall cushion decision reflects lower risks to domestic infla- for many economies in the region, especially for tion, declining international commodity prices the GCC. And recent interest in the field may and weak prospects for global growth in 2009. be prompting an eventual expansion of Islamic 21 2009 Economic Developments and Prospects ­ Navigating through the Global Recession banking practices to a wider global arena. maintained food subsidies, imposed price con- However, Islamic finance does not guarantee trols and restricted exports. During 2008 rice the absence of risks; recently in Kuwait, a bank suppliers in Egypt were constrained to export specializing in Islamic finance faced financial only up to the amount they could import. This difficulties "export ban" has been extended until further notice. Yemen started providing wheat at a MENA--largely implemented at the time of subsidized price, while expanding and reform- the food crisis can be grouped into two catego- ing a targeted cash transfer program. A second ries. First, as a response to the crisis, several group of policy actions were targeted to ease measures were viewed as means of ensuring the impact of high prices on households, with food availability on local markets at affordable some governments cutting import duties on prices. (As noted, MENA countries are net food certain commodities deemed critical for house- importers and rely on imports to meet about holds' food consumption. For example, Morocco 50% of their food needs). To ease the burden reduced wheat tariffs and started subsidizing of the food price crisis, MENA governments wheat importers. 22 Chapter 2 The Global Economic Environment and MENA's 2009­10 Prospects: Mitigating the Impact of Global Recession Facing an Uncertain Global After a lackluster 1.9% global economic Economic Environment growth in 2008, the world economy is projected to shrink by 2.9% in 2009 before a weak recovery If 2008 was a year of large swings in financial and to 2.0% in 2010. (Figure 2.1). The recession that economic indicators with little impact on MENA, started in the second half of 2008 in advanced 2009 will see the first global recession since World economies has been, and continues to be, rapidly War II with serious impact in MENA countries. spreading across the globe. Many developing As discussed in Chapter 1, the global financial countries which were initially decoupled from crisis had a muted impact on MENA's financial events in developed countries, have now joined systems and little impact on the real economy in the expanding list of economies forecast to con- 2008; however, in early 2009, signs have emerged tract in 2009. Out of 121 countries, the World that the global recession is having an impact on Bank projects that 21 countries will experience the real economies across the region. Although negative growth in 2009--this compares with 5 current projections suggest that a global recovery countries in 2008. could happen in 2010, these projections remains clouded with uncertainties. Even if the global Having by and large avoided the impact of economy starts recovering in 2010, the impact the financial crisis on their financial systems as of the recession on human and physical capital discussed in chapter 1, MENA countries face may linger on and jeopardize growth prospects the prospects of seeing the global recession in some emerging market economies. It is there- transmit to their real economy through various fore important to seek to mitigate the short-term channels. The paragraphs that follow discuss impact of the crisis in MENA. possible global developments which may impinge on MENA's growth prospects in 2009 and 2010. Section I of this chapter will review the main characteristics of the global economic environ- Oil prices are projected to be in the $55­63 ment that will have an important bearing on bbl range in 2009­2010--levels that are above MENA economies in 2009­2010. The impact of the breakeven point for most GCC oil producers the crisis on MENA's prospects for 2009­10 will but below breakeven point for some of MENA's be analyzed in section II. Section III will discuss non-GCC oil producers.1 Several factors are policies that can be envisaged to mitigate the impact of the crisis on MENA economies in the 1 The IMF estimates that the breakeven price is close to $57 per short-term. barrel for many MENA oil producers. Stark exceptions include 23 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Figure 2.1: Global GDP growth rates: %, 1981­2010 6 5 4 3 2 1 0 ­1 ­2 ­3 ­4 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 Source: World Bank data. likely to work to prevent oil prices from increas- work to limit the integration between finance ing significantly in 2009­2010. First, oil prices and commodities. With lower prices (Figure and global industrial production appear to be 2.3) and weakened global demand, hydrocar- correlated and industrial production is project- bon export revenues--the mainstay of many ed to decline by another 12% in 2009.2 (Figure MENA countries--is likely to decline sharply in 2.2). With depressed industrial production, 2009­10. However, current trends suggest that demand for oil will remain low and oil prices the price of oil will remain above breakeven level are unlikely to increase markedly above current for most MENA oil producers. levels. Second, it is unlikely that speculation will be a strong factor in oil prices movements Global trade volume is projected to de- in the next couple of years. Recent additions cline sharply by 9.7% in 2009, the first decline to global oil production capacity--with Saudi since 1982 and the biggest drop in 80 years Arabia's having increased its potential produc- (Figure 2.4).This sharp contraction in trade is tion capacity from 10.5 to 12.5 billion barrel likely to affect the MENA region in two major per day--thanks to recent investments--along ways. First, the decline in global trade affects with excess production capacity that may have directly export of oil, oil-related products (such been created by recent production cuts by OPEC, will work to lull any speculative price increases, even in the face of possible isolated Iraq and Iran with breakeven oil prices of $111 and $90 per supply disruptions. Oil inventories in developed barrel. Oil price at breakeven level is where a country would achieve fiscal balance. (see IMF, 2009a.) countries continue to be high--indicating a 2 A study by Ewing and Thompson, 2007 shows that the crude oil supply overhang.3 Third, the securitization prices are procyclical and lag industrial production by 1 month, of commodities that contributed to oil price as indicated by Hodrick-Prescott and Baxter-King or 2 months, as indicated by Christiano-Fitzgerald filters. Also a simple regres- increases in 2003­08 is unlikely in the short- sion of the lagged oil prices (2 months) on the world industrial term, as capital markets remain depressed or production done for the purpose of this chapter showed a strong recovering slowly from the doldrums of the 2008 positive relationship between these two variables for the period of 2005/01­2008/08 (R2 = 0.77). crash. Moreover, tightening regulations in the 3 In the long term, as the global economy recovers, it is possible aftermaths of the crisis and increased public that supply constraints may reappear unless new investments intervention on global capital markets might in oil or alternative source of energy take place. 24 Chapter 2: The Global Economic Environment and MENA's 2009­10 Prospects: Mitigating the Impact of Global Recession Figure 2.2: Industrial production growth, % change, 2008/01­2009/02 Developing Countries, IP Index, SA, % y-o-y High Income Countries, IP Index, SA, % y-o-y 15 10 5 0 ­5 ­10 ­15 ­20 2008M01 2008M02 2008M03 2008M04 2008M05 2008M06 2008M07 2008M08 2008M09 2008M10 2008M11 2008M12 2009M01 2009M02 Source: World Bank data. Figure 2.3: Average oil prices, US$, 2000­2010 120 100 80 60 40 20 0 2000­05 2006 2007 2008e 2009f 2010f Source: World Bank data. Note: Oil prices are in average of Brent, WTI and Dubai crude prices. as petrochemicals), and manufactured goods MENA's Economic Prospects (mostly garments) to Europe and OECD coun- for 2009­10 tries. In fact, the region's exports declined by 7% in the third quarter of 2008 when the recession Overview was already affecting OECD countries. The sec- ond channel through which sluggish global trade Although the MENA region held up fairly well will impact the MENA region is through lower in 2008 and was able to brush off the first wave trade related services--an important source of of impact of the global financial turmoil on na- foreign exchange for countries like Egypt, Dji- tional financial systems, it will experience serious bouti and the UAE. impact on the real economy, households and 25 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Figure 2.4: World export revenues, US$ million, 2007/01­2009/01 1300000 1200000 1100000 1000000 900000 800000 2007M1 2007M3 2007M5 2007M7 2007M9 2007M11 2008M1 2008M3 2008M5 2008M7 2008M9 2008M11 2009M1 Source: World Bank data. workers as the crisis has now mutated from a the demand perspective, public consumption re- financial crisis to a globally synchronized reces- mains relatively steady (helped by fiscal stimulus sion. As reviewed in chapter 1, MENA is the only spending) while sharp falls in investment and region that was able to avoid a decline in GDP exports drive down GDP growth (Table 2.1). growth in 2008 compared to the previous year. MENA's growth rate is expected to rebound to 4% However, the region is projected to see a marked in 2010, but this rebound is expected to be less decline in its overall growth, with regional growth marked than in other regions. Growth resump- projected to decline sharply from 6.1% in 2008 tion in 2010 is likely to be driven by expansion of to 2.2% in 2009 (figure 2.5). However, this sharp investments at home, starting in GCC countries, decline puts MENA in a relatively good position as well as investments in, and exports to, other compared to some other developing regions-- emerging and developing economies where the MENA's growth rate is comparable to develop- potential for incremental growth is the largest. ing country average of 2.1%. From the sectoral In 2010, even if growth turns positive again, GDP perspective, MENA's growth decline in 2009 and growth will remain well below potential due to 2010 will be mostly led by a sharp contraction in large spare capacity and necessary corrections the hydrocarbon sector across the region. From in global consumption patterns. Table 2.1: GDP growth by demand and contribution to growth, %: MENA, 2008­2010 Gross Exports of Imports of Demand Private Government Domestic Goods and Goods and components GDP Concumption Concumption Investment Services Services 2008e 6.1 6.2 10.2 7.9 6.3 11.2 2009f 2.2 1.8 8.0 0.8 ­3.7 0.8 2010f 4.0 3.8 6.9 3.9 2.2 5.2 Contribution to Growth 2008e 6.1 3.6 2.3 3.1 3.0 ­5.9 2009f 2.2 1.6 2.0 0.7 ­1.0 ­1.0 2010f 4.0 2.4 1.8 1.7 1.2 ­3.1 Source: World Bank data. 26 Chapter 2: The Global Economic Environment and MENA's 2009­10 Prospects: Mitigating the Impact of Global Recession Fiscal and current account balances will to the financial crisis. Weaker economic activity deteriorate sharply across the MENA region. and weaker fiscal revenues will make the situa- Although the levels remain more comfortable tion even more difficult. than in other regions, the decline in MENA's fiscal and external accounts is sharper (Figure Inflation in many MENA countries is likely 2.5). Large fiscal space built in recent years is to be the silver lining of the global financial likely to vanish, or at least decline significantly, crisis in 2009­10, from being the major concern as MENA governments pay for subsidies and in developing countries in the first half of 2008. wage increases committed in 2008 in response The inflation picture in MENA will improve as to food and fuel crisis, and as they now turn their in other developing regions (Figure 2.5). The attention to additional fiscal stimuli in response declining prices of global commodities including Figure 2.5: Regional key macroeconomic indicators, 2008­2010 Growth Rates, % 2008­2010 2008e 2009f 2010f 10 8 6 4 2 0 ­2 ­4 MENA Developing EAP ECA LAC SA SSA Countries Current Account Balance as % of GDP, 2008­2010 2008e 2009f 2010f 25 20 15 10 5 0 ­5 ­10 ­15 MENA Developing EAP ECA LAC SA SSA Countries (continued on next page) 27 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Figure 2.5: Regional key macroeconomic indicators, 2008­2010 (continued) Fiscal Balance as % of GDP, 2008­2010 2008e 2009f 2010f 20 15 10 5 0 ­5 ­10 ­15 MENA Developing EAP ECA LAC SA SSA Countries CPI Inflation rate, %, 2008­2010 2008e 2009f 2010f 25 20 15 10 5 0 MENA Developing EAP ECA LAC SA SSA Countries Source: World Bank data. food, and the strengthening of the dollar vis-ŕ-vis North Africa in 2009 compared to 2007. In many major international currencies, have contributed GCC countries, foreign workers suffered the most to lowering consumer price indices across MENA. from job loss. The number of foreign workers in Kuwait for example dropped to 1.75 million Despite a decline in inflation, households and at the end of 2008 from 1.77 million in 2007. workers are likely to feel the impact of the crisis About 90% of Dubai's workforce is foreign-born sharply in 2009­2010. Data is not yet available and most are in the country on work visas that to assess the social impact of the crisis across are cancelled when their jobs are lost. In Egypt, MENA. However, initial indications suggest that employment growth has slowed down by 30% in economic slowdown has caused a weakening in Q2-FY094 compared to the Q2-FY08 which led to the region's already lackluster ability to create an increase in the unemployment rate to 8.8%5. In jobs and caused massive layoffs in some coun- tries. In fact, the International Labor Organiza- 4 Fiscal year ends June 30. tion (ILO) projects an increase in unemployment 5 Ministry of Manpower and Migration. and Labor Force Sample rate of about 25% in the Middle East and 13% in Survey, CAPMAS. 28 Chapter 2: The Global Economic Environment and MENA's 2009­10 Prospects: Mitigating the Impact of Global Recession Jordan, the unemployment rate reached 13.0% in albeit slower growth in tourism receipts in 2009 Q2 2009, up from 12.1% in Q1 2009 and 12.5% in and 2010, the rest of the country groupings is Q2 2008. On the positive side, in Saudi Arabia, the likely to move to negative territories in 2009 but Cabinet approved two labor market liberalization are expected to see some improvements in 2010.7 measures. First, migrant laborers working in the (Figure 2.6) public sector via contractors can now shift their work authorization to a new contractor without Remittances have also been resilient so needing a new visa. Second, the Cabinet opened far but are projected to decline in 2009 before the professional and social sector services to experiencing a mild recovery in 2010. Partly nationals of any GCC country, implementing a reflecting the deterioration in labor market long-standing GCC objective. conditions worldwide, remittances to develop- ing countries began to fall in the last quarter of Tourism and remittances will not be able to 2008, a trend that has continued into 2009. For sustain high GDP growth in MENA in 2009 and 2009 as a whole they are expected to decline possibly 2010. Even though tourism has been by 7.3% (Figure 2.7). In MENA, remittances somewhat resilient, it has not been immune grew in 2008 but at a slower pace of 8.6% than and a decline is expected in 2009. International 17% during 2006­07; they proved resilient in tourism arrivals declined by 2% in 2008 from 2008. However, they are likely to lose steam an average growth rate of 7% in 2004­2007. in the rest of the year and are projected to fall Preliminary estimates by UNWTO indicate that international tourism arrivals will stagnate or even decline slightly (­2%) in 2009.6 In MENA 6 UNWTO, (2009), "World Tourism Barometer, Quick overview tourism receipts grew by only 10% in 2008, much of Key Trendsî, Vol 7, No.1. slower than the growth of 45% in 2007. With 7 Countries in the region are putting in effect policies to pro- global recession persisting and wealth effects mote tourism demand. In Egypt for example a set of measures aimed at bolstering tourism such as exempting hotels from settling in, MENA's tourism receipts are expected paying contributions to the country's tourism promotion author- to contract about 3% in 2009. Apart from GCC ity, and cutting fees paid by charter flights were announced in countries which are expected to show positive early 2009. Figure 2.6: Growth in tourism receipts: MENA country groupings, %, 2008­2010 2008 2009 20010 25 20 15 10 5 0 ­5 ­10 ­15 GCC countries Oil exporters with Diversified exporters with Diversified exporters large populations strong GCC links integrated with Europe Source: World Bank data. 29 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Figure 2.7: Regional growth in remittances flows, %, 2008­2010 2008 2009 2010 40 30 20 10 0 ­10 ­20 EAP ECA LAC MNA SA SSA Source: World Bank data. by 6.2% in 2009.8 This rate of decline is one of remain tight for MENA in 2009 and possibly 2010. the lowest across developing country groups. Global FDI flows are projected to fall sharply in The resilience shown by remittances in MENA 2009; and MENA will be directly affected.9 FDI may be due to the fact that migrants continue flows are low in MENA, and while their level is to send remittances as long as they have a job holding up, they are expected to decline slightly (even if new migrants are not arriving) and mi- in 2010 as investors complete large projects that grants having lost their jobs return home with they started before the global financial crisis and their stock of accumulated savings thus helping could not easily interrupt without incurring large to compensate for reduced flows of remittances. financial losses and now postpone, cancel or scale If the global recession persists and deepens, it is back new projects (figure 2.8). In fact, FDI has expected that in 2009, these resilience factors started declining in some MENA countries. In will weaken and remittance levels could decline Egypt for example, FDI declined by 50% in early more sharply. In addition to being a recipient 2009 compared to the previous year. As in many of remittances, MENA is also an important developing regions, short-term capital flew out of supplier of remittances. Thus MENA will not MENA quite suddenly in 2008. The phenomenon only suffer from decline in remittances but was more apparent in GCC countries that had with lower oil prices and close to zero growth both attracted short-term flows and had open (in 2009 and expected low growth in 2010) in capital accounts. Several factors are likely to major remittance source countries among the impede the return of short-term capital to MENA Gulf countries (Saudi Arabia and UAE), MENA in the short-term. First, regional stock markets will generate much less remittances for regions remain depressed. Second, expectations of cur- like South and East Asia. It is projected that in rency depreciation in the GCC--a major factor 2009, remittances outflows from GCC countries behind short term inflows in GCC countries prior will decline sharply by 9% compared to 37% to September 2008--have subsided in the face growth in 2008. Like for most emerging markets and develop- 8 World Bank 2008a. ing countries, external financing conditions will 9 UNCTAD, 2009a. 30 Chapter 2: The Global Economic Environment and MENA's 2009­10 Prospects: Mitigating the Impact of Global Recession Figure 2.8: FDI as a share in GDP, %, MENA country groupings, 2008­2010 2008e 2009f 20010f 18 16 12 10 8 6 2 4 0 ­2 MENA region GCC countries Oil exporters with Diversified exporters Diversified exporters large populations with strong GCC links integrated with Europe Source: World Bank data. of lower inflation pressures. Finally, with lower by large financial institutions with guarantee oil price and wealth effect of declining stock from their governments. Even so, an Abu Dhabi market indices, there will be less complementary state-owned investment vehicle, Mubadala, suc- domestic capital to serve as magnet for short cessfully managed the first corporate bond issue term foreign flows. in the GCC since September. The sale raised US$ 1.75 billion, with about two-thirds in 5 year Although international bond markets have bonds at about 400 basis points (bp) above US improved somewhat from the fourth quarter Treasuries and the remainder in 10 year bonds of 2008, conditions are likely to remain tight at a 460 bp premium. Corporate borrowing has for MENA sovereign and corporate borrowers. remained tight since the beginning of the crisis, With large stimulus packages to be financed in although there are signs of easing. For example, developed countries, there are fears that emerg- the Abu Dhabi International Petroleum Invest- ing market sovereign bonds will be crowded ment Corporation is expected to soon complete out by bonds issued by developed countries.10 a US$3.5 billion syndicated loan which will Nonetheless, emerging markets with market ac- be the first large scale syndicated loan in the cess can take advantage of declining interest and region since the financial crisis deepened last spreads in 2009: countries like Brazil, Colombia, September. The Philippines and Turkey were able to make large sovereign bond issues in January 2009. Finally, ODA is expected to decline some- However, in 2008 and 2009, only three MENA what in 2009, with the risks that this will impose countries--Lebanon, Qatar, and the UAE--have issued bonds on the international financial 10 In March, net foreign purchases of U.S. long-term U.S. secu- market. Although sovereign bond spreads have rities were $ 56.6bn (up from $20.8bn in Feb and net sales in declined from their peaks reached in late 2008, January and November) private foreign investors bought $30bn they remain above mid-2008 levels. A second fac- ($25.9bn in Feb) and foreign official institutions $26.4bn (rever- tor that may crowd out emerging market sover- sal from net sales in Jan and Feb combined). Some European countries have borrowed abroad massively (Germany: US$US$ eign and corporates' access to the international 2.3trn, the Netherlands: US$US$ 1.9trn, the UK: US$US$ 4.5trn). bond market is the large issuance being made [Source: RGE Monitor, 5/18/2009]. 31 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Figure 2.9: Spreads basis points delta since Sep 15, 2008, 01/01/2007­04/20/2009 Egypt Lebanon Tunisia 800 700 600 500 400 300 200 100 0 ­100 ­200 ­300 2008:01:01 2008:01:29 2008:02:26 2008:03:25 2008:04:22 2008:05:20 2008:06:17 2008:07:15 2008:08:12 2008:09:09 2008:10:07 2008:11:04 2008:12:02 2008:12:30 2009:01:27 2009:02:24 2009:03:24 Source: World Bank data. pro-cyclical forces in ODA dependent countries an average of 5.5% during 2004­08 to 1.1% and in MENA. ODA tends to be pro-cyclical with eco- 4.2% in 2009 and 2010. However, with their nomic cycle in source countries. For example, significant financial reserves, GCC countries are ODA to LICs fell by 3% during crises in Nordic likely to be able to maintain countercyclical fis- countries in early to mid-1990s. With today's global cal stances and ride the storm comfortably if oil synchronized crisis, source countries are likely to prices stay above $50 bbl throughout 2009 and reduce ODA at a time when recipient countries 2010. While their fiscal revenues are projected are also affected by the crisis and need ODA in- to decline by 40% of GDP in 2009, expenditure creases to implement counter-cyclical fiscal poli- is projected to remain at its 2008 level, leading cies. Economies like Yemen, Djibouti, West Bank to a sharp decline in fiscal balances, financed and Gaza will suffer if ODA levels are cut back. mostly with drawdown on past reserves. 11 Capital expenditures in particular are expected Prospects by country grouping to be sustained at high levels. (Figure 2.10). Across the GCC, inflation is expected to ease Gulf Cooperation Council (GCC) ­ Bahrain, to 7.6% and 4.7% in 2009 and 2010 from 11.4% Kuwait, Qatar, Oman, Saudi Arabia, and UAE in 2008, partly because of a drop in world com- modity prices in 2009 and the stabilization of As a group, GCC countries are poised to expe- the US dollar--to which most GCC currencies rience the sharpest growth contraction among are pegged--against the euro and other world MENA countries in 2009. Although the impact currencies. External balance in GCC countries is on growth in 2008 was limited, the sharp decline expected to decline sharply to 13.2% and 16.7% in oil prices since mid-2008 and continued de- of GDP respectively in 2009 and 2010 from its pressed demand for oil on global markets are peak level of 33.6% in 2008, while their fiscal ushering in lower economic growth in 2009 and balance will deteriorate sharply from 26.6% of 2010 in virtually all GCC countries, with the ex- GDP in 2008 respectively to 5.3% and 7.2% of ception of Qatar. In fact the two MENA countries GDP in 2009 and 2010. projected to enter recession zone, Saudi Arabia and Kuwait, are among the GCC. For the GCC as a whole, growth is projected to decline from 11 Source; IMF, 2009c. 32 Chapter 2: The Global Economic Environment and MENA's 2009­10 Prospects: Mitigating the Impact of Global Recession Figure 2.10: Capital expenditures: GCC, US$ billions, 2007­2010 80 70 60 50 40 30 20 10 0 2007 2008 2009 2010 Source: World Bank data. Oil exporters with low oil revenue per capita Non-oil exporters reliant on ­ Algeria, Iran, Iraq, Libya, Syria, and Yemen financial flows from GCC or official development assistance from OECD Although their public finances and external re- ­ Djibouti, Jordan, Lebanon, WBG serves will be stretched, oil exporting countries with large populations and social commitments Non-oil exporting countries with strong eco- relative to their hydrocarbon wealth will avoid nomic linkages with GCC countries (through recessionary growth in 2009 and 2010. Oil GDP remittances, FDI or tourism) and/or with strong will decline sharply but non-oil GDP will help dependency on foreign aid are seeing a stagna- maintain economic growth in positive territories. tion of financial flows from GCC and face the Real growth is projected to decline from an aver- challenge of mobilizing aid at a time when source age of 5.6% in 2008 to 2.7% and 3.5% respectively countries are affected by the crisis. Countries in 2009 and 2010. With Iran's double digit inflation in this group entered the crisis with generally rate (23.5% in 2009) continuing into 2010, it is weak macroeconomic frameworks character- expected that the group's inflation will average ized by high fiscal deficits, high debt levels, and 15.1% and 12.7% respectively in 2009 and 2010. tight external positions (see chapter 1). Their Although, public finances will benefit from declin- ability to conduct counter-cyclical policies will ing outlays for fuel subsidies on account of lower be dependent on fresh external flows or rollover oil prices, countries in this group will see large of existing debt combined with a rationalization swings in fiscal balances from a group average of expenditure patterns. Growth is projected to of 5.5% of GDP in 2008 to a projected negative slow to 2.5 and 4.2% for the group in 2009 and 6.6% and negative 1.8% of GDP in 2009 and 2010. 2010 compared with 6.1% in 2008. Inflation will Large swings will also be observed in current ac- ease to 5­6% from its high level of 12.5% in 2008. count balances from an average of 22.7% of GDP The group's average fiscal balance will remain in 2008 to 2.2% and 3% of GDP respectively in negative in 2009 and 2010 (around negative 4 and 2009 and 2010. While some countries are tight- 2.5% for both years), although it will show some ening up their fiscal stance due to lack of fiscal improvement over 8.4% in 2008. The group's space and limited borrowing capacity (e.g. Iran), average current account balance will remain in others are able to envisage counter-cyclical poli- negative territories but will improve over 2008 cies thanks to available reserves from previous and reach negative 9.9% and 6.9% of GDP re- years' oil revenues (e.g. Algeria). spectively in 2009 and 2010. The improvements 33 2009 Economic Developments and Prospects ­ Navigating through the Global Recession in fiscal and external balances will be driven by in MENA's real economy could affect the financial contractionary policies in the absence of space sector through feedback loop effects. for large fiscal stimuli. Risk of prolonged global recession Non-oil exporters with strong economic linkages with Eurozone and OECD ­ Despite signs that the recession may be bottom- Egypt Morocco, and Tunisia ing out in the US and some other OECD coun- tries, signs also abound pointing to the possibility Non oil exporters with strong economic linkages that the global economic crisis may become more with the Eurozone and OECD--Egypt Morocco, protracted or deeper in the months ahead. So- and Tunisia--entered the crisis with relatively called "green shoots" emerged in the U.S. toward good macroeconomic stance, although with al- the end of the first quarter of 2009 providing signs ready tight fiscal space. With real GDP growth that the U.S. economy might be on the path to rate averaging nearly 6.5% and inflation rate of recovery. Manufacturing surveys suggested that 6.8% in 2008, this group of countries experi- as of the end of the first and the beginning of the enced the highest growth and lowest inflation second quarters of 2009, the manufacturing sec- rates among sub-groups of MENA countries. tor was contracting at slower rates in advanced However, they started feeling the impacts of the economies than at the end of the fourth quarter crisis on their real economy as early as the last of 2008. China's index showed signs of recovery. quarter of 2008 as the recession spread across However, considering the large extent of wealth Europe and other export markets. Growth is effects of big losses in the OECD banking sectors expected to decline to about 4% and inflation and excess capacity, the recent "green shoots" should be contained at about 5.2% and 4.3% in could well be short-lived. In April, the IMF es- 2009 and 2010. Fiscal balance is projected to timated that, during the period 2007­10, banks remain at the same level of 2008 of about 4% of and other financial institutions faced potential GDP in 2009 and 2010. Current account deficit aggregate losses of $4.05 trillion in the value of is expected to average at about 5% of GDP in their holdings as a result of the crisis12. Of that 2009 and 2010. Countries in this group can build amount, $2.7 trillion is from loans and assets on their good track record of sound macroeco- originating in the United States. That estimate is nomic policies and structural reforms to mobilize up from $2.2 trillion in the fund's interim report financing needed to implement countercyclical in January and $1.4 trillion last October. In the policies. United States alone, banks reported $510 billion in write-downs by the end of 2008, and they face Downside risks to the prospects an additional $550 billion in 2009 and 2010. In the countries of the euro zone, banks reported MENA's prospects for 2009­10 remain subject to just $154 billion in write-downs by the end of last significant downside risks that will test the endur- year but still face $750 billion in projected write- ance of countries and how they would fair in the downs. Such large projected write-downs could face of a possible persistence or deepening of the extend the credit squeeze faced by producers crisis. Three such risks are worth highlighting. and consumers, thus delaying the recovery in First, a deeper and more protracted global reces- the US and OECD countries. sion than currently envisaged or a delayed global recovery recession could continue to depress The large investments in housing and demand for MENA's exports of hydrocarbon and manufacturing sectors around the world prior manufactures. Second, unchecked protectionist to the global financial crisis, especially in the tendencies from trading partners or MENA coun- high-income countries and emerging markets, tries could jeopardize MENA's contribution to now constitutes excess capacity and represents global recovery through trade and affect MENA's growth and employment prospects in the short term. Third, a sharp or persistent deterioration 12 IMF, 2009d 34 Chapter 2: The Global Economic Environment and MENA's 2009­10 Prospects: Mitigating the Impact of Global Recession another factor that could delay global recovery worse. In responding to the current crisis, gov- until 2010. Globally, investment grew at 3.8% ernments around the world have so far managed during 2000­07 driven by growth prospects to avoid or limit such policies. However, protec- and driving growth--especially in MENA where tionist tendencies are on the rise and a number investment growth reached 17% in 2007 and of the policy measures adopted in 2008--in both contributed 4% to growth. Growth in investment developed and developing countries (including added to global supply capacity, which has now MENA), are akin to trade protection. translated into excess capacity, and further dis- suading investors from going into new ventures In developed countries, the group of G20 or expanding existing capacity. On the other proposed a total of 78 trade measures, of which hand, aggregate demand has been drastically 66 measures involved trade restrictions. To date reduced following massive loss of wealth and 47 trade-restricting measures have been put in deleveraging in the financial sector that reduce effect in 17 countries of G20.14 These include funds for investments and consumption globally. tariff increases, non tariff measures and subsi- This reduction in investment and consumption dies. About a third of these measures are tariff could lead to negative growth and deflation, increases. For example, Russia raised tariffs on possibly increasing the extent of the excess used auto and Ecuador raised tariffs on more capacity in the short term, and delaying global than 600 items. Non-tariff measures have also recovery.13 been taken by several countries. Argentina for example imposed non tariff measures on auto Even if the recovery in the US and OECD parts, textiles, and leather goods, China tight- occurs in 2009 or 2010, there are uncertainties as ened its standards (which have slowed import to whether recovery in emerging market econo- entry), India banned Chinese toys, and EU an- mies, including the MENA region, will be syn- nounced new export subsidies on dairy product. chronized with, or lag, US and OECD recovery. Subsidies proposed for the auto industry have Indeed, just as the impact of the crisis in MENA proliferated with total of $48 billion worldwide, lagged the impact in OECD and most other with more than 92% ($42.7 billion) allocated in emerging market economies, it is possible that high-income countries. United Kingdom, China, MENA's recovery also lag the US and OECD's. Argentina, Brazil, Sweden and Italy have pro- This risk would be greater if MENA governments' vided direct or indirect subsidies in addition to response to the crisis does not address some of the US direct subsidy of $17.4 billion to its three the impediments to private sector activities and national companies.15 Moreover Australia has distortions in the use of public resources. managed to support its car dealers, while South Korea and Portugal support their component Risk of protectionist measures suppliers. Another risk clouding MENA's prospects is Should current protectionist tendencies gain the temptation of trade protectionism around momentum, the impact on MENA economies the world. With trade flows on the decline and would be detrimental. Early indications are that countries under pressure to reestablish macro- trade restrictive measures taken in 2008 will not economic balances, ensure adequate supply to be repeated in 2009. With inflationary pressure their domestic markets, and use tax payers re- sources to save the domestic economy and jobs, policy-makers might be under pressure to err World Bank, 2009b 13 14 World Bank, (2009), "Trade protection: Incipient but Worri- on the side of protectionism. During the Great some Trends", Trade Note #37. Depression in the 1930s, countries resorted 15 In addition to the non tariff measures taken by US is the to protectionist measures and implemented provision in the stimulus bill that "None of the funds appropri- ated or otherwise made available by this Act may be used for a beggar-thy-neighbor policies such as competi- project for the construction, alteration, maintenance, or repair tive devaluations and trade restrictions to limit of a public building or public work unless all of the iron and the impact of the crisis. This move made things steel used in the project is produced in the US." (Sec. 1110(a)). 35 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Box 2.1: Example of measures that can limit MENA's contribution to global trade In response to lobbying request from within the all government authorities prohibiting the import of domestic steel industry, Egypt imposed a 10% import any final goods that have local substitutes of similar tariff on cold-rolled flat-tin sheets, on top of existing specifications and quality. duties, to stabilize the local market price. This follows Like some other oil exporters, Algeria has mandated a similar move to put anti-dumping duties of LE500/ that oil and gas projects (including their downstream ton on imports of white sugar, in addition to the exist- revenues) must be at least 51% Algerian-owned. In ing 10% tariff, to protect the local sugar industry from December 2008, a directive from the prime minister's "unfairly" priced imports. During 2008, rice suppliers office extended this local ownership restriction to registered with the General Authority for Supply were include all public projects. A new law passed in Janu- constrained to export only up to the amount they im- ary 2009 stipulates that foreign investors cannot hold port subject also to an export tax of LE1000 a ton. This more than 49% of shares in new ventures. The rest "export ban" has been extended until further notice. must be held by local investors. The government has The Ministry is reviewing commitment to the Aghadir also mandated that public enterprises use local rather free trade agreement to decide whether to continue to than foreign banks. This, however, does not apply to allow Moroccan cars to enter Egypt duty free or not. the private sector. In addition, the Prime Minister issued instructions to Source: MENA Staff having eased, MENA governments will face no Risks of feedback loop from the real pressure to take trade restrictive measures. economy to the banking sector However, MENA could suffer from preferences given to domestic firms or to domestic contents With global recession working its way through as part of bailout packages in developed coun- the real economy in MENA countries, MENA's tries. On the export side, MENA exporters may banking sector may face risks of feedback loop find it more difficult to maintain shares in markets from the real economy. Having been spared by where importers are receiving government sup- deep contagion from global financial markets, port and are required to favor domestic content. MENA's banking system may not avoid the impact For example, the European Union's decision to of deterioration in the balance sheets of their reactivate export subsidies for butter, cheese customers in the real sector16. The global reces- and whole and skimmed milk powder to help sion may induce an increase in non-performing European exporters better compete on the world loans, especially among companies in MENA's market could harm MENA exports of dairy prod- exporting sectors and tourism sector. Slowing ucts to the EU. export activity and falling real estate prices are also likely to be a risk particularly in Dubai (Box In these dangerous times, it is important that 2.2) and diversified economies in North Africa MENA countries avoid measures that reinforce where banks' have large exposure either to real protectionist instincts which may have been ini- estate sector or trade-oriented manufacturing tiated elsewhere (see section I). As one of the and services sectors. Internal weaknesses in the few regions expected to have positive growth in banks may also be magnified by--and magnify-- 2009, MENA will critically contribute to reducing the feedback loop form the real economy. For the depth of the global recession and contribute to global recovery in 2009 or 2010. To preserve 16 Moreover, since mark-to-market practices are virtually absent this contribution, MENA will need to play its full in the MENA region, the direct impact of the crisis on banks will role in supporting global trade. likely be revealed with a lag, possibly between 2009 and 2010. 36 Chapter 2: The Global Economic Environment and MENA's 2009­10 Prospects: Mitigating the Impact of Global Recession Box 2.2: United Arab Emirates: were somewhat constrained by currency pegs Recent developments in the real estate to the US dollar and other major OECD cur- and financial sectors rencies, and by fear of inflation as commodity prices were still high. Inflation rates have come down markedly and prospects point to further The Colliers Home Price Index showed a 41% declines, giving MENA authorities more room decline in home prices during the first quarter to relax monetary stance to stimulate domestic of 2009. This followed a decline of 8% in the last demand. Some countries have in fact done so in quarter of 2008 bringing prices roughly to their end- 2008 (see chapter 1). However, on the whole, 2007 levels. As 2007 had already seen several years the efficacy of monetary policy has been reduced of appreciation, analysts are concerned that further because the crisis has eroded confidence in fi- declines are in store. Recent financial results for nancial institutions among market participants. property developers reflect the plunge in prices and Also, with excess liquidity in the banking system cessation of new activity. Emaar and Nakheel (both in some countries--partly caused by the fact of which have close links to the Dubai government) that many financial institutions are holding back announced profits well below consensus expecta- lending due to weakened trust--lending rates are tions, but Abu Dhabi-based developers have also less responsive to monetary policy tools. In any been badly affected. However, commercial banks event, going forward, authorities will rely less have reported solid profits for the first quarter of on monetary policy instruments to deal with the 2009. This reflects their gains from the extensive impact of the crisis as the crisis permeates the liquidity operations of the Central Bank, which have real economy. lowered their funding costs. Nevertheless, analysts are concerned that indirect exposures to property Starting with the last few months of 2008, have yet to play out. attention has gradually shifted to fiscal policy across the region17. Fiscal policy responses to Source: Collier International, MENA Region, Dubai, Q1, 2009. the global crisis have varied across the MENA region, reflecting the diversity of impacts and fiscal constraints. Going forward, efficacy of measures already taken and the adequacy example, derivative losses in a Kuwaiti bank is of future measures will critically depend on: a warning that weaknesses in risk management (i) remaining fiscal space or availability of financ- need to be addressed in earnest in the banking ing and (ii) nature and content of the stimulus system if the region is to mitigate the impact of measures. any feedback loop effects that may be caused by shocks to bank clients in the real economy. Also, Dealing with shrinking fiscal space Kuwait's investment companies have suffered equity market losses and two have defaulted on Although many MENA countries entered the debt payments in the last six months. crisis with respectable fiscal space, the region is seeing the largest decline in fiscal position among Policies to Mitigate the Impact developing regions, mainly due to sharply lower of the Global Recession oil revenues compared to 2008 (Figure 2.11). Moreover, on the expenditure side, budgets are Introduction lumbered by expensive and often poorly targeted social programs and large civil service wage Although monetary policy was considered in bills, and on the revenue side, governments face many MENA countries as part of the toolbox to declining intake due to less buoyant income tax deal with high consumer prices and respond to the impact of the crisis on financial systems in 17 A global survey of World Bank economists for 66 countries 2008, its efficacy has been mixed thus far. Initial (mostly middle income countries) in early 2009 found that 44 monetary policies in the second half of 2008 percent had plans for a fiscal stimulus (World Bank (2009j). 37 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Figure 2.11: Projected deterioration in fiscal balance, % of GDP, (changes) in 2008­2009 0 ­2 ­4 ­6 ­8 ­10 ­12 ­14 ­16 Middle East & South Africa Latin America East Africa Sub-Saharan Europe & North Africa & Caribbean & Pacific Africa Central Asia Source: World Bank data. revenues. If and when economic recovery occurs, elevated levels of private debt should be factored automatic stabilizers might kick in and some in as the likely location of contingent liabilities components of revenues (such as oil revenues that will constrain fiscal space if they are realized. and income taxes) may increase whereas some If private sector liabilities are in foreign curren- components of expenditures such as employ- cies, countries with larger foreign exchange ment benefits (in the case of Maghreb countries) reserves will be better positioned. In Brazil, for may decline. However, automatic stabilizers are example where the public sector through rapid less effective in MENA than in OECD countries. accumulation of foreign reserves had become a To be prudent, MENA countries should take net creditor in hard currency, the government safeguards fiscal measures to increase revenues announced that the private sector will be allowed or reduce expenditures in order to reduce the to access official reserves to repay debts. non-discretionary deficit, if economic recovery does not occur as fast or as robustly as expected. Using the levels of fiscal deficit and public debt to assess fiscal space shows that MENA However, fiscal deficit is not a sufficient met- countries are quite diverse. (table 2.2) Half of ric to get an accurate picture of fiscal space. To GCC countries--Qatar, Oman and the UAE--have get a more accurate picture of fiscal space, it is comfortable fiscal space. Bahrain, Saudi Arabia, useful to also take into account the level of debt. and Kuwait have some fiscal space but they might The lower initial deficit and debt condition, the be constrained by a moderate fiscal deficit in the larger fiscal space is available to the governments. case of Kuwait and a limited fiscal surplus in Saudi In fact creating fiscal space is constrained by the Arabia and Bahrain. Going forward, they will need amount of public debt and deficits as well as the to use their remaining fiscal moderately. size and nature of private sector debt. The latter will impose constraints on fiscal space because All other oil exporters, except Iraq (Algeria, during boom times the private sector may have Iran, Libya and Syria) have some fiscal space that over leveraged itself, and finds it difficult to repay needs to be managed carefully going forward.18 debts during the downturn. Governments may intervene and bail out banks and nonfinancial 18 Despite a zero budget deficit, Iraq has no fiscal space due to firms in distress. Thus booms in private credit or an already high level of debt. 38 Chapter 2: The Global Economic Environment and MENA's 2009­10 Prospects: Mitigating the Impact of Global Recession Table 2.2: Fiscal space projections: MENA country groupings: 2009 Fiscal Balance as Government Debt as % of GDP % of GDP 2009f 2009f GCC countries Bahrain 1.8 26.0 Kuwait ­2.7 7.5 Oman 11.9 5.0 Qatar 13.5 6.0 Saudi Arabia 1.5 15.6 United Arab Emirates 13.5 10.8 Oil exporters with large populations Algeria ­11.5 8.7 Iran, Islamic Republic of ­5.2 14.6 Iraq 0.0 137.0 Libya ­9.8 0.0 Syrian Arab Republic ­5.5 32.6 Diversified exporters with strong GCC links Djibouti ­3.4 47.7 Jordan ­3.4 65.9 Lebanon ­4.4 161.9 Yemen ­2.0 39.9 Diversified exporters integrated with Europe Egypt ­5.6 73.8 Morocco ­3.1 47.8 Tunisia ­3.1 48.4 Source: World Bank and IMF data, and World Bank staff estimates Fiscal balance ----> Larger than 2% of GDP -2% to + 2% of GDP Less than -2% of GDP Government Debt ---­-> 0 to 30% of GDP 30% to 80% of GDP Larger than 80% of GDP Thanks to high oil revenues in the recent past, Yemen, Syria) should refrain for increasing their they have been able to maintain a low level of debt to GDP ratio as their repayment capacity debt; and although they are all expected to run may be constrained going forward. a fiscal deficit in 2009, they have some space to increase the level of public debt in hopes that Among non-oil exporters, with a debt to GDP oil prices will not fall below levels that jeopar- ratio among the highest in the world and a fiscal dize their governments' ability to accumulate deficit of more than 4%, Lebanon has no fiscal surpluses and repay debt. However, countries space. Other than rolling over existing debt, it where debt issuance can be constrained by other will be difficult for Lebanon to issue new debt to factors than the debt level may not be able to in- finance a stimulus plan. Jordan and Djibouti have crease public debt and will be constrained in their no fiscal space either; they also suffer from a high ability to implement pro-cyclical fiscal policies. fiscal deficit although with a much lower debt to Also, countries with declining oil production (e.g. GDP ratio than Lebanon. Morocco and Tunisia 39 2009 Economic Developments and Prospects ­ Navigating through the Global Recession have some fiscal space thanks to moderate levels the effectiveness of domestic debt as a source of of public debt. With a higher fiscal deficit and stimulus financing can be stifled by the Ricardian debt ratio, Egypt has no fiscal space and will find equivalence whereby taxpayers, seeing today's new it difficult to finance additional stimulus spending debt as a cause for tax increases tomorrow, save in 2009­2010 over and above the package already an amount equivalent to today's new debt to face announced by the authorities. tomorrow's tax increases. By doing this, taxpayers cause public spending to substitute for, rather than The quality of fiscal and debt management adding to, private spending and therefore defeat policies and institutions are also important fac- the purpose of the stimulus. To get around the tors in assessing the desirability of temporary Ricardian equivalence, domestic debt issuance fiscal deficit as a crisis response measure. Not all should finance revenue-generating investments countries in need of external financing for their (e.g. through cost-recovery) or activities that add fiscal stimulus packages have the institutional to future growth of the overall economy (e.g. public capacity to implement largely scaled up public investments that crowd in private investment) as expenditure programs. Effectiveness of poli- such activities would add to government revenues cies will depend on institutions for fiscal policy without having to increase tax rates. making and implementation. For example, can policy-makers reverse temporary deficit-building What fiscal stimulus packages measures into deficit-reducing ones later on, cor- for MENA? rect errors mid-course, or spend discretionary fiscal stimulus funding for social or infrastructure As the impact of the crisis on the real economy efficiently? In many instances, the answers to deepens in MENA, the attention currently re- these assessment questions are not unequivo- ceived by fiscal stimulus packages will need to cally positive. In some countries where the qual- turn to composition of stimulus packages and ca- ity of current social spending is wanting, it may pacity to implement them effectively. Most fiscal be necessary to accept some contraction of the stimulus packages imply increasing government public expenditure programs while restructur- consumption of goods and services, government ing them to make them sound and high-impact. transfers and/or public investment so as to offset a fall in other components of aggregate demand. As With falling fiscal revenues in almost all the discussed in Favaro et. al, fiscal stimulus packages countries in the region and with tightening exter- are effective if they result in production of goods nal financing conditions, domestic public debt can and services valuable to the consumer via employ- be an interesting alternative for financing fiscal ing labor and capital that are idle as a result of the stimulus packages. In fact domestic public debt is recession. At the other extreme, fiscal stimulus already an important share of total public debt in packages may be ineffective if the increase in MENA where 50% of public debt is domestic, com- government spending goes to the production of pared to 30% in sub-Saharan Africa19. Many MENA goods and services of zero value to the consumer countries have issued domestic bonds since mid- and do not affect net employment.20 They may 2008. As conditions remain tight on international be ineffective also if they result in an equivalent bond markets, domestic markets may remain the decline of private investment or consumption as best option for many MENA countries. However, discussed in the previous section. MENA will need to carefully manage the risks asso- ciated with domestic debt issuance to finance crisis In designing their stimulus packages, coun- response. First, the public sector should avoid tries in MENA should seek to include at least the crowding-out the private sector at a time when following three components: measures that can the private sector is already facing difficulty raising stimulate investment and remove bottlenecks funds from banks or corporate markets. Second, in some countries such as Lebanon where the cost of 19 Source: World Bank, (2009j). servicing domestic debt is already high, the gov- 20 See Edgardo Favaro, Leonardo Garrido and Tihomir Stucka ernment should avoid adding to that cost. Third, for a discussion of Egypt's fiscal stimulus package. 40 Chapter 2: The Global Economic Environment and MENA's 2009­10 Prospects: Mitigating the Impact of Global Recession to future growth, measures that provide needed Reliable data for the investment needs in the safety nets to the poor and vulnerable through a MENA region are not available but estimates show rationalization of existing subsidy programs, and that more than $300 billion of investment will be measures that support private sector's economic needed in MENA over the next 10 years in order to activity and trade in the short term. Attention meet infrastructure capital demands.21 Among the should also be paid to coordinating fiscal stimuli countries in the region, GCC countries infrastruc- across MENA countries so that stimuli can be ture needs are the highest. Despite high profile mutually reinforcing. investments in some GCC cities, GCC countries as a group are in dire need of modernizing their Removing Bottlenecks to Growth infrastructure. It is estimated that between 1998 and 2007, about 20% of GCC `s total GDP was To benefit from global recovery once the crisis is invested, compared with 39% and 30% in China over, MENA countries will need to use the crisis and South Korea respectively. Given the large as an opportunity to remove infrastructure bot- needs and low level of investment to date, care tlenecks and institutional constraints that have should be taken not to cut too sharply MENA's suppressed regional growth for decades. MENA's investment rates as a result of the crisis. Lessons pre-crisis growth rate has been respectable but from past crises indicate that this is a risk to bear not stellar when compared to other developing in mind in governments' responses to the crisis. regions. For example, during 2000­08, MENA In Argentina for example, the crises of the late was the second slowest growing of all develop- 1980s and of 2001­02 elicited deep declines in ing regions with a growth rate of 4.3% (Figure fixed investment which resulted in Argentina's 2.12). The region's growth rate was identical in investment-GDP ratio standing some 7.8 points the 1990s and even lower in the 1980s, in contrast below trend in 2002. And during the East Asia to the fast growth of the 1970s which the region crisis, Thailand, the country initially at the focus has been unable to replicate since. Despite its of the disruption, saw investment (in real estate as abundant natural resources and a strategic geo- well as in services and manufacturing) drop by an graphical location, MENA's growth potential has astounding 18% per year between 1996 and 1999. been subdued; lack of modern infrastructure to raise the region's competitiveness and fully take 21 OECD, (2006), Initiative on Governance and Investment for advantage of the growing global manufacturing Development, MENA Workshop on Public-Private Partnerships and services trade is one of the reasons for this. for Infrastructure Financing, Organized in Istanbul, Turkey. Figure 2.12: Regional average growth rates: 1970­2008 1970­79 1980­89 1990­1999 2000­2008 10.0 8.0 6.0 4.0 2.0 0.0 ­2.0 EAP ECA LAC MNA SAS SSA OECD World Source: World Bank data. 41 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Recognizing the infrastructure challenge, Subsidies represent on average 7.1% of GDP some GCC countries have committed to main- and over 20% of government spending in MENA taining high levels of spending to stimulate their countries for which data is available.22 In most economy and provide competitive infrastructure. MENA countries, high social spending is seen For example in Saudi Arabia, capital spending is as part of the social contract, or as a mechanism budgeted to leap 36% to US$60 billion in 2009, to redistribute natural resource wealth. Some and the country's medium-term investment of the subsidy programs were either introduced program totals US$400 billion over the next five to address spikes in commodity and were thus years. Qatar and Bahrain have announced ambi- deemed to be temporary or as a safety net to sup- tious investment plans. Despite the heavy impact port the poor. Across the region, these programs of the crisis, Dubai appears to be well positioned have persisted even when commodity prices to take advantage of a global rebound--although declined. Programs created as safety nets for it is unlikely to regain the pre-crisis level of en- the poor and vulnerable have tended to benefit thusiasm--helped by a high level of investment the wealthy as well and perhaps more than the and a conducive business environment. poor in some cases. For example, in Morocco, the richest 20% of the population receives more The role of the private sector in infrastruc- than 31% of subsidies on fuel and liquefied gas ture should be actively encouraged as part of while the poorest 20% received less than 10%. MENA's crisis response framework. This is par- ticularly important given the limited fiscal space While removing entrenched subsidies is not faced by many MENA governments. In the past an easy task, and while there is no ideal time 15 years, a country like Egypt has taken slow to do so, the time may be ripe for governments but steady steps towards strengthening the role in MENA to rationalize their expensive subsidy of markets in the allocation of resources. These programs. First, the argument can be made that policy changes have yielded a high return in the global financial crisis strengthens the case for terms of growth and employment, showing that restructuring poorly targeted safety net programs changes are possible. Tunisia has also had some and other social programs in order to free up re- success in private sector-led growth. But even sources to finance critical social programs and job in Egypt and Tunisia, and more so in most other creation that benefit the poor and those who are MENA countries, much remains to be done to deeply or directly affected by the crisis. Simula- create a leveled playing field for all investors, tions show that elimination of energy subsidies domestic and foreign, public and private (chapter would generate US$46 billion welfare gain for 3). In the post crisis era, countries with adequate the world (0.1% of GDP), of which US$12 billion infrastructure and conducive business environ- for MENA (0.005% of GDP), and US$33 billion ment will have a particular edge over other for non-MENA, and a reduction in energy use in countries as investors are likely to look for profit the MENA region (up to 13.2% in Morocco and opportunities while taking minimal risks in order in 46% in Iran). Second, as fuel and food prices to make up for the losses of the crisis period. have come down somewhat, restructuring of subsidy program will not represent an inordinate Using subsidies effectively to mitigate the increases in household expenditure for wealthy impact of the crisis on vulnerable groups households who may have to forgo formerly and stimulate investment especially in received subsidies. Finally, in some countries, small and medium enterprises subsidies have created heavy reliance on imports, public companies, rent-seeking situations, cor- Historically, MENA countries have maintained ruption and smuggling which in turn have stifled high levels of subsidies and social spending that competition and private sector development. The tie up a significant share of public resources need to spur private sector activity and growth that rarely benefit the social groups or sectors for which they are intended. In the majority of countries, all fuels and electricity are subsidized. 22 Source: World Bank, MENA data. 42 Chapter 2: The Global Economic Environment and MENA's 2009­10 Prospects: Mitigating the Impact of Global Recession should be an important component of any stimu- perhaps--increase benefits to the poor. The lus package for economic recovery. Removing impact on vulnerable groups can be lessened if these "institutional bottlenecks" is yet another subsidies are reformed in a progressive fashion, reason for rationalizing subsidies in MENA. cutting unnecessary subsidies that benefit the wealthy while maintaining or even increasing It should however be noted that in some subsidies that benefit the poor and vulnerable. cases, price subsidies, especially food subsidies, This seems to be the guiding principle behind do reach the poor and play an important role in ongoing efforts at reforming subsidies and in- their livelihood. Therefore subsidies should be troducing new social programs in a number of rationalized with care so as to maintain--and MENA countries (Box 2.3). Box 2.3: Examples of social programs being introduced in MENA Safety nets in Syria consist mainly of subsidized prices In Iraq, for the past several years, policy makers on food and other commodities, although this is chang- have made increasingly more public statements about ing rapidly. Gasoline and diesel prices were increased the need for reform of the PDS. As a first step to re- in May and again in December 2008, and coupons were form the un-targeted Public Distribution System (PDS), issued for limited purchase of diesel at subsidized the authorities announced that eligibility of better-off prices for all families to ease the transition. While families will be restricted as of mid-2009. Although the current public safety nets are limited, it is expected PDS is an effective safety net, this goal is accomplished that remaining energy subsidies will be phased out, in a highly inefficient manner, costing about US$ 6.30 replaced by a targeted cash transfer program. The to transfer US$ 1 worth of food to a poor person. Any program would initially target the poorest 15% of the phasing out of the PDS is scheduled to take place as population, and is expected to be launched by the authorities set up a cash-based targeted safety net. Ministry of Social Affairs and Labor in 2009. Informal However, there is little popular support for targeting or assistance from family members and from nongovern- moving to a cash-based safety net. mental charities remains a significant safety net for In Egypt, a plan to liberalize trade in subsidized the poor. flour used in the production of subsidized bread has In Morocco, the government implemented better- been adopted. The objective is to eliminate the waste targeted social programs to enhance the efficiency of and leakage of both subsidized wheat and flour, and social spending while fighting poverty and improving to create more competition in the market. The Holding the welfare of the population. To this effect, two impor- company for Milling will undertake the purchase of tant social programs were launched in 2008. The first wheat and will sell it to the Minister of Social Solidarity concerns a health insurance coverage scheme for the at market prices, which will tender the milling of the poor and vulnerable (RAMED), and the second involves wheat. The General Authority for Supply and Com- a Conditional Cash Transfer program. Both of these modities (GASC) will continue to import wheat from programs and other similar ones would improve social abroad to maintain a strategic stock for at least four protection coverage of the population and hence help months and will make the wheat available for mills set the conditions for progressively phasing out the wishing to participate in the tender process to mill the inefficient current universal subsidy system. wheat at market prices. Moreover, bread will continue In Iran, where energy subsidies exceeded 20% of to be subsidized and sold at LE0.05/loaf, with subsi- GDP in 2007/08, the government submitted a bill dies reaching LE15 billion in the state budget (almost to reduce energy subsidies in December 2008. The 1.5% of FY09 GDP). The plan will be implemented in parliament rejected the proposal on the grounds that four phases over two years, starting with 20% of the ending energy subsidies, particularly during this time subsidized flour quotas. However, it is not clear, at this of economic crisis and high inflation, would only serve point, whether the new system could lead to savings in to stoke inflationary pressures. subsidies on wheat due to efficiency gains. 43 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Beyond subsidies, countries are consider- and wage subsidies) may be appropriate if the ing other social spending for rationalization. crisis is short-lived but may not be fiscally sus- Although not all the efforts are directly related tainable if the crisis is prolonged. They may also to the global financial crisis, lessons from previ- be difficult to remove in the upturn due to risk of ous crises suggest that in restructuring social capture. In Morocco, the recovery plan focuses spending, countries should favor projects that on three labor-intensive exporting sectors that can act as automatic stabilizers such as means- employ between 300,000 and 400,000 employees: tested social benefit programs whose extension textiles, automotive components, and leather and will occur naturally and should be financed footwear products. The ultimate objective of the during downturns as more people fall below government's recovery plan is to preserve jobs in the eligibility threshold, and this will reverse these activities. The recovery plan provides guar- as the economy recovers. Similarly, public work antees for up to 65% for working capital loans; programs with below market wages can act as extends insurance risk coverage for exports; automatic stabilizers. Aspects of Egypt's fiscal eases regulations that relate to imports covered stimulus package geared toward job-creating by the temporary admission scheme; provides ad- infrastructure investment fall in this category. ditional training and logistics in partnership with Introducing new conditional cash transfers is not business associations; and covers the employers' appealing in the midst of the crisis as eligibility contributions to social security in eligible cases criteria and thresholds may have been affected (that is, provided the firms retain their employees by the crisis making it difficult to accurately and can show a 20% loss). While some measures define the beneficiaries. The implementation of in the Morocco package may be beneficial in the Morocco's recent plans to introduce a conditional post-crisis era (easing of import regulations and cash transfer, though based on international best partnership with business associations), some practice, may need to be timed to take into ac- other components will need to be phased out count the crisis. when the crisis is over lest they become a bur- den on public finances. Tunisia has announced Labor market interventions to support em- similar measures to support domestic SMEs and ployment and earnings (e.g. payroll tax holidays employment. 44 ANNEX Country Prospects urgency to efforts to diversify fiscal revenue, which will possibly include the introduction of Gulf Cooperation Council, GCC value-added tax (VAT) and increases in electricity countries and water tariffs, visa fees and the levy on expatri- ate workers. The government also seeks greater Bahrain. Real GDP growth is projected to decline private-sector participation in the economy, but from 6.1% in 2008 to 2.6% in 2009 followed by 4% progress is slow as the global economic downturn in 2010. Demand for Bahrain's exports of goods is causing a fall in foreign direct investment flows. and services, is likely to come under pressure in The agenda here includes promoting efficiency in 2009 as the global economic downturn and lower the performance of core government functions, oil prices hurt regional growth. Current account reducing the footprint of government through surplus of the past few years is projected to turn privatization and pension reform, improving the targeting of subsidies and transfers, and encour- aging best practice in managing state-owned Key Economic Indicators 2008e 2009f 2010f enterprises. Nevertheless, growth prospects can Real GDP Growth (%) 6.1 2.6 4.0 be grounded in the resilience of Saudi Arabia Inflation Rate (%) 3.5 3.0 3.0 and Bahrain's role as the flexible niche hub for Fiscal Balance (% of GDP) 8.0 1.8 9.0 the Saudi economy. The integration between Current Account Balance 32.3 ­5.4 ­4.8 the economies is extremely high, and the deter- (% of GDP) mination of Saudi Arabia to keep focused on its Source: World Bank data long-term investment agenda means that there is a potentially lucrative project finance pipeline in which Bahrain can be a player. into a deficit of 5.4% and 4.8% of GDP in 2009 and 2010. The global financial turmoil poses risks to Kuwait. Growth is projected to decline from Bahrain's economy, particularly since the banking 5.2% in 2008 to negative 1.2% in 2009 driven sector, the largest contributor to GDP, could see by a sharp contraction in oil GDP of about 5%.23 a decline in activity if international banks were Kuwait's ability to increase its growth prospects to reduce their presence in Bahrain. Inflation is for 2010 will depend on the global environ- projected to slow slightly to an average of 3% in ment--notably oil prices--but also on the com- 2009 and 2010. In the short run, the Bahraini gov- plex interaction between the domestic political ernment's economic policy will focus on shoring up growth given the global economic downturn. The government plans a strong fiscal expansion in Key Economic Indicators 2008e 2009f 2010f 2009 and 2010 despite falling oil revenues. Fiscal Real GDP Growth (%) 5.2 ­1.2 2.4 surplus is projected to decline from 8% of GDP Inflation Rate (%) 5.4 4.2 4.0 in 2008 to 1.8% of GDP in 2009 but increase to Fiscal Balance (% of GDP) 25.7 ­2.7 3.3 9% of GDP in 2010. Because it does not have a large resource endowment, Bahrain did not ex- Current Account Balance 48.2 19.6 31.6 perience the extent of windfall seen elsewhere in (% of GDP) the GCC in 2007­08 and its budget comes under Source: World Bank data pressure more quickly when oil prices weaken: oil revenue still accounts for about 75% of total fiscal revenue. The fall in oil prices will give more 23 IMF, World Economic Outlook, 2009 45 2009 Economic Developments and Prospects ­ Navigating through the Global Recession situation and the ability to design and implement Key Economic Indicators 2008e 2009f 2010f policies. Inflation is expected to ease down to Real GDP Growth (%) 6.2 3.0 3.8 about 4.2% in 2009 and 2010. Current account Inflation Rate (%) 6.0 6.7 2.0 balance is projected to drop by more than 50% Fiscal Balance (% of GDP) 12.7 11.9 11.2 from its high level of 48.2% of GDP in 2008, reaching 19.6% and 31.6% of GDP respectively Current Account Balance 16.3 ­14.2 ­19.7 (% of GDP) in 2009 and 2010. Fiscal balance is expected to Source: World Bank data deteriorate to negative territories from a surplus of 25.7% of GDP in 2008 to negative 2.7% of GDP in 2009 before turning positive to 3.3% of GDP. The government has relied mainly on ag- counterbalance a contraction in the oil sector. gressive monetary policy measures to mitigate With the slowdown in global and regional growth, the impact of the crisis, but this model is now Oman's tourism industry which is an important under strain. In addition to Central Bank easing, driver for the service sector will face a difficult the Kuwait Investment Authority is making lo- year ahead. Current account surplus of recent cal stock exchange investments to support the years is projected to turn into deficits of 14­20% market (and thus the local institutions linked to of GDP in 2009 and 2010. Inflation is contained by it). The Central Bank has also managed modest the government's extensive subsidy system, which depreciation of the Kuwaiti Dinar to the point holds in check the prices of a range of core goods where the exchange rate against the dollar is and services which will also continue to weigh on now almost exactly where it was when Kuwait public finances. It is projected that inflation will abandoned the dollar peg in 2007. The financial remain around its current level of 6% in 2009 sector stabilization package, enacted by decree but with oil and non-oil commodity prices falling in March, concentrates on refinancing about $17 sharply, it is expected that inflation will fall to 2% billion of Investment Company debts invested in in 2010. Fiscal balance is projected to remain at now sharply depreciated financial assets. Under around 12% of GDP in 2009 and 2010. The govern- the package, 50 percent of any new loans ex- ment has also announced an increase in spending tended to the investment companies by domestic by 11% in response to the economic slowdown. banks will be guaranteed if it goes to refinance With net foreign assets estimated at 50% of GDP, domestic debt and 25 percent if it goes to refi- the economy has saved prudently in recent years, nance foreign debt. The size of the package may which will give it a robust budgetary cushion for not be sufficient given the still-emerging debt the next few years. However, existing challenges restructuring situations in the financial sector. will be accentuated if the global crisis does not Moreover, the package fails to quarantine bad unwind over 2009­2010; the country would have debt and risks contaminating the fairly healthy a lower ability to run countercyclical policies than commercial banking sector with the bad debts of most other Gulf countries, given its lower revenue the weaker investment funds. In the short-term, base. Oman's resource extraction costs are much Kuwait has several margins of adjustment for higher than in its GCC neighbors (due to difficult dealing with the global economic crisis. Large geology) and oil prices projected at $55­63/bar- financial wealth had been seen as one beneficial rel will not permit the windfall saving of recent side effect of Kuwait's limited strategy of focus- years when set against the highly capital-intensive ing on oil extraction, while limiting its attention mode of development. Well aware of this fact, to development ventures internally. However, policymakers have long welcomed private sector the big capital losses of the Kuwait Investment involvement in the upstream energy sector and Authority (the country's sovereign fund) over the through judicious use of partnerships and joint last year have raised questions over this strategy. ventures have built significant local capacity in the energy sector. However, it is likely that more Oman. Real GDP growth is expected to slow from diversified sources of funding for investments will 6.2% in 2008 to 3­4% in 2009 and 2010. Non-oil have to be found, focused for example on financial growth should remain at 4% which will help to sector deepening and privatization. 46 Chapter 2: The Global Economic Environment and MENA's 2009­10 Prospects: Mitigating the Impact of Global Recession Qatar. Qatar looks set to be unique in maintain- economy. Nevertheless, Qatar is feeling some ing strong growth in 2009 among GCC countries. effects from the global crisis. The severe regional Real GDP growth is projected to increase to stock market plunge has almost certainly caused 18.2% in 2009, up from 16.4% in 2008. Growth is big losses for investment firms, with consequent expected to be sustained at 16.2% in 2010. This exposure risk for the commercial banking sec- reflects the coming on stream of new liquefied tor. In a pre-emptive move, QIA announced in natural gas (LNG) facilities in the world's largest October in 2008 that it would purchase phased 5% stakes in all local banks, and the government said that it would purchase the investment and Key Economic Indicators 2008e 2009f 2010f real estate portfolios of commercial banks. Over- Real GDP Growth (%) 16.4 18.2 16.2 all, the government is confident that Qatar can Inflation Rate (%) 15.1 10.0 6.0 capitalize on the crisis, especially in terms of its regional ambitions. Plans to make Doha a hub Fiscal Balance (% of GDP) 11.5 13.5 14.7 for education, healthcare, and financial services Current Account Balance 37.1 12.4 30.7 are being kept on track, and ample liquidity is (% of GDP) available from hydrocarbon revenues to keep Source: World Bank data the private sector engaged. Even highly ambi- tious projects like the "Friendship Causeway" to Bahrain are reportedly on schedule. However, LNG exporter. The economy was less exposed revisions in international financial regulation than others in the GCC to the global economic may require some adjustments to the ambitious crisis. LNG sales are mostly determined by plan of Qatar as a global Financial Centre. long-term contracts which preset prices and quantities (although a spot market is emerging), Saudi Arabia. While the largest economy in and the main customers in East Asia remain the GCC and the MENA region was able to avoid committed to gas imports. Although Doha has the financial and property sector turmoil afflict- seen a building boom, many of the new towers ing the UAE, Kuwait and some other emerging are for relocated government ministries for market economy, the combined effects of lower which the appetite remains solid. Furthermore, oil prices and production cuts will be sharp re- Qatar avoided the speculative trade in unfin- ductions in economic growth and fiscal and trade ished apartments, which was a feature of the Dubai property boom. Qatar's inflation rate is the highest among GCC countries with rent and food prices being major contributors. Inflation Key Economic Indicators 2008e 2009f 2010f is projected to fall to 10% in 2009 from 15.1% Real GDP Growth (%) 4.6 -0.9 3.0 in 2008 due to the pass through of declining Inflation Rate (%) 9.9 5.7 3.5 international food prices and slower increase Fiscal Balance (% of GDP) 30.4 1.5 4.5 in domestic rents. On the fiscal side, Qatar will maintain a surplus of 13­15% of GDP in 2009 Current Account Balance 35.5 16.2 26.4 (% of GDP) and 2010, similar to levels of the past few years. Qatar has maintained high current account Source: World Bank data surplus in the past few years peaking at 37.1% of GDP in 2008 and is projected to continue the same trend except in 2009 where the current surpluses in Saudi Arabia in the 2009­10. Saudi account balance will decline to 12.4% of GDP. Arabia will see recession in 2009. GDP growth In 2010 it is projected that the external account rate is projected to contract by negative 0.9% in balance will strengthen and reach 30.7% of GDP. 2009 before recovering to 3% in 2010. Inflation is Although LNG is the engine of growth in Qatar, projected to ease to 5.7% and 3.5% respectively oil production (at about 0.85 million barrels per in 2009 and 2010 from 9.9% in 2008. The loss day) remains an important "cash cow" for the of fiscal revenue due to oil price movements is 47 2009 Economic Developments and Prospects ­ Navigating through the Global Recession projected to be 27% of GDP in 2009.24 The fiscal Key Economic Indicators 2008e 2009f 2010f balance is projected to deteriorate from 30.4% of Real GDP Growth (%) 7.4 0.3 3.3 GDP to less than 2% and 4.5% in 2009 and 2010. Inflation Rate (%) 11.5 2.0 3.1 On the external side, the surplus of about 35.5% Fiscal Balance (% of GDP) 23.6 11.2 8.0 of GDP in 2008 is projected to decline to 16.2% Current Account Balance 17.5 8.1 ­5.3 but will improve to 26.4% of GDP in 2010. The (% of GDP) wealth effect caused by large losses on the stock Source: World Bank data markets and uncertainty regarding short term prospects have caused consumers to cut down consumption of certain luxury goods (e.g. cars). 11.5% in 2008 to 2­3% in 2009 and 2010. The This wealth effect may persist throughout 2009 fiscal surplus of the past few years is projected and possibly 2010, stifling growth prospects. In to shrink to 11.2% and 8.0% of GDP in 2009 and fact, recently, The Saudi Arabia Basic Industries 2010. External balance will halve to 8.1% in 2009 Company (SABIC), the largest traded company and is projected to lower to negative 5.3 per- in Saudi Arabia, surprised the stock market cent of GDP in 2010 as the impact of the sharp with a big loss in the first quarter of 2009. The decline in economic activity in Dubai is likely company was hurt by poor performance in its to persist and stimulus spending helps sustain US operations (the former GE Plastics) and by imports. In fact, with the diversity of situations sharply declining petrochemical product prices. across the constituent Emirates, the UAE faces Luckily, thanks to, Saudi Arabia is in a position a challenging situation in the short term. The to provide a sizeable fiscal stimulus thanks to UAE is experiencing the most complex manifes- its large international reserves accumulated in tation of the global economic crisis among the past years and its cautious approach to overseas GCC countries. While the volatility in oil prices investment of oil wealth--largely US Treasury and their associated effect is common to the instruments rather than in global equity as other GCC, the UAE also features emerging market- sovereign funds. Thus the Saudi government type vulnerabilities overlaid with an embryonic has announced an important fiscal stimulus for system of intergovernmental fiscal relations. 2009­2010 amounting to a total of 9­10% of Critical to understanding the crisis dynamic in GDP--the largest among G20 countries. Govern- the UAE is that it is an oil-rich economy which ment's focus is to maintain the level of investment relied heavily on external financing for its non- in the economy and keep large projects (such as oil growth. After the sharp collapse in the real railways) on track so as not to jeopardize long- estate property market as well as in the financial term growth potentials. Public financing is used market in Dubai, the main short term challenge to make up for the project finance vacuum left by is to manage the impact of the global recession the departure of many large international banks on Dubai in an environment where lower oil hitherto providing financing to local projects. Re- prices may constrain Abu Dhabi's rescue ca- cently, the impact of two corporate debt distress pacity. Abu Dhabi has provided much needed situations in Saudi Arabia has spread around support to help stabilize the financial system the GCC. It is generally considered that banks across the Emirates and especially Dubai. Abu in Bahrain, the UAE, and Saudi Arabia have a Dhabi has also issued bonds worth $10 billion combined exposure to these two companies that and used the proceeds to help Dubai remain could run into billions of dollars. current on its debt service and guaranteed an additional $10 billion bonds. On a consolidated United Arab Emirates (UAE). The UAE will basis, the scale of the financial crisis in the UAE experience the sharpest growth slowdown of is manageable; the issue is the institutional ca- any MENA economy in 2009. Growth is pro- pacity to do so. Given the UAE's GDP of $250 jected to decline from 7.4% in 2008 to 0.3% in 2009. UAE is expected to have the lowest infla- tion rate among GCC countries in 2009, with 24 Source: IMF, (2009), Regional economic Outlook, Middle inflation projected to ease from its high level of East and Central Asia 48 Chapter 2: The Global Economic Environment and MENA's 2009­10 Prospects: Mitigating the Impact of Global Recession billion, even an outright fiscal loss of $25 billion years of imports. In the absence of substantial on Dubai projects (which is in the range of pub- improvements in productivity and the business licly cited cost estimates) would be 10 percent climate, non-hydrocarbon output is unlikely to of GDP--difficult, but similar to financial crisis be an engine of growth in the short term. But costs in other countries. And assets of sovereign growth in 2010 could be higher than projected wealth funds provide a huge buffer for coping if decisive actions are taken to promote private with such costs. Beyond the concerns over the sector development and economic diversification. short-term impact of the crisis, Dubai is likely to emphasize its fundamental strengths in logistics, Iran. Growth is projected to slow down from light manufacturing, and as a safe haven for 6.9% in 2008 to about 2.5% and 3% in 2009 funds and investors from Iran and South Asia. and 2010. Iran is adjusting to low oil prices by As the crisis has highlighted weaknesses in the reducing public expenditures. This has become financial sector (such as a lack of diversity in even more necessary since Parliament refused to products and reliance on volatile sources of allow a reduction in subsidies (which represent funding), correcting these are likely to be high up to 18% of GDP). A cut of US$ 6.4 billion is priorities for policymakers in the short-term. projected in capital expenditures (44% reduc- tion) and US$ 2.1 billion in current expenditures Oil exporters with low oil revenue per capita ­ Algeria, Iran, Iraq, Libya, Syria, and Yemen Key Economic Indicators 2008e 2009f 2010f Real GDP Growth (%) 6.9 2.5 3.0 Algeria. GDP growth is expected to reach 2.2% in Inflation Rate (%) 22.5 23.5 20.0 2009 and 3.5% in 2010, supported by a 6% growth in non-hydrocarbon output in 2009. Inflation is Fiscal Balance (% of GDP) 0.7 ­5.2 ­6.0 projected at 3.5%, assuming a favorable harvest. Current Account Balance 20.6 4.1 4.9 The overall fiscal balance will turn negative for (% of GDP) the first time since 1999, with a deficit of 11.5% Source: World Bank data and a small surplus of 1.8% of GDP respectively in 2009 and 2010. This deficit would be financed (5% reduction) in addition to cuts of 8.6% of GDP in current expenditures and 1.7% of GDP in capital expenditures between fiscal year 2008/09 Key Economic Indicators 2008e 2009f 2010f and 2009/10.25 Tax revenues are budgeted to fall Real GDP Growth (%) 3.0 2.2 3.5 by 1.8% of GDP, reflecting an expected slow- Inflation Rate (%) 4.0 3.5 3.0 down in economic activity; while oil revenues Fiscal Balance (% of GDP) 8.3 ­11.5 1.8 are expected to fall by 5.6% of GDP. With low oil Current Account Balance 24.2 6.3 1.4 prices and contractionary budget for the fiscal (% of GDP) year 2009/10 and after several years of posi- Source: World Bank data tive balance, fiscal balance will turn negative at around 5­6% of GDP in 2009 and 2010. Inflation is expected to remain high at 23.5% and 20% in by significantly drawing down the oil stabilization 2009 and 2010, a continuation of the past trend fund. The recession in Europe and the decline in mostly due to an expansionary credit policy oil revenues pose significant risks. The projected and a significant, albeit recently reduced, fiscal decline in oil prices coupled with high imports spending. Owing to the lower oil receipts, cur- induced by the public investment program would rent account balance is projected to fall sharply reduce the current account surplus to 6.3% and from 20.6% of GDP in 2008 to 4­5% of GDP in 1.4% of GDP in 2009 and 2010, from 24.2% in 2009 and 2010. 2008. Nevertheless, the international reserve coverage would still remain at more than two 25 Iranian fiscal year ending March 20. 49 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Iraq. Oil production and export volumes are Key Economic Indicators 2008e 2009f 2010f projected to increase by 2.5 mbpd and 2.0 mbpd, Real GDP Growth (%) 6.3 2.9 4.8 respectively in 2009 and 2010. This increase is Inflation Rate (%) 0.9 0.9 0.9 mostly due to the recent security gains in Iraq. Fiscal Balance (% of GDP) 22.8 ­9.8 ­0.2 However, due to lower oil prices, 2009 oil rev- Current Account Balance 39.2 8.7 11.9 enues are expected to be about 25% lower than (% of GDP) the outturn in 2008. This implies an equivalent Source: World Bank data Key Economic Indicators 2008e 2009f 2010f Real GDP Growth (%) 9.8 6.9 6.7 will be significantly lower than in 2008 but will nevertheless remain positive, at 8.7% of GDP in Inflation Rate (%) 6.8 6.0 6.0 2009, with improvement to 11.9% expected in Fiscal Balance (% of GDP) 0.0 0.0 0.0 2010. The reduced price of oil may imply some Current Account Balance 26.7 ­5.8 3.4 adjustments to the public investment program. (% of GDP) Fiscal balance will turn negative in 2009 for the Source: World Bank data first time since 1996, falling from a surplus of 22.8% percent of GDP in 2008 to a deficit of 9.8% of GDP in 2009. Some improvement is expected loss of government revenues and is having a ma- in 2010. Inflation should be contained at 0.9% in jor impact on fiscal plans. The difficult financing 2009 and 2010 with the international prices sta- outlook and lack of savings from past years limit bilizing and money growth slowing. International the scope for counter-cyclical fiscal policies. The reserves will maintain healthy levels, equivalent Government has announced it will cut recurrent to about 40 months of imports. and capital spending in a supplementary bud- get if oil prices remain low in order to contain Syria. Declining global output and trade as well fiscal balance at zero percent of GDP in 2009 as the ongoing drought could have a significant and 2010. As a result of a severe drought, total impact on Syria in 2009. The external demand wheat production is expected to decline in 2009 shock has been compounded by a domestic by 27%. The combination of lower oil revenue supply shock, namely, a severe drought that and poor performance of agriculture will be a is entering its third year, with severe impact lower GDP growth. Iraq's economy is projected on agricultural output. The global downturn is to grow by about 6.9 and 6.7% in 2009 and 2010 while inflation should be contained at 6%. The current account surplus of 26.7% of GDP in 2008 Key Economic Indicators 2008e 2009f 2010f is expected to turn into a deficit of about 5.8% of Real GDP Growth (%) 5.2 3.0 3.5 GDP in 2009 before improving to 3.4% of GDP in Inflation Rate (%) 14.5 8.5 5.0 2010. Continued recovery of non-oil activity and Fiscal Balance (% of GDP) ­5.3 ­5.5 ­2.3 increase of production and export volumes are Current Account Balance 1.1 ­9.6 ­9.0 expected to play a role in the recovery. However, (% of GDP) short-term economic prospects critically hinge Source: World Bank data on the security situation and the political recon- ciliation process. Libya. Although less robust than in recent expected to decelerate the recent growth in years, Libya's economic outlook for 2009­10 tourism and foreign direct investment, and to remains solid. Real GDP growth is expected to reduce remittances from expatriate workers as slow to 2.9% and 4.8% respectively in 2009 and job losses mount in the GCC countries and other 2010, with hydrocarbon growth turning nega- "labor-importing" countries. Growth is projected tive. Current account balance in 2009 and 2010 to decline to 3% and 3.5% respectively in 2009 50 Chapter 2: The Global Economic Environment and MENA's 2009­10 Prospects: Mitigating the Impact of Global Recession and 2010. Inflation is projected to ease respec- and slow growth in the Gulf. The current crisis tively to 8.5% and 5% from its high level of 14.5% could also reduce remittances coming from Gulf in 2008. Fiscal pressures are expected to arise countries. Despite these odds, the overall growth as well despite the authorities' commitment to rate will rise to 7.7% in 2009 and 5% in 2010 from fiscal discipline. Fiscal deficit will remain at 5.5% 4% in 2008, owing to a one-off impact of the com- of GDP and 2.3% of GDP in 2009 and decrease ing on-stream of a liquefied natural gas (LNG) to 2% in 2010. Export earnings are expected to plant. The performance of the non-hydrocarbon decline substantially reflecting falling oil and sector, the main source of employment, will slow agricultural prices. Current account balance is to about 4%. As an early sign of slower growth in expected to turn negative from surplus of 1.1% economic activity in 2009, the customs authority of GDP in 2008 to negative 9.6% and 9% of GDP have reported a noticeable decline in customs in 2009 and 2010. Going forward, Syria faces the revenue in the first two months of the year, re- challenges of developing its non-hydrocarbon flecting lower import prices and lower volumes. sources of growth. After peaking at 650,000 bpd Monetary data available for the first two months in 1995, crude oil production has plummeted to of the year show a decline in credit to the private about 380,000 bpd in 2007. With declining output sector. The fiscal deficit will remain at 2% of GDP and rising consumer demand for petroleum prod- in 2009 and 2010. Lower inflation will be among ucts, Syria's overall oil balance turned negative the positive developments, with the CPI falling to in 2007. Oil production is expected to decline 5.5% in 2009 and 2010. Current account deficit further over the coming years, reaching a plateau will increase to 11.1% of GDP in 2009 from 6.5% of about 300,000 bpd by 2025 and eventually of GDP in 2008 before seeing some improvement depleting recoverable reserves by 2030. Further in 2010 to 6% of GDP. Disbursement of pledges progress in economic reforms and continued ef- made at the Consultative Group meeting in forts to diversify Syria's production and exports London in 2006 has been slow, amounting to are necessary. less than 6% of pledges by the end of February 2009. The pace of disbursement may be affected Yemen. Yemen faces a number of economic by the global economic crisis. Yemen's short to and political uncertainties in 2009­10. External medium term prospects reinforce the need to sources of concern include depressed oil prices, tackle the structural weaknesses of the economy, plunging growth rates in the Gulf countries, and particularly fostering non-oil growth led by the instability in the Horn of Africa. The ongoing private sector. crisis is expected to reduce the flow of foreign investment, both to the hydrocarbon and non- Non-oil exporters reliant on financial flows from GCC or official development assistance Key Economic Indicators 2008e 2009f 2010f from OECD ­ Djibouti, Jordan, Lebanon, West Bank and Gaza Real GDP Growth (%) 4.0 7.7 5.0 Inflation Rate (%) 8.5 5.5 5.5 Djibouti. The economy is expected to grow at Fiscal Balance (% of GDP) ­3.0 ­2.0 ­2.0 rates of 5­5.5% over the next two years, com- Current Account Balance 6.5 ­11.1 ­6.0 pared with 5.8% in 2008. Inflation is expected (% of GDP) to fall to 5.4 in 2009 as world oil and food prices Source: World Bank data continue to fall. Fiscal deficit is projected to reach 3.4% of GDP in 2009 and 2010 due to lower grants, higher investments, and military hydrocarbon sectors. Non-hydrocarbon invest- expenditures related to the border conflict with ment flows, coming mostly from the Gulf in the Eritrea. Improvements in tax administration, past, have tended to concentrate in tourism, real including the introduction of the VAT and the estate, and some manufacturing industries. They rationalization of exemptions in the Free Trade are likely to be affected by lower oil revenues Zone in 2009, should increase tax revenue and 51 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Key Economic Indicators 2008e 2009f 2010f Key Economic Indicators 2008e 2009f 2010f Real GDP Growth (%) 5.8 5.0 5.5 Real GDP Growth (%) 5.5 2.5 3.5 Inflation Rate (%) 12.0 5.4 4.0 Inflation Rate (%) 14.9 2.0 10.0 Fiscal Balance (% of GDP) ­3.4 ­3.4 ­3.4 Fiscal Balance (% of GDP) ­9.9 ­3.4 ­2.6 Current Account Balance ­6.7 ­5.0 ­3.4 Current Account Balance ­27.5 ­9.6 ­9.5 (% of GDP) (% of GDP) Source: World Bank data Source: World Bank data improve fiscal outlook beyond 2010. Current projected to decline from 9.9% of GDP in 2008 account deficit will continue throughout 2009 to about 3% on average in 2009 and 2010. Rec- and 2010 albeit lower than the levels in 2008. It ognizing the lack of fiscal space, the Government is projected that the current account deficit will plans to increase public capital spending in 2009 reach 5% and 3.4% of GDP respectively in 2009 only to the extent that it can be financed from and 2010. Traditional exports should continue expected savings and lower spending on fuel and rising in 2009­2010, following the expansion food subsidies (the timing may be opportune of port activities, cattle processing facilities since prices have declined). Jordan also has a and salt extraction. This will help to reduce high dependence on current transfers and capital the trade deficit in 2009, further supported by inflows; and there remain key risks related to reduced international food and oil prices and a financing of the current account deficit, which is fall in FDI-related imports. FDI has been high at estimated to reach 9.6% and 9.5% of GDP in 2009 about 23% and 30% of GDP in 2007 in 2008, but and 2010 from a high deficit of 27.5% of GDP in is expected to decline to levels of around 20% 2008. If financing dries up over and above what is of GDP in the medium-term as ongoing invest- currently projected, the resulting squeeze would ments are completed and others are cancelled contract economic activity and worsen already or postponed. The construction of the second high unemployment. To compensate for limited container terminal in Doraleh by Dubai World has scope for fiscal stimulus, the government has been delayed to 2010 as well as the construction sought to support economic activity by relaxing of a new refinery and pipeline. Due to Djibouti's monetary policy. The Central Bank has loosened small size, investment projects are limited in monetary policy by scaling back operations to number and large projects have a high economic soak up liquidity, reducing a key policy interest importance. This in turn means that a withdrawal rate (so far by 50 bps) and reducing reserve of such investments is associated with high eco- requirements (from 10 to 9% of total deposits). nomic risks. However, recent investments in tour- Inflation is projected to ease to 2% from its high ism, alternative energy, and the Free Zone will level of 14.9% in 2008 but could pick up in 2010 if continue to support growth as will a projected liquidity in the banking system remains high. The increase in earnings from port services. possible loss of jobs held by Jordanian workers in GCC countries can compound the pressures on Jordan. Economic activity is expected to slow an already difficult job market at home return-- significantly, with growth rate slipping to 2.5% unemployment rate has reached 13.0 percent in and 3.5% respectively in 2009 and 2010 in line Q2 2009, up from 12.1 percent in Q1 2009 and with expected lower foreign capital flows, ex- 12.5 percent in Q2 2008. ports and remittances, and domestic private investment. One early indication is the industrial Lebanon. Despite a resilient banking sector, production index which decreased by 6.8% in Lebanon's real economy will be impacted in January 2009. Jordan has limited room for fiscal 2009 largely through economic slowdown in stimulus; and fiscal space has been eroded fur- neighboring Gulf oil exporters. Economic growth ther in 2008 as a result of generous compensation is expected to slow from 6.5% in 2008 to 2.5% to public sector employees to mitigate the impact and 4.5% respectively in 2009 and 2010 in line of higher fuel and food prices. Fiscal deficit is with expected reduction in regional demand and 52 Chapter 2: The Global Economic Environment and MENA's 2009­10 Prospects: Mitigating the Impact of Global Recession Key Economic Indicators 2008e 2009f 2010f Key Economic Indicators 2008e 2009f 2010f Real GDP Growth (%) 6.5 2.5 4.5 Real GDP Growth (%) 2.0 5.0 6.5 Inflation Rate (%) 10.7 8.5 5.0 Inflation Rate (%) 7.0 4.0 3.0 Fiscal Balance (% of GDP) ­7.7 ­4.4 ­2.5 Fiscal Balance (% of GDP) 23.3 ­35.7 ­22.7 Current Account Balance ­19.3 ­10.4 ­5.2 Current Account Balance ­27.2 ­39.7 ­29.3 (% of GDP) (% of GDP) Source: World Bank data Source: IMF data slowdown in inflows of remittances and foreign rate requires that the peace process be consoli- direct investment from GCC countries. Inflation dated to restore investor confidence. The 2009 is projected to ease to 8.5% in 2009 and lower budget calls for about $1.65 billion in external to 5% in 2010 following a double digit rate in aid, with as much as $1.15 billion designated 2008. Current account deficit is projected at for budget support and $50 billon allocated to around 10.4% of GDP in 2009 and 5.2% in 2010. development expenditures. However, it may Fiscal deficit is projected to decline respectively be difficult to redirect that much external aid to 4.4% and 2.5% in 2009 and 2010 from 7.7% from recurrent expenses to development ex- of GDP in 2008. But public debt is expected to penditures. With real wages for government remain very high, close to its 2008 level of 162%. employees declining and the private sector not Moreover, interest payments on public debt expanding quickly, the Palestinian Authority will absorb 45% of government revenues and the be under pressure to both increase the public exposure of commercial banks to public debt is work force and increase their wages. Currently, very high (over 55% of the US$47 billion stock the 2009 draft budget calls for a 6% increase in of public debt was held by commercial banks as the wage bill, with 4% coming from a general of end-2008). Lebanon has very limited room for wage rise to offset the rising cost of living and a fiscal stimulus or countercyclical fiscal spend- another 2% to account for additional hiring in ing, unless inefficient subsidies to the electricity the health and education sectors. company are rationalized to free up resources for much needed safety nets and infrastructure Non-oil exporters with strong investments. In the absence of fiscal space, the economic linkages with authorities have focused on monetary policy to Eurozone and OECD ­ Egypt manage the impact of the global crisis, with some Morocco, and Tunisia success so far. The central bank has recently announced plans to facilitate lending by banks Egypt. The rapid deterioration in the global through the provision of subsidized facilities and economic outlook weakens nearly all key driv- by reducing reserves requirements on deposits. ers of Egypt's balance of payment and economic activity in fiscal year 2009. Tourism revenues West Bank and Gaza. The optimistic scenario are expected to fall by 8% (in fact, revenues of is for West Bank and Gaza's economy to grow at 5% and 6.5% respectively in 2009 and 2010.26 This would begin a recovery of per capita GDP. Key Economic Indicators 2008e 2009f 2010f The fiscal deficit is projected to worsen to 35.7% Real GDP Growth (%) 7.2 3.8 4.2 of GDP in 2009 and improve marginally in 2010 Inflation Rate (%) 11.7 8.5 7.3 to 22.7%, a level close to the 2008 level. The Fiscal Balance (% of GDP) ­7.6 ­5.6 ­4.7 current account deficit is projected to follow a similar pattern--worsening sharply to 39.7% of Current Account Balance ­6.7 ­6.3 ­6.3 (% of GDP) GDP in 2009 and recovering to the 2008 level in 2010. All of the growth in 2009 is assumed to Source: World Bank data come from the West Bank, while Gaza continues to stagnate. Reaching the projected 5% growth 26 IMF, 2009b 53 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Egyptian hotels have reportedly declined by 30 base (formal or informal sector), unleveraged to 40 percent in the past nine months due to the financial sector with only 41% of the total credit global economic crisis). Suez Canal revenues are extended to the private sector; a relatively di- expected to fall by 10­15%, due to falling traf- versified economy with available opportunities fic, with a larger drop in fiscal year 2010 if tariff in most sectors; comfortable level of net inter- reductions take place.27 Worker remittances will national reserves (US$32.2 billion in end-March also fall by 5­10% (to US$ 7.5 billion in fiscal 2009, projected at US$35.5 billion by the end of year 2009 and US$ 6.8 billion in fiscal year 2010) FY09 and US$37.2 billion in FY10) to be drawn following the growth slowdown in GCC (which upon as the current account deteriorates. originates around half of Egypt's worker remit- tances). Net merchandise exports will fall by Morocco. An unexpected outstanding 2009 har- 20­25% on the back of the recession in Europe vest brought about by good rains and targeted and the US in 2009. Net hydrocarbons exports sectoral fiscal stimulus actions are expected to are expected to rise due to steady prices of natu- moderate the impact of the global recession on ral gas--which represents most of Egypt's hy- the Moroccan economy. Economic growth is ex- drocarbon exports--while hydrocarbon imports pected to weaken to 5% and 3% respectively in are bought at or close to spot prices. Yet, this will 2009 and 2010, lower than the 5.6% growth rate not likely compensate for the sizable loss in net non-oil merchandise exports leading to a larger trade deficit as a ratio to GDP despite lower Key Economic Indicators 2008e 2009f 2010f non-oil merchandise import growth. Tighter Real GDP Growth (%) 5.6 5.0 3.0 global credit conditions and increased investor Inflation Rate (%) 3.9 3.5 2.5 aversion should lead to a fall in FDI inflows by Fiscal Balance (% of GDP) ­0.1 ­3.1 ­2.8 almost 40% (to US$8.5 billion in fiscal year 2009 and US$7.7 billion in 2010). Against these nega- Current Account Balance ­5.4 ­2.5 ­2.9 (% of GDP) tive trends, the current account is expected to Source: World Bank data post a deficit of 6.3% of GDP in fiscal years 2009 and 2010. Against this backdrop, GDP growth is projected at 3.8% in 2009 and 4.2% in 2010. This growth rate is too low to absorb the 600­700 in 2008. Inflation should be contained around thousand annual cohorts of new entrants in the 3.5% in 2009, mainly determined by imported labor market. Together with the potential return food inflation, and remain subdued around 2.5% of expatriate Egyptians, particularly from GCC in 2010. Unemployment is expected to moder- states, this might lead to increasing unemploy- ately deteriorate in 2009 to around 11% from ment. On the positive side, inflation is expected 10% in 2008, and progressively improve as to fall to 8.5% in 2009 and 7.3% in 2010 due to growth strengthens. Fiscal deficit is projected base effects, falling international commodity to increase to 3.1% and 2.8% of GDP in 2009 prices and weakening domestic demand. Egypt and 2010 as the authorities provide incentives has announced a fiscal stimulus. However, given to firms for job creation and exports and step up the country's tight fiscal space, the main chal- social spending to boost safety nets. 28 Although lenges in the short term remain the ability of the the trade deficit should remain at the same level government to implement expansionary poli- as in 2008 (around 22% of GDP), with falling cies without impairing long-run fiscal stability. imported commodity prices compensating for It is expected that increase in spending will be lower exports, the current account is expected partially financed by savings on the cost of food subsidies. Fiscal deficit is projected to remain at 27 In an attempt to encourage more traffic, the Suez Canal around 5.6% and 4.7% of GDP in 2009 and 2010. Authority has temporarily lowered its fees for dry cargo vessels while keeping its transit fees for 2009 unchanged. Compared to the last downturn, Egypt's eco- 28 Here the fiscal data differs from the national fiscal data since nomic fundamentals place it in a better position it does not include in the budget the Hassan II fund and it does to weather shocks including a large consumer include privatization receipts. 54 Chapter 2: The Global Economic Environment and MENA's 2009­10 Prospects: Mitigating the Impact of Global Recession to remain in deficit, at 2.5% and 3% of GDP in demand, especially private consumption and 2009 and 2010 due to a drop in tourism receipts public investment will thus be the main drivers and workers' remittances. With moderate FDIs of growth. The major infrastructure projects flows and loans, foreign reserves are expected to that are expected to boost growth include a remain at comfortable level. new airport, a new refinery, and the Tunis- Medjes-Beja-Boussalem highway. It is expected Tunisia. Tunisia's real GDP growth is expected that the fiscal deficit will remain at about 3% to weaken to 3% and 4% respectively in 2009 for both 2009 and 2010. Despite the strong and 2010, following a slowdown in 2008 (with public investment program and fiscal incentives 2008 growth estimated at 4.5% against 6.3% in provided to small and medium enterprises af- 2007). Agricultural sector growth is expected fected by export declines as well as support to to pick up in 2009, following a sluggish per- firms that create jobs. In fact, the Government formance in 2008. The slowdown in economic has extended for another six months the mea- sures approved in December 2008 in support of firms that have experienced a sharp decline Key Economic Indicators 2008e 2009f 2010f in exports. These measures consist mostly of subsidies of the employer's cost of social secu- Real GDP Growth (%) 4.5 3.0 4.0 rity and the cost of export insurance. External Inflation Rate (%) 4.7 3.5 3.0 financing will be constrained by tight condi- Fiscal Balance (% of GDP) ­3.0 ­3.1 ­3.0 tions on sovereign bond markets but Tunisia Current Account Balance ­5.4 ­4.8 ­3.6 hopes to tap multilateral sources of financing. (% of GDP) With the global commodity prices falling and Source: World Bank data then stabilizing, and with domestic demand likely to weaken, inflation is expected to ease to 3.5% and 3% in 2009 and 2010. Current ac- growth in 2009 will be caused by moderating count deficit will reach 4.8% and 3.6% of GDP growth in export-oriented manufacturing in- respectively in 2009 and 2010. In contrast with dustries such as electrical and mechanical engi- recent years during which the economy has at- neering and information technology industries, tracted significant FDI, especially from the Gulf due to both increased competition and weaker Arab countries and the UK (hydrocarbons), FDI demand from the EU. The global slowdown inflows will be highly vulnerable in 2009­2010 will also depress tourism activity. Domestic to the impact of the global credit crunch. 55 Chapter 3 Policies to Reduce Vulnerability and Increase Flexibility to Respond to Shocks over the Long Term Introduction tions; a regulatory environment which prevents firm adjustment to economic shocks on the la- The MENA region has implemented a variety of bor margin; piecemeal social safety nets which policies that can help to mitigate the short-run are not well targeted to those most affected by impacts of the current global economic down- economic shock; and a fundamental disinterest turn within their economies. Over the longer in systemic gathering and transparent dissemina- run, reducing vulnerability to economic crises tion of data, which hinders the region's ability to will depend on a policy framework which can monitor and respond appropriately to economic both mitigate exposure to systemic risk as well crises which occur. as increase the capacity for the government, the private sector, and households to cope with The chapter proceeds as follows: Section 3.2 shocks when they occur. highlights the major channels for shock to the region and the pass-through of those shocks to The MENA region faces vulnerabilities along the economy; Section 3.3 discusses the types of both the exposure and the coping fronts. MENA's structural policies that can influence both the integration with the world through financial exposure and the resilience to economic shocks. markets has been limited, but the region has The chapter addresses three of those structural been heavily exposed to external shocks through policy areas in greater detail: in Section 3.4, the merchandise trade. With both highly concen- financial sector is evaluated with respect to its trated export structures (primarily fuels) and ability to mitigate external shock; in Section 3.5, the world's highest food import dependency, the the trade structure and policies are evaluated; region leads the world in terms of exposure to and in Section 3.6, the private business sector is commodity price shocks. The ability to rebound discussed. Finally, 3.7 concludes with a discus- from shocks, meanwhile, is weakened by struc- sion of the role of safety nets in reducing vulner- tural characteristics and policies in the region, ability to shocks. including: lack of global financial integration, which has limited the potential sources of finance Major Channels for Shock in MENA in a downturn; largely underdeveloped financial sectors outside the GCC, with few instruments Exposure to shock has been a seminal character- for mitigating risk and insuring vulnerability; istic of the modern growth experience of MENA a business environment with discretionary en- economies. Large geopolitical shocks (such as forcement of business regulations, which has the ongoing war in Iraq, the continuing conflict limited the ability for creative destruction of in Gaza, and the recent war in Lebanon) have firms and industries to changing economic condi- captured international attention, although they 57 2009 Economic Developments and Prospects ­ Navigating through the Global Recession are not the only, or even the greatest, source of 3.1). However, nonoil exports are considerably shock to the region. Frequent droughts, which underdeveloped, and lack of trade diversification can sharply reduce rural incomes and agricultural has exposed the region heavily to commodity production, are a source of repeated shocks for price shocks. MENA is extremely dependent countries such as Morocco and Yemen. Climate upon primary commodity exports (the dominant change (seen through water scarcity, desertifi- being fuels), but as a net importer of food, it is cation, and rising populations in coastal areas) also vulnerable to food prices. As a result, the and high population growth represent extended MENA region leads the world in its exposure to and rising sources of vulnerability to the region, commodity price shocks.1 with increasing concentrations of the population locating in infrastructure-strained urban and MENA countries are also strongly integrated hazard prone areas. The unstable security situ- into the global economy through migration, ei- ations from countries in conflict have impacted ther as migrant sending or receiving countries. other countries in the region through economic The MENA region sent some 15 million emigrants linkages within the region (including through abroad in 2000, representing 4.5% of the total refugee and labor inflows and returns, tourism population, and in a few countries, including and trade). West Bank and Gaza, Lebanon, Jordan, Bahrain, Malta and Kuwait, emigration rates exceed 10% The channels for global economic integration of the population (Table 3.1). For a few countries, in MENA have had a strong bearing on its expo- including Algeria, Morocco, and Tunisia, Europe sure to shock and its ability to rebound from it. is the main destination of migrants, intensifying The region is reasonably well integrated into the global economy through commodity trade, with trade to GDP ratios above world averages (Figure 1 Hirata, et al. 2005. Figure 3.1: Trade as a share of GDP, 2007 200 180 Exports + imports as a share of GDP 160 140 120 100 80 60 40 20 0 Algeria Iran, Islamic Rep. Syrian Arab Republic Bahrain Kuwait Oman Qatar Saudi Arabia United Arab Emirates Djibouti Jordan Lebanon Egypt, Arab Rep. Morocco Tunisia East Asia & Pacific Europe & Central Asia High Income: OECD Latin American and the Caribbean Middle East & North Africa South Asia Sub-Saharan Africa World Source: World Bank data. Note: Regional averages trade weighted 58 Chapter 3: Policies to Reduce Vulnerability and Increase Flexbility to Respond to Shocks over the Long Term the links to European economic developments. The region is far less integrated with the In other MENA countries, including Egypt, Ye- global economy through financial markets. GCC men, Syria, and to a lesser extent Jordan, the economies are the most integrated into the global GCC economies are the main destination. On the financial network, particularly through Sovereign negative side, the strong migration links have Wealth Fund investments in Western and other increased the vulnerability of MENA countries to financial markets, but elsewhere there is limited external developments. Migration between non- evidence of integration with developed markets. oil MENA economies and the GCC, for example, While the limited links to the global financial has served to amplify the terms of trade shocks community has insulated the region from the in the region. On the positive side through, mi- initial effects of the current crisis, the lack of fi- gration has also provided a substantial outlet for nancial integration also prevents the region from regional labor market imbalances in the face of circumventing some of the vulnerability arising domestic shocks. from trade shocks. Table 3.1: Emigration from MENA countries in 2000 Total migration Main destination Stock Rate of growth (Annual average) Herfin Country Stock Share MENA4 Algeria 2070840 6.8% 0.428 France 1333587 64.4% Egypt 2173711 3.2% 0.232 Saudi Arabia 1015124 46.7% Morocco 2589108 9.1% 0.131 France 759011 29.3% Tunisia 607491 6.4% 0.373 France 364498 60.0% MENA9 Djibouti 16990 2.4% 0.208 France 6093 35.9% Iran 926312 1.4% 0.133 USA 291625 31.5% Lebanon 577123 17.0% 0.084 USA 111142 19.3% Libya 78109 1.5% 0.098 Israel 19200 24.6% Malta 113094 28.9% 0.261 Australia 46998 41.6% Others Bahrain 128719 19.2% 0.262 Philippines 54230 42.1% Iraq 1109957 4.4% 0.163 Iran 413710 37.3% Jordan 667754 13.4% 0.277 W.Bank Gaza 319367 47.8% Kuwait 486861 21.8% 0.244 Saudi Arabia 210594 43.3% Oman 17881 0.7% 0.219 United Kingdom 7841 43.9% Qatar 15958 2.6% 0.224 United States 7065 44.3% Saudi Arabia 243258 1.2% 0.214 United States 106230 43.7% Syria 423764 2.5% 0.100 Saudi Arabia 109048 25.7% United Arab Em. 123886 3.8% 0.218 India 53883 43.5% W.Bank Gaza 1065224 33.8% 0.368 Syria 630725 59.2% Yemen 603173 3.4% 0.371 Saudi Arabia 360438 59.8% Source: Docquier and Marchiori, 2009. 59 2009 Economic Developments and Prospects ­ Navigating through the Global Recession The combined impact of the shocks to MENA trends in the MENA region over 1980­2005 sug- countries has resulted in the region exhibiting gests that while volatility (measured through the the greatest year-to-year volatility in economic standard deviation in GDP) had a strongly posi- growth of any other region since the 1970s tive relationship on poverty, there is an evidence (Figure 3.2). of a structural breakpoint around 1993, a time when the region was able to significantly reduce While MENA's growth volatility has dimin- economic volatility. Post 1993, the impact of ished significantly over the past decade (the volatility on poverty was no longer a significant average deviation in growth over the past decade driver of poverty, suggesting that the region was is about 60% lower than the previous decade), it better able to absorb economic shocks without is unclear whether the social impacts of adverse significant increases in poverty. external shocks have declined equivalently. The region's historical models of development--with Labor markets, on the other hand, have been welfare systems supporting widespread subsi- more strongly impacted by economy-wide devel- dies, publically provided education, health care, opments than in the past, when near-full employ- housing and other benefits, pervasive use of price ment was a virtual mainstay in many countries ceilings, and high levels of public sector employ- in the region. Egypt's open unemployment rate, ment--in many ways cushioned the pass-through for example, was barely affected by significant of economic shocks to the rest of the economy. As changes in economic growth in both the 1960s the region has transitioned toward more market- and 1970s, but by the mid 1990s, the strong in- oriented development models, shocks (though verse relationship between unemployment and less severe) may be more heavily absorbed by growth became visible2 (Figure 3.3). households, through labor markets, prices and safety nets. On the poverty side, preliminary evidence 2 At the same time, official unemployment rates often masked suggests otherwise. Recent analysis of poverty significant underemployment. Figure 3.2: Regional growth volatility,1960s­2007 Sub-Saharan Africa High Income OECD MENA East Asia and Pacific Latin America Caribbean South Asia 9 Standard deviation in growth over decade 8 Latin America Caribbean 7 6 5 Sub-Saharan Africa East Asia and Pacific 4 High Income OECD South Asia MENA 3 2 1 0 1960s 1970s 1980s 1990s 2000s Source: World Bank data. Note: Regional growth deviations weighted by mid pereiod GDP. 60 Chapter 3: Policies to Reduce Vulnerability and Increase Flexbility to Respond to Shocks over the Long Term Figure 3.3: Unemployment and economic growth in Egypt, 1960­2007 Year-on-year growth Unemployment rate 16 Yearly economic growth/Unemployment rate 14 12 10 8 6 4 2 0 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: World Bank data. Note: Regional changes in yearly growth weighted by GDP. In the end, both elements--the degree to extent to which they will be able to implement which countries are exposed to economic shock, countercyclical policies. as well as the resilience of economies in coping with those shocks--are important in determining Just as important as macroeconomic poli- how successful countries will be in achieving long cies, structural features--and the policies which term development objectives. Both elements are influence them--will have strong bearing on an determined in large part by the structural and economy's exposure to and resilience from eco- policy factors in the economy. nomic shocks. The degree of integration with the global economy, the level of economic diversifi- Reducing Vulnerability through cation, factors which affect the flexibility of the Structural Policies economy (and actors in the economy) to shocks, the management of scarce resources, the social The global economic downturn has focused protection systems in place to mitigate shocks, renewed attention on the macroeconomic and the accountability and credibility of authori- policy framework, important in the immedi- ties in managing (and avoiding) negative shocks ate navigation through the crisis, and equally ultimately determine the overall vulnerability of important in preventing external shocks from countries over the long run. severely impacting economies. As Chapter 2 has highlighted, factors such as the level and Structural policies in every sector of the structure of debt, the degree of fiscal space, economy will impact the vulnerability (or re- external balances (and their financing sources), sistance) of an economy to shock. Water sector the exposure and soundness of financial sys- policies improving the supply and efficiency of tems, the flexibility of the exchange rate, and scarce water reduce the economy's vulnerability the extent of (difficult to retract) subsidies in to the host of social, economic and environmental the economy are factors which will largely de- impacts from water shortages, including poor termine how deeply countries in MENA will be health incidence, reduced rural incomes and hit by the global economic crisis, as well as the poverty, and volatility in agricultural exports, 61 2009 Economic Developments and Prospects ­ Navigating through the Global Recession among other things. Education policies that regulations can make it more difficult for firms support a more competitive workforce reduce and economic actors to reallocate resources in the economy's vulnerability to unemployment- an economic shock (for example through col- induced poverty. Good governance and the rule lateral constraints, which heighten the impact of law diminish the risks for foreign investors, of a negative terms-of-trade shock), and the reducing the volatility of FDI flows. Good urban inefficiencies in financial markets often exacer- planning can reduce the vulnerability to man- bate financial volatility, which in turn amplifies made structural disasters. shocks. In this chapter, three of the major structural More indirectly, there is the fundamental policy areas for reducing the economic exposure role the financial system plays in supporting to external shocks are highlighted: (i) financial growth and creating a competitive and thereby sector policies for economic resilience; (ii) resil- resilient economy, allowing for more resources ience through external trade diversification and to be channeled to investment, improving the flexibility; and, (iii) resilience through business allocation of resources across investments, and flexibility and efficiency, with an overarching raising household savings (which can mitigate need for good governance and institutions, the pass-through of shocks to households). which will determine the success and credibility of domestic policy management. While these Financial sector development in MENA structural policy areas have their own individual implications on the vulnerability to shocks, the Financial sector development in MENA in large interaction among these policies also has a role part reflects the very recent nature of financial to play. And, with the poor disproportionately im- reform. Most MENA countries did not even pacted from economic shocks, a long-term strat- introduce financial sector reforms until the egy for reducing vulnerability to crisis depends 1990s. Before then, financial systems were fundamentally on adequate social safety nets and heavily regulated and dominated by the public mechanisms to protect vital social expenditures sector. Partly as a result, financial systems in which contribute to long term growth. MENA currently play a significantly smaller role than other economies at similar income levels Financial Sector Policies for (see Box 3.1). Economic Resilience There is great variance within the region in Financial system soundness, and the role that terms of the degree of financial sector develop- the financial system plays in the economy, is ment. On the one hand, the oil-exporters of the important in crisis avoidance and mitigation for GCC have reasonably well-developed financial a variety of reasons. Most obvious, as the current markets, with substantial diversity in financial global financial crisis elucidates, a malfunctioning instruments, high levels of foreign penetration, financial system can be the source of tremendous and limited state ownership. Non-oil economies, economic shock. For that reason, much of the on the other hand,--particularly the economies attention on the financial sector focuses on its relatively dependent upon ties with Europe--, likely soundness: the capital adequacy of financial have substantially less developed financial sec- institutions, the quality of assets and off-balance tors. Banks dominate the financial systems, with sheet positions, its profitability and liquidity, the varying degrees of state and foreign ownership, pace and quality of credit growth, its supervision but they play a relatively limited role in financial and governance by central banks, etc. intermediation or economic development. The least developed financial sectors in the region are Even when the source of economic shocks in the oil non-GCC countries, where public sector lies elsewhere, the financial system plays a banks either fully control or dominate financial pivotal role in transmitting and amplifying (or sectors, and where the quality of financial system mitigating) economic shocks. Financial market governance is low. 62 Chapter 3: Policies to Reduce Vulnerability and Increase Flexbility to Respond to Shocks over the Long Term Because of the divergence in financial sys- termediate large hydrocarbon revenues through tems in the region, MENA's longer-term financial the domestic financial systems. In part this deci- sector vulnerabilities to shock vary strongly as sion was to insulate some of the revenues from well. Among the GCC economies, the financial political pressures to spend, and an acknowl- sector vulnerabilities have emerged largely from edgement of the supply-side constraints in the the decision governments have made not to in- economies: rapid spending growth would result Box 3.1: Overview of financial sector development in MENA The banking sectors and equity markets are large more restricted in the non GCC countries. As noted by international standards in many MENA countries. above, the ratio of loans to deposits is very low in this Average banking assets in both the GCC and non GCC group (60 percent), reflecting to a good extent large amount to about 60 percent of GDP. The large size of holdings of government paper. Moreover, lending bank assets in GCC countries is consistent with their remains predominantly short term and focused on high per capita income, but several non GCC countries larger companies. There are fewer branches and loans have larger banking systems than would be predicted per population than the average of emerging countries. by their income levels. The same pattern holds for eq- Technologies such as mobile banking used to extend uity markets--the large size of equity markets in GCC outreach in other regions are held back by regula- countries (market capitalization above 100 percent) is tors and lack of innovation. The equity market has not consistent with their level of development, but some been a significant source of finance, and the number of non GCC countries have surprisingly large equity mar- listed firms per population is comparatively low. kets (market capitalization about 80 percent), including Egypt, Jordan, and Morocco. The more restricted access is due to several causes, including large fiscal deficits in some countries, the By contrast, non banking financial institutions (NBFIs) large role of the state-owned banks and non-financial are very small in most MENA countries. Fixed income enterprises, weak financial infrastructure, and pos- markets are generally undeveloped and restricted to sibly lack of Islamic finance products. The low ratio government debt markets. NBFIs--insurance compa- of loans to deposits in non GCC countries reflects to a nies, pension funds, and mutual funds are surprisingly good extent the financing of large government deficits. small, even considering the income levels of MENA Moreover, despite privatizations, state owned banks countries. Morocco is one of the few exceptions. Leasing still account for almost 50 percent of bank assets in and factoring companies have grown in some countries MENA--only in South Asia state banks have a higher but also remain small. Some countries have made ef- market share. These banks have channeled a large forts to strengthen their government debt markets, but amount of resources to state owned enterprises and market development remains generally limited, with accumulated a large volume of non-performing loans, restricted liquidity, short maturities, and the lack of a reflecting their inefficiency in financial intermediation. solid benchmark yield curve for private issuers. Private This is particularly true in countries such as Algeria, fixed income and derivatives markets remain negligible. Libya, and Syria, but also true in other countries such as Egypt and Tunisia. Finally, financial infrastructure The large size of the banking system, and of the remains deficient, as indicated by weak creditor rights, equity market in some countries, has not yet trans- collateral systems, and credit information. The MENA lated into financial sector access. Although there region compares unfavorably in most relevant Doing are differences across MENA countries, on average a Business indicators and other enabling environment higher proportion of MENA firms identifies access to indicators. The lack of Islamic finance products is also finance as a major constraint than firms in all other a possible cause of restricted access, both from the regions, except Sub-Saharan Africa. Access seems borrowing and deposit sides. Source: World Bank, Financial Sector Group. 63 2009 Economic Developments and Prospects ­ Navigating through the Global Recession in inflation and real exchange rate appreciation. The serial nature of GCC stock market crashes-- As a consequence, there has been limited de- with associated demands for bailouts--points to velopment of long-term financing domestically. the need to develop the long-term investor base to increase the depth of stock markets and miti- The GCC's domestic banking sector is not gate the impact of market declines on the wider well equipped to handle large scale corporate economy (e.g. through impacts and household refinancing, because their deposit bases are small finances and in turn to banks which have lent and heavily weighted towards short-maturities to households). Finally, since GCC countries (i.e. demand or short time deposits). Further- remain committed to exchange rate pegs, there more, bouts of speculation related to the dollar is the ever-present risk of a mismatch between pegs have led to fairly rapid inflows and outflows the externally-determined level of interest rates, of short-term funds, complicating liquidity man- trends in oil prices, and the level of the dollar. agement for the domestic banking system. The configuration seen for these variables in the first half of 2008 resulted in negative real inter- On the other hand, stock markets have not est rates during an oil boom, contributing to the served as a source of long-term financing either. rapid expansion of bank balance sheets and the And corporate bond markets are also poorly general growth in speculative activity. The finan- developed, partly a result of government's own cial sector will likely be the first to experience the role in financing hydrocarbon projects direct- side effects of a similar mismatch in the future. ly--which crowds out the capacity that might otherwise have developed for general long-term Outside of the GCC, the ability to cope with project financing. shocks is hampered by the limited development of the financial sector in general, as well as the The combined effect of these structural ele- limited access to financial services by households ments is to create a special set of vulnerabilities and firms. Banks dominate the financial sectors for the GCC financial sectors. First, because the of non-GCC countries, with non-bank financial domestic financial systems have not developed as institutions significantly underdeveloped. As a sources of long-term finance, the non-oil sector result, a host of financial instruments for manag- has remained reliant on external debt financing ing risk--from insurance products to financial at relatively short maturities. This has exposed derivatives--are not available to households and investors to refinancing risks when terms expire. firms (Figure 3.4). The limited development of Of course, governments typically have sufficient financial sectors (in terms of breadth of services liquidity to backstop affected borrowers, but the available to the public) has implications beyond resulting uncertainty about terms and conditions lower risk abatement on the individual level. attached to such support itself has the potential Absence of stock markets, for example, (and to be destabilizing, acting as a deterrent to equity limited links between the financial system and investors. the real economy) limits transmission of signals from policy to the market, and may allow policy Second, given the lack of depth of banks' mistakes and vulnerability to build up over time corporate business, their balance sheets are without notice. heavily weighted towards personal loans, which may be applied towards investments in property Access to the financial sector has had other or the stock market (regardless of their stated implications on the ability of regional econo- purpose), leaving banks exposed to asset market mies to manage shock. As investment climate crashes or a worsening of household credit risk. assessments in the region reveal, few private This is a particular issue in Kuwait. sector firms even utilize bank credit to finance investment, relying instead primarily on retained Third, GCC countries lack a deep institu- earnings (Figure 3.5). Thirty-eight percent of tional investor base, leading to a preponderance firms outside the GCC identify access to finance of short-term retail speculation on stock markets. as a major constraint to business, higher than 64 Chapter 3: Policies to Reduce Vulnerability and Increase Flexbility to Respond to Shocks over the Long Term Figure 3.4: Selected non-bank financial assets as a share of GDP Pension Assets Insurance Assets Mutual Funds 60 50 Percent of GDP 40 30 20 10 0 East Asia Europe & Latin American and Middle East & South Asia High Income & Pacific Central Asia the Caribbean North Africa OECD Source: World Bank Financial Structure Database. Figure 3.5: Use of bank credit by firms 25 Proportion of firms using banks to finance investment (%) 20 15 10 5 0 Middle East and East Asia and Europe and Latin America South Asia Sub-Saharan North Africa the Pacific Central Asia and the Caribbean Africa Source: World Bank investment climate assessments, various years. Note: Regional averages unweighted. for all other regions but Sub-Saharan Africa.3 was muted by its relative disconnect of the finan- Eighty-four percent of loans require collateral, cial sector from the real economy. On the positive which is close to the higher end of the distribu- side, this has meant that most private sector firms tion, and the collateral needed as a percentage have not experienced the credit shortages im- of loan amount is 166%, which is t he highest mediately apparent in other regions.4 However, it in the world. There are fewer bank branches in has also meant that the region has sacrificed long MENA than in other emerging economies (per 1000 people). 3 Source: World Bank Investment Climate Assessments; vari- The disconnect from the global financial com- ous years munity prevented most regional economies from 4 It may also have helped to mitigate the future negative feedback loops between the real and financial sectors ­ where limited suffering immediate significant impacts of the access to bank credit affects loan repayments, weakening bank shock, but it is also true that the regional impact balance sheets, and causing banks to curtail credit further. 65 2009 Economic Developments and Prospects ­ Navigating through the Global Recession run growth, with one of the central functions of business (e.g. Dubai, Qatar, plans in Saudi Arabia). the financial sector--allocating resources toward International financial liberalization also can help investment--in large part disabled. surplus countries manage domestic shocks by tap- ping into foreign assets to mitigate the impact of From a vulnerability perspective, this weak domestic shocks. This factor in particular played link to the real economy has meant the loss of an important role in allowing GCC countries to one of the most effective tools an economy has respond to the financial impacts of the current for risk mitigation. The financial sector is the crisis as early as the second half of 2008. primary conduit through which monetary policy impacts the real economy. With limited financial The current crisis has had an impact on virtu- intermediation outside the GCC countries, along ally all countries and all asset classes, and GCC's with the prevalence of fixed exchange rate ar- foreign assets have suffered losses. However, rangements throughout the region, the ability for over the long term, the economic argument for authorities to conduct effective monetary policy financial liberalization remains. The countrerfac- is considerably more limited. tual to international financial liberalization in the GCC in the context of the recent crisis may never More generally, a well developed financial be known, but past experiences from countries sector, which provides diversified funding such Indonesia and Nigeria where oil resources sources for both individuals and enterprises were not invested through sovereign funds or for mitigating risk and insuring vulnerability, foreign assets of the central bank suggests that and in which households and firms can borrow GCC countries could have been far worse off in to smooth the consequences of an economic the absence of international financial diversifi- downturn is critical to the broader economy's cation. In Indonesia and Nigeria, part of the oil resilience--its ability to mitigate and manage surpluses found their way out of the countries the impacts from shock and adjust to the chang- and into foreign bank accounts in a less than ing conditions present in a dynamic economy. transparent way, and domestic investment of Worldwide experience confirms that countries part of the surplus was not as productive as seen with well developed financial systems grow recently in the GCC. Comparing the management faster and more consistently than those with of the recent oil boom with past oil booms in the weaker systems, and a high level of financial GCC also offers some arguments in support of sector development equips a country to better financial liberalization. adjust to real sector shocks5. Economies in the region have taken steps Part of that asset diversification and devel- forward to reform their financial sectors. Over opment can come from financial sector liberal- the past decade in particular, banking sectors ization. Although the current economic crisis have slowly opened to private and/or interna- points to fundamental risks associated with global tional participation, with a handful of countries financial interconnectivity--with the most finan- in the region granting licenses to private banks cially integrated economies in the region, the GCC and changing foreign ownership restrictions. In countries, most deeply affected by the financial Egypt, for example, majority stakes in one of impacts of the crisis--international diversification the four main state owned banks, the Bank of of financial assets has also served countries well. Alexandria, were sold over 2006, and the sale International diversification allowed many of GCC of the third largest bank in Egypt, Banque du countries to invest their oil surplus into foreign Caire (postponed in June 2008), is expected assets, thus avoiding flooding small domestic mar- when international financial markets recover. kets and avoiding overheating and asset bubbles. Even among the non-GCC oil economies, where Also, international liberalization allowed them to public sector banks still dominate the financial attract foreign investments into their hydrocar- bon sectors (e.g. Saudi Arabia, Qatar) and create international hubs for finance, trade logistics and 5 Beck, et. al. 2000. 66 Chapter 3: Policies to Reduce Vulnerability and Increase Flexbility to Respond to Shocks over the Long Term sector, there has been progress with financial diversify from local markets, reducing the risks sector liberalization through both private and of domestic shocks. Trade also allows for a level foreign competition. of growth and social development which would be impossible without it, since trade allows for Nonetheless, the public sector remains domi- a more efficient allocation of resources. A suc- nant, which has implications on the region's abil- cessful trade strategy recognizes both facts, and ity to manage shocks from a fiscal perspective. seeks to maximize the gains that can accrue from State owned banks tend to have lower profitabil- trade, while minimizing the exposure to and ity and higher costs than private counterparts. impacts from external shocks. With high remaining state ownership in many countries,6 the economic costs can be large. As Trade patterns in MENA are highly diverse an example, Algeria's public banks' losses have in term of both volumes and structure, and on average represented over 4% of GDP each these differences have important ramifications year since the early nineties.7 This insolvency on exposure to shock and the ability to rebound represents a tremendous drain on the economy's from shock. Oil-producing countries have higher fiscal ability to respond to economic shock. export levels, but, not surprisingly, exports are highly concentrated in fuels (more than 85% of The majority of MENA countries have rec- merchandise exports emanate from fuels). As a ognized the need for greater financial access, result, fuel prices exert critical influence over private participation, and better regulation, these countries' export success. Among non-oil standards and oversight. As the trend toward economies, meanwhile, while export concentra- financial deepening and financial globalization tion is also relatively high, the geography of trade increases, the MENA region will need to manage flows (whether predominantly with Europe or the process to take advantage of opportunities, with the GCC economies) also exerts a strong while minimizing the risks. While the process will influence over the ultimate exposure of countries differ for each country, some generalities can be to external shocks. made. Creating an enabling structural environ- ment for more resilient and enabling financial MENA's high export concentration (particu- systems in MENA will necessarily include efforts larly for oil producing countries in the region) to reduce the involvement of the government in has meant both higher volatility, and lower the financial system, including through reduc- growth. The international evidence on trade ing state ownership of banking and non-banking suggests that the level of export variety raises financial sectors; promote non-bank financial productivity, allowing for greater knowledge development; strengthen the capacities within spillovers to the rest of the economy, while highly the financial sector to assess individual and concentrated exports are negatively associated systemic risk; and design and enforce appropri- with economic growth.9 Heavy reliance on any ate regulation and supervision of the financial one export creates a vulnerability to changes in sector, to both safeguard the financial system's demand for that good, with detrimental effects stability and mitigate procyclicality of financial on planning public and private investment, sector requirements and norms. Strengthening import capacity, foreign exchange cash flow, regional financial sectors through these efforts inflation, and growth, lowering the expected can help MENA improve its capacity to respond to systemic shocks, as well as mitigate the pass- through to the rest of the economy. 6 In Algeria, for example, though twelve foreign banks have been established since liberalization efforts began, the public sector continues to hold more than 90 percent of the economy's Trade and Vulnerability to deposits and credit; in Syria, despite eight private banks in Commodity Price Shocks operation, state banks still account for 80 percent of the assets of the banking sector. 7 World Bank, 2009c. Greater trade openness increases exposure to 8 Loayza and Raddatz, 2007. external shocks,8 but it allows for countries to 9 See literature survey in Naudé and Rossouw 2008. 67 2009 Economic Developments and Prospects ­ Navigating through the Global Recession gains from trade.10 As a result, with MENA's There is some encouraging news, however. merchandise exports concentrated heavily Recent analysis suggests the source of export among so few export categories, this means that growth for MENA's non-oil countries is tilting not only is MENA's exposure to terms-of-trade more towards new products and markets. Table shocks larger, but the expected gains from trade 3.2 decomposes the recent export growth among are lower. the region's non-oil economies into intensive mar- gins (based on existing products and markets) Non oil producers in the region are not im- and extensive margins (based on new products mune from the high degree of export concentra- and markets). Only in Jordan and Tunisia is the tion. Merchandise exports from MENA's non-oil contribution of the intensive margin larger than exporting economies, though more diversified the contribution of the extensive margin. This than oil exporters, are still considerably more suggests a changing industrial structure which concentrated than comparator middle-income is adapting to the new competitive pressures it economies (Figure 3.6), with the bulk of ex- is facing by moving towards new markets and ports in either primary products or products of products.12 low technological structure, such as clothing, footwear, and textiles. Nor has export concen- Diversification is a much more difficult pros- tration fallen significantly over the past fifteen pect for the region's oil producers. Diversifying years (with the exception of Jordan).11 Terms petroleum-dependent economies is one of the of trade shocks (on agricultural products) con- more complex economic challenges, and the stitute an important source of vulnerability in non-oil economy export structures, but perhaps of even greater importance from a vulnerability 10 See Dawe 1996. The geographic concentration (in terms perspective is the increasing competition MENA's of export destinations and strategic import sources) likewise creates vulnerability to relations or circumstances with key non-oil economies face on low-tech exports from trading partners. lower-cost suppliers such as China, India, and 11 World Bank, 2007a. Bangladesh. 12 World Bank, 2008a. Figure 3.6: Export concentration among MENA's non-oil economies 70% Share of total exports from top 4 export 60% 50% categories (percent) 40% 30% 20% 10% 0% Djibouti Egypt, Arab Rep. Jordan Lenanon Morocco Tunisia West Bank & Gaza Argentina Brazil China Indonesia India Russian Federation Turkey Source: World Bank staff estimates from UN Comtrade data. Note: Export concentration measured by the share of total Exports emanating from the 4 four export categories, measured at the 4-digit ISIC. 68 Chapter 3: Policies to Reduce Vulnerability and Increase Flexbility to Respond to Shocks over the Long Term Table 3.2: Decomposition of export growth into intensive and extensive margins, 1995­2005 Egypt Jordan Lebanon Morocco Tunisia Increase of existing products to existing markets 57.2 78.1 81.8 110.6 101.6 Decrease of existing products to existing markets ­19.1 ­9.0 ­21.8 ­47.2 ­25.0 Extinction of existing products to existing markets ­12.1 ­6.9 ­22.1 ­13.4 ­14.2 Total Intensive Margin 26.0 62.2 37.9 50.0 62.5 New products to existing markets 10.1 12.7 14.9 4.5 8.4 Existing products to new markets 63.9 25.0 47.0 45.6 29.2 New products to new markets 0.0 0.1 0.1 0.0 0.0 Total Extensive Margin 74.0 37.8 62.1 50.0 37.5 Source: World Bank 2008c. path for achieving economic diversification is Because export diversification for oil- not well charted. Only a handful of oil-producing producers is challenging, GCC countries have countries have achieved notable success in di- increasingly sought diversification through other versifying their export bases out of oil (for ex- means. On the export side, the development of ample, Indonesia and Mexico). Within the MENA petro-chemicals and other fuel-related commodi- region, only a few oil producers have managed ties have allowed countries like Saudi Arabia to to substantially reduce the concentration of move up the value chain and at least diversify exports from fuel and fuel-related commodities exports within fuels. Elsewhere, sovereign wealth (Figure 3.7), including Bahrain and the United funds have allowed the countries to convert their Arab Emirates. finite oil and gas wealth into longer-term revenue Figure 3.7: Oil in total exports, 1980 and 2006 120% Share of total exports emanating 100% from fuels (percent) 80% 60% 40% 20% 0% Kuwait Qatar Oman Saudi Arabia United Arab Emirates Bahrain Algeria Libya Syria Indonesia Mexico Iran Iraq Source: World Bank staff estimates from UN Comtrade data. 69 2009 Economic Developments and Prospects ­ Navigating through the Global Recession streams. And the development of service export region (Figure 3.8). As a result, changes in the activities, including financial and legal services, price of grains, rice, and other staples can have trading, tourism, and transport, has provided a a strong impact on import costs. Moreover, with major avenue for economic diversification and food representing about half of the expenditures economies of scale outside of oil. Three of the of the poor in MENA,14 changes in food prices GCC economies have developed regional and in- can dramatically impact household budgets. ternational financial centers: Qatar (which is also Beyond food imports, although the region is a laying plans to make the country a regional hub net fuel exporter, many countries in the region for knowledge industry, education and health- depend heavily on fuel imports, and the region's care), Bahrain (the hub for Sharia finance, now pervasive use of fuel subsidies has had strong also developing plans to be a regional hub for fiscal and current account implications for both information technology and for private aviation), non-oil economies and oil-exporters alike. and the United Arab Emirates. Kuwait meanwhile has made investments to establish itself as a trade The goal of reducing an economy's exposure and financial center. Tourism has become one of to shocks is not to insulate a country from the the most important vehicles for diversification in global economy, which would sacrifice the long- the GCC, providing job creation and horizontal run efficiency and growth gains provided by global capital flows. integration and market exposure, but rather to manage that external exposure in a way which The MENA region faces additional sources of reduces the potential impact of external shocks. exposure on the import side, primarily through the region's heavy dependence on food imports. 13 Food import dependency measured as share of food imports The MENA region leads the world in terms of in total household consumption. food import dependency,13 well above any other 14 World Bank, 2008b. Figure 3.8: Food import dependency, 2007 Djibouti Jordan Yemen Algeria Libya Bahrain United Arab Emirates Ratio of food imports to total household consumption (%) Saudi Arabia Syrian Arab Republic MENA Kuwait Lebanon Qatar Egypt, Arab Rep. Oman Tunisia Morocco Sub-Saharan Africa Europe and Central Asia Iran, Islamic Rep. High Income/OECD East Asia and the Pacific Latin America and the Caribbean South Asia 0% 5% 10% 15% 20% 25% 30% Source: World Bank staff estimates from UN Comtrade data (food imports) and World Bank World Development Indicators (house- hold consumption). 70 Chapter 3: Policies to Reduce Vulnerability and Increase Flexbility to Respond to Shocks over the Long Term On the import side, MENA's dependence on countries in the GCC, including Saudi Arabia, food imports is likely to increase over time, as the United Arab Emirates, and Bahrain, have scarce water supplies are increasingly strained. sought to limit their exposure to food trade Increasing domestic production through more vulnerabilities by pursuing agricultural offshor- efficient agricultural processes can help cush- ing agreements with other countries, renting or ion countries from erratic commodity markets, buying land abroad to ensure food security (See but MENA countries will need to rely on trade Box 3.2). On the food trade side, to deal with for food security over the long term. Several this permanent source of external shock, MENA Box 3.2: Land-for-food deals for food security With global crop shortages and high food prices, food tries will honor the agreements in times of food short- security has become an increasing concern through- age, particularly if their own citizens are in crisis. As a out the MENA region. GCC countries are particularly result, some GCC investments have run into opposition concerned. Cereal production in the Gulf has declined from local stakeholder groups. significantly because of depletion of water resources. To best ensure these agreements are honored At the same time, the population is expected to rise and that they result in a win-win situation, countries from below 40 million today to nearly 60 million in need to design them with significant awareness and 2035. The need for food imports, which already meet consideration for host country concerns and vulner- 60 per cent of total demand, will grow. It is estimated abilities. If this approach is to be pursued further, for example that Saudi Arabia will be fully dependent land acquisition processes need to be transparent, on imports for food by 2016. In an effort to safeguard and transaction structures need to account for several food security, several GCC countries have initiated categories of stakeholders: for example, on terms schemes to invest in land in other countries where which benefit farmers and local consumers, as well as agriculture and cultivation are a more conducive ven- local land owners, and whose compliance is assured ture. Saudi Arabia has expressed its interest to invest by development institutions like the World Bank or the in countries like Pakistan, Thailand, Sudan and even Islamic Development Bank. Agricultural investments Turkey, with a decided budget of $5 billion. Qatar and yield the greatest benefits when the investments result Sudan have established a joint holding company with in greater employment of locals, and result not only the specific intent of serving the Arab food markets. in land purchase but in the collateral purchases of Abraaj Capital, a large private company in the UAE, has seed, fertilizer and the like. A range of local priori- acquired 800,000 acres of farmland in Pakistan along ties, including labor conditions, land ownership rights, with other business entities.* environmental degradation, and, most importantly, But it remains doubtful whether a buy-to-produce local food security need to be taken into consideration strategy will be effective in reducing the GCC countries to ensure the interests of host countries are not over- vulnerabilities to volatile commodity price fluctuations looked. GCC investments should strive improve local and food import shortages even in the short term. food security in tandem with safeguarding their own Government-to-government dealings often draw op- food security. portunistic transactions automatically into the political In agriculturally intensive economies which might domain. For one thing, the policy of buying up arable be candidates for investment several conditions ap- land in countries with sometimes high levels of poverty ply which suggest a different approach to the one-off and undernourishment (such as Sudan and Pakistan), negotiated deal approach which has been followed or with physical water shortages themselves is not to date: i) productivity in these countries falls well very popular. Changing geopolitical situations can put below the level of Best Agricultural Practice; ii) farm the land agreements at risk, and even under friendly to market linkages are weak and frequently a major circumstances, and there is no guarantee host coun- cause of production loss as well as a cause of price (continued on next page) 71 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Box 3.2: Land-for-food deals for food security (continued) distortions; iii) supply chain infrastructure is weak. might involve water for food programs which would Hence, handling, transport and transaction costs are entail the development of regional irrigation systems high; iv) access to working capital required to diver- in return for forward commitments to repay loans in sity into higher value crops and to raise productivity food equivalent value. Simply removing a critical factor is extremely limited. Opportunities exist to address input, "land", from the agricultural production mix these more systemic problems with win-win solu- without increasing productivity is likely to backfire over tions, which might entail the development of " nuclear the medium term, with increases in commodity price farms" which could be used to disseminate best volatility, contraction in liberal food trade and a further appropriate technologies, create rural labor markets politicization of global food markets. and link farmers to markets. Other solutions might A recently announced agriculture investment firm include the forward contracting with local commercial owned by the Saudi Public Investment Fund is a step farmers to fill multi-year purchase agreement which in the right direction, which will participate with Saudi would involve incentive payments for productivity investors to invest in agro-industrial projects abroad. enhancement. To this end, a brand for Halal Meat or Large-scale investments in infrastructure funded by organic product might be developed jointly with MENA these projects can open up untapped water resources based supermarkets and equity in this brand offered in host countries, while also ensuring food production to participating poor farmers. Yet, another alternative for home. *"In Search of Hidden Water: GCC Nations & Food Security"; Gitanjali Bakshi; Turkish Weekly; March 20, 2009 countries can better manage the exposure to global demand shifts), as well as advances export food price fluctuations by increasing their use of diversification in terms of product quality, geog- future markets, future contracts and other mod- raphy, and diversification into service exports (as ern instruments to hedge against supply risks, the GCC has undertaken). Achieving this broad while ensuring that the impact of food price level of diversification requires an equally broad shocks is cushioned for those chronically food portfolio of policies, including improving the in- insecure households through well-developed centives for goods and services trade, lowering and targeted safety nets. Universal food subsi- the cost of critical backbone services to trade, dies, prevalent throughout the region, are not and proactive policies to support trade.15 Even well targeted to those in need. In addition, they with product diversification, external shocks can represent a serious fiscal burden (in Egypt and hit segments of the economy more heavily than Morocco, averaging 1.3% of GDP, and reaching as others and put economies at risk. The recent high as 2.1% in Syria), greatly limiting the fiscal crisis has shown that countries with diversified scope for other better-targeted programs. More manufactured exports, such as Germany, China generally, the region will need to continue to and Japan, are not immune to strong shocks, since develop and implement broad pro-poor growth aggregate demand fell in all segments of consumer strategies, which can generate foreign exchange goods. Because diversification cannot provide full, earnings to pay for food imports and create a key companion of diversification is the develop- incomes for the poor, the best defense against ment and reliance on leading indicators to prepare food price shocks. for and respond quickly to shocks that do occur. On the export side, MENA countries can best Previous editions of the MENA Economic manage their vulnerability by creating a trading Developments and Prospects Reports have out- environment which both develops competitive- ness (allowing existing firms to better withstand 15 Newfarmer, et al. 2009. 72 Chapter 3: Policies to Reduce Vulnerability and Increase Flexbility to Respond to Shocks over the Long Term lined the many measures undertaken by coun- At the same time, the architecture and tries to enhance merchandise trade, including policies governing trade in most of MENA have efforts to expand markets through bilateral and limited its ability to achieve significant gains in regional trade agreements--perhaps most im- competitiveness and diversification. The way portantly through the Association Agreements in which goods are produced and exported with the EU signed by Algeria, Egypt, Jordan, worldwide has changed dramatically in recent Lebanon, Morocco, Syria, Tunisia and the West years, with technology and economies of scale Bank and Gaza--, through extensive liberaliza- motivating global production networks. MENA tion of key services for trade to domestic and countries are poorly integrated into cross-border foreign competition, and through trade policy production networks, reducing the potential for reforms. The Barcelona Process toward a free higher foreign direct investment, the collateral trade area between MENA members and the knowledge spillovers that usually occur within EU has led to the dismantling of tariff rates on production networks, and opportunities for ex- EU industrial and agro-industrial goods within panding vertical integration. The reasons for this most MENA countries, and several are initiat- poor integration vary, but include low levels of ing the reduction on other goods. More than FDI in manufacturing, poor regional integration half of the region's economies are members of (which might allow for important economies the World Trade Organization (WTO). Free of scale), high logistics and transport costs, trade agreements with the United States have and for countries outside the GCC, Lebanon, been signed by Bahrain, Jordan, Morocco and Jordan and Yemen, still high trade barriers17. Oman, which combined have contributed to According to the new World Tariff Profiles,18 export growth to the US market averaging more than 20% a year (see Figure 3.9). The region 16 Although the United Arab Emirates, at least, decided in May, has also entered into various intraregional 2009 not enter into the monetary union. trade and investment agreements, including 17 World Bank 2008a. 18 In contrast to previous editions of the MENA Economic the Agadir Agreement (between Egypt, Mo- Developments and Prospects Reports, this report now utilizes rocco, Tunisia and Jordan) and the Greater the new World Tariff Profiles to assess import protection. In the Arab Free Trade Agreement (GAFTA), while World Tariff Profiles, the WTO, ITC, and UNCTAD have made the GCC countries have formed a customs an effort convert Non-ad valorem duties into their ad valorem equivalents. As a result, it is not possible to assess tariff reform union, and plans for a monetary union between from 2000 to the present (as in previous editions), since the the states are progressing.16 WTO no longer calculates tariffs by ad-valorem duties alone. Figure 3.9: Growth in MENA FTA exports MENA FTA partner exports to US 1999 2003 2005 2008 Exports to United States in million $US 1,200 1,000 800 600 400 200 0 Bahrain Jordan Morocco Oman Source: World Bank staff estimates from UN COMTRADE data. 73 2009 Economic Developments and Prospects ­ Navigating through the Global Recession average most-favored nation (MFN) tariffs for Business Flexibility and non-oil Europe integrated economies averages Vulnerability some 22%, while non-GCC oil exporters main- tain an average MFN tariff of 18%. This places One of the greatest weapons against external both groups of countries in the bottom quintile shock is entrepreneurship. An economy in which of economies, worldwide, with regard to tariff the private sector is able to respond to market import protection (Table 3.3).19 Despite reduc- changes by innovating, diversifying production, tions in the MFN tariffs on imports of inputs and and adopting new technologies when circum- intermediate products from the rest of the world, stances change is able to rebound more quickly MENA's Europe-dependent countries have aver- after negative shocks.20 And, the development age applied MFNs two-three times higher than of a robust private sector is crucial to diversify the average Europe preferential tariff, raising regional economies and reduce their high depen- incentives for trade diversion and greatly limiting dency on hydrocarbons exports. the possibility of integrating into European and other production chains. There is no precise "measure" of private sector dynamism. Standard indicators of performance-- Expanding and diversifying trade in the such as size, levels of investment, or outputs of the MENA region to reduce vulnerability to terms private sector--capture only parts of what is the of trade and global demand shocks will require broad notion of private sector strength, and even supportive measures along many fronts, which these indicators can vary sharply depending upon have been analyzed in great depth in other the manner of measurement and the period of time publications. A few key measures to support analyzed. By many measures, the private sector in the process include analyzing particular export MENA does not appear much different than the failures--in access to export finance or access private sector in other regions. While (publically to overseas market information--to identify the owned) oil sectors dominate many of the regional specific failures in the process. That can help to economies (thus the private sector is small, if one guide interventions which can support trade, includes the oil sector), the majority of the non-oil including export and investment promotion productive base is private sector-held, and there agencies, standards bodies, and improvements has been substantial progress in the past fifteen to in transport logistics. Continuing trade reform twenty years in increasing the size of the private is needed to encourage MENA's resources to sector (Figure 3.10). move to higher productivity activities, which will be critical for the region's competitiveness, Several indicators suggest that the private as the potential of remaining competitive in low- sector in MENA is considerably less dynamic technology activities is limited. Reducing bar- than in other regions, in ways that are important riers to trade will also help regional integration from an economic resilience perspective. efforts, which can provide the needed econo- mies of scale to participate in global production While the goal of a dynamic private sector networks. Improving the backbone services for is for it to respond to economic shocks, doing trade is also essential for competitiveness, and so requires firm destruction and creation. The the analysis of export failures (through such ability for new firms to enter and less productive analysis as investment climate assessments) can help to identify to the key stumbling blocks along the way. Combined, these measures can 19 A similar result is found using the Overall Trade Restrictive- help MENA producers become more competi- ness Index, where non-GCC oil exporters rank in the bottom 22 tive, to expand their product and geography percent of countries worldwide with regard to tariff and non- tariff measures on imports. Non-oil Europe dependent countries, base, and to entice firms (both local and foreign) meanwhile, rank in the bottom 8 percent. to use MENA countries as platforms from which 20 See Duval, et al (2008) for evidence from the OECD on policies to conduct business. and institutions and shock persistence. 74 Chapter 3: Policies to Reduce Vulnerability and Increase Flexbility to Respond to Shocks over the Long Term Table 3.3: Average tariff protection in MENA, 2008 Average tariff Time for export Time for import Overall trade Country/region Average tariff (index)* clearance (index*) clearance (index*) policy index* Algeria 18.6 8 67 50 43 Bahrain 5.0 89 77 76 91 Djibouti 27.8 1 59 72 49 Egypt 16.7 14 77 76 64 Iran 26.2 2 33 18 11 Jordan 11.2 37 59 53 56 Kuwait 4.6 91 55 61 79 Lebanon 6.9 66 30 20 39 Morocco 23.0 3 77 68 56 Oman 5.5 73 43 40 61 Qatar 4.9 89 50 61 76 Saudi Arabia 5.0 89 67 68 85 Syria 19.4 6 72 57 50 Tunisia 26.8 2 67 50 41 United Arab Emirates 5.0 89 85 89 94 West Bank and Gaza -- -- 36 19 -- Yemen 7.1 63 21 36 42 MENA 13.4 47 54 51 58 GCC 5.0 91 63 66 81 Oil, non-GCC 17.8 51 39 32 36 Non-oil, Europe- 22.2 7 74 65 53 integrated Non-oil, GCC 15.3 36 46 41 48 dependent East Asia/Pacific 8.7 67 47 50 59 Europe/Central Asia 7.3 67 50 51 46 High Income/OECD 5.6 78 84 85 92 Latin America/ 9.6 52 59 57 64 Caribbean South Asia 14.3 25 33 41 32 Sub-Saharan Africa 12.8 32 27 27 27 World 10.1 50 50 50 50 Note: Index relates country's average tariff (export clearance/import clearance/overall trade policy) to the world by calculating its position in a worldwide distribution of countries according to that trade indicator, where 100 reflects the economy with the "best" trade policies and 1 reflects the economy with the "worst" trade policies. Sources: World Bank staff estimates from WTO Tariff Profiles; Doing Business Indicators. firms to exit is a key indicator in the dynamism more constrained. One of the notable charac- and resilience of the private sector in the long teristics of the private sector is its age. At 19 run (although it may entail substantial economic years, the median local manufacturing firm's costs in the short run). In the MENA region, that age is higher than any other developing region creative destruction appears to be significantly in the world, and about the same as that in more 75 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Figure 3.10: Private sector as a share of non-oil GDP Previous years indicated Previous years indicated 2005 100 90 80 2000 2000 1995 1993 70 1997 2000 1985 1983 2000 2000 1994 60 1990 50 1990 40 1990 1990 30 1990 20 1990 10 0 Algeria Egypt Tunisia Morocco Syria Kuwait UAE Jordan Saudi Arabia Lebanon Poland Hungary Czech Republic India China Iran Yemen Source: World Bank, 2009c. mature OECD economies (Figure 3.11).21 The While exit and entry form the cornerstone for persistence of older firms in MENA suggests that private sector resilience as a whole, private sector creative destruction in MENA is substantially weaker than in other regions. 21 World Bank, 2009c. Figure 3.11: Median age of manufacturing firms (years) 30 25 20 15 10 5 0 Europe & Central Asia East Asia & Pacific South Asia Latin America & Caribbean Africa MENA Jordan Syria Oman Yemen WB & Gaza Morocco Saudi Arabia Egypt Algeria Lebanon OECD Source: World Bank, 2009c. 76 Chapter 3: Policies to Reduce Vulnerability and Increase Flexbility to Respond to Shocks over the Long Term resilience at the firm level depends on the ability labor flexibility in MENA is strikingly low, par- to adjust activities to accommodate shock, and ticularly from the standpoint of the difficulties especially on the labor margin. Recent research, with worker dismissal (see Table 3.4). in fact, suggests that labor market flexibility is the most important factor for dampening the 22 Loayza and Raddatz. 2007. Other factors analyzed included effect of terms-of-trade shocks on per capita trade openness, financial depth, financial openness, and ease GDP.22 Outside the GCC, however, the degree of of firm entry. Table 3.4: Doing business indicators of labor flexibility Difficulty of Hiring Index Difficulty of Firing Index Firing Costs, in weeks of Country/Region (standardized) (standardized) wages (standardized) Algeria 30 41 77 Bahrain 89 23 92 Djibouti 13 52 32 Egypt 89 12 4 Iran 67 23 14 Iraq 47 64 98 Jordan 67 12 92 Kuwait 89 88 22 Lebanon 30 52 77 Morocco 1 23 19 Oman 47 88 92 Qatar 89 64 25 Saudi Arabia 89 88 22 Syria 67 23 22 Tunisia 48 1 77 UAE 89 88 20 West Bank Gaza 47 64 14 Yemen 89 41 98 MENA 60 47 49 GCC 82 73 46 Other oil 53 38 53 Non-oil, Europe integrated 46 12 34 Non-oil, GCC dependent 49 44 59 East Asia/Pacific 62 63 57 Europe/Central Asia 45 50 65 Latin America/Caribbean 45 58 38 High Income/OECD 54 55 66 South Asia 62 39 43 Sub-Saharan Africa 42 38 38 World 50 50 50 Source: Staff estimates from Doing Business Indicators, The World Bank. Indices represent a country's placement in a worldwide cumulative frequency distribution according to that indicator, with high values representing the countries in the world which have the "easiest" policies for hiring and firing workers, and low values representing the countries which have the most difficult (or costly). 77 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Both features point to a more limited ability is also a key obstacle to the resistance to shocks, in MENA to self-restructure, in part as a result as it prevents the critical resource shifts needed of policies designed precisely to protect jobs and to bounce back from economic shock. One of the industries. MENA's historical development mod- telling indicators of that uneven playing field is els, based on state-led industrial development the high productivity dispersion of firms within and economic and social policies designed for re- an industry. If markets are competitive, with rela- distribution and equity have also created a busi- tively free entry and exit, the dispersion should ness environment in which there is little space be quite low, because efficient competitive firms for creative destruction and labor adjustment. will drive less competitive firms out of business Although the region has made strong progress (or force them to raise productivity). And studies in moving to more market-oriented economies, bear out the fact that lower productivity disper- legacies of past policies remain. And while these sion is associated with increased openness and policies may dampen the initial impact of a shock, greater competition with foreign firms.24 they also may actually increase its persistence. The relative difficulty in job destruction, for In MENA, the dispersion of value added per example, while protecting workers in the short- worker is considerably higher than in comparator run response to a negative shock, also hinder countries (Figure 3.12), particularly in non-GCC the wage adjustment process and the relocation oil producing economies like Algeria, Yemen and towards other productive jobs23, and may also Syria. increase the fiscal impact of a shock. In the past several years, the region as a Beyond a legacy of policies designed to whole has made progress in lowering some of protect jobs and industries, recent research the constraints to business activity, particularly paints a picture of a region in which private in the area of reducing the costs (both financial sector dynamism, investment, and innovation is and other) of starting a business. A few countries significantly constrained by an unlevel playing in particular, including Egypt, Saudi Arabia, Syria field between established and new firms, with high entry barriers to competition. This lack of 23 Duval, et al. 2007. dynamism, while an obstacle to stronger growth, 24 World Bank, 2009c. Figure 3.12: Dispersion in value-added per worker (Ratio of 80th percentile to 20th percentile of value added per worker in the garment industry) 8 6 MENA Average 4 2 0 Saudi Arabia Lebanon Oman Morocco Syria Egypt Yemen Algeria Malaysia Thailand Philippines China India Pakistan Turkey South Africa Source: World Bank, 2009c. 78 Chapter 3: Policies to Reduce Vulnerability and Increase Flexbility to Respond to Shocks over the Long Term and Yemen, undertook reforms which resulted in in the region but, given its unique structure and significant improvement in their world rankings resources, is not particularly helpful in guiding according to the World Bank Doing Business other countries). More useful are the positive Indicators. steps being taken to ameliorate the ICR frame- work including legislation consistent with best Overall several areas of reform remain very practice (Egypt, Tunisia), the role of regulators low by international standards and have not been (the Companies Controller in Jordan) and the tackled by the region. Contract enforcement potential development of specialized courts or remains the weakest area of the business envi- `chambers' (Egypt, Jordan, Saudi Arabia). ronment both within the GCC and the rest of the region, greatly limiting business dealings outside A systemic problem with measuring struc- those built by long-term relationships, repeated tural reform is that one cannot determine the interactions and trust. And while the process for binding constraints to conducting business. closing a business has improved over the past few Without knowing the true constraints to invest- years, that area also remains problematic for the ment and growth in each country, it is impossible region, especially among non-GCC economies. to know whether improvements in a particular The frameworks for insolvency make bankruptcy area(s) of the regulatory front will materially difficult. Legal rules for reorganizing troubled change the business environment for investors. companies are out of date, and the institutions If the binding constraints to investment remain, that support the insolvency framework (courts so-called `top reformers' may not have substan- and the regulation of insolvency professionals) tially improved the de facto business climate at are also inadequate in dealing with these matters all. While an average ranking can be indicative (the insolvency law of the Dubai International of the prevalence of problems in the business Financial Center is the strongest insolvency law and regulatory environment, it is less useful in Figure 3.13: Reform of business policies in MENA 2005 2008 100 to world (100=top ranked economy) GCC Overall business climate, relative 80 MENA 60 Oher MENA 40 20 0 Starting a business Dealing with licenses Hiring and Firing Registering Property Protecting Investors Paying Taxes Enforcing Contracts Closing a Business Starting a business Dealing with licenses Hiring and Firing Registering Property Protecting Investors Paying Taxes Enforcing Contracts Closing a Business Starting a business Dealing with licenses Hiring and Firing Registering Property Protecting Investors Paying Taxes Enforcing Contracts Closing a Business Note: Bars reflect where country/region stands in a worldwide distribution of countries ranked according to the ease of doing busi- ness, according to the World Bank Doing Business Indicators. High values indicate policies in country relatively easy for conducting business. = World median. Source: World Bank Doing Business Indicators 2009. 79 2009 Economic Developments and Prospects ­ Navigating through the Global Recession diagnosing the true nature of the constraints to Despite a favorable macroeconomic environment private sector growth. for the past decade, macroeconomic uncertainty remains a leading concern for business. Corrup- There is reason to suspect that binding tion, anticompetitive practices, and regulatory constraints to private investment remain intact policy uncertainty all rank high in the minds in many MENA countries. Looking at the broad of business managers. In many countries, busi- range of business and regulatory indicators in the nesses also point to reform gaps in the regulatory Doing Business reports, there is a high degree environment, in access to finance, and in access of `regulatory dispersion' in MENA, with some to land. Rather than policies as they are appear areas of the business regulatory environment on paper, a large part of the problem seems to lie significantly more cumbersome than others (for with the unequal, discretionary, and preferential example, in Egypt, while the time needed for implementation of policies26. starting a business is less than in 90% of coun- tries worldwide, the costs associated with firing This point to the overarching need for gov- workers, in weeks of wages, is higher than in 95% ernance not only for improving the business of countries worldwide). Table 3.5 highlights environment, but for reducing vulnerability to MENA countries' "most cumbersome" areas of shocks in general. Poor governance, in particular doing business25, calculating where, on average, through domestic policy mismanagement, can di- any business indicator would place a country rectly and significantly contribute to volatility and within a worldwide distribution, and averaging the exposure to shocks (through high inflation, the bottom third indicators for each country. overvalued exchange rates, or sustained budget On average, MENA countries' most cumbersome deficits, etc).27 Additionally, and related, gover- business regulatory areas would rank them in nance sends key signals about credibility of policy the bottom 20% of countries worldwide--were and the ability for the economy to emerge from they only evaluated against the world by their crisis, affecting both household and private sector most cumbersome areas of business, not signifi- responses. While good governance cannot ensure cantly different from world averages. However, shocks will not hit, bad governance can arguably outside the GCC, MENA countries' more difficult ensure that the impacts of shocks will persist. business regulations would rank in the 17th percentile, only higher than Sub-Saharan Africa Previous editions of the MENA Economic and South Asia. And for non-GCC oil countries, Developments and Prospects reports have out- the most cumbersome aspects of their business lined the two major governance challenges facing environments would rank in the 13th percentile the region, and both are important in preventing worldwide, lower than any other region of the and adjusting to external shock. First, it faces the world. This suggests that while the region may challenge of modernizing governance structures have taken substantial steps forward to improve and operations for more efficient public sec- the business environment, there remain signifi- tor management. For countries to successfully cant obstacles to doing business, sufficient to hin- absorb external shocks, they need to be able to der the ability for the private sector to respond in the face of exogenous shock. 25 For each business regulatory category, a country was ranked relative to the world by placing it in a worldwide frequency Moreover, while the individual character- distribution according to that indicator, with 100 reflecting the istics of the business environment matter, the country with the "best" policies and 0 reflecting the country lack of policy certainty and discretion in imple- with the worst. Utilizing the 31 indicators of business regula- tion across eight broad areas of reform in the Doing Business menting the rules constrains investment in the 2009 report, the most difficult aspects of doing business index region. Investors in MENA--especially managers was calculated by averaging each country's placement in the of small and medium-sized firms-- consistently worldwide frequency distribution for their "most cumbersome" areas of doing business (the bottom third, and with different point to policy uncertainty and an uneven play- business areas for each country). ing field that favors some incumbent firms at 26 World Bank, 2009c. the expense of new entrants and competitors. 27 Bacchetta, et. al 2007. 80 Chapter 3: Policies to Reduce Vulnerability and Increase Flexbility to Respond to Shocks over the Long Term Table 3.5: Business and regulatory environment: Most cumbersome business areas (Relative to rest of world, for those areas of the business environment) Country/Region Areas of most cumbersome business regulation Algeria 13 Bahrain 37 Djibouti 8 Egypt 14 Iran 14 Iraq 16 Jordan 24 Kuwait 22 Lebanon 23 Morocco 15 Oman 26 Qatar 28 Saudi Arabia 35 Syria 12 Tunisia 17 UAE 17 West Bank Gaza 18 Yemen 25 MENA 20.2 GCC 27.5 Non-GCC 16.6 Oil, other 13.5 Non-oil, GCC dependent 19.7 Non-oil, Europe integrated 15.4 East Asia Pacific 23.3 Europe Central Asia 21.4 High Income OECD 36.1 Latin America Caribbean 18.6 South Asia 15.0 Sub-Saharan Africa 13.5 World 20.9 respond quickly and effectively, adjusting fiscal administrative reform to enhance the efficiency expenditures, removing bottlenecks and insti- of the bureaucracy, to improve mechanisms of tutional constraints to growth, and safeguard- internal accountability, and to reduce corruption. ing the most vulnerable in the population, all of which require the institutional capacity for Secondly, the MENA region faces the more effective policy making and implementation. Im- difficult challenge of increasing public sector ac- proving public sector efficiency in MENA involves countability. This challenge requires improving 81 2009 Economic Developments and Prospects ­ Navigating through the Global Recession transparency in governance mechanisms and the resources to smooth consumption, thus the enhancing contestability in government policies. state of safety nets will be an important deter- Public accountability impacts the exposure to rent to vulnerability in all economies. MENA has the persistence of shocks through two major the advantage of having low levels of poverty, channels. First, the lack of accountability in the compared with other regions. Nevertheless, a public sector, either through policy uncertainty few structural features about MENA make the or through the lack of transparency and discre- region particularly vulnerable to economic crisis tion in the implementation of rules, reduces the from a poverty perspective. credibility in the government's capacity to effec- tively manage the shock, thus reducing private Firstly, although poverty in MENA is low investment needed for the recovery. Second, the relative to other regions, it is characterized lack of contestability puts countries at greater by a significant number of people living above risk of implementing poor policies, increasing the but close to the poverty line. As a result, the potential persistence of shocks. On this front, the sensitivity of poverty to external shocks is high. MENA region faces its largest challenge, ranking Overall, less than 5% of MENA's population lives below every other region of the world with regard on less than US$1.25 a day but some 19% of the to accountability (Table 3.6). regional population lives on less than US$2 a day. Moreover a considerable share of the popula- One of the strongest indicators of the gap tion hovers just above the poverty line: in 2005, in public sector accountability is a general dis- close to one fifth of Egyptians and Moroccans interest in systemic gathering and transparent had per capita daily consumption falling into a dissemination of data, which greatly hinders narrow band between US$2 and US$2.50. This the ability for the region to monitor shocks and is as many as those who were under the US$2 design policies to respond to them. While there poverty line in these countries. About 15% of are differences across the region, access to data Yemen and Djibouti populations are in the same of all types is severely limited in MENA: for some 0.50 cents a day band. With such deep cluster- countries, the data of the sort that would be ing of large proportions around the poverty line, important for understanding the impacts of eco- even a moderate shock represents a serious risk nomic policy (or the leading indicators needed to wider-scale poverty in many countries of the to predict shocks) is simply not collected, or is MENA region (see Figure 3.14). collected so infrequently as to be of little use. In other countries, while data may be collected, Secondly, few countries in the region have the data is retained within government agencies well-developed, well-targeted safety nets. Most and not made public. In still others, data is only programs rely heavily on consumer subsidies, shared with a restricted group. With access to highly expensive but usually suffering from both data useful in monitoring and responding to crisis poor coverage and a high degree of leakage to so constrained, the ability to analyze and use data the non-poor. Egypt's food and energy subsidies, atrophies in general because there is little pres- for example, which absorb some 30% of public sure to improve analytical skills and techniques, expenditure (and about 10% of GDP), are not which has longer term implications on reducing available to a large segment of the poor, due to vulnerability to shock. Improving data collection the geographic areas in which the poor tend to and unfettered availability to the comprehensive live (rural Upper Egypt) and to the eligibility data needed to adequately monitor and respond criteria for ration cards, and on average, the to shock is thus an important component of re- wealthiest quintile of the population receive ducing vulnerability to shock over the long term. about twice the resources from the subsidies scheme as the poorest.28 In Morocco, meanwhile, Safety nets and shock the poor are receiving only 10% of what the The most severely affected by economic crisis will often be the poor and near-poor, who lack 28 World Bank, 2005. 82 Chapter 3: Policies to Reduce Vulnerability and Increase Flexbility to Respond to Shocks over the Long Term Table 3.6: Indicators of governance in MENA, 2007 Voice and Political Government Regulatory Control of Country/region Accountability Stability Effectiveness Quality Rule of Law Corruption Algeria 20 13 36 26 26 41 Bahrain 25 34 68 79 69 73 Djibouti 18 41 14 21 40 40 Egypt 12 22 39 43 52 36 Iran 8 11 24 4 21 37 Iraq 10 0 2 7 1 2 Jordan 27 34 65 62 65 67 Kuwait 34 60 63 61 71 72 Lebanon 34 4 29 48 30 31 Libya 2 64 12 17 32 22 Morocco 29 27 55 51 51 53 Oman 19 72 67 70 72 73 Qatar 28 76 58 67 80 82 Saudi Arabia 7 25 51 52 59 58 Syria 5 25 16 10 37 19 Tunisia 13 47 69 57 60 60 United Arab 23 73 79 72 70 82 Emirates West Bank Gaza 10 5 9 7 22 24 Yemen 17 8 13 24 18 33 MENA 18 34 41 41 46 48 GCC 23 57 64 67 70 73 Non-GCC 16 23 29 29 35 36 Oil, non GCC 10 20 17 15 23 26 Non oil, GCC 22 21 29 34 39 41 dependent Non oil, Europe 18 32 54 50 54 50 integrated East Asia Pacific 34 44 47 44 43 37 Europe Central 48 46 49 54 43 43 Asia High Income OECD 90 78 91 91 90 90 Latin America 58 48 53 52 46 53 Caribbean South Asia 26 25 35 31 34 32 Sub Saharan Africa 33 34 27 28 28 31 World 50 50 50 50 50 50 Note: Index values represent country's placement in a worldwide distribution of countries based on that indicator, with 100 repre- senting the country with the "best" governance and 0 representing the country with the "worst" governance. Source: Staff calculations from World Bank Governance Matters database. 83 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Figure 3.14: Poverty incidence at alternative poverty lines, late 1990s Below $1.25 Below $2.00 (including bar below) Below $2.50 (including bars below) 80 60 40 20 0 Algeria Djibouti Egypt Iran Jordan Morocco Tunisia Yemen Source: World Bank POVCAL data. government spends on universal price subsidies, most poor from starving. It is also protecting the while 90% goes to subsidies goods consumed non-poor from drifting dangerously close to pov- by the non-poor.29 Even more diversified social erty. And for this group, the programs designed safety net programs, such as in Jordan and Ye- for the poor will not help in their crisis. For men, suffer from poor coverage and high leakage. them, other mechanisms of social protection will Countries in MENA have taken steps to improve be important to mitigate the effects of shocks, the efficiency, targeting and coverage of social including labor market programs and social in- safety net mechanisms as a core element of their surance programs. Many of these programs also development agenda, but the progress has been suffer from deficiencies, which limit their ability slow. Nowhere has progress been more difficult to be effect shock absorbers. than in the area of energy subsidy reform. Only Jordan has moved forward aggressively with Labor market programs, which have evolved energy subsidy reform, although a few others from the region's history as employer of the last are in the process of developing plans for reform resort (particularly within the oil-producing (including Morocco, Egypt, Syria and Yemen). In economies), have focused on job protection rath- Iran, although energy subsides exceed 20% of er than income protection. Rigid labor legislation, GDP,30 political constraints have prevented the designed to protect workers from being laid off introduction of subsidy reform, despite years of in the short run in response to a negative shock, attempts. The most recent bill to reduce energy also slow down the wage adjustment process as subsidies as part of an overall economic reform well as workers' reallocation towards other pro- package presented to the Iranian parliament was ductive jobs, thereby delaying the return of em- rejected on the grounds that ending energy sub- ployment and output to their initial levels. Over sidies, particularly during this time of economic the long run, they reduce the incentives to hire crisis and high inflation, would only serve to workers and create imbalances between worker stoke inflationary pressures. The continued low protection within and outside the firm. Other ad- domestic energy prices have caused production hoc programs such as supply-driven vocational inefficiency, excessive consumption, corruption, training, limited job-search assistance, and wage smuggling, and environmental degradation. subsidies that attempt to stimulate job creation Nor does the region have well-developed mechanisms of social insurance. Guarding 29 World Bank 2009e. against vulnerability is not just protecting the 30 Estimated based on 2007/08 data. 84 Chapter 3: Policies to Reduce Vulnerability and Increase Flexbility to Respond to Shocks over the Long Term have received substantial public resources, yet individual level, the large mandates reduce the their effectiveness remains in doubt. Most of incentives for saving for retirement outside of these programs have continued to operate in the the mandatory pension system, so retirement absence of appropriate monitoring and impact savings are not diversified. evaluation systems. Unemployment insurance, which could significantly cushion the impact of And perhaps most fundamental, MENA's abil- economic shocks, is only available in a handful ity to respond effectively to the social impacts of countries, including Algeria, Egypt, and Iran, of economic shock is hindered by a general dis- and the systems face problems in terms of design interest in systemic gathering and transparent that affects financial sustainability, incentives dissemination of data. The ability to design safety and equity. nets and social insurance programs equipped to deal with a variety of sources of household Health insurance and pension systems also vulnerability, as well as to monitor and respond have deficiencies which reduce their effective- to economic crises which occur, depends on ness in times of economic shock. Health insur- access to a variety of reliable, high-frequency ance systems are affected by weak institutional data, including nationwide longitudinal studies capacity to manage, regulate, and supervise. In of households which capture as many sources all cases, there is little or no information regard- of shock and dimensions of poverty as possible. ing utilization patterns and unit costs and it is Data which allows for rapid and in-depth analysis therefore not possible to price health insurance on risk-induced poverty and vulnerability, risk plans. As a result, contributions to the health sys- management strategies and instruments, and tem are ad-hoc and often insufficient to finance an analysis of existing safety net programs, are generous benefits packages. At the same time, essential in better informing the safety net de- the free health care offered through the public sign to adequately deal with the consequences system reduces incentives to enroll in the insur- of economic shock. In this area especially, the ance scheme and thus impairs and reduces the MENA region falls short. Data collection is lim- contributory base. Another issue is related to ited, and there are few sources which might aid inadequate payment mechanisms for providers, in monitoring social impacts of crisis. Moreover, mostly public providers. Current practices do not access to information throughout the region is se- generate incentives to control costs and improve verely curtailed. As a result, the ability for MENA the quality of care. countries to design appropriate social policies to address the impacts of shock (or prevent them) The region's defined benefit pension sys- is severely constrained. tems, which provide old-age, disability, and survivorship pensions, represent an exceptional More generally, the ability for the region vulnerability for the region's macroeconomic to prevent future crises and design policies to stability and fiscal framework. The estimated respond to all of the potential impacts of eco- accrued-to-date pension liabilities in MENA nomic shock--be it financial regulations in the range between 6% of GDP (Morocco) and more face of rising contingent risks, policies to shore than 170% (Jordan), which, in the absence of up specific markets or firms, monetary and fiscal any intervention, will be unsustainable (increas- policies to combat generalized recession, or poli- ing the vulnerability of those currently in the cies to mitigate widespread drops into poverty, system) or will require significant tax increases will depend over the long run on the region's or reductions in the budget for other items improvement in the collection and distribution (for example, education and health). At the of complete, timely and reliable statistics. 85 Statistical Annex Table A1: Country group characteristics for analysis of the Triple-F crises Country economic GDP Net characteristics as of GDP in growth CAB Fiscal Hydrocarbons-X hydro-x Key export calendar year 2007 USD bn 2005­07 % of GDP % of GDP % of GDP % of GDP shares % GCC countries 793.5 5.6 25.2 18.8 58.6 33.8 Bahrain 10.7 7.6 13.2 2.9 35.7 42.3 Kuwait 109.7 7.4 45.6 39.2 58.4 -- Oman 40.1 6.3 4.7 13.7 38.9 32.8 Qatar 71.0 13.1 30.9 11.4 59.1 37.1 Saudi Arabia 381.8 4.0 25.1 12.3 65.7 34.9 United Arab Emirates 180.2 5.6 16.1 25.2 49.2 29.4 Oil exporters with low 539.8 4.9 16.5 7.2 43.3 28.4 per-capita revenues Algeria 134.4 3.3 18.1 11.4 52.2 34.6 Iran 215.8 5.5 15.0 12.3 35.7 21.6 Iraq 61.7 2.3 15.6 25.2 61.8 60.8 Libya 69.7 6.1 33.9 26.2 57.1 -- Syria 39.2 4.6 2.0 ­3.5 9.1 10.5 Yemen 19.1 3.9 ­8.0 ­4.0 25.6 21.1 Diversified exporters with 41.6 4.0 ­13.8 ­10.4 0.1 2.2 ..to GCC links to GCC Djibouti 0.8 4.3 ­8.2 ­3.4 0.0 -- Jordan 15.7 6.7 ­17.0 ­7.9 0.3 ­15.4 11.8 Lebanon 25.1 2.6 ­12.1 ­12.2 -- ­7.7 15.2 Diversified exporters 241.7 5.6 ­0.3 ­4.7 1.1 ­0.4 ..to EU integrated with EU Egypt 131.9 6.1 0.3 ­7.7 0.7 2.7 47.0 Morocco 74.9 4.5 ­0.3 ­0.2 0.3 ­6.3 64.2 Tunisia 34.9 5.3 ­2.6 ­3.0 4.3 0.0 81.0 Memo items: MENA region 1,616.6 5.3 17.6 10.8 43.4 25.2 Oil exporters 1,333.3 5.4 20.0 12.3 47.1 28.9 Diversified exporters 283.3 4.5 ­4.5 ­3.6 1.2 ­0.1 Source: National Agencies, IEA, OPEC, IMF and World Bank staff estimates, 87 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Table A2: Summary of economic developments in the region, 1996­2008 1996­1999 2000­2005 Estimate Country average average 2006 2007 2008 MENA Region (excluding Iraq) real GDP growth (%) 3.5 5.0 4.7 5.6 6.1 population 2.0 1.9 2.0 1.9 1.9 per-capita GDP 1.5 3.0 2.7 3.6 4.1 CPI inflation (ch%) 5.1 3.7 6.2 7.2 10.6 industrial production (ch%) ­0.4 17.6 20.5 6.7 36.3 fiscal balance (% GDP) ­2.3 3.8 12.2 10.8 14.9 current account balance (% GDP) 0.8 8.5 21.3 17.6 22.6 foreign direct investment (% GDP) 0.7 1.4 2.9 1.8 1.4 GCC countries real GDP growth(%) 3.0 5.5 4.0 5.6 6.3 population 3.0 3.0 3.1 3.1 3.1 per-capita GDP 0.1 2.4 0.9 2.3 3.0 CPI inflation (ch%) 2.2 2.3 7.6 9.4 11.4 industrial production (ch%) ­2.2 19.8 19.8 9.2 49.8 fiscal balance (% GDP) ­2.7 8.3 22.3 18.8 25.5 current account balance (% GDP) 0.7 12.1 29.1 25.2 32.2 foreign direct investment (% GDP) 0.5 1.3 2.0 0.2 ­0.1 Oil exporters with large populations real GDP growth(%) 4.4 4.0 4.6 5.2 5.6 population 2.0 2.1 2.1 2.2 2.1 per-capita GDP 2.4 1.9 2.4 3.0 3.5 CPI inflation (ch%) 13.9 9.2 9.4 10.0 15.5 industrial production (ch%) 1.3 27.4 32.3 39.0 48.8 fiscal balance (% GDP) ­0.8 3.5 6.5 7.2 5.5 current account balance (% GDP) 3.9 9.9 20.0 16.5 22.7 foreign direct investment (% GDP) 0.1 0.6 0.9 0.8 0.7 Diversified exporters with strong GCC ties real GDP growth (%) 2.8 4.3 1.9 7.1 6.1 population 2.3 2.0 1.9 2.0 2.0 per-capita GDP 0.5 2.3 0.1 5.0 4.1 CPI inflation (ch%) 3.2 3.7 7.5 4.6 12.5 industrial production (ch%) 5.2 4.1 8.0 6.6 9.5 fiscal balance (% GDP) ­12.9 ­10.6 ­9.2 ­10.4 ­8.4 current account balance (% GDP) ­14.7 ­13.5 ­11.8 ­13.8 ­22.0 foreign direct investment (% GDP) 9.1 7.4 15.2 9.2 16.8 (continued on next page) 88 Statistical Annex Table A2: Summary of economic developments in the region, 1996­2008 (continued) 1996­1999 2000­2005 Estimate Country average average 2006 2007 2008 Diversified exporters integrated with Europe real GDP growth (%) 5.0 4.2 6.9 5.9 6.5 population 1.7 1.6 1.6 1.5 1.5 per-capita GDP 3.3 2.5 5.3 4.3 4.9 CPI inflation (ch%) 4.2 3.0 6.1 5.3 6.8 industrial production (ch%) 1.4 16.5 24.5 17.3 53.0 fiscal balance (% GDP) ­2.2 ­5.5 ­5.5 ­4.7 ­4.7 current account balance (% GDP) ­1.4 1.0 1.6 ­0.3 ­6.1 foreign direct investment (% GDP) 0.9 1.9 7.9 7.4 5.9 Source: National Agencies, IMF, and World Bank staff estimates. 89 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Table A3: Assumptions about the external environment to 2010 2000­2005 Estimate Forecast average 2006 2007 2008 2009 2010 Oil market developments World Bank average price ($/bbl)a 37.4 64.3 71.1 97.0 55.5 63.0 Growth in world demand (mb/d) ch % 1.7 1.4 1.0 ­0.3 ­3.0 0.9 OECD demand 0.7 ­0.5 ­0.8 ­3.7 ­5.1 ­0.2 Developing country demand 3.3 4.3 3.5 3.8 ­0.3 2.3 Growth in world supply (mb/d) 1.9 1.0 0.1 1.0 ­3.5 0.9 OPEC supply 2.7 0.8 ­0.9 3.0 ­7.5 2.2 o/w MENA 1.8 1.3 ­1.5 4.0 ­8.0 2.7 Non-OPEC supply 1.5 1.2 0.7 ­0.4 ­0.6 0.1 GDP growth in MENA export marketsb World 3.1 4.2 3.8 1.9 ­2.9 2.0 OECD countries 2.4 2.8 2.5 0.6 ­4.2 1.2 United States 2.6 2.8 2.0 1.1 ­3.0 1.8 Euro Area 2.0 3.0 2.6 0.6 ­4.5 0.5 Japan 1.6 2.1 2.3 ­0.7 ­6.8 1.0 Developing countries 5.7 7.7 8.2 5.9 2.1 4.4 China 9.7 11.6 13.0 9.0 6.5 7.5 Other East Asia and Pacific 5.1 5.7 11.4 8.0 5.3 6.6 Europe and Central Asia 5.8 7.4 6.9 4.3 ­2.1 1.6 Financial markets U.S. LIBOR 6-months (%) 3.43 5.19 5.23 3.20 1.50 1.70 U.S. ten-year T-note 4.71 4.76 4.62 3.67 2.99 3.60 U.S. dollar effective exchange rate (ch %)c ­2.3 ­1.6 ­5.6 ­4.5 10.1 ­2.3 Dollar per euro exchange rate 1.089 1.256 1.370 1.471 1.355 1.407 Average spread on EM Debt (basis points) 527 198 197 400 500 350 Average spread on MENA Debt 453 338 476 500 600 400 MSCI EM equity index (USD) ch % 12.2 32.6 35.0 ­10.6 ­49.7 25.0 MSCI MENA equity index (USD) ch % 7.8 60.3 ­16.9 3.9 ­57.5 25.0 Non-oil commodity prices Non-oil commodity prices (ch %) 9.9 29.0 17.1 21.0 ­30.2 ­2.1 Agriculture 5.2 12.6 20.1 27.2 ­20.9 ­0.3 Food 4.9 10.0 25.7 33.9 ­22.9 1.3 Grains 4.9 18.4 26.1 49.1 ­26.4 0.7 Raw materials 7.3 22.4 9.1 11.9 ­23.2 ­1.2 Fertilizers 9.7 3.2 42.4 136.0 ­44.5 ­28.5 Manufactures unit value index (ch %) 1.3 1.6 5.5 7.5 1.9 1.0 Source: International Energy Agency, JP Morgan-Chase, Morgan-Stanley, OPEC, World Bank and IEA projections. Notes: a Average of Brent, WTI and Dubai crude prices. b GDP in 2000 U.S. dollars. c Nominal, broad measure. 90 Statistical Annex Table A4: Real GDP growth, 1996­2010 1996­1999 2000­2006 Estimate Forecast Country average average 2007 2008 2009 2010 MENA region (incl. Iraq) -- 4.7 5.6 6.1 2.2 4.0 MENA (excl. Iraq) 3.5 4.9 5.6 6.1 2.2 4.0 GCC countries 3.0 5.2 5.6 6.3 1.1 4.2 Bahrain 4.0 6.1 8.1 6.1 2.6 4.0 Kuwait 1.2 7.4 4.4 5.2 ­1.2 2.4 Oman 2.9 5.1 6.2 6.2 3.0 3.8 Qatar 12.0 9.0 15.3 16.4 18.2 16.2 Saudi Arabia 2.0 3.8 3.5 4.6 ­0.9 3.0 United Arab Emirates 5.2 6.6 7.7 7.4 0.3 3.3 Oil exporters with large populations 4.4 4.1 5.2 5.6 2.7 3.5 Algeria 3.4 4.1 3.0 3.0 2.2 3.5 Iran, Islamic Republic of 3.8 5.5 6.2 6.9 2.5 3.0 Iraq -- ­64.2 1.5 9.8 6.9 6.7 Libya 1.3 4.4 6.8 6.3 2.9 4.8 Syrian Arab Republic 2.2 4.1 4.2 5.2 3.0 3.5 Yemen 5.8 4.1 3.0 4.0 7.7 5.0 Diversified exporters with strong GCC links 2.8 4.0 7.1 6.1 2.5 4.2 Djibouti ­0.7 2.9 4.8 5.8 5.0 5.5 Jordan 2.9 5.9 6.6 5.5 2.5 3.5 Lebanon 2.8 3.0 7.5 6.5 2.5 4.5 Diversified exporters integrated with Europe 5.0 4.5 5.9 6.5 4.0 3.9 Egypt 5.1 4.4 7.1 7.2 3.8 4.2 Morocco 4.4 4.9 2.7 5.6 5.0 3.0 Tunisia 5.9 4.6 6.3 4.5 3.0 4.0 Note: Oil-exporting countries (excl. Iraq) 3.4 5.0 5.7 6.2 2.0 4.0 Oil-importing countries (excl. WBG) 4.2 4.6 4.9 5.5 3.8 3.6 Memorandum items: Comparator regions MENA (excl. Iraq) 3.5 4.9 5.6 6.1 2.2 4.0 All Developing countries 4.2 5.7 8.2 5.9 2.1 4.4 East Asia and the Pacific 6.2 8.5 11.4 8.0 5.3 6.6 Europe and Central Asia 2.0 5.8 6.9 4.3 ­2.1 1.6 Latin America and the Caribbean 3.6 3.1 5.8 4.3 ­0.6 2.2 South Asia 5.7 6.5 8.4 5.6 3.6 6.3 Sub-Saharan Africa 3.4 4.5 6.5 5.3 1.8 4.1 Source: National agencies and World Bank staff estimates and projections. 91 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Table A5: Population growth, 1996­2010 1996­1999 2000­2006 Estimate Forecast Country average average 2007 2008 2009 2010 MENA region (incl. Iraq) 2.0 2.0 2.0 2.0 2.0 2.0 MENA (excl. Iraq) 2.0 1.9 1.9 1.9 1.9 1.9 GCC countries 3.0 3.0 3.1 3.1 3.1 3.2 Bahrain 3.3 2.0 2.0 2.0 2.0 2.0 Kuwait 4.0 3.0 2.2 2.0 2.0 2.0 Oman 2.5 1.2 2.1 2.4 2.4 2.3 Qatar 4.3 5.2 4.5 4.5 4.5 4.5 Saudi Arabia 2.5 2.5 2.5 2.5 2.4 2.4 United Arab Emirates 5.9 7.0 7.2 7.2 7.2 7.2 Oil exporters with large populations 2.0 2.1 2.2 2.1 2.0 2.0 Algeria 1.5 1.5 1.5 1.5 1.5 1.5 Iran, Islamic Republic of 1.6 1.5 1.8 1.8 1.7 1.7 Iraq 2.3 3.3 3.1 2.7 2.5 2.5 Libya 2.0 2.0 1.9 1.9 1.9 1.9 Syrian Arab Republic 2.7 2.4 2.4 2.4 2.4 2.4 Yemen 3.4 3.1 3.0 3.0 3.0 3.0 Diversified exporters with strong GCC links 2.3 1.9 2.0 2.0 2.0 2.0 Djibouti 3.3 2.2 1.6 1.6 1.6 1.6 Jordan 2.7 2.4 2.6 2.6 2.6 2.6 Lebanon 1.6 1.3 1.2 1.2 1.2 1.2 Diversified exporters integrated with Europe 1.7 1.6 1.5 1.5 1.5 1.5 Egypt 1.9 1.8 1.8 1.8 1.8 1.8 Morocco 1.5 1.2 1.0 1.0 1.0 1.0 Tunisia 1.3 1.0 1.0 1.0 1.0 0.9 Note: Oil-exporting countries (excl. Iraq) 2.0 2.0 2.1 2.1 2.1 2.1 Oil-importing countries (excl. WBG) 1.6 1.3 1.2 1.2 1.2 1.2 Memorandum items: Comparator regions MENA (excl. Iraq) 2.0 1.9 1.9 1.9 1.9 1.9 All Developing countries 1.6 1.3 1.3 1.3 1.0 1.1 East Asia and the Pacific 1.1 0.9 0.8 0.8 0.8 0.7 Europe and Central Asia -0.9 0.0 0.0 0.0 0.0 0.1 Latin America and the Caribbean 1.7 1.4 1.3 1.3 1.3 1.2 South Asia 2.6 1.7 1.7 1.3 1.4 1.3 Sub-Saharan Africa 2.8 2.5 2.5 1.9 1.9 2.0 Source: UN population database, National agencies and World Bank staff estimates. 92 Statistical Annex Table A6: Real GDP per capita growth, 1996­2010 1996­1999 2000­2006 Estimate Forecast Country average average 2007 2008 2009 2010 MENA region (incl. Iraq) -- 2.7 3.5 4.0 0.2 1.9 MENA (excl. Iraq) 1.5 3.0 3.6 4.1 0.3 2.0 GCC countries 0.1 2.2 2.3 3.0 ­2.0 1.1 Bahrain 0.8 4.0 6.0 4.0 0.6 2.0 Kuwait ­2.7 4.3 2.2 3.1 ­3.1 0.4 Oman 0.4 3.8 4.0 3.7 0.6 1.4 Qatar 7.4 3.7 10.3 11.4 13.1 11.2 Saudi Arabia ­0.4 1.3 0.9 2.1 ­3.2 0.6 United Arab Emirates ­0.6 ­0.4 0.5 0.2 ­6.4 ­3.6 Oil exporters with large populations 2.4 2.0 3.0 3.5 0.7 1.5 Algeria 1.8 2.5 1.5 1.5 0.7 2.0 Iran, Islamic Republic of 2.2 4.0 4.3 5.0 0.8 1.3 Iraq -- ­65.4 ­1.6 6.9 4.3 4.1 Libya ­0.7 2.4 4.8 4.3 1.0 2.9 Syrian Arab Republic ­0.5 1.7 1.8 2.8 0.6 1.1 Yemen 2.3 0.9 ­0.0 1.0 4.6 1.9 Diversified exporters with strong GCC links 0.5 2.0 5.0 4.1 0.6 2.1 Djibouti ­3.9 0.7 3.2 4.1 3.3 3.8 Jordan 0.3 3.4 3.9 2.9 ­0.1 0.9 Lebanon 1.2 1.7 6.2 5.2 1.3 3.3 Diversified exporters integrated with Europe 3.3 2.9 4.3 4.9 2.4 2.3 Egypt 3.2 2.5 5.2 5.3 2.0 2.4 Morocco 2.8 3.7 1.7 4.5 3.9 2.0 Tunisia 4.5 3.6 5.2 3.4 2.0 3.1 Note: Oil-exporting countries (excl. Iraq) 1.3 2.9 3.5 4.0 ­0.0 1.9 Oil-importing countries (excl. WBG) 2.5 3.2 3.6 4.2 2.5 2.4 Memorandum items: Comparator regions MENA (excl. Iraq) 1.5 3.0 3.6 4.1 0.3 2.0 All Developing countries 2.6 4.3 6.8 4.5 1.1 3.2 East Asia and the Pacific 5.1 7.5 10.5 7.2 4.5 5.8 Europe and Central Asia 3.0 5.8 6.9 4.2 ­2.2 1.4 Latin America and the Caribbean 1.9 1.8 4.4 3.0 ­1.9 0.9 South Asia 3.1 4.8 6.7 4.3 2.1 4.9 Sub-Saharan Africa 0.6 2.0 3.9 3.3 ­0.1 2.1 Source: National agencies and World Bank staff estimates and projections. 93 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Table A7: Nominal GDP in billions U.S. dollars, 1996­2010 1996­1999 2000­2006 Estimate Forecast Country average average 2007 2008 2009 2010 MENA region (incl. Iraq) 657.0 984.0 1,616.6 2,067.6 2,104.7 2,033.6 MENA (excl. Iraq) 638.0 961.0 1,554.9 2,002.6 2,032.2 1,958.6 GCC countries 269.8 464.2 793.5 1,106.5 1,165.8 1,025.1 Bahrain 6.2 8.3 10.7 11.4 11.7 12.6 Kuwait 29.5 57.2 109.7 146.6 96.9 105.6 Oman 15.2 24.8 40.1 47.9 50.8 45.0 Qatar 10.8 29.9 71.0 101.1 112.2 114.5 Saudi Arabia 157.5 242.7 381.8 539.7 618.2 455.3 United Arab Emirates 50.7 101.4 180.2 260.0 276.0 292.2 Oil exporters with large populations 219.4 322.1 539.8 622.1 552.4 581.9 Algeria 48.0 76.8 134.4 154.3 153.1 161.0 Iran, Islamic Republic of 105.8 149.1 215.8 234.7 200.4 201.4 Iraq 12.7 23.0 61.7 65.0 72.5 75.0 Libya 31.4 36.3 69.7 100.0 60.0 72.8 Syrian Arab Republic 14.8 24.3 39.2 45.0 42.2 44.7 Yemen 6.6 12.5 19.1 23.1 24.2 27.1 Diversified exporters with strong GCC links 23.9 31.1 41.6 47.4 58.3 64.3 Djibouti 0.5 0.6 0.8 0.9 1.0 1.1 Jordan 7.5 10.8 15.7 17.1 23.5 26.1 Lebanon 15.8 19.7 25.1 29.4 33.8 37.0 Diversified exporters integrated with Europe 137.6 166.6 241.7 291.6 328.2 362.3 Egypt 80.4 92.2 131.9 163.9 194.9 217.6 Morocco 37.5 49.7 74.9 88.6 94.5 100.9 Tunisia 19.8 24.7 34.9 39.1 38.8 43.8 Note: Oil-exporting countries (excl. Iraq) 556.9 855.5 1,403.6 1,827.5 1,840.6 1,749.6 Oil-importing countries (excl. WBG) 81.1 105.5 151.3 175.1 191.6 209.0 Memorandum items: Comparator regions MENA (excl. Iraq) 638 961 1,555 2,003 2,032 1,959 All Developing countries 5,726 8,343 13,420 16,164 15,191 16,718 East Asia and the Pacific 1,514 2,602 4,080 4,900 5,387 5,952 Europe and Central Asia 1,105 1,619 3,074 4,000 3,092 3,397 Latin America and the Caribbean 1,833 2,243 3,412 4,035 3,547 3,858 South Asia 544 879 1,406 1,523 1,505 1,725 Sub-Saharan Africa 344 479 625 745 721 778 MENA less GCC 387 520 823 961 939 1,008 Source: National agencies and World Bank staff estimates. 94 Statistical Annex Table A8: Population in millions, 1996­2010 1996­1999 2000­2006 Estimate Forecast Country average average 2007 2008 2009 2010 MENA region (incl. Iraq) 286.5 319.3 345.4 352.4 359.4 366.5 MENA (excl. Iraq) 264.4 293.2 315.8 322.0 328.2 334.6 GCC countries 27.5 32.4 36.5 37.6 38.8 40.0 Bahrain 0.6 0.7 0.8 0.8 0.8 0.8 Kuwait 2.0 2.4 2.6 2.7 2.8 2.8 Oman 2.3 2.5 2.7 2.7 2.8 2.9 Qatar 0.5 0.7 0.9 0.9 1.0 1.0 Saudi Arabia 19.3 22.0 24.3 24.9 25.5 26.1 United Arab Emirates 2.8 4.0 5.2 5.6 6.0 6.4 Oil exporters with large populations 149.7 167.2 181.6 185.4 189.2 193.1 Algeria 29.4 31.9 33.8 34.4 34.9 35.4 Iran, Islamic Republic of 61.3 66.5 70.8 72.0 73.3 74.5 Iraq 22.1 26.1 29.6 30.4 31.2 31.9 Libya 5.1 5.6 6.1 6.2 6.3 6.4 Syrian Arab Republic 15.2 17.4 19.1 19.5 20.0 20.5 Yemen 16.6 19.7 22.3 22.9 23.6 24.3 Diversified exporters with strong GCC links 8.9 9.9 10.7 10.9 11.1 11.3 Djibouti 0.7 0.8 0.8 0.8 0.8 0.9 Jordan 4.6 5.2 5.7 5.9 6.0 6.2 Lebanon 3.6 3.9 4.1 4.2 4.2 4.3 Diversified exporters integrated with Europe 100.4 109.7 116.7 118.4 120.2 122.1 Egypt 63.5 70.3 75.5 76.9 78.2 79.7 Morocco 27.5 29.5 30.8 31.1 31.4 31.8 Tunisia 9.4 9.9 10.3 10.4 10.6 10.7 Note: Oil-exporting countries (excl. Iraq) 218.7 243.8 264.0 269.5 275.1 280.8 Oil-importing countries (excl. WBG) 45.7 49.3 51.8 52.5 53.1 53.7 Memorandum items: Comparator regions MENA (excl. Iraq) 264.4 293.2 315.8 322.0 328.2 334.6 All Developing countries 4,737 5,188 5,469 5,532 5,597 5,660 East Asia and the Pacific 1,688 1,802 1,854 1,869 1,884 1,898 Europe and Central Asia 434 424 424 424 424 425 Latin America and the Caribbean 477 528 552 559 566 573 South Asia 1,270 1,459 1,540 1,560 1,582 1,602 Sub-Saharan Africa 610 689 790 805 820 836 MENA less GCC 259 287 309 315 321 326 Source: UN population database, National agencies and World Bank staff estimates. 95 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Table A9: Consumer prices, 1996­2010 1996­1999 2000­2006 Estimate Forecast Country average average 2007 2008 2009 2010 MENA region (incl. Iraq) -- -- -- -- -- -- MENA (excl. Iraq) 5.1 4.1 7.2 10.6 7.7 6.2 GCC countries 2.2 3.0 9.4 11.4 7.6 4.7 Bahrain 0.1 0.9 3.3 3.5 3.0 3.0 Kuwait 1.8 2.0 4.9 5.4 4.2 4.0 Oman ­0.9 0.5 5.5 6.0 6.7 2.0 Qatar 3.7 4.7 13.8 15.1 10.0 6.0 Saudi Arabia ­0.3 0.3 4.1 9.9 5.7 3.5 United Arab Emirates 2.5 4.4 11.1 11.5 2.0 3.1 Oil exporters with large populations 13.9 9.2 10.0 15.5 15.1 12.7 Algeria 7.8 2.3 3.9 4.0 3.5 3.0 Iran, Islamic Republic of 19.6 13.7 14.1 22.5 23.5 20.0 Iraq 3.1 27.8 4.7 6.8 6.0 6.0 Libya 1.0 0.9 0.9 0.9 0.9 0.9 Syrian Arab Republic 2.0 4.0 4.7 14.5 8.5 5.0 Yemen 11.4 11.6 12.6 8.5 5.5 5.5 Diversified exporters with strong GCC links 3.2 2.3 4.6 12.5 5.3 6.3 Djibouti 2.6 2.4 4.5 12.0 5.4 4.0 Jordan 3.4 2.7 5.4 14.9 2.0 10.0 Lebanon 3.6 1.9 4.0 10.7 8.5 5.0 Diversified exporters integrated with Europe 4.2 3.4 5.4 6.8 5.2 4.3 Egypt 7.5 6.1 11.0 11.7 8.5 7.3 Morocco 1.9 1.7 2.0 3.9 3.5 2.5 Tunisia 3.3 2.4 3.1 4.9 3.5 3.0 Note: Oil-exporting countries (excl. Iraq) 4.8 4.1 7.4 10.7 7.8 6.2 Oil-importing countries (excl. WBG) 2.7 2.0 3.0 6.7 4.4 3.9 Memorandum items: Comparator regions MENA (excl. Iraq) 5.1 4.1 7.2 10.6 7.7 6.2 All Developing countries 7.5 5.0 6.0 9.3 5.5 4.0 East Asia and the Pacific 6.1 4.6 5.2 7.5 5.0 4.5 Europe and Central Asia 4.9 4.7 7.9 10.4 9.0 7.5 Latin America and the Caribbean 11.8 5.8 6.2 8.7 6.0 5.5 South Asia 6.9 6.3 7.6 20.3 14.8 12.5 Sub-Saharan Africa -- -- -- -- -- -- Source: World Bank DECPG data, National agencies and World Bank staff projections. 96 Statistical Annex Table A10: Overall fiscal balance, billions U.S. dollars, 1996­2008 1996­1999 2000­2005 Estimate Country average average 2006 2007 2008 MENA region (incl. Iraq) -- -- 178.8 172.7 -- MENA (excl. Iraq) ­14.9 39.5 172.9 167.2 298.4 GCC countries ­7.2 40.9 161.8 149.4 281.8 Bahrain ­0.3 0.1 0.4 0.3 0.9 Kuwait 4.1 13.6 29.9 43.0 37.7 Oman 0.1 1.8 5.1 5.5 6.1 Qatar ­0.9 2.2 4.9 8.1 11.6 Saudi Arabia ­8.0 12.2 74.8 47.1 164.3 United Arab Emirates ­2.3 10.9 46.6 45.3 61.3 Oil exporters with large populations ­1.7 10.7 31.8 39.0 34.2 Algeria 0.1 5.2 15.7 6.1 12.8 Iran, Islamic Republic of ­1.6 0.8 ­7.3 11.2 1.7 Iraq -- -- 5.9 5.5 0.0 Libya ­0.1 5.0 19.6 18.3 22.8 Syrian Arab Republic 0.1 ­0.2 ­1.2 ­1.4 ­2.4 Yemen ­0.2 ­0.1 ­0.9 ­0.8 ­0.7 Diversified exporters with strong GCC links ­3.1 ­3.1 ­3.5 ­4.3 ­4.0 Djibouti ­0.0 ­0.0 ­0.0 ­0.0 ­0.0 Jordan ­0.1 ­0.4 ­0.9 ­1.2 ­1.7 Lebanon ­2.9 ­2.7 ­2.5 ­3.1 ­2.3 Diversified exporters integrated with Europe ­3.0 ­8.9 ­11.4 ­11.4 ­13.7 Egypt ­1.5 ­6.2 ­8.8 ­10.2 ­12.5 Morocco ­0.7 ­1.9 ­1.7 ­0.1 ­0.1 Tunisia ­0.8 ­0.8 ­0.9 ­1.0 ­1.2 Note: Oil-exporting countries (excl. Iraq) ­10.4 45.3 178.9 172.7 303.6 Oil-importing countries (excl. WBG) ­4.6 ­5.8 ­6.0 ­5.5 ­5.2 Memorandum items: Comparator regions MENA (excl. Iraq) ­14.9 39.5 172.9 167.2 298.4 All Developing countries ­124.0 ­105.0 59.4 35.1 -79.0 East Asia and the Pacific ­19.6 ­43.7 ­21.7 10.6 ­30.7 Europe and Central Asia ­45.0 ­6.2 75.2 47.6 26.6 Latin America and the Caribbean ­0.6 8.0 39.9 42.4 33.5 South Asia ­40.5 ­55.8 ­64.0 ­89.7 ­135.4 Sub-Saharan Africa ­10.5 ­6.1 19.0 6.4 10.5 MENA less GCC ­7.8 ­1.3 11.0 17.8 16.5 Source: World Bank, National agencies, IMF and World Bank staff estimates. 97 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Table A11: Fiscal balance as a share of GDP, percent, 1996­2010 1996­1999 2000­2006 Estimate Forecast Country average average 2007 2008 2009 2010 MENA region (incl. Iraq) -- -- 10.7 -- -- -- MENA (excl. Iraq) ­2.3 5.0 10.8 14.9 0.3 2.2 GCC countries ­2.7 10.3 18.8 25.5 5.1 6.8 Bahrain ­4.4 2.2 2.9 8.0 1.8 9.0 Kuwait 13.9 26.8 39.2 25.7 ­2.7 3.3 Oman 0.8 8.6 13.7 12.7 11.9 11.2 Qatar ­8.1 8.0 11.4 11.5 13.5 14.7 Saudi Arabia ­5.2 6.3 12.3 30.4 1.5 4.5 United Arab Emirates ­4.4 13.4 25.2 23.6 11.2 8.0 Oil exporters with large populations ­0.8 3.9 7.2 5.5 ­6.6 ­1.8 Algeria 0.2 7.8 4.6 8.3 ­11.5 1.8 Iran, Islamic Republic of ­1.6 ­0.0 5.2 0.7 ­5.2 ­6.0 Iraq -- -- 8.9 0.0 0.0 0.0 Libya 1.4 16.8 26.2 22.8 ­9.8 ­0.2 Syrian Arab Republic 0.7 ­1.1 ­3.5 ­5.3 ­5.5 ­2.3 Yemen ­2.5 ­0.9 ­4.0 ­3.0 ­2.0 ­2.0 Diversified exporters with strong GCC links ­12.9 ­10.4 ­10.4 ­8.4 ­4.0 ­2.5 Djibouti ­2.4 ­1.9 ­3.4 ­3.4 ­3.4 ­3.4 Jordan ­1.9 ­3.8 ­7.9 ­9.9 ­3.4 ­2.6 Lebanon ­18.6 ­14.1 ­12.2 ­7.7 ­4.4 ­2.5 Diversified exporters integrated with Europe ­2.2 ­5.5 ­4.7 ­4.7 ­4.6 ­4.0 Egypt ­1.8 ­7.4 ­7.7 ­7.6 ­5.6 ­4.7 Morocco ­1.8 ­3.8 ­0.2 ­0.1 ­3.1 ­2.8 Tunisia ­4.2 ­3.2 ­3.0 ­3.0 ­3.1 ­3.0 Note: Oil-exporting countries (excl. Iraq) ­1.9 6.3 12.3 16.6 0.6 2.8 Oil-importing countries (excl. WBG) ­5.7 ­5.7 ­3.6 ­3.0 ­3.4 ­2.7 Memorandum items: Comparator regions MENA (excl. Iraq) ­2.3 5.0 10.8 14.9 0.3 2.2 All Developing countries ­1.1 ­0.9 0.1 ­0.6 ­4.0 ­4.0 East Asia and the Pacific ­1.1 ­1.7 0.3 ­0.6 ­3.2 ­3.3 Europe and Central Asia ­4.3 ­0.2 1.5 0.7 ­5.3 ­4.6 Latin America and the Caribbean 0.0 0.5 1.2 0.8 ­1.8 ­1.4 South Asia ­7.4 ­6.8 ­6.4 ­8.9 ­11.0 ­11.3 Sub-Saharan Africa ­3.2 ­0.5 1.0 1.4 ­3.4 ­3.0 Source: World Bank, National agencies, IMF and World Bank staff projections. 98 Statistical Annex Table A12: Exports of goods and services as a share of GDP, percent, 1996­2008 1996­1999 2000­2005 Estimate Country average average 2006 2007 2008 MENA region (incl. Iraq) 33.1 45.5 57.3 59.4 67.9 MENA (excl. Iraq) 33.5 44.4 57.2 59.2 66.9 GCC countries 47.2 56.8 69.0 72.1 79.3 Bahrain 79.4 103.0 141.0 146.6 173.2 Kuwait 47.9 53.8 59.8 63.5 68.5 Oman 47.6 58.7 63.2 64.7 73.4 Qatar 49.2 60.7 65.4 66.2 75.0 Saudi Arabia 36.1 46.5 60.6 62.7 71.0 United Arab Emirates 76.6 78.8 90.9 96.6 101.5 Oil exporters with large populations 25.0 39.3 48.8 50.4 59.5 Algeria 26.7 38.7 48.7 42.9 53.6 Iran, Islamic Republic of 18.8 30.5 43.2 48.1 57.3 Iraq 60.4 111.7 60.5 66.1 97.2 Libya 23.1 46.6 68.9 67.5 60.9 Syrian Arab Republic 37.0 37.5 37.5 37.6 41.9 Yemen 35.1 38.9 45.2 40.3 42.8 Diversified exporters with strong GCC links 24.4 41.5 61.9 62.5 67.2 Djibouti 38.8 38.3 39.9 41.4 43.3 Jordan 47.9 47.3 57.6 57.7 68.5 Lebanon 12.6 38.8 65.4 66.2 67.2 Diversified exporters integrated with Europe 23.7 28.6 36.0 37.8 42.6 Egypt 17.7 24.0 33.8 33.6 39.6 Morocco 26.6 29.6 32.2 36.5 38.3 Tunisia 42.5 46.6 52.1 56.6 64.7 Note: Oil-exporting countries (excl. Iraq) 34.0 45.4 58.5 60.4 68.4 Oil-importing countries (excl. WBG) 29.8 37.0 44.9 48.3 52.0 Source: National agencies and World Bank staff estimates. 99 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Table A13: Exports of merchandise in billions U.S. dollars, 1996­2010 1996­1999 2000­2006 Estimate Forecast Country average average 2007 2008 2009 2010 MENA region (incl. Iraq) 190.4 429.9 874.7 1,305.8 785.0 755.7 MENA (excl. Iraq) 184.1 410.3 833.9 1,242.7 756.5 726.6 GCC countries 118.5 268.0 553.0 857.6 521.1 474.2 Bahrain 4.2 7.8 13.7 17.6 9.2 9.9 Kuwait 12.5 29.4 65.3 95.7 38.7 37.8 Oman 6.9 14.1 24.7 33.8 19.8 20.5 Qatar 5.2 17.1 44.6 72.9 59.5 63.2 Saudi Arabia 52.7 118.3 234.3 377.7 159.8 155.8 United Arab Emirates 37.0 81.3 170.3 259.9 234.0 187.0 Oil exporters with large populations 50.5 127.5 257.6 352.8 183.9 196.7 Algeria 12.4 31.3 56.9 81.7 53.8 50.9 Iran, Islamic Republic of 18.7 46.3 95.0 124.3 64.6 66.9 Iraq 6.3 19.6 40.8 63.2 28.4 29.1 Libya 7.2 18.4 47.0 60.3 21.2 30.8 Syrian Arab Republic 3.8 7.0 10.9 14.3 8.1 8.8 Yemen 2.1 4.7 7.0 9.1 7.7 10.2 Diversified exporters with strong GCC links 3.6 5.5 9.8 13.6 13.0 13.9 Djibouti 0.0 0.0 0.1 0.1 0.1 0.1 Jordan 1.8 3.3 5.6 7.8 7.5 8.1 Lebanon 1.7 2.1 4.1 5.8 5.4 5.7 Diversified exporters integrated with Europe 17.8 28.9 54.4 81.8 67.0 70.9 Egypt 5.0 11.3 24.4 41.6 31.0 33.1 Morocco 7.1 9.1 15.2 20.3 18.2 19.0 Tunisia 5.7 8.5 14.9 19.9 17.8 18.8 Note: Oil-exporting countries (excl. Iraq) 167.7 387.2 794.1 1,188.8 707.5 675.0 Oil-importing countries (excl. WBG) 16.4 23.1 39.8 53.8 49.0 51.6 Memorandum items: Comparator regions MENA (excl. Iraq) 184.1 410.3 833.9 1242.7 756.5 726.6 All Developing countries 1,157.8 2,089.0 4,190.3 5,142.2 4,304.9 4,547.5 East Asia and the Pacific 443.5 975.4 1,775.0 2,066.0 1,984.0 2,110.0 Europe and Central Asia 193.5 193.5 873.0 1,130.0 887.0 925.0 Latin America and the Caribbean 306.0 492.2 763.0 928.0 727.0 759.0 South Asia 59.8 109.7 188.6 224.0 206.0 218.0 Sub-Saharan Africa 83.2 156.3 269.0 346.0 237.0 254.0 MENA less GCC 71.9 161.9 321.7 448.2 263.9 281.5 Source: World Bank, National agencies, IMF and World Bank staff estimates. 100 Statistical Annex Table A14: Exports of oil and gas in billions U.S. dollars, 1996­2010 1996­1999 2000­2006 Estimate Forecast Country average average 2007 2008 2009 2010 MENA region (incl. Iraq) 129.9 339.9 701.4 994.1 428.1 428.2 MENA (excl. Iraq) 124.3 322.5 663.2 935.0 401.5 400.9 GCC countries 82.6 224.1 465.1 668.8 282.0 280.0 Bahrain 1.1 2.3 3.8 4.9 2.2 2.2 Kuwait 11.8 28.8 64.1 93.9 38.0 37.0 Oman 5.5 10.2 15.6 21.9 10.6 10.8 Qatar 3.8 16.8 42.0 64.1 25.9 27.3 Saudi Arabia 46.3 125.1 251.0 356.2 150.8 147.0 United Arab Emirates 14.1 41.0 88.7 127.8 54.6 55.7 Oil exporters with large populations 44.4 113.1 233.5 322.5 143.0 144.9 Algeria 11.4 32.4 70.2 96.6 42.0 42.0 Iran, Islamic Republic of 15.3 37.8 77.0 103.2 47.0 48.7 Iraq 5.5 17.4 38.1 59.1 26.6 27.3 Libya 7.9 18.3 39.8 54.7 24.3 23.9 Syrian Arab Republic 2.3 3.2 3.6 4.0 1.6 1.5 Yemen 1.9 4.0 4.9 4.9 1.6 1.5 Diversified exporters with strong GCC links 0.0 0.0 0.0 0.0 0.0 0.0 Djibouti 0.0 0.0 0.0 0.0 0.0 0.0 Jordan 0.0 0.0 0.0 0.0 0.0 0.0 Lebanon 0.0 0.0 0.0 0.0 0.0 0.0 Diversified exporters integrated with Europe 2.9 2.6 2.7 2.7 3.1 3.3 Egypt 2.3 1.6 0.9 1.5 2.0 2.2 Morocco 0.1 0.3 0.2 0.2 0.2 0.2 Tunisia 0.5 0.8 1.5 1.0 0.9 0.9 Note: Oil-exporting countries (excl. Iraq) 123.7 321.4 661.5 933.7 400.5 399.8 Oil-importing countries (excl. WBG) 0.6 1.1 1.8 1.2 1.1 1.1 Source: National agencies, WITS database, IEA, OPEC and World Bank staff projections. 101 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Table A15: Imports of goods and services as a share of GDP, percent, 1996­2008 1996­1999 2000­2005 Estimate Country average average 2006 2007 2008 MENA region (incl. Iraq) -- 37.4 38.8 43.6 45.5 MENA (excl. Iraq) 31.8 34.5 38.8 44.0 45.5 GCC countries 40.1 39.1 42.9 49.1 46.1 Bahrain 69.6 79.6 111.6 128.1 138.2 Kuwait 43.6 33.0 24.2 25.9 21.7 Oman 41.1 37.6 38.5 45.8 53.1 Qatar 49.5 29.3 33.8 35.1 35.9 Saudi Arabia 27.7 30.1 37.0 42.7 36.8 United Arab Emirates 71.3 64.5 67.4 78.2 77.9 Oil exporters with large populations 19.2 27.4 28.7 31.5 35.6 Algeria 20.9 23.4 21.8 24.2 28.8 Iran, Islamic Republic of 16.2 25.0 27.7 34.0 38.1 Iraq -- 81.5 39.5 33.1 45.3 Libya 19.6 27.8 28.7 29.2 28.2 Syrian Arab Republic 35.9 32.1 33.9 35.8 41.1 Yemen 44.7 37.1 44.7 49.1 50.1 Diversified exporters with strong GCC links 53.1 63.6 84.8 90.0 101.4 Djibouti 50.6 48.5 57.3 57.6 57.3 Jordan 69.2 74.6 93.9 98.8 120.3 Lebanon 45.5 58.3 80.0 85.5 91.8 Diversified exporters integrated with Europe 40.1 39.1 42.9 49.1 46.1 Egypt 25.6 27.1 37.4 39.9 52.9 Morocco 30.0 34.2 38.8 46.4 53.0 Tunisia 45.1 49.8 54.3 59.7 70.1 Note: Oil-exporting countries (excl. Iraq) 30.5 33.0 37.1 42.2 43.2 Oil-importing countries (excl. WBG) 40.4 46.5 55.0 61.5 69.9 Source: National agencies and World Bank staff estimates. 102 Statistical Annex Table A16: Worker remittances, net receipts in billions U.S. dollars, 1996­2008 1996­1999 2000­2005 Estimate Country average average 2006 2007 2008 MENA region (incl. Iraq) ­11.5 ­10.7 ­13.3 ­10.9 ­7.3 MENA (excl. Iraq) ­11.5 ­10.7 ­13.3 ­10.9 ­7.3 GCC countries ­25.5 ­24.3 ­29.1 ­32.4 ­29.2 Bahrain ­0.1 0.5 2.2 1.4 3.7 Kuwait ­1.5 ­2.1 ­3.0 ­3.1 ­3.2 Oman ­1.4 ­1.7 ­2.7 ­3.6 ­3.6 Qatar ­1.2 ­1.9 ­3.9 ­4.1 ­2.2 Saudi Arabia ­14.8 ­14.8 ­15.6 ­16.1 ­16.9 United Arab Emirates ­6.3 ­4.4 ­6.0 ­7.0 ­7.0 Oil exporters with large populations 2.9 4.0 4.6 5.2 5.3 Algeria 0.9 1.5 1.6 2.1 2.3 Iran, Islamic Republic of 0.6 0.9 1.0 1.1 1.1 Iraq 0.0 0.0 0.0 0.0 0.0 Libya 0.0 0.0 0.0 0.0 0.0 Syrian Arab Republic 0.2 0.5 0.8 0.8 0.8 Yemen 1.1 1.2 1.2 1.2 1.2 Diversified exporters with strong GCC links 2.1 2.4 3.2 3.9 3.9 Djibouti 0.0 0.0 0.0 0.0 0.0 Jordan 1.7 2.2 2.9 3.4 3.4 Lebanon 0.3 0.3 0.4 0.4 0.4 Diversified exporters integrated with Europe 9.6 8.7 11.8 15.4 17.7 Egypt 3.2 3.3 5.2 7.5 9.5 Morocco 2.0 3.5 5.5 6.7 7.0 Tunisia 4.4 1.9 1.1 1.2 1.2 Note: Oil-exporting countries (excl. Iraq) ­20.0 ­18.6 ­23.1 ­22.7 ­19.4 Oil-importing countries (excl. WBG) 8.5 7.8 9.8 11.8 12.1 Memorandum items: Comparator regions MENA (excl. Iraq) ­11.5 ­10.7 ­13.3 ­10.9 ­7.3 All Developing countries 71.6 140.3 218.8 270.9 293.9 East Asia and the Pacific 13.2 34.5 52.9 65.2 69.9 Europe and Central Asia 10.3 20.4 38.3 50.4 53.1 Latin America and the Caribbean 16.7 37.5 59.2 63.1 63.3 South Asia 13.6 27.3 39.6 52.1 66.0 Sub-Saharan Africa 3.9 7.0 12.9 18.6 19.8 MENA less GCC 14.0 13.5 15.8 21.5 21.9 Source: World Bank data, IMF, National Agencies. 103 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Table A17: Worker remittances, gross receipts in billions U.S. dollars, 1996­2008 1996­1999 2000­2005 Estimate Country average average 2006 2007 2008 MENA region (incl. Iraq) 14.8 15.4 19.9 24.9 26.9 MENA (excl. Iraq) 14.8 15.4 19.9 24.9 26.9 GCC countries 0.0 0.0 0.0 0.0 0.0 Bahrain 0.0 0.0 0.0 0.0 0.0 Kuwait 0.0 0.0 0.0 0.0 0.0 Oman 0.0 0.0 0.0 0.0 0.0 Qatar 0.0 0.0 0.0 0.0 0.0 Saudi Arabia 0.0 0.0 0.0 0.0 0.0 United Arab Emirates 0.0 0.0 0.0 0.0 0.0 Oil exporters with large populations 2.9 4.1 4.7 5.3 5.5 Algeria 0.9 1.5 1.6 2.1 2.3 Iran, Islamic Republic of 0.6 0.9 1.0 1.1 1.1 Iraq 0.0 0.0 0.0 0.0 0.0 Libya 0.0 0.0 0.0 0.0 0.0 Syrian Arab Republic 0.2 0.5 0.8 0.8 0.9 Yemen 1.2 1.3 1.3 1.3 1.3 Diversified exporters with strong GCC links 2.1 2.5 3.3 3.9 3.9 Djibouti 0.0 0.0 0.0 0.0 0.0 Jordan 1.7 2.2 2.9 3.4 3.4 Lebanon 0.3 0.3 0.4 0.4 0.5 Diversified exporters integrated with Europe 9.8 8.7 11.9 15.6 17.4 Egypt 3.4 3.3 5.3 7.7 9.5 Morocco 2.0 3.5 5.5 6.7 6.7 Tunisia 4.4 1.9 1.1 1.2 1.2 Note: Oil-exporting countries (excl. Iraq) 6.3 7.5 10.1 13.0 15.0 Oil-importing countries (excl. WBG) 8.5 7.9 9.8 11.8 11.8 Memorandum items: Comparator regions MENA (excl. Iraq) 14.8 15.4 19.9 24.9 26.9 All Developing countries 72.4 142.1 222.8 274.2 298.9 East Asia and the Pacific 13.2 34.5 52.9 65.2 69.9 Europe and Central Asia 10.3 20.4 38.3 50.4 53.1 Latin America and the Caribbean 16.7 37.5 59.2 63.1 63.3 South Asia 13.6 27.3 39.6 52.1 66.0 Sub-Saharan Africa 3.9 7.0 12.9 18.6 19.8 MENA less GCC 14.8 15.3 19.9 24.8 26.8 Source: World Bank, National agencies, IMF and World Bank staff estimates. 104 Statistical Annex Table A18: Worker remittances, gross payments in billions U.S. dollars, 1996­2008 1996­1999 2000­2005 Estimate Country average average 2006 2007 2008 MENA region (incl. Iraq) 26.5 26.8 34.1 36.5 35.2 MENA (excl. Iraq) 26.5 26.8 34.1 36.5 35.2 GCC countries 26.1 25.9 32.9 35.4 34.3 Bahrain 0.7 1.1 1.5 1.5 1.4 Kuwait 1.5 2.1 3.0 3.1 3.2 Oman 1.4 1.7 2.8 3.7 3.7 Qatar 1.2 1.9 3.9 4.1 2.2 Saudi Arabia 14.8 14.8 15.6 16.1 16.9 United Arab Emirates 6.3 4.4 6.0 7.0 7.0 Oil exporters with large populations 0.3 0.8 1.1 0.9 0.9 Algeria 0.0 0.0 0.0 0.0 0.0 Iran, Islamic Republic of 0.0 0.0 0.0 0.0 0.0 Iraq -- -- -- -- -- Libya 0.2 0.7 0.9 0.8 0.8 Syrian Arab Republic 0.0 0.0 0.0 0.0 0.0 Yemen 0.0 0.1 0.1 0.1 0.1 Diversified exporters with strong GCC links 0.0 0.0 0.0 0.0 0.0 Djibouti 0.0 0.0 0.0 0.0 0.0 Jordan 0.0 0.0 0.0 0.0 0.0 Lebanon 0.0 0.0 0.0 0.0 0.0 Diversified exporters integrated with Europe 0.2 0.0 0.1 0.2 0.0 Egypt 0.2 0.0 0.1 0.2 0.0 Morocco 0.0 0.0 0.0 0.0 0.0 Tunisia 0.0 0.0 0.0 0.0 0.0 Note: Oil-exporting countries (excl. Iraq) 26.5 26.8 34.1 36.5 35.2 Oil-importing countries (excl. WBG) 0.0 0.0 0.0 0.0 0.0 Source: World Bank, National agencies, IMF and World Bank staff estimates. 105 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Table A19: Tourism receipts in billions U.S. dollars, 1996­2010 1996­1999 2000­2006 Estimate Forecast Country average average 2007 2008 2009 2010 MENA region (incl. Iraq) 11.6 19.8 28.5 31.3 30.3 31.2 MENA (excl. Iraq) 11.6 19.8 28.5 31.3 30.3 31.2 GCC countries 2.3 3.8 5.1 5.5 6.0 6.4 Bahrain 0.4 0.9 1.3 1.4 1.4 1.5 Kuwait 0.0 0.0 0.0 0.0 0.0 0.0 Oman 0.3 0.6 1.0 1.1 1.3 1.6 Qatar 0.0 0.0 0.0 0.0 0.0 0.0 Saudi Arabia 1.0 1.2 1.3 1.4 1.5 1.6 United Arab Emirates 0.7 1.1 1.5 1.6 1.7 1.7 Oil exporters with large populations 1.6 2.2 3.2 3.8 3.3 3.5 Algeria 0.2 0.3 0.4 0.5 0.5 0.5 Iran, Islamic Republic of 0.2 0.7 1.2 1.5 1.0 1.0 Iraq 0.0 0.0 0.0 0.0 0.0 0.0 Libya 0.0 0.0 0.0 0.0 0.0 0.0 Syrian Arab Republic 1.1 1.0 1.4 1.6 1.6 1.7 Yemen 0.1 0.2 0.2 0.2 0.2 0.2 Diversified exporters with strong GCC links 0.9 3.1 2.6 2.9 2.8 2.9 Djibouti 0.0 0.0 0.0 0.0 0.0 0.0 Jordan 0.8 1.1 1.9 2.2 2.1 2.1 Lebanon 0.1 2.0 0.7 0.8 0.7 0.7 Diversified exporters integrated with Europe 6.7 10.7 17.7 19.1 18.2 18.4 Egypt 3.3 5.2 8.2 8.9 8.3 8.4 Morocco 1.7 3.6 7.1 7.7 7.5 7.6 Tunisia 1.7 1.8 2.4 2.6 2.5 2.5 Note: Oil-exporting countries (excl. Iraq) 7.3 11.3 16.5 18.2 17.6 18.3 Oil-importing countries (excl. WBG) 4.3 8.5 12.1 13.1 12.8 12.9 Source: World Bank, IMF, National Agencies and World Tourism Organization. 106 Statistical Annex Table A20: Tourism revenues as a share of GDP, percent, 1996­2010 1996­1999 2000­2006 Estimate Forecast Country average average 2007 2008 2009 2010 MENA region (incl. Iraq) 1.8 2.0 1.8 1.5 1.4 1.5 MENA (excl. Iraq) 1.8 2.1 1.8 1.5 1.4 1.5 GCC countries 0.9 0.8 0.6 0.5 0.5 0.6 Bahrain 5.9 10.5 12.1 12.0 12.3 12.0 Kuwait 0.0 0.0 0.0 0.0 0.0 0.0 Oman 1.8 2.3 2.4 2.4 2.6 3.5 Qatar 0.0 0.0 0.0 0.0 0.0 0.0 Saudi Arabia 0.6 0.5 0.3 0.3 0.2 0.3 United Arab Emirates 1.4 1.1 0.8 0.6 0.6 0.6 Oil exporters with large populations 0.8 0.7 0.6 0.6 0.6 0.6 Algeria 0.5 0.4 0.3 0.3 0.3 0.3 Iran, Islamic Republic of 0.2 0.5 0.6 0.6 0.5 0.5 Iraq 0.0 0.0 0.0 0.0 0.0 0.0 Libya 0.0 0.0 0.0 0.0 0.0 0.0 Syrian Arab Republic 7.1 4.1 3.5 3.6 3.8 3.9 Yemen 2.0 1.6 1.1 0.9 0.9 0.8 Diversified exporters with strong GCC links 3.8 10.0 6.2 6.1 4.9 4.5 Djibouti 0.0 0.0 0.0 0.0 0.0 0.0 Jordan 10.5 10.5 11.9 12.6 9.0 8.2 Lebanon 0.7 10.1 2.9 2.6 2.2 2.0 Diversified exporters integrated with Europe 4.9 6.4 7.3 6.6 5.5 5.1 Egypt 4.2 5.7 6.2 5.4 4.2 3.9 Morocco 4.5 7.2 9.5 8.6 7.9 7.5 Tunisia 8.4 7.5 6.8 6.5 6.3 5.6 Note: Oil-exporting countries (excl. Iraq) 1.3 1.3 1.2 1.0 1.0 1.0 Oil-importing countries (excl. WBG) 5.3 8.1 8.0 7.5 6.7 6.2 Source: World Bank, IMF, National Agencies and World Tourism Organization. 107 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Table A21: Current accounts in billions U.S. dollars, 1996­2010 1996­1999 2000­2006 Estimate Forecast Country average average 2007 2008 2009 2010 MENA region (incl. Iraq) -- 226.9 282.9 469.6 137.3 158.6 MENA (excl. Iraq) 5.2 127.9 273.2 452.3 141.5 156.0 GCC countries 2.3 88.2 200.1 356.6 147.4 163.5 Bahrain ­0.1 0.8 1.4 3.7 ­0.6 ­0.6 Kuwait 5.6 20.0 50.0 70.6 19.0 33.4 Oman ­0.9 2.8 1.9 7.8 ­7.2 ­8.9 Qatar ­1.6 6.8 22.0 37.5 14.0 35.1 Saudi Arabia ­3.5 43.6 95.8 191.7 100.0 120.0 United Arab Emirates 2.8 14.3 29.0 45.4 22.3 ­15.5 Oil exporters with large populations 8.5 44.4 89.3 141.3 12.2 17.7 Algeria 1.5 12.8 24.3 37.4 9.6 2.2 Iran, Islamic Republic of 3.0 17.5 32.4 48.3 8.3 9.8 Iraq -- 5.7 9.6 17.4 ­4.2 2.6 Libya 3.9 10.2 23.6 39.2 5.2 8.7 Syrian Arab Republic 0.2 0.9 0.8 0.5 ­4.0 ­4.0 Yemen ­0.0 0.5 ­1.5 ­1.5 ­2.7 ­1.6 Diversified exporters with strong GCC links ­3.6 ­4.3 ­5.8 ­10.4 ­5.8 ­4.5 Djibouti 0.0 ­0.0 ­0.1 ­0.1 ­0.1 ­0.0 Jordan 0.1 ­0.3 ­2.7 ­4.7 ­2.2 ­2.5 Lebanon ­3.6 ­4.0 ­3.0 ­5.7 ­3.5 ­1.9 Diversified exporters integrated with Europe ­2.0 2.1 ­0.7 ­17.9 ­16.6 ­18.1 Egypt ­1.3 1.7 0.4 ­11.0 ­12.4 ­13.6 Morocco ­0.1 1.0 ­0.2 ­4.8 ­2.3 ­3.0 Tunisia ­0.5 ­0.7 ­0.9 ­2.1 ­1.9 ­1.6 Note: Oil-exporting countries (excl. Iraq) 9.5 131.8 280.1 469.6 151.5 165.0 Oil-importing countries (excl. WBG) ­4.2 ­3.9 ­6.9 ­17.3 ­10.0 ­9.0 Memorandum items: Comparator regions MENA (excl. Iraq) 5.2 127.9 273.2 452.3 141.5 156.0 All Developing countries ­62.0 310.3 459.8 435.0 133.8 204.9 East Asia and the Pacific ­1.1 135.1 425.0 433.7 435.5 494.3 Europe and Central Asia ­2.1 25.3 ­30.5 ­19.3 ­94.0 ­85.6 Latin America and the Caribbean ­44.2 12.0 15.6 ­30.0 ­96.0 ­94.0 South Asia ­9.5 ­4.8 ­22.5 ­57.9 ­24.0 ­30.7 Sub-Saharan Africa ­8.0 3.8 ­10.6 ­4.5 ­77.5 ­74.2 MENA less GCC 3.0 138.7 82.8 113.0 ­10.2 -4.9 Source: World Bank, IMF, National Agencies. 108 Statistical Annex Table A22: Current accounts as a share of GDP (%), 1996­2010 1996­1999 2000­2006 Estimate Forecast Country average average 2007 2008 2009 2010 MENA region (incl. Iraq) -- 17.8 17.5 22.7 6.5 7.8 MENA (excl. Iraq) 0.8 11.9 17.6 22.6 7.0 8.0 GCC countries 0.7 16.7 25.2 32.2 12.6 15.9 Bahrain ­2.2 8.6 13.2 32.3 ­5.4 ­4.8 Kuwait 18.5 30.9 45.6 48.2 19.6 31.6 Oman ­6.2 10.9 4.7 16.3 ­14.2 ­19.7 Qatar ­16.5 21.0 30.9 37.1 12.4 30.7 Saudi Arabia ­2.4 15.6 25.1 35.5 16.2 26.4 United Arab Emirates 5.7 12.7 16.1 17.5 8.1 ­5.3 Oil exporters with large populations 3.9 12.5 16.5 22.7 2.2 3.0 Algeria 3.1 15.3 18.1 24.2 6.3 1.4 Iran, Islamic Republic of 2.8 10.7 15.0 20.6 4.1 4.9 Iraq -- 15.8 15.6 26.7 ­5.8 3.4 Libya 12.3 24.5 33.9 39.2 8.7 11.9 Syrian Arab Republic 1.3 4.0 2.0 1.1 ­9.6 ­9.0 Yemen ­0.7 4.9 ­8.0 ­6.5 ­11.1 ­6.0 Diversified exporters with strong GCC links ­14.7 ­13.8 ­13.8 ­22.0 ­9.9 ­6.9 Djibouti 1.0 0.1 ­8.2 ­6.7 ­5.0 ­3.4 Jordan 0.6 ­1.3 ­17.0 ­27.5 ­9.6 ­9.5 Lebanon ­22.4 ­20.6 ­12.1 ­19.3 ­10.4 ­5.2 Diversified exporters integrated with Europe ­1.4 1.2 ­0.3 ­6.1 ­5.0 ­5.0 Egypt ­1.5 1.9 0.3 ­6.7 ­6.3 ­6.3 Morocco ­0.4 2.1 ­0.3 ­5.4 ­2.5 ­2.9 Tunisia ­2.8 ­2.8 ­2.6 ­5.4 ­4.8 ­3.6 Note: Oil-exporting countries (excl. Iraq) 1.7 13.8 20.0 25.7 8.2 9.4 Oil-importing countries (excl. WBG) ­5.2 ­3.8 ­4.5 ­9.9 ­5.2 ­4.3 Memorandum items: Comparator regions MENA (excl. Iraq) 0.8 11.9 17.6 22.6 7.0 8.0 All Developing countries ­0.8 2.4 3.5 2.7 0.9 1.2 East Asia and the Pacific 0.9 4.7 10.4 8.9 8.1 8.3 Europe and Central Asia ­0.1 1.7 ­1.0 ­0.5 ­3.0 ­2.5 Latin America and the Caribbean ­2.6 0.4 0.5 ­0.7 ­2.7 ­2.4 South Asia ­1.7 ­0.4 ­1.6 ­3.8 ­1.6 ­1.8 Sub-Saharan Africa ­1.8 0.7 ­1.7 ­0.6 ­10.7 ­9.5 Source: World Bank, IMF, National Agencies. 109 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Table A23: Foreign direct investment (FDI) in billions U.S. dollars, 1996­2010 1996­1999 2000­2006 Estimate Forecast Country average average 2007 2008 2009 2010 MENA region (incl. Iraq) 4.4 13.4 27.9 28.5 29.8 26.0 MENA (excl. Iraq) 4.4 13.2 27.4 28.0 29.3 25.5 GCC countries 0.9 6.4 1.7 ­1.1 3.1 ­2.1 Bahrain 0.6 ­0.0 0.1 0.3 0.1 0.3 Kuwait 0.4 ­0.2 ­14.1 ­10.4 ­7.4 ­8.4 Oman 0.1 0.4 2.4 0.3 0.3 0.3 Qatar 0.3 0.6 ­4.5 ­2.8 ­0.5 ­1.3 Saudi Arabia ­0.1 2.4 11.2 7.9 8.1 7.0 United Arab Emirates ­0.2 3.2 6.6 3.5 2.5 0.0 Oil exporters with large populations 0.3 1.7 4.6 4.3 4.7 4.8 Algeria 0.4 0.9 1.7 1.7 1.7 1.8 Iran, Islamic Republic of 0.0 0.4 0.8 0.4 0.7 0.7 Iraq 0.0 0.2 0.5 0.5 0.5 0.5 Libya 0.0 0.0 0.0 0.0 0.0 0.0 Syrian Arab Republic 0.1 0.2 0.8 0.8 0.9 0.9 Yemen ­0.2 0.0 0.9 0.9 0.9 0.9 Diversified exporters with strong GCC links 1.7 2.3 3.8 7.9 4.1 4.7 Djibouti 0.0 0.0 0.2 0.2 0.2 0.2 Jordan 0.2 0.7 1.8 1.9 1.8 1.8 Lebanon 1.5 1.6 1.8 5.8 2.1 2.6 Diversified exporters integrated with Europe 1.3 3.1 17.8 17.3 17.9 18.6 Egypt 0.9 1.5 11.6 12.0 12.6 13.1 Morocco 0.0 0.9 4.6 3.6 3.6 3.7 Tunisia 0.4 0.7 1.6 1.7 1.7 1.8 Note: Oil-exporting countries (excl. Iraq) 2.2 9.4 17.4 14.8 19.9 15.4 Oil-importing countries (excl. WBG) 2.2 3.8 10.1 13.2 9.4 10.1 Memorandum items: Comparator regions MENA (excl. Iraq) 4.4 13.2 27.4 28.0 29.3 25.5 All Developing countries 122.8 233.1 511.9 590.2 545.5 568.9 East Asia and the Pacific 55.1 79.2 175.3 185.1 171.2 179.8 Europe and Central Asia 0.0 57.8 154.4 170.8 153.7 157.6 Latin America and the Caribbean 55.3 65.9 107.5 124.8 118.6 124.5 South Asia 3.7 10.2 29.9 47.5 46.1 48.4 Sub-Saharan Africa 5.4 12.9 18.6 32.4 29.2 30.6 MENA less GCC 3.4 7.0 26.2 29.6 26.7 28.1 Source: United Nations, (UNCTAD), World Bank and IMF. 110 Statistical Annex Table A24: Foreign direct investment as a share of fixed investment, 1996­2008 1996­1999 2000­2005 Estimate Country average average 2006 2007 2008 MENA region (incl. Iraq) -- -- -- -- -- MENA (excl. Iraq) 3.4 6.4 13.0 7.0 5.8 GCC countries 1.7 7.0 10.5 1.0 ­0.6 Bahrain 75.0 0.1 62.6 2.5 7.2 Kuwait 8.6 4.9 ­65.2 ­108.3 ­81.3 Oman 2.5 8.3 24.3 32.2 3.9 Qatar 9.1 9.8 0.3 ­30.3 ­15.8 Saudi Arabia ­0.5 4.9 28.6 14.2 8.5 United Arab Emirates ­1.7 13.5 4.3 13.4 6.3 Oil exporters with large populations 0.9 2.7 4.4 3.6 2.7 Algeria 3.0 5.5 6.8 4.3 3.2 Iran, Islamic Republic of 0.2 1.0 0.6 1.1 0.5 Iraq -- -- -- -- -- Libya 0.0 0.0 0.0 0.0 0.0 Syrian Arab Republic 4.1 4.8 10.2 8.1 7.2 Yemen ­10.8 1.6 18.8 12.2 10.7 Diversified exporters with strong GCC links 17.6 19.1 34.0 18.8 29.6 Djibouti 6.8 13.2 47.6 61.5 60.0 Jordan 4.1 8.2 23.4 11.4 8.8 Lebanon 32.9 41.6 85.9 45.8 117.1 Diversified exporters integrated with Europe 4.9 7.6 28.2 23.5 16.7 Egypt 6.5 6.9 31.3 25.8 17.8 Morocco 0.3 6.3 16.3 20.9 13.8 Tunisia 8.1 11.7 44.2 18.3 16.5 Note: Oil-exporting countries (excl. Iraq) 2.1 5.2 10.5 5.1 3.5 Oil-importing countries (excl. WBG) 9.5 12.5 28.2 19.6 20.9 Source: IMF, UNCTAD, National agencies and World Bank staff estimates. 111 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Table A25: Foreign direct investment as a share of GDP (%), 1996­2010 1996­1999 2000­2006 Estimate Forecast Country average average 2007 2008 2009 2010 MENA region (incl. Iraq) 0.7 1.6 1.7 1.4 1.4 1.3 MENA (excl. Iraq) 0.7 1.6 1.8 1.4 1.4 1.3 GCC countries 0.5 1.4 0.2 ­0.1 0.3 ­0.2 Bahrain 9.3 2.5 0.8 2.5 0.9 2.0 Kuwait 2.0 ­0.4 ­12.8 ­7.1 ­7.6 ­7.9 Oman 0.4 1.9 5.9 0.6 0.6 0.7 Qatar 2.7 2.0 ­6.3 ­2.7 ­0.4 ­1.1 Saudi Arabia 0.0 1.4 2.9 1.5 1.3 1.5 United Arab Emirates ­0.2 2.6 3.7 1.3 0.9 0.0 Oil exporters with large populations 0.1 0.6 0.8 0.7 0.9 0.8 Algeria 0.7 1.3 1.2 1.1 1.1 1.1 Iran, Islamic Republic of 0.0 0.2 0.3 0.2 0.3 0.3 Iraq 0.0 0.6 0.8 0.8 0.7 0.7 Libya 0.0 0.0 0.0 0.0 0.0 0.0 Syrian Arab Republic 0.9 1.1 1.9 1.8 2.0 1.9 Yemen ­3.2 1.1 4.8 4.0 3.8 3.4 Diversified exporters with strong GCC links 9.1 8.5 9.2 16.8 7.1 7.2 Djibouti 0.7 3.9 23.4 22.8 21.1 20.0 Jordan 2.8 8.8 11.7 11.0 7.7 7.0 Lebanon 10.1 8.4 7.2 19.9 6.2 7.0 Diversified exporters integrated with Europe 0.9 2.7 7.4 5.9 5.5 5.1 Egypt 1.1 2.8 8.8 7.3 6.5 6.0 Morocco 0.1 2.1 6.1 4.1 3.8 3.7 Tunisia 2.0 4.0 4.6 4.3 4.4 4.1 Note: Oil-exporting countries (excl. Iraq) 0.5 1.2 1.2 0.8 1.1 0.9 Oil-importing countries (excl. WBG) 3.1 4.4 6.6 7.6 4.9 4.9 Source: IMF, UNCTAD, National agencies and World Bank staff estimates. 112 Statistical Annex Table A26: International reserves in billions U.S. dollars, 1996­2010 1996­1999 2000­2006 Estimate Forecast Country average average 2007 2008 2009 2010 MENA region (incl. Iraq) 89.5 226.0 514.7 543.0 573.3 592.8 MENA (excl. Iraq) 89.5 220.1 486.3 513.4 542.3 560.4 GCC countries 33.1 58.8 146.5 104.6 107.3 111.4 Bahrain 1.3 1.9 3.4 3.5 3.6 3.8 Kuwait 4.1 9.2 16.8 17.2 17.8 18.5 Oman 2.2 3.5 5.3 11.6 11.9 12.3 Qatar 1.0 2.9 9.8 10.0 11.1 11.6 Saudi Arabia 15.3 23.4 34.0 30.6 29.8 31.0 United Arab Emirates 9.2 17.9 77.2 31.7 33.0 34.3 Oil exporters with large populations 23.6 115.5 275.8 335.8 357.3 368.0 Algeria 6.2 37.9 110.6 143.5 149.3 155.2 Iran, Islamic Republic of 8.8 27.6 52.0 57.4 58.4 62.5 Iraq 0.0 5.8 28.4 29.7 31.0 32.4 Libya 6.9 23.5 59.5 79.9 92.4 90.6 Syrian Arab Republic 0.4 15.6 17.5 17.1 17.7 18.4 Yemen 1.2 5.0 7.7 8.1 8.5 8.9 Diversified exporters with strong GCC links 11.4 18.4 28.6 37.2 39.9 41.1 Djibouti 0.1 0.1 0.1 0.1 0.1 0.1 Jordan 2.0 4.9 7.9 8.8 9.1 9.4 Lebanon 9.3 13.5 20.5 28.3 30.7 31.5 Diversified exporters integrated with Europe 21.4 33.2 63.9 65.4 68.8 72.3 Egypt 14.7 16.6 31.4 33.8 35.5 37.2 Morocco 4.7 13.1 24.6 22.7 24.0 25.3 Tunisia 2.0 3.5 7.9 8.9 9.3 9.9 Note: Oil-exporting countries (excl. Iraq) 71.4 185.1 425.2 444.6 469.1 484.2 Oil-importing countries (excl. WBG) 18.1 35.0 61.1 68.8 73.2 76.2 Source: IMF, National agencies and World Bank staff estimates. 113 2009 Economic Developments and Prospects ­ Navigating through the Global Recession Table A27: Reserves, months of import cover, 1996­2010 1996­1999 2000­2006 Estimate Forecast Country average average 2007 2008 2009 2010 MENA region (incl. Iraq) -- --. 12.1 9.0 9.9 9.9 MENA (excl. Iraq) 7.3 10.9 11.9 8.9 9.8 9.7 GCC countries 5.4 6.1 6.7 3.4 3.4 3.5 Bahrain 4.5 3.9 3.3 3.0 4.3 4.1 Kuwait 6.5 11.4 10.9 9.8 10.9 10.2 Oman 5.8 6.2 4.7 7.2 7.3 7.1 Qatar 3.0 5.6 5.9 4.0 3.4 5.9 Saudi Arabia 7.0 7.4 4.9 3.4 3.3 3.3 United Arab Emirates 3.9 4.3 7.9 2.2 2.2 2.2 Oil exporters with large populations 8.5 18.5 24.0 21.9 24.9 23.9 Algeria 9.8 28.2 46.7 43.6 45.7 43.0 Iran, Islamic Republic of 7.4 10.5 11.7 10.5 11.7 11.6 Iraq -- 0.0 16.7 12.1 13.3 13.4 Libya 16.3 34.6 40.3 38.1 46.9 43.8 Syrian Arab Republic 5.9 0.0 19.1 13.8 16.1 0.0 Yemen 6.3 16.4 13.0 10.9 12.1 11.1 Diversified exporters with strong GCC links 14.7 16.1 14.2 13.5 17.5 17.0 Djibouti 4.6 4.3 4.0 3.8 3.6 3.5 Jordan 6.9 9.6 7.9 6.4 8.0 7.8 Lebanon 19.8 22.4 21.0 21.0 27.6 27.0 Diversified exporters integrated with Europe 8.2 9.1 9.0 5.8 6.9 6.8 Egypt 12.4 11.2 9.8 5.8 7.0 6.8 Morocco 6.0 10.6 10.1 6.6 8.0 7.9 Tunisia 3.1 3.7 5.2 4.4 5.1 5.2 Note: Oil-exporting countries (excl. 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