WORLD BANK MIDDLE EAST AND NORTH AFRICA REGION MENA ECONOMIC MONITOR Refugee Crisis in MENA Meeting the Development Challenge October 2017 WORLD BANK GROUP WORLD BANK MIDDLE EAST AND NORTH AFRICA REGION MENA ECONOMIC MONITOR Refugee Crisis in MENA Meeting the Development Challenge World Bank Group Washington, DC © 2017 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 20 19 18 17 This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; e-mail: pubrights@worldbank.org. ISBN (electronic): 978-1-4648-1214-9 DOI: 10.1596/978-1-4648-1214-9 Cover photo: © UNHCR/Shawn Baldwin. Contents Acknowledgments v Abbreviations vii Recent Economic Developments and Prospects 1 Global Outlook 1 Developments in the Oil Market 2 Recent Economic Developments and Outlook for MENA 3 Economics of MENA: A Longer Term View 7 Refugee Crisis in MENA: Meeting the Development Challenge 9 Introduction 9 Why Is the Welfare of Refugees a Development Challenge? 11 Welfare of Refugees as a Global Public Good 11 Supporting Livelihoods for Refugees 12 What Are the Development Challenges and How Should They Be Tackled? 13 Four Interlinked Crises and Four Sets of Policy Responses 13 1. Education 13 2. Health 17 3. Jobs 21 4. Livelihoods 24 How Can the Development Community Do Better? 26 Interventions and Assistance 26 Resources 26 Burden-Sharing 28 Data and Monitoring 31 References 35 Country Notes 42 Boxes Box 2.1 Resettlement of Refugees in Third Countries 30 Box 2.2 Global Concessional Financing Facility (GCFF) 31 Figures Figure 1.1 Global Outlook 1 Figure 1.2 Developments in the Oil Market, 2013Q1–2017Q1 2 Figure 1.3 Macroeconomic Status of MENA 4 Figure 2.1 Distribution of Refugees across the 251 Most Vulnerable Localities in Lebanon 15 Figure 2.2 Enrollment Trends in Public Schools in Lebanon, 2011–17 16 Figure 2.3 Gross Official Development Assistance, 2013–15 27 Figure 2.4 Syrian Humanitarian Response, 2012–17 28 Tables Table 1.1 MENA’S Macroeconomic Outlook, 2014–19 5 Table 2.1 Status of Registered Syrian Refugees 19 Acknowledgments The MENA Economic Monitor is a product of the Chief Economist’s Office of the Middle East and North Africa Region of the World Bank. The report was prepared by a team led by Lili Mottaghi, and including, Afrah Alawi Al-Ahmadi, Nabila Assaf, Philippe Auffret, Caroline Bahnson, Safaa El Tayeb El-Kogali, Angela Elzir, Kent Garber, Yashodhan Ghorpade, Jan von der Goltz, Himanshi Jain, Omer Karasapan, Hideki Matsunaga, Aakanksha Pande, David Robalino, Friederike Uta Rother, Meriem Ait Ali Slimane, Sami Sofan, and Mohamed Yassine. The report was prepared under the overall guidance of Shanta Devarajan and Samia Msadek. We are grateful to Elena Ianchovichina, Omer Karasapan, Youssouf Kiendrebeogo, Hideki Matsunaga, Sajjad Ali Shah Sayed, and Christina Wood for providing comments on the earlier version of the report. Isabelle Chaal-Dabi and Eva Davoine provided excellent administrative and data support. Alicia Hetzner edited the report. The country notes are based on reports by the following Country Economists, led by Kevin Carey: Sara B. Alnashar, Luca Bandiera, Ibrahim Chowdhury, Khalid El Massnaoui, Nur Nasser Eddin, Wilfried Engelke, Wissam Harake, Sahar Hussain, Kamer Karakurum-Ozdemir, Majid Kazemi, Tehmina Khan, Christos Kostopoulos, Julie Lohi, Emmanuel Pinto Moreira, Harun Onder, Abdoulaye Sy, Fulbert Tchana Tchana, and Hoda Youssef. v Abbreviations ALMP active labor market program ALP Accelerated Learning Program CCT conditional cash transfer CDC United States Centers for Disease Control CFF Concessional Financing Facility CIREFCA International Conference on Assistance to Refugees in Central America CRRF Comprehensive Refugee Response Framework DAC Development Assistance Committee DAR Development Assistance for Refugees DLI Development through Local Integration ECD early childhood development ECE early childhood education EU European Union FAO Food and Agriculture Organization of the United Nations 4Rs Repatriation, Reintegration, Rehabilitation, and Reconstruction FD financial development FDI foreign direct investment GCC Gulf Cooperation Council GCFF Global Concessional Financing Facility GDP gross domestic product ICARA International Conference on Assistance to Refugees in Africa IDA International Development Association (World Bank group) IDP internally displaced person IEA International Energy Agency IFI international financial institution ILO International Labour Organization IMF International Monetary Fund ISIS Islamic State in Iraq and Syria (Daesh) KRI Kurdish Region of Iraq mbd million barrels per day MDG Millennium Development Goal MEHE Ministry of Education and Higher Education (Lebanon) MENA Middle East and North Africa Region (WBG) MILES Macroeconomic policy, investment climate, labor regulations, education, and social protection policies MOL Ministry of Labor vii NGO nongovernmental organization ODA Official development assistance (OECD/DAC) ODI Overseas Development Institute OECD Organization for Economic Co-operation and Development OOSC out-of-school children OPEC Organization of Petroleum Exporting Countries Oxfam Oxford Committee for Famine Relief PSSA Psychosocial Structured Activities REACH Consortium comprises IMPACT, ACTED, and UNOSAT RRP Refugee Response Plan (UNHCR) SME small and medium size enterprise SOE state-owned enterprise UAE United Arab Emirates UN United Nations UNDP United Nations Development Programme UNHCR Office of the United Nations High Commissioner for Refugees UNICEF United Nations Children's Fund UNRWA United Nations Relief and Works Agency for Palestine Refugees in the Near East USAID United States Agency for International Development VAT value-added tax WBG West Bank Group WDI World Development Indicators (World Bank) WDR World Development Report (WBG) WFP World Food Programme WHO World Health Organization viii Recent Economic Developments and Prospects Global Outlook The recovery in global activity anticipated in the April MENA Economic Monitor is on track. The global economy is projected to grow by 2.9 percent over the next two years, up from 2.4 percent in 2016 (Figure 1.1). The uptick in global growth reflects strong domestic demand, improved industrial production, and increased exports in almost all countries (Figure 1.1, right panel). The recovery is led by a pickup in growth in advanced economies including the United States, the Euro Area, and Japan. Growth in East Asia and Pacific, Eastern Europe and Central Asia remains robust. Economic activity in commodity-exporting developing countries is accelerating, contributing to the global recovery. After years of slow growth, economic activity in oil exporters is starting to improve because the oil market has reached some stability, although at low prices. Russia, Nigeria and Brazil are expected to emerge from recession and growth could turn positive in 2017 and beyond. In oil- importing countries, economic activity points to solid momentum. In low income countries growth is expected to rebound in 2017 by 1 percentage point, projected at 5.4 percent, compared to the last year. The rebound is due primarily to rising metals prices, which raised production in metals exporters, and infrastructure investment in others. Figure 1.1 Global Outlook Global Growth Outlook (%) Industrial Production, seasonally adjusted 2008M01=100 8 125 6 115 4 105 2 95 0 -2 China Russia 85 Eurozone United States 2008M01 2016M10 2008M08 2009M03 2009M10 2010M05 2010M12 2011M07 2012M02 2012M09 2013M04 2013M11 2014M06 2015M01 2015M08 2016M03 2017M05 Global -4 2015 2016 2017 2018 2019 Source: World Bank and Haver data. MENA Economic Monitor October 2017 1 Risks to the outlook still tilt to the downside. Increased policy uncertainty; an increase in volatility in commodity prices, especially in the oil market; and weaker growth potential over the long term could cloud the prospects for a growth rebound. While inflation remains low, as actual growth continues to exceed potential growth, increasing inflation and closing output gaps could lead to the prospects of less accommodative monetary policy, which could dampen global growth going forward. Over the long run, reforms to boost potential output are important. Developments in the Oil Market Oil prices have stayed within the $48 to $55 per barrel range since mid-2016 due to the ongoing market imbalances, mainly from the supply side (Figure 1.2). Rising U.S. shale oil production, reaching its highest level in two years, has offset some of the impacts of the production cuts among OPEC members and their allies. Moreover, the overall compliance with production cuts within OPEC is estimated at 75 percent. Among OPEC members, Libya, Angola, and Nigeria increased output by an estimated 350,000 barrels per day only in August. As a result, the inventory buildup peaked at approximately 4.6 million barrels of crude oil during the same period, higher than the 4 million barrels forecasted by the International Energy Agency (IEA). As predicted in the MENA Quarterly Economic Brief, the stagnation in oil prices is expected to continue into 2020 (Devarajan and Mottaghi 2016a). Figure 1.2 Developments in the Oil Market, 2013Q1–2017Q1 Global supply, demand and prices for oil 100 120 98 100 96 80 94 60 92 40 90 88 20 86 0 Demand (mb/d) Supply (mb/d) Crude oil, Brent ( nominal US $, RHS) Source: IEA data. Several factors will contribute to keep oil prices low for longer, including the oil production growth in the U.S.; the weakening impact of OPEC and non-OPEC cuts; and the rise of electric vehicles, specifically in China (Petroleum Monitor 2017). MENA Economic Monitor October 2017 2 Going forward, rebalancing in the oil market is expected to be delayed. Estimates by the International Energy Agency (IEA) show that the global demand for oil will continue to grow at a slower pace than the global supply, at least until the end of the decade. Non-OPEC output is expected to double to reach 1.4 million barrels per day (mbd) in 2018 from the previous year. Due to cost efficiency measures, an increasing number of oil projects world-wide could break even at $30 per barrel and lower. This lower price could significantly increase oil production beyond the U.S. (that is, in Canada and Brazil). These last two likely would add to the already high oil inventory and, in the absence of a pickup in demand, could hold oil prices down for longer. Uncertainty about compliance among some OPEC members including Iran, Iraq, Libya, and Nigeria is a challenge facing OPEC in battling the excess supply. There are speculations that the OPEC cut of approximately 1.2 million barrels a day will be extended until March 2018. It remains to be seen how the extended cut and the excess supply will affect the sentiment in the oil market. Recent Economic Developments and Outlook for MENA The pickup in economic activity in the Middle East and North Africa (MENA) region that started in mid-2016 is expected to moderate in 2017 due to slower growth in MENA’s oil exporters. Oil production cuts will weigh down growth in almost all countries in the subgroup. Growth prospects for the MENA region is projected to improve in 2018 and 2019 with growth exceeding 3 percent. Both MENA’s oil exporters and oil importers will benefit from a steady improvement in the global growth; increased trade with Europe and Asia; more stabilized commodity markets, especially oil; and reforms undertaken in some of the countries in the region (Figure 1.3). Nevertheless, MENA’s overall growth levels are half of what they were before the 2011 Arab Spring, making it difficult to address the youth unemployment problem and the needs of massive numbers of people who are displaced across the region as conflicts continue. Fiscal and current account balances are expected to improve over the projection period ending in 2019, resulting from both fiscal consolidation efforts and some stability in the commodity markets, including oil. Growth outlook in MENA’s oil exporters is expected to improve in 2018 and 19, as governments are slowly adapting to the “new normal” of low oil prices. To counter the impact of falling oil prices, most of the governments have adopted new revenue measures and spending cuts. These measures range from increases in corporate income tax in Bahrain and Oman, and introduction of value-added tax (VAT) in 2018 in all Gulf Cooperation Council (GCC) countries, to spending cuts that include reducing fuel, water, and electricity subsidies elsewhere in the region (Figure 1.3, bottom left panel). After a contraction in 2015, a growth recovery is projected for the group of developing oil exporters in the short term. Growth prospects in the subgroup is contingent on recovery in the oil sector while non oil sector activity is expected to remain subdued. Iran and Algeria showed a strong recovery in the oil sector in 2016 and early 2017. Economic growth in Libya is expected MENA Economic Monitor October 2017 3 to increase significantly in 2017 and continue through 2018 and 2019 due to the resumption of oil production. However, oil production still remains below potential due to violent conflict. The war on ISIS and low oil prices are expected to weigh on the Iraqi economy in 2017, but growth will accelerate in the following years. After a grinding three-year recession, growth is expected to rebound in Yemen in 2018 and 2019. Economic outlook in 2018 and beyond will depend on whether an end to the on-going conflict will allow for rebuilding the Yemeni’s economy. Figure 1.3 Macroeconomic Status of MENA Real GDP Growth (%) MENA 8 8 4 projections projections projections 6 0 4 -4 2 -8 -12 0 2016 2019 2014 2015 2017 2018 2019 2014 2015 2016 2017 2018 2016 2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019 2014 2015 2017 2018 2019 Fiscal balance as % of GDP Current account balance as % of MENA Developing MENA GCC GDP Fiscal Consolidation Measures Fiscal Space Sustainability* 0.9 20 Saudi Arabia Foreign reserves as % of GDP, 2016 (10 years) Algeria (7 15 years) % of non-oil GDP 0.6 10 Oman (8 Qatar (8 Iraq (8 years) 5 years) years) 0.3 UAE (76 years) 0 Yemen (7 years) Bahrain (11 -5 years) IRN UAE DZA BHR QAT SAU OMN IRQ KWT 0.0 Spendings Cuts 2015 Revenue Increases 2015 -20 -15 -10 -5 0 Spending Cuts 2016 Revenue Increases 2016 Fiscal balance as % of GDP, 2016 Source: World Bank and IMF. Note: *Total number of years to finance deficits through reserves. Growth in the GCC subregion is expected to remain low in 2017, at below 1 percent. Among the GCC countries, UAE is more diversified and has a large fiscal buffer that helps withstand sustained low oil prices. Qatar is feeling the brunt of political turmoil with neighboring countries, and its growth projections for 2017 are revised downward to 2 percent. MENA Economic Monitor October 2017 4 Table 1.1 MENA’s Macroeconomic Outlook, 2014–19 Real GDP Growth (%) Fiscal Balance (% of GDP) Current Account Balance (% of GDP) 2014 2015 2016e 2017f 2018f 2019f 2014 2015 2016e 2017f 2018f 2019f 2014 2015 2016e 2017f 2018f 2019f MENA 2.7 2.6 4.9 2.1 3.0 3.4 -2.4 -9.6 -10.6 -6.7 -4.8 -3.6 6.0 -3.9 -4.8 -1.4 -0.7 -0.4 Developing MENA 2.2 1.3 7.4 3.4 4.0 3.9 -7.2 -10.1 -10.3 -6.5 -5.2 -3.9 -3.0 -5.7 -6.1 -4.4 -3.7 -3.0 Oil Exporters 2.7 2.3 5.3 1.7 2.8 3.1 -0.9 -9.9 -10.9 -6.5 -4.5 -3.1 8.5 -3.5 -4.1 -0.1 0.5 0.8 GCC Countries 3.2 3.7 2.3 0.7 1.9 2.7 2.1 -9.1 -10.9 -6.8 -4.5 -3.3 14.4 -2.2 -3.5 1.2 1.9 1.9 Bahrain 4.4 2.9 3.0 2.4 2.0 1.6 -3.4 -12.8 -13.0 -7.8 -7.5 -6.8 4.6 -2.4 -4.8 -3.5 -3.1 1.1 Kuwait 0.5 0.6 3.6 -1.0 1.9 3.5 18.7 0.0 0.5 1.7 1.6 2.5 32.5 4.5 -4.5 0.1 1.8 2.8 Oman 2.5 5.7 2.8 0.1 3.4 2.9 -3.6 -16.5 -20.8 -13.5 -12.2 -11.4 5.2 -15.5 -17.4 -15.7 -11.1 -9.2 Qatar 4.0 4.0 2.2 2.0 1.7 3.0 12.6 1.4 -8.3 -5.7 -4.3 -2.7 23.9 8.4 -7.6 3.9 3.5 1.9 Saudi Arabia 3.7 4.1 1.7 0.3 1.2 2.1 -3.4 -15.8 -16.6 -10.0 -6.3 -4.9 9.8 -8.7 -3.9 1.7 2.4 2.3 UAE 3.1 3.8 3.0 1.4 3.1 3.3 1.9 -3.4 -4.3 -3.2 -1.9 -1.0 13.3 4.7 2.4 2.6 2.8 2.9 Developing Oil Exporters 1.9 0.0 9.7 3.3 4.1 3.7 -6.1 -11.1 -10.9 -6.1 -4.5 -2.9 -1.6 -5.6 -5.1 -2.4 -1.9 -1.1 Algeria 3.8 3.7 3.3 2.2 2.0 1.5 -8.0 -15.7 -13.7 -11.5 -7.3 -5.7 -4.4 -16.5 -15.6 -13.0 -10.8 -9.5 Iran, Islamic Rep. 4.6 -1.3 13.4 3.6 4.0 4.3 -1.1 -1.7 -2.2 -2.2 -2.3 -2.1 3.1 2.3 3.9 4.1 4.0 3.8 Iraq 0.7 4.8 11.0 -0.5 3.0 1.7 -5.3 -12.3 -14.1 -5.1 -4.8 -1.7 2.6 -6.5 -8.7 -6.3 -6.7 -4.1 Libya -24.0 -8.9 -2.8 25.6 16.4 10.4 -43.3 -76.9 -63.9 -22.0 -11.0 -5.0 -46.1 -31.9 -12.8 -8.3 -5.6 -4.4 Syrian Arab Rep. -17.0 -3.9 -1.5 … … … -17.7 -16.4 -9.0 … … … -14.9 -9.7 -27.9 … … …s Yemen, Rep -0.2 -28.1 -9.8 -2.0 8.5 13.5 -4.1 -10.6 -13.5 -9.9 -6.6 -2.5 -1.7 -5.5 -6.1 -2.3 -2.4 -2.1 Developing Oil Importers 2.7 3.7 3.0 3.7 3.7 4.2 -9.1 -8.8 -9.4 -7.4 -6.7 -5.6 -5.2 -5.8 -7.6 -8.3 -7.2 -6.6 Djibouti 6.0 6.5 6.5 7.1 7.0 7.0 -10.7 -20.7 -15.2 -3.8 -2.6 -1.4 -25.2 -30.4 -22.2 -15.4 -12.3 -10.2 Egypt, Arab Rep. 2.9 4.4 4.3 4.2 4.5 5.3 -12.0 -11.4 -12.5 -10.8 -8.8 -7.1 -0.9 -3.7 -6.0 -6.6 -4.6 -3.9 Jordan 3.1 2.4 2.0 2.3 2.4 2.5 -9.3 -3.6 -3.2 -3.3 -1.6 -0.5 -7.3 -9.1 -9.3 -8.7 -8.6 -8.5 Lebanon 2.0 0.8 2.0 2.0 2.5 2.0 -6.3 -7.8 -9.6 -9.2 -9.6 -9.8 -24.2 -16.1 -19.8 -17.9 -19.4 -19.5 Morocco 2.7 4.5 1.2 4.1 3.1 3.2 -4.7 -4.2 -4.0 -3.5 -3.5 -3.0 -5.7 -3.1 -4.3 -5.2 -5.3 -5.1 Tunisia 2.3 1.1 1.0 2.3 3.0 3.5 -5.0 -5.6 -6.1 -6.2 -5.9 -4.4 -9.1 -8.9 -8.4 -8.8 -8.5 -7.9 West Bank and Gaza -0.2 3.4 4.1 3.0 3.0 2.9 -2.8 -5.1 -2.4 -3.8 -3.3 -3.2 -7.4 -16.3 -10.4 -13.1 -13.2 -13.4 Source: World Bank data. Note: e = estimate, and f=forecast. Data for Egypt correspond to fiscal year (July-June). Due to lack of data for Syria, regional and subregional averages may not be comparable over time. MENA Economic Monitor October 2017 5 A settlement of the Qatari standoff would limit the damage on its economy. Growth outlook is projected to improve over the projection period ending in 2019, ranging from 3.5 percent in Kuwait to 2.1 percent in Saudi Arabia in 2019. The overall growth in GCC countries for 2019 is projected at 2.7 percent, below the levels seen prior to the 2014 oil price shock. The average growth rate prior to 2011 for the GCC countries was around 4.5 percent. In Saudi Arabia, low oil prices, coupled with reduced oil output resulting from the OPEC oil production cuts, are keeping investment subdued and harming private consumption. Although the fiscal grip was relaxed to some extent this year, the overall stance remains tight, with public employees’ salaries still frozen and several infrastructure projects postponed. Financial challenges have exhausted Saudi Arabia’s foreign reserves, which hit a 6-year low in July 2017 (Figure 1.3, bottom right panel). Lower-than-expected oil prices, limited crude production, and widespread geopolitical risks will lead the economy to slow down this year. The World Bank expects Saudi growth to fall to 0.3 percent in 2017, before rising to 2 percent in 2019, which is down 1.4 percentage points from last year. Challenges remain, particularly in debt issuance volumes across GCC counties. Moody estimates the debt-to-GDP ratio across the GCC will rise from 10.5 percent in 2014 to 31.6 percent by 2018, adding another $154 billion in government debt in 2017 and 2018. Bahrain and Qatar likely will continue to rely solely on market funding whereas Kuwait, Oman, Saudi Arabia, and UAE will issue debt and make use of government reserves. Bahrain and Saudi Arabia will record the largest increase in debt between 2016 and 2018, with the government-debt-to-GDP ratio rising by around 14 percentage points. For Kuwait and Oman, Moody expects lower debt increases of 8 to 9 percentage points of GDP. On the other hand, the debt burdens of Qatar and UAE, having pre- financed part of their 2017 deficits, are expected to stabilize in 2017 and decline in 2018. Among oil importers, Egypt’s economy is projected to perform better going forward with growth expected to accelerate to 5.3 percent in 2019. This growth is due mostly to liberalization in the exchange rate market and recovery in merchandise exports and tourism. Of the remaining economies in the subregion, Morocco likely will grow faster in 2017 than in 2016 due to a strong rebound in the agricultural output. However, the rebound is unlikely to sustain because the economy is prone to drought. The protracted Syrian conflict remains an impediment to the return to potential growth in Lebanon and Jordan. For the fifth year, Lebanon remains the largest host (on a per capita basis) for displaced Syrians. This influx has significantly strained already weak public finances. The short-term prospects of improvement in MENA’s economic activity are contingent on many factors. First, rising global risks aversion and geopolitical uncertainty arising from protracted conflicts in Iraq, Libya, Syria, and Yemen can impact the overall performance of both oil exporters and oil importers. Second, the region is dealing with massive numbers of refugees and internally MENA Economic Monitor October 2017 6 displaced persons (IDPs). This influx brings development challenges and impacts the economic performance not only of the countries of origin but also of the neighboring host countries. Economics of MENA: A Longer Term View Economic performance in the MENA region has stayed below potential for at least 40 years. There were periods of sharp growth followed by sharp falls, but growth was never sustained. Historical data show that most of the output growth in the region occurred during boom years and because of increases in oil production: the region grows by oil and slows by oil. Approximately two-thirds of the countries in the region are oil exporters and, over the past five decades, have benefitted immensely from several episodes of oil price shocks. The positive spillovers of the boom years also have benefitted oil importers who are recipients of foreign direct investment (FDI), remittances, and tourism. Nevertheless, the volatile pattern of long-term growth in the region reveals that MENA countries initiate growth but fail to sustain. This pattern is clearly seen in the high volatility of growth across the region (Devarajan and Mottaghi 2016b). Among countries, volatility of real GDP growth in oil exporters has been twice that of the oil- importing economies. A major consequence of the volatile growth is the region’s high youth unemployment rate of 30 percent: the highest rate in the developing world. The rate for females is even higher, standing at around 50 percent in some MENA countries. To address these long-standing challenges, in the short run, MENA countries need to grow faster to enable them to create more jobs for the youth bulge. However, in the long run, it is necessary to for these countries to increase their potential output. To boost the growth potential in MENA countries, the right mix of policies is needed. Although policies may differ by country, the need for reforms is urgent, particularly to diversify away from oil in oil exporters, thus strengthening the business climate to unleash the potential of the private sector (Devarajan and Mottaghi 2017). Reforming the business climate and making it more competitive through enforcing competition policies and reducing the power of monopolies is very important. Rationalizing fiscal policies by replacing untargeted and wasteful energy subsidies with targeted cash transfers is equally important. A related challenge holding back growth is the low female labor force participation rate. In this vein, promoting the formal private sector is important. Equally important is the need to reform the education system and skills training programs. These programs can improve the education system by making teachers more accountable to students and their parents; and by better adapting the curriculum to the modern world. Even in the short run, such reforms could start producing positive effects on the macroeconomic indicators, particularly on employment and output, thereby increasing potential output in the long run. Conversely, crises and conflicts could permanently reduce the supply side capacity (losses in output and employment) that could weigh on the potential output over the medium and long MENA Economic Monitor October 2017 7 terms. Studies show that there is a strong likelihood of a large negative impact of prolonged crisis on potential output in the short run, followed by a prolonged period of slow growth as economies adjust to their post-crisis growth paths. A "permanent level loss" in potential output means that the economy eventually would return to its pre-crisis potential growth rate but would fail to recoup all of the lost output. The total effect depends on an assessment of the various channels through which the crisis could impact labor market developments, investment, and productivity. MENA is among the most conflicts affected regions in the world and the Syrian refugee crisis is among the worst such crisis since World War II. The protracted stay of refugees in hosting communities, now in its sixth year, not only has increased the risk to MENA’s economic outlook but also has brought refugees’ long-term development challenges to the forefront. Meeting these enormous challenges requires collective efforts, which are the subject of the next chapter. MENA Economic Monitor October 2017 8 Refugee Crisis in MENA Meeting the Development Challenge Introduction The current refugee crisis in the Middle East and North Africa (MENA) stands out for many reasons. First, Syrians account for the bulk of the refugees and displaced people regionwide, followed by Iraq, Libya, and Yemen, in which conflicts are ongoing. Second, the Syrian conflict has seen exponential growth of refugees during 2012 to 2016. In July 2012, 100,000 Syrians were registered refugees. This number increased 15-fold in 1 year, and that new number quadrupled by the end of 2016 to reach 5.4 million. There are estimates that the number of unregistered refugees in MENA could be as many as those registered.1 Third, and most important, more than 75 percent of the refugees hosted in MENA are concentrated in only 2 countries: Lebanon and Jordan.2 In 2016, Lebanon ranked among the top 10 hosting countries worldwide in per capita numbers (UNHCR 2017). The remaining top hosting countries were in Africa. The massive scale of the inflows of refugees has brought increasing social and economic burdens to hosting communities, exacerbating their pre-existing development challenges while leaving refugees with uncertain futures. In the past, refugees’ welfare was viewed primarily as a humanitarian, rather than a development, issue on the assumption that once the conflict stabilized and emergency needs were met, longer term solutions would be addressed after returnees reached their homelands. However, the protracted refugee crisis3 in MENA has brought development challenges to the forefront. Specifically, refugees face four interlinked 1 This may result from differences between country’s official statistics and the UNHCR statistics due to the fact that "the UNHCR calculates the number of those registered with it as refugees, while Jordan, for example, classifies a refugee as any person who enters its territory from the nationalities that cannot return to their countries for any reasons. 2 Civil war in Syria has displaced 50 percent of the population, 33 percent of them outside the country. The conflict in Yemen has touched every aspect of Yemenis’ lives. Violence in Libya has displaced 10 percent of its 6 million people internally, and approximately 125,000 externally, particularly to Europe because of its proximity. The 2011 Arab uprising caused some movements between and within other states, but for short periods. For example, before the Arab uprising, approximately 2 million Libyans had left their countries, most moving to Chad, Egypt, Italy, and Tunisia. While official data are not available, after the fall of Gaddafi, many Libyan refugees were encouraged to repatriate. 3 Defined by the United Nations High Commissioner for Refugees (UNHCR) refugees can be regarded as being in a protracted situation when they have lived in exile for more than five years, and when they still have no immediate prospect of finding a durable solution to their plight by means of voluntary repatriation, local integration, or resettlement. MENA Economic Monitor October 2017 9 crises: limited or no access to, and poor quality of, education, health care, jobs, and livelihoods. If not addressed, these four interlinked crises continue to fuel long-term problems.4 Targeting these challenges not only helps hosting communities deal with their development challenges but also prepare refugees for the time that they can return to their homelands. This chapter provides a perspective on the long-term development challenges faced by refugees in MENA which are (1) basic health services, (2) education needs, (3) jobs and accommodation of refugees in local labor markets, and (4) civil, social, and economic rights including freedom of movement. The chapter further lays out specific development policy responses to tackle these challenges. Specifically, we address three fundamental questions: 1. Why is the welfare of refugee a development challenge? 2. What are the development challenges and how should they be tackled? 3. How can the development community do better? While the details will be country specific, this chapter suggests enhancing an early transition from humanitarian aid to development assistance. For example, at the time of crisis, Sierra Leone received more support in the form of development aid than did Liberia, giving Sierra Leone more predictable support for education. The transition cannot happen without reliable statistics, which are lacking globally, particularly in some hosting countries. There is an urgent need for more data and an integrated monitoring system, for both registered and unregistered refugees.5 In this vein, creating specific development indicators for refugees and their children and integrating these indicators in the global development indicators could help immensely to monitor refugees’ welfare. At the country level, an improved data system is even more important. It would improve understanding of the micro-implications of the refugee crisis, especially poverty measurement. Equally important is the need for refugee-specific policies focusing on empowering women refugees, increasing mobility, and developing their skills. The longer refugees are unemployed, their chances of finding a job diminishes because they become deskilled and they find themselves dependent on the country’s resources. 4 There is evidence that malnutrition contributes to a longer-term development problem, especially in education. The effect on refugees’ children is larger because they have experienced violence and trauma and interrupted education. These experiences damage children’s cognitive functioning, thus affecting their educational performance throughout adolescence and into adulthood. Studies have shown that the cognitive damage to children from receiving no education lowers their school performance and cuts their future earnings by an average of 22 percent. 5 For example, the Jordanian government estimates that the total Syrian population in Jordan is close to 1.3 million, compared to the approximately 680,000 Syrians in Jordan who have been registered by the UNHCR. MENA Economic Monitor October 2017 10 Why Is the Welfare of Refugees a Development Challenge? Welfare of Refugees as a Global Public Good The 1951 Convention Relating to the Status of Refugees, itself based on the 1948 Universal Declaration of Human Rights, requires any signatory country to protect refugees who are on their territory. Initially designed to accommodate European refugees after World War II, the Convention has been reinterpreted in light of the dramatically different patterns of refugee movements since 1951. Large numbers of refugees have arrived in relatively small and economically vulnerable countries (including Lebanon and Jordan) only because of their proximity to the conflict countries of Somalia and Syria. Drawing on the preamble to the 1951 Convention, which emphasizes international cooperation, scholars have identified two obligations with respect to refugees: (1) asylum, which is the responsibility of the state that hosts the refugee; and (2) burden-sharing, which reflects the obligation of other states toward those countries in which refugees have settled (Betts 2015). The burden-sharing obligation is a clear statement that the welfare of refugees has all the characteristics of a global public good. It is both non-rival and non-excludable: If one country contributes to a refugee’s welfare, it does not diminish another country’s satisfaction in seeing that refugee better off. However, precisely for this reason, as with all public goods, there is the problem of “free-riding.” Since the benefit to the refugee (and hence to everyone else) is a function of the sum of every one’s contribution, but the cost is borne by the individual country, there is an incentive for each country to cut its contribution and let others pay. If every country does this, there is no benefit to the refugee and hence no public good. This is the reason that the international community has tried to develop cooperative agreements to ensure collectively they contribute towards the common goal. These cooperative agreements have incorporated other insights from the economics of global public goods. First, since smaller states always will have an incentive to free-ride on larger states (Olson and Zeckhauser 1966), the agreements have concentrated on the larger, richer countries. For instance, the two largest contributors to the U.N. High Commission for Refugees (UNHCR) are the United States and the European Union. Second, the welfare of refugees is not a pure public good because it combines two types of goods: (1) a purely altruistic good, whereby the donor feels a moral obligation to help the refugee; and (2) a “security public good” (Betts 2003), whereby the donor is concerned that the presence of refugees may be a security threat, either in the host country or even in the donor’s country. The latter comes closer to a private good (in that it is excludable). Inasmuch as these two goods are jointly produced (Betts 2003), it is possible that the presence of the security good leads to less free-riding in the financing of refugees. MENA Economic Monitor October 2017 11 Supporting Livelihoods for Refugees The impact of refugees on communities and countries will vary depending on the initial conditions in the labor market, access to resources, demographics, the national and local labor laws, and the policy responses of hosting governments. Globally, most refugees are concentrated in some of the poorest, most fragile countries. The refugees’ demands on these countries’ strained economies, inadequate public services and infrastructure, and scarce jobs further distort their markets, and often dramatically affect local populations. If not met with increased supply, refugees’ increased demands for food and services often increase inflationary pressures that adversely affect the livelihoods of the poor. Studies have shown that the inflow of refugees to a nearby country adversely affects the income per capita growth of the latter. Murdoch and Sandler (2004) argue that the negative spillovers of conflict are anticipated to be greater in countries close to many civil wars. Easterly and Levine (1998) show that, due to regional economic integration and regional multiplier effects, the spillovers will push beyond close neighbors. The spillovers can cause negative economic consequences through reduced trade, low investment, and increased capital flights. Borjas and Monras (2016) find that refugee supply shocks can adversely affect local, low-skilled workers, but this supply also can provide a positive complementary effect. Refugees take on low- skilled jobs that native workers spurn, enabling locals to find better paying jobs. Foged and Peri (2015) find positive effects on employment and wages of native workers with similar skills. The influx of refugees prompted less educated native workers to change occupations. The less educated native workers experienced either positive or insignificant wage and employment effects, which persisted in the long run. Quantitatively, a 1 percentage point increase in the share of low-skilled native workers, including refugees, increased wages for low-skilled native workers by 1.0 percent to 1.8 percent. Due to the lack of data and an effective monitoring system (see section on Data and Monitoring), the net economic effect of refugee influx on the local economies is still a source of controversy. Given the protracted nature of conflicts worldwide, particularly in MENA, and the fact that refugees are unable to return to their countries of origin in the foreseeable future due to conflict, the international community and policy-makers need to focus on refugees’ development challenges.6 These include facilitating the participation of refugees in the labor market by 6 The idea of providing targeted development assistance to support durable solutions for refugees is not new. According to the WDR 2011, UNHCR had promoted the concept of “Refugee Aid and Development,” which was applied in both the International Conference on Assistance to Refugees in Africa (ICARA) in 1981 and 1984; and the International Conference on Assistance to Refugees in Central America (CIREFCA) in 1989. In 1999 the issue again was taken up through the “Brookings process,” which set out to define a new way to address relief to the development transition of forced displacement. In 2003 the approach was revived as part of the Framework for MENA Economic Monitor October 2017 12 investing in skills through strengthening childhood7 and adult education and vocational training. Refugees’ chances of finding jobs diminish the longer they are unemployed in their hosting countries because they become deskilled. The economics literature has found strong links between education and human capital, and between human capital and long-term growth and productivity (Griliches 1996). These links could justify the international community’s and policy- makers’ extending quality education and job skills training t o registered and unregistered children and adult refugees, regardless of gender or nationality. What Are the Development Challenges and How Should They Be Tackled? Four Interlinked Crises and Four Sets of Policy Responses I. Education Two MENA countries host the largest number of refugees per capita: Lebanon and Jordan with ratios of refugees-to-host-population in the former exceeding 1:4. Most of these refugees are children under the age of 18. In Jordan, approximately 51 percent of Syrian refugees are children; in Lebanon, the percentage goes up to 55 percent.8 The cost of not educating refugee children is high in loss of human capital for regional economic development; and for the long-term processes of peace, stability, and reconstruction. Because these refugee children need education services, significant strains are put on the education sector of the hosting countries. These countries are forced to expand service provision to refugees while maintaining education quality for both the hosting and refugee communities. Thus, the education systems of hosting countries will need to be strengthened because these systems will be catering to a larger number of students, many of whom require additional academic and psychosocial support due to forced displacement. Financing for the sector also will need to be increased. When enrolling in schools in hosting countries, refugee children face a pedagogic and psychosocial challenges. On the pedagogic side, when the language of instruction is different from the native languages of the refugees or the languages of instruction in their home countries, the language of the hosting country can impede the academic success of refugee students. Syrian Durable Solutions for Refugees and Persons of Concern. The framework comprised the three tools of (a) Development Assistance for Refugees (DAR); (b) the 4Rs of Repatriation, Reintegration, Rehabilitation, and Reconstruction; and (c) Development through Local Integration (DLI). UNHCR’s DAR initiative was driven by the necessity to address the long-term economic and social impacts of displacement on hosting communities. The 4Rs initiative was based on the understanding that, in post-conflict situations, the development needs of refugees and returnees have not been incorporated systematically in transition and recovery plans by the hosting governments, the donor community, and the UN. 7 Fifty percent of the world’s registered refugees are under age 18. 8 UNHCR, July 2017, http://data.unhcr.org/syrianrefugees/regional.php. MENA Economic Monitor October 2017 13 refugees in Turkey and the Kurdish Region of Iraq (KRI) as well as Ethiopian and Somali refugees who migrated to Yemen all face this challenge. Even in an Arabic-speaking country such as Lebanon, schools use French or English as a language of instruction for mathematics and science classes. Many Syrian refugees face serious challenges in understanding subjects taught in these languages (UNHCR 2015). In many cases, the Lebanese Ministry of Education and Higher Education (MEHE) instructed teachers to use Arabic for instruction in second-shift classrooms. This remedy cannot be fully effective so long as the national textbooks used for instruction remain in a language foreign to the refugee students (Shuayb and others 2014). On the socioemotional side, schools are settings in which children affected by displacement manifest symptoms of trauma and shock. However, schools also can provide the psychosocial support that children need. Indeed, evidence shows that school-based psychosocial programs improved children’s well-being in Bosnia (Layne and others 2008), Uganda (Ager and others 2011), and the United States (Han and Weiss 2005). Teacher-led interventions also have been effective in a variety of contexts in Croatia, Kosovo, Lebanon, and Turkey. For hosting countries that integrate refugee children in their formal education systems, overcrowding is a common challenge. Overcrowding can impede students’ learning, particularly when teachers have not been trained to manage large classrooms. Overcrowding is exacerbated by the fact that refugees often migrate to some of the most vulnerable localities, which have pre- existing challenges in delivering education services. As an example, in Lebanon, more than 50 percent of Syrian refugees live in the 50 most vulnerable localities. Furthermore, the 251 most vulnerable localities in Lebanon host 87 percent of the country’s Syrian refugees as well as 67 percent of the extremely poor Lebanese (Figure 2.1).9 This population distribution greatly exacerbates the difficulty of providing quality education services to both refugees and vulnerable hosting communities. A development response An effective strategy to expand access to education services to refugees should address both the demand-side barriers and the supply-side constraints to education. Different countries in different contexts have employed various models to provide refugee education. The United Nations Relief and Works Agency for Palestine Refugees (UNRWA) operates the longest standing system for providing education services in MENA. This model is external to the hosting country’s education system and is funded by donors. Over more than 60 years, UNRWA has educated 4 million children in Jordan, Lebanon, Syria, and the West Bank and Gaza (Cahill 2010). Today, approximately 500,000 children are studying in 689 UNRWA schools. In Gaza, almost 90 percent of the school-age refugee population attends UNRWA schools. 9 UN Interagency data, March 2016. MENA Economic Monitor October 2017 14 Figure 2.1 Distribution of Refugees across 251 Most Vulnerable Localities in Lebanon Source: UN Interagency data, March 2016. Hosting countries could decide to provide nonformal education opportunities to help raise learning outcomes for refugee children. Nonformal education can facilitate the transition of school children into formal education. In Lebanon, the Ministry of Education and Higher Education (MEHE) is running an Accelerated Learning Program (ALP), which enables out-of-school children to cover in a short period the curricula of the grades that they have missed so that they can enroll in formal education at the most age-appropriate grades. MEHE also regulates a series of nonformal education programs delivered by NGOs for early childhood education and for basic literacy and numeracy.10 In Jordan, UNICEF is running nonformal education centers, which provide learning and psychosocial support to refugee children.11 In 2015–16, these centers 10 MEHE. Reaching All Children with Education 2 Final Narrative. http://www.mehe.gov.lb/uploads/file/2016/Oct/RACE percent20II_FINAL percent20Narrative_29AUG2016.pdf. 11 UNICEF. Guidance Note on “Makani.” https://www.unicef.org/jordan/Guidance_Note_on_Makani_DRAFTmarch_2015.pdf. MENA Economic Monitor October 2017 15 hosted 66,000 children (28 percent of Jordan’s school-age refugees), many of whom were enrolled simultaneously in the formal education system. Expanding formal education services to refugees has had different levels of success depending on the hosting country and the context. Early childhood education (ECE) and secondary education tend to have the lowest enrollment rates. However, these two education stages are critical to develop the region’s human resources. In Jordan, 125,000 Syrian refugees were enrolled in formal education represents 54 percent of total registered refugees. In Lebanon, the public education student population almost doubled and enrolls 51 percent of its Syrian refugee students in public formal education.12 In 2017, in Lebanon’s first-shift schools, the number of Syrian refugees (68,822 students) exceeds 25 percent of total students. In addition, the country has opened 313 second-shift schools, which are operating solely for Syrian students (more than 120,000).13 This remarkable increase of refugee students was coupled with a slight decrease in Lebanese enrollment in public schools at the onset of the crisis due to the influx of refugees and the consequent loss of confidence in the quality of public education (Figure 2.2). However, after three years of enrollment fee subsidies to Lebanese students, this loss was recouped. Figure 2.2 Enrollment Trends in Public Schools in Lebanon, 2011–17 300,000 250,000 Number of public enrolment K-12 200,000 150,000 100,000 50,000 Lebanese Non-Lebanese - 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 Source: Lebanon MEHE. Other methods of expanding access to education in MENA have used mobile classrooms or technology e-learning tools. Iraq used the latter, enabling the country to reach all Syrian children 12 Brussels Conference April 2017. http://wos-education.org/uploads/reports/170331_Brussels_paper.pdf. 13 Ministry of Education and Higher Education (MEHE), Lebanon. March 2017. MENA Economic Monitor October 2017 16 with education opportunities. More than 80 percent of these children were reached through formal education, and the rest through nonformal pathways. Addressing the demand-side barriers that prevent refugee parents from sending their children to schools is equally important. One of the main barriers is the necessity for refugee children to work to support their families. This barrier is more common for children in Grade 7 and above. Early marriages for girls also are common in some refugee communities. To incentivize enrollment, associated costs of attending schools need to be reduced or eliminated. These costs include transportation, textbooks and learning materials, and enrollment fees, which, for example, were waived in Jordan, and covered by the Ministry of Education on behalf of parents in Lebanon. In contrast, conditional cash transfer (CCT) programs could help the households with the cost of children enrolled in schools. In Lebanon, in 2016 the United Nations Children's Fund (UNICEF) piloted a cash transfer program in two governorates. The pilots had very positive results. The agency measured an increase of 7 percent in enrollment rates in the pilot regions and an increase of 1 month in school attendance for students who participated in the program (WFP and others 2017). II. Health Before the start of the Syrian conflict, Syria’s neighbors had enjoyed a decade of steadily improving health outcomes. From 2000 to 2010, life expectancy in Jordan and Lebanon rose (from 71.9 years to 73.4 years, and 74.9 years to 78.5 years, respectively) and continued to outstrip the MENA regional average (69.2 years to 71.4 years). Other basic health indicators such as maternal and infant mortality rates improved as well, and both countries met the UN Millennium Development Goals for maternal and child health. These improvements came despite quite different economic and political contexts affecting health spending. Jordan, which enjoyed relatively steady economic growth during the 2000s, increased public spending on health from 4.6 percent to 5.9 percent of GDP over the decade, while reducing out-of-pocket spending from 39 percent to 28 percent of total health expenditures. Lebanon, by contrast, had to contend with austerity measures, high debt levels, and the 2006 Lebanese war, which limited its overall fiscal space. From 2000–10, Lebanon’s public spending on health fell from 3.2 percent to 2.7 percent of GDP; and out-of-pocket spending, although trending down, remained high, declining from 57 percent to 46 percent of total health expenditures. Despite these gains, both health systems, like many in the region, faced growing pressure to evolve to better meet the needs of their populations and support development goals. Noncommunicable diseases such as heart disease and stroke had replaced infectious diseases as the major causes of morbidity and mortality. Concerted efforts to address these conditions MENA Economic Monitor October 2017 17 lagged. Although the numbers of hospital beds and physicians generally were considered adequate, many of these resources were concentrated in major cities, leaving rural and remote areas with limited access and poorer quality care. Despite progress to reduce out-of-pocket payments, the poorest in these countries remained highly vulnerable to financial shocks from health-related issues. Refugees’ impacts on MENA hosting countries The Syrian crisis and resulting refugee flows have significantly increased demand for health services in neighboring MENA countries (Table 2.1). In 2014, Jordan recorded some 700,000 visits by Syrian refugees to health centers or hospitals throughout the country. In Lebanon, in 2015, the country’s Primary Health Care Center network, which provides care to vulnerable populations at roughly 200 facilities, recorded more than 1.5 million visits––more than double the 700,000 visits recorded in 2009 before the crisis began. In 2013, nearly 35 percent of all visits to primary health centers in Lebanon were by Syrian refugees. Displacement has stalled, and in some cases reversed, important health gains. Although Lebanon met the Millennium Development Goals (MDGs) for maternal and child health, both goals have suffered notable reversals. From 2012 to 2017, the neonatal mortality rate in Lebanon increased from 3.4 to 4.9 deaths per 10,000 live births, and the maternal mortality rate increased from 12.7 to 21.3 deaths per 100,000 live births. For both, rates among Syrian refugees were nearly double the rates of the native population. In Jordan and Lebanon, previously well-controlled communicable diseases including measles, tuberculosis, and leishmaniosis have reemerged and are threatening both local and regional disease control efforts. In 2012, for example, the first year of significant refugee inflows to Lebanon, reports of tuberculosis increased by 27 percent. UNHCR data show that communicable diseases are one of the main drivers of refugees seeking primary care in Jordan and Lebanon. Refugee influxes have complicated efforts to provide universal health coverage and basic financial protection. In 2013 Lebanon unveiled ambitious plans to expand insurance coverage, particularly for vulnerable Lebanese, but the influx of 1.3 million Syrian refugees over the past 5 years and the resulting demand for health services has stalled such efforts (World Bank 2017d). Today, UNHCR covers a part of the cost of specific hospital services, such as obstetrical care and life-threatening emergencies, for Syrians in Lebanon, but the remainder of the bills often falls to the patients. Other services, such as cancer treatment, dialysis, and catastrophic illnesses, are not covered at all. A recent study found that hospitalization rates among Syrian refugees lagged well behind their Lebanese counterparts (6 percent vs. 12 percent annually), raising serious concerns about cost as a barrier to care. In Jordan, a similar set of concerns has emerged. From 2012 to 2014, the Jordanian government generously covered essentially all healthcare cost for refugees. However, as the refugee numbers MENA Economic Monitor October 2017 18 rose, this approach became fiscally unsustainable, forcing Jordan to implement a 20 percent copayment by refugees for most services. In the 2 years since the copayment was implemented, use of health services by refugees in Jordan has dropped nearly 60 percent. A recent survey found that more than 50 percent of Syrian refugees in Jordan say that they cannot afford their medications, and more than 50 percent of pregnant women say that they cannot afford transportation to antenatal care appointments. Table 2.1 Status of Registered Syrian Refugees Country of Asylum Syrian Arrivals* Living Conditions Access to Health Services Iraq 227,971 38% camp Specific services are offered to select 62% non-camp a registered refugee populations.b c d Jordan 655,833 82% urban or informal Syrian refugees (registered with settlements a UNHCR) can access public health system.h Lebanon 1,017,433 Urban areas (Beirut); informal UNHCR registration is required for tent camps (Bekaa Valley); Syrian refugees to access primary Sabra and Shatila camps healthcare services.h (Beirut)f Registration of new arrivals was halted in May 2015 at request of Lebanese government.a Turkey 2,764,500 Districts (known as a satellite Registered Syrian refugees who live cities); camps along Turkish- in low income neighborhood are Syrian borderg enrolled in the Turkish General Health Insurance Program and can access free health services. In camps, government agencies provide clean water, sanitation, and other health services.f Egypt 115,204 Urbanh Syrians are granted access to the public health system but are required to pay the same fees as Egyptians.e Services are overburdened and often inaccessible to refugees due to cost.h Source: CDC 2016. Note: *Number of UNHCR-registered refugee arrivals as of October 31, 2016,. a. https://www.cdc.gov/immigrantrefugeehealth/profiles/syrian/population-movements/index.html#thirteen. b. https://www.cdc.gov/immigrantrefugeehealth/profiles/syrian/population-movements/index.html#fourteen. c. https://www.cdc.gov/immigrantrefugeehealth/profiles/syrian/population-movements/index.html#fifteen. d.https://www.cdc.gov/immigrantrefugeehealth/profiles/syrian/population-movements/index.html#sixteen. e. https://www.cdc.gov/immigrantrefugeehealth/profiles/syrian/population-movements/index.html#seventeen. f. https://www.cdc.gov/immigrantrefugeehealth/profiles/syrian/population-movements/index.html#eighteen. g. https://www.cdc.gov/immigrantrefugeehealth/profiles/syrian/population-movements/index.html#nineteen. h. https://www.cdc.gov/immigrantrefugeehealth/profiles/syrian/population-movements/index.html#twenty. MENA Economic Monitor October 2017 19 The inability to meet growing demand for health services has decreased patient satisfaction, threatening an already tenuous relationship between citizens and the health system. Waiting times for services have increased in both countries. In Jordan, in 2016 these delays became so long that referrals to non-Ministry of Health hospitals increased more than 50 percent over the previous year, costing the government $154 million. Stock-outages of some essential medicines reportedly have become more common (World Bank 2017c). Shortages of health workers, particularly those trained to address reproductive health, gender-based violence, mental health, and noncommunicable diseases, have further undermined satisfaction with care. Cultural disconnects also have dampened patient satisfaction, with some Syrian refugees reporting that humanitarian health workers lack appropriate cultural sensitivity when providing care. A development response With basic health services overstretched and development goals in jeopardy, new solutions are needed that simultaneously address the underlying problems of health systems while responding to new demands created by refugee influxes. Even before the Syrian conflict, many MENA countries were grappling with shortcomings in their health systems, from high reliance on out- of-pocket payments and shortages of certain types of health workers to fragmentation of services resulting in inefficiencies and poorer quality care. Efforts to address these pre-existing challenges have been exacerbated by the arrival of millions of refugees, who live largely within local communities rather than in camps and often seek access to the same services as do local populations. Despite initial attempts by some hosting countries to fund these services for refugees, the costs and demand have proved overwhelming, particularly amid rising debt levels and shortfalls in humanitarian support. Recent experiences suggest several ways that health sectors can help countries facing large refugee inflows to meet development goals: ▪ Use innovative financing mechanisms to support basic health service while affirming the principle that hosting refugees is a global public good. In recent months, the Bank approved 2 emergency health projects in the MENA region: the Jordan Emergency Health Project for $50 million; and the Lebanon Health Resilience Project for $120 million. Both projects were part of separate $150 million projects, with parallel financing crowded in by the Islamic Development Bank (IDB). These are the first health projects supported by the World Bank’s Global Concessional Financing Facility (GCFF), which was established recently to support middle-income MENA countries that are hosting large numbers of refugees. ▪ Many MENA countries’ health systems were highly fragmented well before the Syrian crisis began, with health services provided by an array of actors including various government ministries, private sector players, NGOs, and faith-based charities. Recent refugee flows often MENA Economic Monitor October 2017 20 contributed to this fragmentation because humanitarian actors sometimes set up parallel systems that do not support––and, in some cases, drain—resources from national health systems. Efforts to increase the supply also should strengthen national capacity, not compete with it. For example, the Lebanon Health Resilience Project helps to expand the scope and scale of the basic service package already covered by UN organizations within the country’s network of primary health facilities, helping to strengthen capacity within these sites and streamline care. ▪ Enable trained refugee health workers to fill human resource gaps. UNHCR March 2017 data show that the Syrian refugee population in Jordan included 483 doctors, 880 nurses, 448 pharmacists, and 335 medical assistants. Due to legal restrictions, most of these health workers will be unable to resume working in their fields. Some countries are exploring innovative pathways to employ such specialists to address refugees’ health needs. Turkey, for example, has opened dozens of refugee clinics employing Syrian doctors and nurses, who provide primary care in Arabic to the refugee populations. ▪ Tailor health worker training to the changing burden of disease brought by conflict and mass displacement. Consideration should be given to scale up such efforts to ensure that the next cadre of clinicians and public health officials are trained appropriately to meet the health needs often unique to refugee populations as well the needs of the hosting communities. III. Jobs Labor market developments before and after the influx of refugees More than 5 million Syrians have fled the conflict and the majority of them across borders to neighboring MENA countries (Table 2.1). The Syrian conflict has caused a loss of 3.2 million jobs in the country, inducing major structural changes in the economy and labor markets and massive losses of high-end skills. Since 2011, due to the massive lay-offs caused by factory and firm closures, jobs have been destroyed at an estimated rate of 538,000 per year. More than 50 percent of the working age population is out of the labor force. In 2015 the national unemployment rate increased to 52.9 percent, and the rate for youth to 78 percent. To earn an income for their families, individuals increasingly are engaged in military service or the “war economy”. As the oil and manufacturing sectors collapse, a large and increasing share of the labor force now works in low-productivity sectors. The share of industrial jobs declined from 14 percent to only 2 percent. Twenty percent of workers are still employed in agriculture despite the loss of 400,000 agricultural jobs. In contrast, employment has increased in low-productivity services, MENA Economic Monitor October 2017 21 which constitute 78 percent of workers.14 Emigration due to the lack of security, lack of job opportunities, and steep decline in the standards of living also has created important skills shortages in Syria (World Bank 2017a). The impacts of refugees on the hosting country labor market and wages are difficult to ascertain. Even before the Syrian conflict, labor regulations and active labor market programs (ALMPs) in MENA countries had structural deficiencies. Domestic labor markets still face a large reservoir of untapped human resources due to the high inactivity and unemployment rates, particularly among youth. The high unemployment coupled with limited private sector formal job creation has pushed a growing number of workers into unproductive, subsistence-level activities, often in the informal economy (World Bank 2012). The massive influx of refugees have exacerbated the malaise in the local labor markets because 50 percent of the refugees are in working-age groups. In Lebanon, the influx of refugees from Syria increased the size of the labor force by close to 35 percent. Many of these refugees work in the informal sector due to lower education levels and/or lack of work permits. Youth are much more likely to compete occupationally with Syrian refugees in the labor market and to be concentrated in the sectors (tourism and trade) whose growth is most impacted by the crisis.15 Syrian refugees also accept lower wages than hosting community unskilled workers. The Jordanian economy was grappling with high unemployment rates prior to the influx of refugees. Unemployment rates continue to be in double digits especially among youth and women, reaching a 10-year high of 15.8 percent in 2017 (IMF 2017). Approximately 120,000 Jordanians enter the work force every year, but only 55,000 find employment. Females and the least educated constitute the majority of the 65 percent of the population who are inactive. Moreover, approximately 50 percent of employment in Jordan is informal.16 The situation is worse for Syrian refugees residing in Jordan. Of approximately 1.3 million Syrian refugees, of whom only half are registered with UNHCR, only 40,000 hold a work permit (as of mid-2017).17 In Iraq, the refugee crisis has impacted both the Iraqis who fled and the communities that they left behind. The situation is even worse for Syrian refugees who have sought safety and jobs in Iraq. In 2016 the national unemployment rate was 16 percent, and youth unemployment was 36 14 The sectoral employment figures are estimated based on the ratio of employment to GDP elasticities so should be interpreted carefully. This method assumes constant labor intensity of production, which might not be the case in all sectors in a conflict situation. 15 In 2010 more than 50 percent of employed youth worked in tourism and trade, compared with only 33 percent in 2015. 16 Jordan’s National Employment Strategy 2011–2020 and MOL reports. 17 Non-Jordanians are allowed to work subject to a set of restricted professions and sector-specific quotas. MENA Economic Monitor October 2017 22 percent. The public sector provides 40 percent of all jobs,18 resulting in virtually no fiscal space. Private job creation is hampered by a very poor business environment: insecurity, corruption, high operating costs, depressed demand, poor access to power and to credit, and a heavy state- owned enterprise (SOE) footprint. Most recently, the struggle against Daesh has significantly harmed jobs prospects. Labor income has fallen by 47 percent in regions affected by Daesh. An estimated 5 million jobs must be created by 2030 to reverse the negative impacts of decades of sanctions and conflict, oil dependency, and heavy regulation that have severely constrained both private and public job creation. The ongoing conflict in Yemen is devastating its economy and has obliterated 600,000 jobs, mostly in agriculture and services. Approximately 3 million people have been displaced, and Yemeni refugees have fled to Djibouti, the Gulf countries, and Sudan. Most of them have fled for security reasons to avoid forced recruitment so have lost their jobs. Yemen itself is hosting refugees from the Horn of Africa, including Ethiopia and Somalia, who are hoping to find better opportunities despite the ongoing conflict. Small and medium size enterprise (SMEs) have been hit the worst by the conflict. In 2015 private sector employment declined by approximately 12 percent19 and has continued to contract. Approximately 70 percent of SMEs have laid off 50 percent of their workforce. In 2016 Yemen’s unemployment rate was only 17 percent (WDI). The destruction of infrastructure and instability has increased business costs; the customer base and revenues have decreased; and significant private sector capital has migrated overseas. UN Refugee Agency (UNHCR) estimates show that approximately 50 percent of those fleeing to Libya are looking for jobs, but they end up fleeing to Europe to escape difficult economic conditions and instability in the labor market. The deep political strife in Libya has had significant negative impact on the economy and hence on the labor market. The overall unemployment rate in Libya increased from 13.5 percent in 2010 to 19.0 percent as of 2012, and has changed little since then. Youth unemployment stands at approximately 48 percent, and female unemployment at 25 percent. The vast majority (85 percent) of Libya's labor force is employed in the public sector, a high rate even by regional standards. The rate for women is even higher, at 93 percent. A development response Although to different degrees, all MENA countries face three common challenges: (1) to accelerate the rate of job creation in the formal sector in higher-value-added activities; (2) to improve the quality of existing informal jobs; and (3) to connect vulnerable population groups to jobs or help them move to better jobs. Over the next decade, it is unlikely that enough formal 18 Unless stated otherwise, all numbers were obtained from the 2012 and 2014 Iraq Household Socio-Economy Surveys. 19 ILO and the Republic of Yemen’s Central Statistical Office Rapid Survey, 2015. MENA Economic Monitor October 2017 23 jobs will be created to absorb all new entrants to the labor market. However, it is possible, and necessary, to gradually expand the share of formal employment to enable more fundamental structural transformation. Labor and migration policies are critical to support vulnerable workers, including refugees, to access jobs or move from low to higher quality jobs. Unfortunately, labor regulations and active labor market programs (ALMPs) in MENA countries have structural deficiencies. First, regulations were designed for an environment in which most workers were in the formal sector. Second, ALMPs were “supply driven” and unable to effectively respond to the needs of workers and employers outside the formal sector. Labor regulations need to be made more efficient to protect workers, including in the informal sector, while internalizing the social costs of jobs destruction and reducing distortions that constrain the creation of formal jobs. Making such regulatory transformations implies coming up with different approaches to (1) guarantee a minimum level of income, (2) ensure a fair distribution of value added between wages and profits, (3) protect workers from unemployment, and (4) enforce core labor standards and adequate working conditions. Similarly, if the social value of connecting workers to jobs or helping workers move from low to higher quality jobs goes beyond the value to the worker (and the employer, when there is one), there is a rationale for increasing investments in ALMPs and expanding their coverage. To achieve these targets, delivery and financing systems must be reformulated. Delivery systems, in particular, should better link the labor market programs to “demand” side interventions that focus on job creation or higher labor productivity. The best way to help refugees get jobs is to substantially improve the functioning of hosting country labor markets. IV. Livelihoods Inadequate civil, social, and economic rights including freedom of movement and residence often inversely impacts refugee livelihoods. Studies (Jacobsen 2002) show that many refugees cannot establish or maintain their livelihoods because they cannot exercise the rights to which they are entitled under international human rights, humanitarian law, and/or refugee law (see section on Changing the Political Debate). A series of country examples follows. The ability of Liberian refugees in Ghana to exercise the rights of freedom of movement as well as access to employment and public education has contributed to their relative success in becoming self- reliant (Dick 2002). The Uganda’s government provided refugees with agricultural land with the objective of making them self-sufficient pending a durable solution. The external environment and uncertainty also influences the refugee’s livelihood. Refugees not only have to cope with the often-traumatic experience of flight and displacement but also often end up with very limited or no resources due to loss of assets and capabilities. Uncertainty about MENA Economic Monitor October 2017 24 obtaining work permits due to rapidly changing policies over renewals and the sectors to which permits apply can negatively influence refugees’ livelihoods. The uncertainty makes it harder for refugees to make decisions and calculate the costs, benefits, and risks of various livelihood strategies.20 In Ecuador, asylum-seekers are not permitted to work until their legal status is resolved. The waiting period, which can last as long as one year, is full of fear and anxiety for the refugees and is made more stressful by their inability to legally engage in formal employment, the lack of labor opportunities, and discrimination. In Colombia, refugees must sustain illegal livelihoods during the asylum application process. Lo (2005) argues that removing this restriction on asylum-seekers would reduce the fear associated with working illegally. A development response As discussed above, livelihoods are influenced by a range of economic, social, political, and environmental factors. For this reason, it is essential to apply a comprehensive approach to the design and implementation of programs that support refugee livelihoods. The right mix of policies is necessary. In this vein, consideration should be given to lifting not only legal barriers but also other barriers, including de facto limited access to the job market due to poor economic conditions, remoteness of refugee settlements, and restrictions imposed by local authorities. Addressing language differences, lack of skills, lack of tools and/or start-up capital, and xenophobia toward refugees is equally important. Activities tend to be more successful when taking into account gender specifics. Creating and maintaining livelihoods are done differently by men and women. Moreover, due to flight and experiences in exile, the gender roles and socioeconomic status of refugees have changed significantly. In establishing their livelihoods, women face different constraints and insecurities than do men. When household livelihoods are on the brink, girls are the first to be pulled out of school to work or are forced into early marriage. A study by No Lost Generation finds that, in 2016, rates of child marriage reached 20 percent in Lebanon and over 30 percent in Jordan.21 Girls in unprotected settings also are prone to being trafficked. Policies to address women’s livelihoods and the assets on which they rely for their livelihoods should take into account these differences. According to UNHCR, when embarking on legislation or regulations to create livelihood- supporting activities, a bottom-up approach is the preferred option. One of the most crucial elements is ensuring and incorporating refugee voices and participation. UNHCR’s success in Guatemala (Cheng and Chudoba 2003) can be largely contributed to the fact that the agency was able to rely on the vast leadership ability and knowledge within the refugee population. Among 20 Discussion in this section is based on a 2017 Overseas Development Institute (ODI) study. 21 In 2016 rates of child marriage reached 20 percent in Lebanon and over 30 percent in Jordan. MENA Economic Monitor October 2017 25 the Guatemalan refugees whom UNHCR assisted, the most successful refugee communities were those in which refugees had been given choices: to live where they wanted with whom they wanted, and to support themselves the ways that they wanted. Finally, addressing pre-existing long-standing development issues in hosting communities including improving the business climate; strengthening and expanding the delivery of education, health, and environmental services to cope with the increased population; and providing skills training for youth should be the key component of promoting livelihoods for refugees. Encouraging policies that enhance freedom of movement and expanding the right to work for refugees––both of which are in the interest of the hosting communities––are equally important. How Can the Development Community Do Better? Interventions and Assistance Resources The massive displacement witnessed by the MENA region over the last decade has significant associated financial costs. Not surprisingly, many of these costs are borne by the refugees themselves, who are using existing assets to support their move and provide for the subsistence of their families. One Oxfam study finds that most Syrian refugees interviewed in Lebanon indicated that, upon arrival, they had relied primarily on their savings (Oxfam America 2015). These resources often get depleted rapidly before the refugee can secure work or long-term shelter. Another major portion of the financing comes from the countries and communities hosting the displaced. Depending on the ratio of refugees to the native population, refugees can significantly strain fiscal and macroeconomic indicators, stemming from, for example, their use of services and access to subsidized goods. Various actors including the World Bank have tried to monetize the burden posed by refugees on hosting countries. However, these studies have tended to use a wide variety of methodologies, making the studies difficult to compare across time and countries (see Section on Burden-Sharing). The third major source of financing for the displacement crises in MENA is external partners, either as humanitarian or development assistance or through private charities and donations. No exhaustive overview or estimates of the amounts of financial assistance that the international community spends on forced displacement crises globally yet exists. A new World Bank study estimates that the global expenditures on forced displacement reached approximately $20 billion in 2015 (World Bank 2017b). However, this calculation leaves out a MENA Economic Monitor October 2017 26 number of actors so is likely to have underestimated the actual costs.22 In 2016 approximately $15.4 billion, or 75 percent of these monies, were spent on refugee resettlements inside OECD donor countries. The share that is staying in donor countries has been rising since the onset of the Syrian crisis, with a 27.5 percent increase from 2015 to 2016. Unprecedented, this amount equated to 10.8 percent of total net ODA. When excluding the cost of refugee resettlement, each refugee in the rest of the world benefitted from an average of $131 dollars in 2015. Determining the actual amounts and type of financing reaching the refugees and their hosts is similarly difficult in MENA. During 2014–15, Jordan was the ninth largest recipient of ODA, receiving approximately $2.5 billion. Of this amount, 30 percent was provided as humanitarian aid, most of which likely was channeled toward the Syrian refugees. In stark contrast, during the same period, Lebanon received $975 million, with almost 60 percent being humanitarian aid (Figure 2.3). Figure 2.3 Gross Official Development Assistance, 2013–15 3,000 2,500 2,000 US$ million 1,500 1,000 500 - Iraq Jordan Lebanon 2013 2014 2015 Source: www.oecd.org. Forced displacement traditionally has been perceived as a temporary problem during which those fleeing needed immediate relief until they could return to their homes. Hence, assistance focused on taking emergency, life-preserving, and largely short-term actions; and tended to cover only the urgent needs of the displaced. Consequently, financing for forced displacement 22 The analysis captures expenditures by most major organizations operating in the financial development (FD) space, However, the analysis does not include reporting from FAO, UNDP, UNICEF, USAID, WHO, small NGOs, and others. Moreover, the note does not include the expenditures that countries spent bilaterally on forced displacement programs in non-OECD countries. MENA Economic Monitor October 2017 27 has come primarily from humanitarian budgets, relying on yearly budgeting cycles and short planning horizons. However, as displacements grow protracted, including those that are decades long such as the Palestinian and Afghan cases, the needs of the refugees become developmental. At the same time, the development trajectories of hosting communities also become affected. This “new normal” has led to an increasing amount of humanitarian assistance being directed toward refugee situations that have lasted longer than eight years and that, in some instances, have become parallel providers of basic services and opportunities for livelihoods, separate from those provided by the hosting state for its own citizens. UNHCR is the world’s primary provider of support to refugees. From an initial amount of $300,000 in 1950, the organization’s operating budget has steadily increas ed to more than $6.5 billion. Most of its funding is channeled through the Refugee Response Plans (RRPs), which is a UNHCR-led, interagency planning and coordination tool for large-scale or complex refugee situations. RRPs present the interagency response strategy and the corresponding financial requirements of all partners to ensure the coherence and complementarity of the humanitarian response. The first Syrian RRP in March 2012 requested support in the amount of $84 million to cover an expected 96,000 refugees in Jordan, Lebanon, Turkey, and Iraq (Figure 2.4). Figure 2.4 Syrian Humanitarian Response, 2012–17 3,500 3,000 2,500 US$ million 2,000 1,500 1,000 500 0 2012 2013 2014 2015 2016 2017 Response plan/appeal funding Unmet requirements Source: UNHCR. Burden-Sharing Due to refugees’ cross-border movements, financing them often is compared to other phenomena considered global public goods, such as controlling climate change or pandemics. MENA Economic Monitor October 2017 28 Ensuring adequate burden-sharing, including raising international funding, is hampered by the same types of challenges encountered by other global public goods to overcome free-riding (see Section on Welfare of Refugees as a Global Public Good). The 1951 Convention on Refugees was articulated based on the recognition that, in the future, any country could produce refugees; hence, hosting refugees is a global responsibility. Because countries of first asylum often are the hosting countries by default, the Convention also acknowledges that the burden could fall disproportionately on a few countries. Recognizing the need for a new look at the implicit burden-sharing model in the 1951 Convention, in September 2016, the United Nations General Assembly unanimously adopted the New York Declaration for Refugees and Migrants. The overall aim of the declaration is to improve the way that the international community responds to large movements of refugees and protracted refugee situations. To ease the burden on the main receiving countries, the declaration proposes, through the Comprehensive Refugee Response Framework (CRRF), specific collective actions needed to (1) ease pressure on hosting countries, (2) enhance refugee self-reliance, (3) expand access to third-country solutions, and (4) support conditions in countries of origin for refugees to return in safety and dignity. The declaration includes commitments to increase burden-sharing such as intentions to improve the delivery of humanitarian and development assistance to the countries most affected, including through innovative multilateral financial solutions. The three goals are (1) to close all funding gaps; (2) to find new homes for all refugees identified by UNHCR as needing resettlement; and (3) to expand the opportunities for refugees to relocate to other than their home countries through, for example, labor mobility or education schemes (Box 2.1). New ideas have emerged on how to increase multilateral financing for refugees. Two main factors previously impeded systematic engagement by the international financial institutions (IFIs) to address the challenges stemming from forced displacement. First, the traditional view that refugees were purely a humanitarian challenge meant that they were seen as being outside the mandate and comparative advantages of these development organizations. Second, the country- based model whereby countries take out loans to invest in development for the benefit of their citizenry led to further underinvestment in the development challenges stemming from hosting refugees. As non-citizens, refugees were not part of any country’s constituency. The “humanitarian only” lens effectively has been discarded as the large-scale influx of Syrians into Jordan and Lebanon forced the recognition that refugee flows do have significant development aspects, for both refugees and the hosting communities, who face their own development challenges. This recognition has led to increased efforts to tackle the lack of incentives for developing countries to borrow for noncitizens. MENA Economic Monitor October 2017 29 In 2016 a number of international organizations and bilateral donors convened to find an innovative way to provide concessional funding for Lebanon and Jordan, the two countries with the world’s highest concentration of refugees. The resulting MENA Global Concessional Financing Facility (GCFF) focused on helping Jordan and Lebanon address the impact of Syrian refugees without having to increase their debt levels (Box 2.2). This result was achieved by pooling donor financing in a financial intermediary fund to provide concessional financing for development projects that support refugees and hosting countries. Although the need has been most pressing for Jordan and Lebanon, it is now realized that the same obstacles to finance noncitizens are faced by other middle-income countries. The GCFF has since been expanded to enable other countries to become recipients of the facility. Box 2.1 Resettlement of Refugees in Third Countries Burden-sharing also comes in the form of resettlement of refugees outside the initial country of asylum. Such resettlement can happen through the UNHCR, which has the mandate to transfer refugees from an asylum country to another State (third country) that has agreed to admit them and ultimately grant the specific refugees permanent settlement. In 2016 almost 77,000 Syrians were submitted for resettlement from MENA and Turkey, compared to 53,000 in 2015. The 2016 number includes 30,181 Syrians from Jordan, 23,498 from Lebanon, and 16,682 from Turkey. From MENA and Turkey combined, since 2013, more than 156,000 Syrian refugees have been submitted for resettlement and humanitarian admission.a Other refugees make the onward journey to seek asylum status in third countries on their own. For example, between April 2011 and May 2017, 952,446 individual Syrians applied for asylum in Europe.b Note: a. http://www.unhcr.org/59364f887.pdf. b. To the extent possible, the numbers reflect first-time applications. However, some of the statistics are likely to include repeated applications (for the same or a different country). Even low-income countries have faced obstacles accessing low-cost development finance to address the needs of hosting communities and refugees. Acknowledging developing countries’ reluctance to use their finite International Development Association (IDA) resources for noncitizens, the World Bank’s shareholders decided to earmark $2 billion for the 18th IDA replenishment cycle to be used for this purpose. This change enables countries with more than 25,000 refugees (or more than 0.1 percent of the population) to receive an additional allocation to their regular IDA envelope. MENA Economic Monitor October 2017 30 Box 2.2 Global Concessional Financing Facility (GCFF) Lebanon and Jordan have borne enormous costs from hosting millions of Syrian refugees who have fled their homes since war broke out in 2011. To mitigate the burden on these hosting countries, in April 2016, the World Bank, United Nations, and Islamic Development Bank, in close collaboration with the donor community and a range of international partners, launched the Concessional Financing Facility (CFF). To recognize the global public good that Lebanon and Jordan provide by opening their borders to Syrian refugees, the facility uses donor grants to reduce the cost of multilateral development bank loans to concessional levels for these two middle-income countries. These grants enable them to borrow more affordably for development projects that benefit both refugees and hosting communities. Despite the facility’s continued focus on Lebanon and Jordan, whose needs are greatest, at the UN General Assembly in September 2016, partners expanded the CFF’s scope to the global level so that it could help middle-income countries address refugee crises wherever they occur. As of August 2017, the renamed Global Concessional Financing Facility (GCFF) has leveraged more than $1 billion concessional financing to Lebanon and Jordan for 7 projects. Data and Monitoring Insufficiency of data on refugees Enhancing the availability, accuracy, and reliability of data on refugees is a critical challenge for the international community in its pursuit of an effective response to the refugee crisis. First, capturing accurate figures of refugee populations is always difficult. In many cases, original data stem from a registration process organized by UNHCR. In certain cases, national institutions of hosting countries also provide data. UNHCR data are very credible, and the organization’s data collection process is ongoing. However, unless those who fled their countries present themselves for registration, they will not be recorded in UNHCR data. Indeed, in some countries, a large number of de facto refugees do not register with UNHCR. For example, the Jordanian government estimates that the Syrian population in Jordan is close to 1.3 million, whereas in August 2017, the number of Syrian refugees in Jordan registered with UNHCR is 660,000. Certain wealthy Syrians in Jordan do not have incentives to register as refugees, and other Syrians come as economic migrants. On the hosting country side, massive inflows can overwhelm intake systems, making registration very difficult. At the other end of the process, some people may lack incentives to deregister as refugees, even when their situation has changed. This lack of deregistering also can add errors in the data on refugee populations. MENA Economic Monitor October 2017 31 Second, given the error margins resulting from variations in collection and aggregation methods across countries and institutions, data on refugees need to be taken with a degree of caution (World Bank 2017b). Moreover, because the variables and indicators covered in such data are limited, they often do not project a realistic picture of the welfare or livelihoods of the refugee population. Third, disaggregated data on refugees in hosting communities often are difficult to find. Conventional statistics such as a national census or World Bank poverty statistics cover only countries’ registered nationals or the resident population, not refugees (Verme and others 2016). It also is difficult to define which communities are affected by inflows of refugees since “being affected” is a difficult concept. No specific threshold exists above which a flow is considered large enough to have a socioeconomic impact on hosting communities (World Bank 2017b). Assessing and monitoring the impacts of refugee flows Assessing and monitoring the impacts of refugee inflows are prerequisites to conducting effective interventions to address refugee crises. Minimizing the negative impacts and optimizing the opportunities from refugee flows requires systematic assessment of the key areas for which interventions are needed and the most appropriate modalities through which these interventions should be delivered. Once interventions are underway, rigorous monitoring is required to understand whether they are having their desired effect; and, if not, why not. Assessment and monitoring in the context of refugee situations remains a relatively new area of economic analysis that requires refinement. To assess refugee flows and monitor the impacts of the interventions to address them, two questions should be raised. One is: “Impacts on whom?” The other is: “Impacts from what?” Regarding the first, a refugee crisis can affect many groups, but the two primary stakeholders affected are the refugees and the hosting communities. For the second question, there are two sources of impacts: one is from the inflow of refugees. The other impact is from interventions intended to address the crisis, such as policy advice or a program of assistance activities. Despite their importance, assessment and monitoring pose methodological difficulties. The main difficulties regard the availability, accuracy, and reliability of data, as discussed above. The major bottlenecks are the limited variables and indicators on the livelihoods of refugees and the lack of disaggregated data in communities. Another difficulty is separating the impacts from the displacement from the impacts of the war and violence that caused it. Assistance programs for refugees could increase the influx of refugees so that the objective of the assessment itself –– documenting the need for additional resources––could impact one critical variable, the number of refugees. MENA Economic Monitor October 2017 32 When it comes to assessing the impact of interventions such as policy advice and assistance programs, concerned institutions have not yet established a robust methodological framework. In general, the impact of humanitarian assistance is not subject to rigorous assessment, whereas the assessment of development support for refugees remains in its early stages. In addition, depending on the projects and institutions involved, the assessment and monitoring frameworks vary significantly. Enhancing data and assessment processes Given the limitations described above, the international community should conduct focused efforts to enhance refugee data and the process of assessing needs and monitoring the impact of designed interventions. Data collection and analysis can be expensive. However, they often result in far lower costs and/or much higher effectiveness in the planning and implementation of relief and development activities (World Bank 2017b). Looking ahead, efforts could center around the following four areas. 1. Many institutions are engaged in responding to refugee crises. Concerned institutions can partner to enhance their joint data collection and develop a concerted methodology to enhance comparability. UNHCR is the leading institution in collecting refugee data. The World Food Program (WFP) maintains an expansive database on vulnerable people, including refugees, and has a strong statistical unit. National institutions and nongovernmental organizations (NGOs) also compile data on vulnerable populations. Some partnerships already exist, particularly regarding the Syrian refugee crisis, for which international organizations and NGOs have launched several initiatives to fill the data gap. For example, UNHCR has undertaken efforts beyond its registration process, including extensive home visit surveys and establishing a vulnerability assessment framework. Based on these data, the World Bank and UNHCR undertook joint research to assess the welfare of Syrian refugees. This research will be used to design both policies and interventions related to refugees and their hosts. REACH, in collaboration with international organizations, have conducted rigorous analyses on the circumstances of refugees in Jordan and Lebanon. These efforts are laudable and need to be expanded and reinforced. 2. To improve data collection and analysis, governments and international organizations should create an open data system by disclosing their raw data on refugee and hosting populations. This system should be set up to enable strong quality control by the users themselves while anonymizing raw data to protect the privacy and security of refugees and IDPs who have fled violence and persecution. 3. The data collection and analysis capacity of each participant should be enhanced. There is significant room to enhance the capacity of national institutions of hosting countries. Hosting MENA Economic Monitor October 2017 33 countries and communities often bear significant costs from refugee inflows. Accurately communicating these costs to the international community could help secure the support needed to mitigate the burden. 4. The international community needs to establish a methodological framework to assess and monitor the impact of refugee inflows and the interventions designed to address them. Such an effort was launched through an international partnership housed at the World Bank group (WBG) to provide concessional financing to help Jordan and Lebanon address the influx of Syrian refugees. The GCFF requires agencies that implement projects supported by funding from the facility to measure the progress and impact of their operations under each project’s results framework (Box 2.1). In addition, leveraging the strengths and capacities of its diverse stakeholders, the facility recently inaugurated an effort to develop an aggregate-level mechanism to measure the specific impacts of supported projects on refugees and hosting communities. 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Project Appraisal Document: “Lebanon Health Resilience Project.” Washington, DC. http://documents.worldbank.org/curated/en/616901498701694043/pdf/Lebanon- Health-PAD-PAD2358-06152017.pdf. Yarrow, N., and M. Capek. 2017. Chapter 5: “Educating Refugees, IDPS, and Migrants in the MENA Region.” In “MENA Education Flagship Report.” Forthcoming. World Bank, Washington, DC. MENA Economic Monitor October 2017 41 Country Notes ment of imports to the large reduction in ALGERIA Recent developments export revenues since 2014. The unemployment rate increased by al- most 2 percentage points, linked to slug- Despite low global oil prices, Algeria’s gish non-hydrocarbon growth. It stood at economic growth got off to a strong start 12.3 percent in the 6 months to April 2017 Strong growth in hydrocarbon production in 2017. Real GDP growth is estimated to and remains particularly high among and higher than expected public spending have grown by 3.7 percent in the first youth and women. The high level of un- underpinned solid growth in early 2017. quarter, mainly driven by strong produc- employment among young is partly ex- tion in hydrocarbon sector, which grew by plained by mismatches between labor However, structural challenges constrain 7.1 percent. Growth in non-hydrocarbon market demand and supply, and to the non-hydrocarbon growth and inflation sector slowed down to 2.8 percent from inability of the economy to create suffi- continues to rise. Substantial twin deficits 4.0 percent during the same period in ciently jobs and promote entrepreneur- remain, depleting fiscal savings and re- 2016. The decline has been particularly ship. The rise in unemployment under- marked in the manufacturing sector, mines impressive poverty reduction. Ten serves. In the medium term, growth and where growth fell to 3.9 percent compared percent of the population is considered the twin deficits are expected to decline as to 5.1 percent in the first quarter of 2016; vulnerable to fall back into poverty and the government implements fiscal consoli- corresponding figures for agriculture are important regional disparities persist with dation. Associated subsidy reforms will 3.0 and 4.8. Inflation is now above 6 per- some regions double (Sahara) or triple need careful management to protect pov- cent for the year so far. (Steppe) the national rate. Substantial fiscal and double-digit exter- erty reduction achievements. nal current account deficits remained, depleting fiscal savings and reserves. Pub- lic spending decreased by less than ex- Outlook pected due to difficulties to pursue the 2016 budget target of a 9 percent expendi- Growth is expected to decelerate sharply ture cut and this pattern carried over to in the second half of 2017 and in 2018 as 2017. On the external front, preliminary fiscal consolidation takes hold. As oil pro- data indicates that imports slightly de- duction stabilizes, headline growth will clined by 0.14 percent in the first quarter decline, and the impact of higher taxes of 2017 due to new import licenses to curb and import duties will weigh on non- the current account deficit, while exports hydrocarbon growth. As a result, GDP have significantly increased (by 35.3 per- growth is expected to stand at 2.2 percent cent). With continued deficits and limited for the full year 2017. GDP growth will capital inflows, international reserves struggle to breach 2 percent for 2018-19 (while still ample) declined rapidly, while (Figure 1) – anemic for a middle-income external debt remains very low. Overall, country with a large youth bulge. While the current account balance (-13 percent of the start of production from new oil wells GDP) is indicative of the lack of adjust- will provide a boost, non-hydrocarbon growth will bear the brunt of the pace of FIGURE 1 Algeria / Real GDP growth FIGURE 2 Algeria / Algeria’s twin deficits Percent change 8 7 6 5 4 3 2 1 0 2015 2016e 2017p 2018p 2019p 2020p 2021p Hydrocarbon GDP Non-hydrocarbon GDP Real GDP Sources: World Bank Staff estimates and projections. Sources: World Bank Staff estimates and projections. fiscal consolidation arising from the gov- female labor force participation (LFP), and ber 6, 2017, the government adopted a non ernment’s aversion to external borrowing. managing the newly adopted non- -conventional monetary policy that allows The twin deficits should be at sustainable conventional monetary policy. Mounting the central bank to finance directly the levels by 2020. If fiscal consolidation con- social discontent from government spend- treasury. This new policy is likely to re- tinues at a slower pace than the 2017-2019, ing cuts, tax hikes and high youth unem- duce public finance constraint in the short budget trajectory presented in the 2017 ployment levels constitute substantial run, but could lead to delay in adopting Budget Law, cuts in public spending will risks to the outlook discussed above. and implementing key fiscal and structur- mainly affect capital expenditure, easing While political will and national consen- al reforms that the Algerian economy bad- the short-term effect but worsening long- sus to rationalize inefficient, inequitable, ly need currently. In this case, the new term growth prospects. While the fiscal and generous subsidies are emerging, monetary policy could lead to substantial deficit will decline (Figure 2), its persis- such reform requires improved safety nets inflationary pressure and to a sharp de- tence will entail significant erosion of re- such as a well-targeted cash transfer sys- cline of the potential GDP in the medium maining fiscal buffers, and indirect deficit tem and a comprehensive media cam- run. finance via recycling of oil revenues in the paign. Some of these accompanying banking system will be more difficult. The measures are currently under design for current account deficit is projected to de- implementation in the medium term. Sec- cline slightly to below 10 percent in 2019, ondly, slow structural transformation is which is manageable given the level of hampering economic diversification from reserves albeit still high for a country that hydrocarbons, and consensus is lacking should be saving more of its resource rev- on key elements of strategy, such as enues. Although the social safety net will whether to push for export development remain substantial, fiscal consolidation or import substitution and the role of the and potential reforms to the subsidy sys- private sector. Thirdly, greater economic tem could increase poverty and vulnera- decentralization would strengthen the role bility during 2017-2019. of local authorities, which will improve access to basic social services, but this would require a change in focus from the Risks and challenges current emphasis on accountability to the center. Fourthly, low female LFP is multi- dimensional, but likely related to infra- The economy is confronted with the chal- structure deficiencies, the pattern of job lenge of social discontent, slow structural creation, the broad scope of the social safe- transformation, low decentralization, low ty net, and migration. Fifthly, on Septem- TABLE 2 Algeria / Macro outlook indicators (annual percent change unless indicated otherwise) 2014 2015 2016 e 2017 f 2018 f 2019 f Real GDP growth, at constant market prices 3.8 3.7 3.3 2.2 2.0 1.5 Private Consumption 4.4 3.9 3.3 3.6 3.3 3.4 Government Consumption 1.1 3.1 1.3 1.2 1.0 -0.5 Gross Fixed Capital Investment 6.4 5.7 3.5 1.1 -4.6 -4.7 Exports, Goods and Services 0.2 0.6 7.9 2.3 3.9 3.6 Imports, Goods and Services 8.4 6.4 -3.0 1.6 1.5 1.0 Real GDP growth, at constant factor prices 4.1 3.8 3.4 2.1 2.0 1.5 Agriculture 2.5 6.0 1.8 2.2 2.5 2.7 Industry 1.5 1.8 6.2 3.2 3.1 2.5 Services 6.6 4.6 1.8 1.2 1.0 0.3 Inflation (Consumer Price Index) 2.9 4.8 6.4 5.5 4.4 4.0 Current Account Balance (% of GDP) -4.4 -16.5 -15.6 -13.0 -10.8 -9.5 Fiscal Balance (% of GDP) -8.0 -15.7 -13.7 -11.5 -7.3 -5.7 Debt (% of GDP) 7.7 8.8 20.6 17.9 17.7 17.0 Primary Balance (% of GDP) -7.8 -15.3 -13.4 -10.8 -6.6 -5.3 So urces: Wo rld B ank, M acro eco no mics and Fiscal M anagement Glo bal P ractice, and P o verty Glo bal P ractice. No tes: e = estimate, f = fo recast. were strengthened by the central bank. BAHRAIN Recent developments However, the lower credit growth of 2.8 percent in 2016, compared to the 9.8 per- cent average for the five years prior to it Bahrain’s economy continued to be nega- along with a quarterly drop of more than tively affected by the lower hydrocarbon 2.5 percent in the total number of em- Growth continues to moderate as aggre- prices. Bahrain maintained an expansion- ployed in the first quarter of 2017, high- gate demand remains weak and fiscal defi- ary fiscal stance since 2009 resulting in light the problem of weak demand in the cits accumulate. The current account general government deficits. However, the economy. situation worsened in 2016 with a decline The authorities’ emphasis on growth (3 stayed in deficit and international re- in oil revenues by 10 percent and an over- percent in 2016) comes at the expense of serves continue to decline, putting further all fiscal deficit estimated at 13 percent of fiscal deterioration. While the hydrocar- pressure on the exchange rate peg. De- GDP (up from 12.8 percent in 2015). The bon sector’s real output stayed almost the spite austerity measures, Bahrain remains deficit spending helped maintain econom- same, the non-oil sectors grew by an aver- ic growth at 3 percent, but brought re- age estimated rate of 3.8 percent, a figure the most vulnerable GCC country in the serves down to a concerningly low level at that reflects the continued emphasis on face of low oil and bauxite prices due to its 1.2 months of imports and increased pub- public investments, some of which were limited savings and high debt levels, leav- lic debt to 65 percent of GDP. Data for the funded by GCC. The downside of this ing it exposed to financing risks. first quarter of 2017 indicates a slight up- approach, however, has been manifested tick in growth especially in the non-oil in persistently high fiscal deficits, estimat- sector growing 4.4 percent annually com- ed at 13 percent in 2016. A large portion of pared to 2016 as a whole (3.7 percent). the 2016 deficit was covered by debt issu- Bahrain has introduced some initiatives ances, despite the sovereign downgrade for fiscal consolidation. Revenue enhanc- reflecting increasing pressures on govern- ing measures such as higher tobacco and ment finances. In July, the Shura Council alcohol taxes and government services once again approved the increase of the fees were introduced. The proposed GCC- debt ceiling to BD 13 billion (accounting wide VAT introduction, which is expected for slightly more than the country’s esti- to be implemented from the beginning of mated GDP in 2017) for the 2017-18 budg- 2018, could further contribute to improv- et. ing government balances. Inflation has In 2017, the non-oil GDP expanded by an gradually picked up in 2016 primarily due annual 4.4 percent in real terms in the first to the ongoing subsidy reform and in spite quarter, which was mainly driven by pri- of weakening demand: the headline CPI vate sector. The country produced an av- rose by 2.8 percent, but it will remain sub- erage of 203,000 b/d oil in the first half of dued in 2017. The financial sector assess- 2017 (most from the shared field with Sau- ment by IMF indicates that the banking di Arabia). sector has remained resilient with ade- Little comprehensive welfare analysis is quate capitalization and liquidity levels as available due to restricted access to house- regulation and supervision of the sector hold survey data and limited capacity. FIGURE 1 Bahrain / Growth in GDP and its components FIGURE 2 Bahrain / Government balances Percent Percent of change GDP 16 40 14 30 12 10 20 8 10 6 0 4 2 -10 0 -20 -2 2013 2014 2015 2016 2017 2018 2019 2013 2014 2015 2016 2017 2018 Overall fiscal balance Hydrocarbon GDP Non-Hydrocarbon GDP Real GDP Total revenue Total expenditure Sources: Bahraini Authorities and World Bank staff estimates. Sources: Bahraini Authorities and World Bank staff estimates. According to the 2014/15 household sur- Average inflation is expected to decrease could trigger additional sovereign rating vey, average consumption expenditure in to 1.5 percent in 2017 reflecting the cooling downgrades making access to external the Kingdom was about US$780 per capita off in economic activity and phasing out financing harder and intensifying pres- per month (about US$800 for Bahraini of temporary price boosting effects of sub- sure on reserves and the peg. Fiscal sol- households). Among Bahraini nationals’ sidy reforms. The current account deficit vency and liquidity risks are high, and labor force participation is low, and peo- will partially narrow to 3.5 percent of outcomes remain vulnerable to shocks to ple work predominantly in the public GDP in 2017 and remain about there for growth, commodity prices, and interest sector, where wages are high and produc- the next year, with the exception of a rates. Saudi Arabia backstops the coun- tivity low. Immigrant workers constitute small adjustment. International reserves try’s fiscal resilience, but this comes with about a half of the resident population are expected to follow a declining trend in the expectation that Bahrain closely aligns and typically command lower incomes. 2018. Public debt is projected to exceed 80 its positions with Saudi Arabia; the associ- percent of the GDP in 2017, and reach ated vulnerability is left implicit. about 96 percent of GDP in 2018, with Key elements of the social contract— Outlook fiscal deficits in the 7 percent range con- tributing to rapid debt accumulation. public employment and subsidies—are becoming less affordable in the context of subdued oil prices. Bahrain aims to gain Economic growth is expected to decline in from upgrading its capacity for welfare the forecast period. Real GDP growth pro- jections have been revised to 2.4 percent in Risks and challenges measurement that would support design- ing policies aimed at mitigating the im- 2017 and 2 percent 2018, as continuing pact of the necessary adjustment. low oil prices depress private and govern- Ensuring fiscal sustainability, while pre- ment consumption. Some infrastructure serving a healthy growth rate, has become investments are also likely to be put on an important challenge and highlights the hold, driven by fiscal sustainability con- need for a medium-term fiscal framework cerns. In addition, the high oil production to bring external debt levels to sustainable in the first quarter of 2016 is not likely to levels. Despite efforts to diversify and continue after the withdrawal of the inter- boost non-oil fiscal revenues, hydrocar- national oil companies from the Awali bons account for about 76 percent of gov- oilfield in May. In the absence of signifi- ernment revenues in Bahrain. In addition, cant upfront fiscal adjustments, Bahrain subsidies still absorb more than 20 percent will remain vulnerable to fiscal risks as oil of the fiscal budget. Delays in implement- prices remain well below fiscal break-even ing fiscal consolidation and structural levels. reforms or a further decline in oil prices TABLE 2 Bahrain / Macro outlook indicators (annual percent change unless indicated otherwise) The banking sector remains weak with DJIBOUTI Recent developments deteriorating loan portfolio commercial banks and rising non- of performing loans (NPLs). The ratio of GDP growth is projected at 7.1 percent in NPLs to total loans increased from 14 per- 2017 reflecting an acceleration from the cent in 2013 to 23 percent in 2016. The Economic growth remains strong in 2017, estimated 6.5 percent in 2016. Growth is authorities attribute this increase to the fueled mainly by construction and rising mainly driven by construction and rising introduction of stricter loan classification transit trade and transshipment for Ethio- transit trade and transshipment for Ethio- requirements. pia with improved port and transport pia with improved port and transport infrastructure. Inflation is expected to infrastructure. Although fiscal and exter- remain at 3.5 percent, driven mainly by nal positions are improving gradually, demand for housing and services. The debt and fiscal sustainability risks remain. latest official unemployment rates show weak links between growth and employ- Outlook With more than a fifth living in extreme ment generation: the rate was 39 percent poverty and nearly 40 percent of the labor in 2015, with women (49 percent) and The medium-term outlook remains favor- force unemployed, reforms to make rural areas (59 percent) showing higher able with the expectation that debt- growth more inclusive, with increased job rates. Meanwhile, the labor force partici- financed mega-infrastructures are effi- creation and improved productivity and pation rate is less than 25 percent. ciently managed to generate sufficient The fiscal deficit is projected to significant- revenues for debt servicing. The fiscal human capital will be critical. ly narrow to 3.8 percent of GDP in 2017, deficit is projected to gradually improve, from an estimated 15.2 percent in 2016, narrowing to low single digits in 2017-19. given that mega-infrastructure projects for This would materialize with rationaliza port development and railways construc- tion of expenditures and effective imple- tion, which triggered large capital ex- mentation of tax reform to enlarge the tax penditure, have ended. The external defi- base and increase revenues from activities cit is also projected to improve to 15.4 generated by megaprojects. percent of GDP in 2017 from 22.2 percent The current account deficit is projected to in 2016, as capital imports wind down. FDI decline to 12.3 percent of GDP by 2018 and is expected to rise to 10.8 percent of GDP further down to 10.2 percent in 2019, with in 2017 from 9.1 percent in 2016. Foreign a gradual pick up in exports growth over exchange reserves are projected to remain imports. FDI inflows and capital transfers sufficient for coverage of broad money and should continue to finance the deficit. Re- currency board at 3.4 months of imports. serves are expected to sustain the peg of The Real Effective Exchange Rate is the Djibouti Franc to the US Dollar at expected to further appreciate, reflecting 177.72. Inflation is projected to remain at the combined effects of the supply side 3.5 percent in 2017-18, furthering pressure constraints and the relatively high on competitiveness. consumer prices. FIGURE 1 Djibouti / Growth and public debt Sources: World Bank staff estimates. With infrastructure-led growth and corresponding demand for foreign labor, mega-projects on their own are not Risks and challenges likely to have a significant positive spillover on job creation and poverty reduction. Stronger monitoring of Economic diversification for job creation, welfare is expected in the future as a strengthening institutional capacity for new National Strategy for Development macroeconomic management and better of Statistics is being developed, and the quality of public services delivery, and first results of a nationally repre- governance system reform to improve sentative household consumption survey accountability, rule of law, government are expected to be available in the Fall of effectiveness and citizens’ engagement 2017. remain the top challenges of the Govern- ment. Addressing these challenges remain imperative to solve the country’s en- trenched issues of poverty, unemploy- ment, and low human capital quality, and to put the macro fundamentals on a sus- tainable path. Macroeconomic stability remains subject to high risks, including debt distress and vulnerability to trade and finance shocks. Social discontent over growing poverty, unemployment and inequality as well as regional instability and acute climate challenges pose addi- tional risks to the growth prospects. TABLE 2 Djibouti / Macro outlook indicators (annual percent change unless indicated otherwise) 2014 2015 2016 e 2017 f 2018 f 2019 f Real GDP growth, at constant market prices 6.0 6.5 6.5 7.1 7.0 7.0 Private Consumption 6.4 7.1 6.0 7.8 7.7 7.9 Government Consumption 1.6 5.7 5.8 6.5 2.3 1.7 Gross Fixed Capital Investment 19.3 32.9 -24.2 -9.3 -0.4 0.5 Exports, Goods and Services 5.4 17.6 4.5 6.5 8.0 8.1 Imports, Goods and Services 11.9 28.9 -5.0 -2.0 2.3 3.0 Real GDP growth, at constant factor prices 6.4 6.5 6.5 7.1 7.0 7.0 Agriculture 3.0 3.0 2.1 2.5 3.0 3.0 Industry 5.4 5.4 5.5 5.8 6.0 6.1 Services 6.8 6.9 6.9 7.6 7.4 7.4 Inflation (Consumer Price Index) 2.9 2.2 3.5 3.5 3.5 3.1 Current Account Balance (% of GDP) -25.2 -30.4 -22.2 -15.4 -12.3 -10.2 Fiscal Balance (% of GDP) -10.7 -20.7 -15.2 -3.8 -2.6 -1.4 Debt (% of GDP) 48.5 69.4 84.8 83.4 81.9 80.5 Primary Balance (% of GDP) -10.4 -19.1 -13.4 -1.7 -0.4 0.9 So urces: Wo rld B ank, M acro eco no mics and Fiscal M anagement Glo bal P ractice, and P o verty Glo bal P ractice. No tes: e = estimate, f = fo recast. the rise in net FDI (reaching 3.3 percent of ARAB REPUBLIC Recent developments projected GDP, from 2.1 percent a year earlier) as well as a surge in portfolio in- OF EGYPT Egypt’s economy is estimated to have flows that were encouraged by Egypt’s grown at 4.1 percent in FY2016/17 (July/ improved outlook and attractive returns June), slightly lower than the 4.3 percent on EGP-denominated assets. The ex- real growth achieved in the previous year. change rate adjustment has helped in free- Following two quarters of slowdown in ing up resources to pay part of the accu- Macroeconomic conditions are showing growth, economic activity is picking up, mulated arrears to international oil com- signs of stabilization following the liberal- driven primarily by the resilient private panies, which currently stand at US$2.3 ization of the exchange rate. Important and (to a lesser extent) public consump- billion in end-June 2017 down from tion, as well as by an uptick in invest- US$3.5 billion in end-2016. Net interna- fiscal reforms are underway, with energy ments with net exports contributing posi- tional reserves spiked to a record level of subsidy cuts and containment of the wage tively for the first time in two years, albeit US$36 billion (7.5 months of merchandise bill contributing to fiscal consolidation. still marginally. imports) in end-August 2017, compared to However, inflation has spiked to record The liberalization of the exchange rate in US$19 billion in end-October 2016. November 2016 has eased shortages in Egypt has also embarked on an ambitious high levels with negative implications on foreign currency, eliminated the parallel fiscal consolidation program, notably social conditions. The Central Bank of market and kick-started an improvement through cuts in energy subsidies, contain- Egypt (CBE) has tightened monetary in Egypt’s external accounts. The Balance ment of the wage bill and implementation policy and the Government has increased of Payments (BoP) achieved a of the VAT. These fiscal reforms have spending on social protection to mitigate US$13.7 billion surplus (5.8 percent of the helped avail resources to scale up social year’s projected GDP); 90 percent of spending whilst achieving a fiscal consoli- the impact on living conditions. which was realized only following the dation in the magnitude of 1.7 percent of November exchange rate floatation. This GDP resulting in a projected fiscal deficit compares to a BoP deficit of of 10.9 percent of GDP in FY2016/17. US$2.8 billion (-0.8 percent of GDP) a year However, inflation continues to be a major earlier,1 with the large improvement in concern, spiking to a record high of 33 FY2016/17 resulting from a narrowing percent in July 2017, before receding current account deficit (albeit in absolute somewhat to 31.9 percent in August. The terms only), and a surge in capital and sharp currency depreciation, along with financial inflows. The current account the introduction of the VAT (followed by deficit fell to US$15.6 billion in FY2016/17 the increase of 1 percentage-point in its from US$19.8 billion a year earlier, due to rate), the two rounds of hikes in energy higher oil and non-oil exports, contained prices, in addition to non -competitive imports, an uptick in tourism and re- practices in domestic markets have all mittances. The capital and financial ac- exerted upward pressure on domestic count jumped to US$29 billion in prices. Notwithstanding the CBE’s efforts FY2016/17, from US$21.2 billion due to to tighten monetary policy (cumulative increased external borrowing as well as policy rate hikes worth 700 basis points FIGURE 1 Arab Republic of Egypt / Real GDP Growth, FIGURE 2 Arab Republic of Egypt / Inflation rates, July demand-side, FY2011-17 2013-July 2017 Contributions in Percentage-Point Annual Percent Growth Private Consumption Public Consumption Core Headline Urban Food 40% Investments Exports 40% 30% Imports GDP Growth 30% 20% 20% 10% 0% 10% -10% q1 q2 q3 q4 q1 q2 q3 q4 q1 q2 q3 q4 q1 q2 q3 q4 q1 q2 q3 q4 q1 q2 q3 q4 q1 q2 q3 0% Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 Source: Authors’ calculations based on Ministry of Planning data. Source: Central Bank of Egypt. between November 2016 and June 2017), licensing law and further improvement in real interest rates remain negative. the regulatory framework are expected to The acceleration of inflation is weighing improve the business climate and foster Risks and challenges on social conditions, with the impact growth over the medium term. affecting both the middle-class and low The economy is forecast to grow by income groups. While unemployment has 4.5 percent in FY2017/18 driven by a resili- Policy slippage and delays in real sector started to decline, it remains elevated at ent private consumption, albeit partially reforms may jeopardize the restoration of around 12 percent in FY2016-17 diluted by high inflation over the short macroeconomic balances. Egypt’s total (compared to 12.7 percent a year earlier), term. As Egypt sustains the momentum of government debt to GDP ratio was 102.8 and continues to be higher among the reforms, further pick-up in investment percent in end-FY2015/16, and is expected youth and the educated. Social protection and a recovery in merchandise exports to increase further in FY2016/17 with the measures were scaled up to mitigate the and tourism are expected to contribute sharp depreciation and increased foreign impact of the recent inflation spike. These positively to growth. The operationaliza- borrowing. Thus, any slowdown/reversal include the expansion in amount and cov- tion of new gas fields is set to boost the in fiscal reform efforts or slowdown in erage of the cash transfer programs extractives sector and improve fiscal and growth can undermine debt sustainability. (Takaful and Karama), an increase in the external balances. High inflation, i f persistent, can warrant allotment in food smartcards from EGP 21 The budget deficit is expected to decrease monetary tightening and challenge eco- to EGP 50 per person per month, in addi- to 8.8 percent of GDP by FY2017/18, sup- nomic growth. tion to higher income tax threshold, lower ported by energy subsidies reform and Additionally, regional and domestic secu- income taxes and an exceptional cost of increase in tax revenues. The current ac- rity risks can exert an adverse impact on living bonus for state workers. count deficit is expected to narrow to 4.6 the recovery of foreign investments, percent of GDP in FY2017/18. tour-ism and remittances, all Outlook Poverty could decrease in part through the strengthened social protection considered im-portant sources of government revenues and foreign measures embedded in the approved exchange resources. As Egypt sustains the momentum of re- budget for FY2017/18, including the in- forms, economic activity is expected to creased allocations for food smartcards improve, and imbalances are projected to and for cash transfer programs. narrow further through the elimination of distortions in foreign currency markets and the government’s commitment to fiscal consolidation. If properly imple- mented, the recently adopted industrial TABLE 2 Arab Republic of Egypt / Macro outlook indicators (annual percent change unless indicated otherwise) 2014 2015 2016 e 2017 f 2018 f 2019 f Real GDP growth, at constant market prices 2.9 4.4 4.3 4.2 4.5 5.3 Private Consumption 4.4 3.1 4.6 2.2 3.1 4.0 Government Consumption 8.4 7.0 3.9 0.8 1.1 1.6 Gross Fixed Capital Investment 1.5 13.8 12.0 8.2 10.1 10.9 Exports, Goods and Services -11.9 -0.6 -14.5 3.2 5.4 7.6 Imports, Goods and Services 0.2 0.6 -1.9 -3.0 1.6 3.8 Real GDP growth, at constant factor prices 2.9 3.4 2.3 4.2 4.5 5.3 Agriculture 3.0 3.1 3.1 3.0 3.0 3.0 Industry 1.5 1.1 0.2 1.9 3.6 4.5 Services 3.9 5.0 3.7 6.0 5.4 6.3 Inflation (Consumer Price Index) 10.1 10.9 10.2 23.3 22.1 14.0 Current Account Balance (% of GDP) -0.9 -3.7 -6.0 -6.6 -4.6 -3.9 Fiscal Balance (% of GDP) -12.0 -11.4 -12.5 -10.8 -8.8 -7.1 .. 16.1 15.0 15.1 14.6 14.0 So urces: Wo rld B ank, M acro eco no mics and Fiscal M anagement Glo bal P ractice, and P o verty Glo bal P ractice. No tes: e = estimate, f = fo recast. It is worth noting that the current account deficit to GDP ratio has actually increased to 6.6 percent, from 6 percent a year earlier. The deterioration is due to the sharp drop in the US$ -denominated GDP following the exchange rate depreciation. 1 although the declining trend in 2015 has IRAN, ISLAMIC Recent developments ended. The fiscal deficit further widened to 2.2 percent of GDP in 2016, but the debt REPUBLIC In 2016, the economy registered a strong to GDP ratio fell to around 35 percent due to a higher GDP.2 The current account oil-based bounce back, with an annual surplus increased by more than 80 percent headline growth rate of 13.4 percent, com- to reach around 4 percent of GDP, up pared to a contraction of 1.3 percent in from 2.3 percent in 2015, primarily as a The Iranian economy strongly recovered 2015.1 The largest contribution to growth result of increase in oil exports. However, in 2016, on the back of a significant rise was from the industry sector (at about 25 non-oil merchandise exports declined by 9 in oil production and exports, following percent) as oil and gas production in- percent in 2016 and recent data for the creased by a staggering 62 percent, mainly first four months of the new fiscal year the removal of nuclear related interna- as a result of sanctions relief. Recovery in indicates a negative growth in non-oil tional sanctions. However, unemploy- non-oil GDP however was limited at 3.3 exports (-10 percent year over year). ment remains high and non-oil sector percent, although this represents the high- The universal cash transfer program ap- activity remains subdued, as anticipated est growth rate in the last 5 years. Recent pears to have more than compensated for foreign investment flows have not materi- data suggests that growth in crude oil the likely increase in energy expenditures production in the first quarter of 2017 de- of less-well-off households, thus contrib- alized, in the absence of a full integration clined to 17 percent year over year. On the uting to positive consumption growth of of the banking sector with the global bank- demand side, all components except in- the bottom 40 percent of the population, ing system and continued uncertainties vestment registered improvements over with overall consumption growth be- regarding full implementation of the the previous year. Investment continued tween 2009 and 2013 being negative. Pov- to contract in 2016, albeit at a much lower erty increased in 2014 to 10.5 percent JCPOA. Growth prospects in the medium rate of 3.7 percent (compared to 12 percent though and this may be associated with a term are modest. a year earlier). The reduction in invest- declining social assistance in real terms. ment was primarily driven by the contin- ued contraction in the construction sector since 2012 following a boom in specula- tive demand for housing. Despite the Outlook growth in the non-oil sector, unemploy- ment increased to 12.6 percent in Spring 2017 up from 12.4 percent six months ear- In the medium term, the economy is ex- lier, which suggests a very limited em- pected to undergo a significant modera- ployment generation capacity in the sec- tion in growth as spare capacity in the oil tors spearheading growth. The CBI to- sector is utilized. Growth in 2018-19 is gether with the Money and Credit Council expected to be slightly stronger than 2017 have implemented measures to increase as investment growth turns positive and investment and non-oil growth. The aver- accelerates along with more political and age interbank interest rate was reduced by economic stability, following the re- around 6 percent to 18.6 percent in 2016, election of President Rouhani for a second FIGURE 1 Islamic Republic of Iran / Fiscal outlook FIGURE 2 Islamic Republic of Iran / GDP growth decom- position Percent 20 15 10 5 0 -5 -10 -15 2000 2003 2006 2009 2012 2015 2018 Gov. cons. GFCF Private cons. Statistical disc. Exports Inventories Imports GDP Sources: Iranian authorities and World Bank staff calculations. Sources: Iranian authorities and World Bank staff calculations. 4-year term in May 2017. With some indi- wider range of structural reforms includ- cations of inflationary pressures due to the ing improving the business closing output gap as well as exogenous Risks and challenges environment, productivity, labor market commodity price shocks, headline CPI flexibility, and further diversification of inflation is expected to remain high but exports. Such reforms would also facilitate below 12 percent in the next three years The main risk to the economy is the politi- investment (both domestic and foreign) in especially considering the high unemploy- cal uncertainty around the continued im- order to achieve a more resilient medium- ment rate and absence of demand pull plementation of the nuclear agreement, in term growth performance. factors. The Central Bank of Iran (CBI) is the wake of new non-nuclear sanctions expected to use activist monetary policy, introduced by the US. This increases risk especially in reducing deposit rates to perceptions of the country and deters fur- redirect credit towards the productive ther improvement in foreign investment sectors and increase non-oil growth. The in the oil and non-oil sectors. At the same CBI remains committed to implementing time, the delays in the banking sector rein- the unification of the official and market tegration with global banking combined exchange rates, although this may be fur- with the challenge of fully implementing ther delayed from the revised target date banking sector reforms create further risks of end 2017. The overvalued real ex- for the medium term. Although the CBI change rate may put pressure on the mon- has succeeded in reining in shadow bank- etary authorities to allow the rial to depre- ing operations considerably, the issue of ciate to promote export competitiveness high deposit rates, banks’ frozen assets and reduce pressure on foreign currency and non-preforming loans are yet to be reserves. Falling real value of cash trans- adequately addressed and are major inter- fers may continue to have negative impact related challenges facing the economy in 1. The CBI has published a new base year (2011) nation- on poverty, while moderate economic the foreseeable future. On the fiscal side, al accounts series. This has resulted in some revisions growth and planned improved targeting the Ministry of Finance’s attempts in de- to growth rates from the previous version of this of benefits may contribute to lower pov- termining the real levels of government report. The old series had reported growth rates of 5.4 erty after 2016. debt and securitization of arrears high- and 9.2 percent for Q1 and Q2 2016 whereas the new lights the need for a more comprehensive series corresponds to 7.5 and 12.9 percent growth for debt management framework comple- those two periods. mented by prudent fiscal policy. The fu- ture prospects of the economy will also be 2. IMF Article 4 (2017). conditional on the implementation of a TABLE 2 Islamic Republic of Iran / Macro outlook indicators (annual percent change unless indicated otherwise) 2014 2015 2016 e 2017 f 2018 f 2019 f Real GDP growth, at constant market prices 4.6 -1.3 13.4 3.6 4.0 4.3 Private Consumption 2.0 -3.5 3.8 3.4 3.5 3.8 Government Consumption 4.2 4.8 3.7 3.8 3.0 2.9 Gross Fixed Capital Investment 7.8 -12.0 -3.7 1.7 8.4 9.2 Exports, Goods and Services 7.2 12.1 41.3 7.1 5.3 5.1 Imports, Goods and Services -4.5 -20.2 6.1 6.0 7.0 6.6 Real GDP growth, at constant factor prices 3.2 -1.6 12.5 3.5 3.9 4.1 Agriculture 5.4 4.6 4.2 4.0 4.1 4.1 Industry 5.1 -1.4 24.7 4.6 4.7 4.8 Services 1.4 -2.5 3.7 2.3 3.0 3.4 Inflation (Consumer Price Index) 15.6 11.9 9.0 11.5 10.9 10.6 Current Account Balance (% of GDP) 3.1 2.3 3.9 4.1 4.0 3.8 Fiscal Balance (% of GDP) -1.1 -1.7 -2.2 -2.2 -2.3 -2.1 Debt (% of GDP) 11.5 41.2 34.7 30.4 29.2 28.0 Primary Balance (% of GDP) -1.1 -1.6 -2.1 -2.1 -0.9 -0.7 Sources: World Bank, Macroeconomics and Fiscal Management Global Practice, and Poverty Global Practice. Notes: e = estimate, f = forecast. to a small recovery in oil prices and REPUBLIC OF Recent developments measures to increase non -oil revenues and to contain salaries and pensions. The IRAQ GOI is prioritizing its limited investment The ISIS insurgency and low oil prices expenditure for reconstruction in areas have severely impacted Iraq’s growth, liberated from ISIS, and to increase elec- which decelerated in 2014-15, with gov- tricity. KRG is also implementing ernment non-oil investment declining by measures to contain expenditure and im- The ISIS war and low oil prices since mid two-thirds and rapid contraction of agri- prove non-oil revenue. KRG fiscal deficit -2014 have severely impacted the econo- culture, manufacturing and construction. decreased by 80 percent from 2014 to my. Contraction in oil production is re- Strong oil production sustained economic 2016. Spending pressures remain high to growth in 2016, while the OPEC agree- assist IDPs and refugees. sulting in negative overall growth in ment to cut production until March 2018 The government financed the deficit main- 2017, but owing to improved security the is expected to lead to a contraction in ly through domestic short-term bank fi- non-oil growth will turn positive after growth in 2017. Non-oil growth has been nancing. GOI’s public debt-to-GDP ratio three year decline, despite the ongoing negative since 2014, but a better security increased from 32 percent in 2014 to 67 situation and the benefits of an initial re- percent in 2016. Over the same period, fiscal consolidation. The government’s construction effort are expected to sustain domestic debt increased from 7 to 27 per- reform effort – but not reconstruction – is non-oil growth at 1.5 percent in 2017. The cent of GDP. Public debt is estimated to supported by a large international financ- drivers are construction and services on decline to 64 percent in 2017. The GOI has ing package. Growth will accelerate in the supply side, and pick-up in govern- accumulated large contingent liabilities, 2018, sustained by higher oil production. ment consumption and investments on by issuing 11 foreign-currency denominat- the demand side. Owing to the pegged ed guarantees (US$36 billion) for inde- despite persistent security risks. exchange rate and subdued aggregate pendent power producers. demand, inflation has averaged 0.4 per- GOI’s structural reforms are supported cent in 2016 and is estimated at 2 percent by a large international financing pack- in 2017. age. In 2016, the World Bank provided The low oil prices and higher security and US$1.44 billion DPF loans and the IMF humanitarian outlays rapidly deteriorat- provided US$1.2 billion financing under a ed the fiscal and external balances since three-year SBA. In January 2017, the gov- 2014 in the Federal Government of Iraq ernment issued a US$1 billion bond guar- (GOI) and the Kurdistan Regional Gov- anteed by the U.S. government. JICA and ernment. GOI’s overall fiscal deficit in- France have provided parallel budget creased to 14 percent of GDP in 2016 support financing. In August 2017, fol- mainly because of a 22 percent fall in oil lowing the successful conclusion of the prices in the previous year; in response, second review of the IMF program, the GOI is implementing a fiscal consolida- government issued a US$1 billion bond tion program to reduce the non-oil prima- maturing in 2023, its first independent ry deficit. In 2017, the fiscal deficit is esti- issuance since 2006. In the first half of mated to reach 5.1 percent of GDP owing 2017, the government introduced a flat FIGURE 1 Republic of Iraq / Fiscal Accounts (% of GDP) Percent of GDP 10 60 5 55 0 50 -5 45 40 -10 35 -15 30 -20 25 -25 2010 2011 2012 2013 2014 2015 2016 2017e 2018f 2019f Overall Fiscal Balance, excl grants (right) Revenues (left) Expenditures (left) Sources: Ministry of Finance; and World Bank staff projections. income tax, successfully stabilized current in 2016 was more than twice that of resi- framework. expenditure, and started reducing arrears dents. to domestic and external creditors. It also adopted a social database based on a Risks and challenges proxy-means testing system and reduced gas flaring. Outlook In 2017, the current account deficit is ex- Downside risks include lingering security pected to decline by 2.4 percentage points Iraq’s economic outlook is expected to challenges, which are likely to continue to of GDP thanks to fiscal consolidation and improve assuming a more favorable secu- disrupt reconstruction efforts after the higher oil revenues. The strong reserve rity environment, continued fiscal consol- liberation of Mosul, and lower oil prices, accumulation during 2010–2013 provided idation and reforms. Overall GDP growth which could renew pressures on Iraq’s a buffer to smooth the fiscal policy adjust- is projected to return positive in 2018 fol- twin deficits and require further fiscal ment required to maintain external sus- lowing the end of production cuts agreed adjustment or additional external financ- tainability. Foreign reserves financed most by OPEC. Oil production in the medium ing. The external debt remains highly vul- of the balance of payment deficit, declin- term is expected to increase only margin- nerable to a further reduction in oil prices ing from US$77.8 billion at end-2013 (or 10 ally as GOI cannot afford to increase in- or a real exchange rate depreciation. Risks months of imports) to US$41.4 billion at vestments in the oil sector. Sustained by are also related to the capacity of GOI to end-2017 (or 6 months of imports). agriculture, construction and services, provide public services even in regions Jobs were not providing a pathway out non-oil economic growth is conservative- not affected by violence and start recon- of poverty even before the crisis. Iraq has ly projected to recover to about half its struction. Tensions between Baghdad and one of the lowest employment -to- pre-2014 average growth to 4 percent as Erbil could re-ignite following KRG deci- population ratios in the region, even recurrent violent outbursts and lingering sion to hold a referendum of independ- among men, and the 2014 crisis has led to presence of ISIS could delay investment ence in September 2017. The escalating an estimated reduction in employment and reforms. The fiscal deficit is expected political tensions and terrorist attacks by 800,000 jobs. The Public Distribution to improve owing to consolidation in non ahead of the general and provincial elec- System provides the only safety net for -oil primary current expenditure, while tions in April 2018 add additional risks. the vast majority of the poor, and is cur- still protecting social spending at around rently stretched to its limits. Many IDPs 22 percent of non-oil expenditure. The are left largely uncovered by any public external current account is expected to safety net. Although the overall food remain negative but to improve owing to insecurity rate in the country is low and higher oil prices. Public debt is expected falling, food insecurity rate among IDPs to peak at 65 percent of GDP in 2018, but reconstruction costs are not in the fiscal TABLE 2 Republic of Iraq / Macro outlook indicators (annual percent change unless indicated otherwise) 2014 2015 2016 e 2017 f 2018 f 2019 f Real GDP growth, at constant market prices 0.7 4.8 11.0 -0.5 3.0 1.7 Private Consumption 7.6 20.0 13.2 2.1 3.1 3.4 Government Consumption -13.2 29.1 5.7 9.4 -3.9 -3.5 Gross Fixed Capital Investment 22.3 -2.1 -30.2 1.0 -0.4 -1.3 Exports, Goods and Services 10.7 28.3 13.1 -2.0 4.4 1.5 Imports, Goods and Services -7.2 11.2 -5.3 13.0 -2.1 -1.1 Real GDP growth, at constant factor prices 0.7 4.8 11.0 -0.4 2.9 1.7 Agriculture -11.2 -49.3 59.6 0.0 7.0 7.0 Industry 4.1 9.3 18.6 -1.0 3.5 1.3 Services -3.9 2.4 -7.2 1.2 1.1 2.2 Inflation (Consumer Price Index) 2.2 1.4 0.4 2.0 2.0 2.0 Current Account Balance (% of GDP) 2.6 -6.5 -8.7 -6.3 -6.7 -4.1 Fiscal Balance (% of GDP) -5.3 -12.3 -14.1 -5.1 -4.8 -1.7 Debt (% of GDP) 32.1 55.1 66.7 63.8 65.3 64.3 Primary Balance (% of GDP) -5.0 -11.7 -13.4 -3.8 -3.7 -0.5 So urces: Wo rld B ank, M acro eco no mics and Fiscal M anagement Glo bal P ractice, and P o verty Glo bal P ractice. No tes: e = estimate, f = fo recast. of GDP. On the external front, despite a JORDAN Recent developments larger energy import bill reflecting higher international oil prices, the large current account deficit is expected to narrow driv- Real GDP growth for 2017 is expected to en mainly by the growth in tourism. be 2.3 percent, a tepid increase of 0.3 per- Jordan’s monetary policy continues to Amidst a challenging regional backdrop, centage points (pp) over the 2016 rate. target the exchange rate dollar peg with Jordan’s economy remains sluggish, Services continued to be the principal the Central Bank of Jordan (CBJ) having driver of GDP growth in 2017 (Figure 1) raised interest rates four times since De- though it is undergoing a modest pick-up propelled by a robust performance in cember 2016—once by 50 basis points in 2017, owing to a resurgence in tourism tourism, which posted double digit (bps) and three times by 25 bps each—in and mining and quarrying. Yet this is growth in receipts and arrivals in the first attempts to maintain an attractive risk overlaid on continued uncertainty regard- half of the year. The tourism sector has premium over the Federal Reserve Board more than made up for declines from (FED) rates. Lower foreign inflows, ex- ing the crises in Syria and Iraq, and the GCC countries by attracting visitors from change market pressure and higher dollar- duration of the slowdown in the Gulf Co- other parts of the world, especially Asia. ization rates all put downward pressures operation Council (GCC) countries on the Jordan’s industrial sector is regaining mo- on central bank’s foreign reserves, which mentum based on a recovery in mining declined to US$11.2 billion in end-July one hand, and the slow pace of structural and quarrying, which grew by 14.7 per- (covering 7.2 months of imports, exclud- reforms on the other. cent in the first quarter of 2017 (Q1-2017) ing re-exports). Meanwhile, headline con- in contrast to a contraction of 8.4 percent sumer prices rebounded from a two-year yoy in Q1-2016. Because of these develop- deflationary period in tandem with the ments, and a resurgence in potash prices global recovery in oil and food prices. The net exports of goods and services are pro- average inflation rate for January – July jected to lead GDP growth on the demand 2017 reached 3.4 percent. side, as they did in 2016. Structurally, While the economy is in a low growth while industry accounts for one quarter of equilibrium, the job market is facing sig- GDP, it provides the main source of buoy- nificant stress. In Q1-2017, the unemploy- ancy in GDP growth. ment rate averaged 18.2 percent, while In 2017, Jordan’s fiscal position is expected labor force participation averaged 40.5 to improve as a result of government’s percent, both reflecting acute gender- fiscal consolidation efforts in line with the based heterogeneity (Figure 2) as female International Monetary Fund program. labor force participation in Jordan signifi- However, the narrowing of fiscal imbal- cantly lags MENA and non-MENA aver- ances is likely to materialize at a slower ages. pace than initially anticipated by the pro- gram due to weaker economic growth. The projected overall fiscal deficit, exclud- ing (including) grants, will be largely un- varied from 2016 levels at 6 (3.3) percent FIGURE 1 Jordan / Albeit sluggish, growth is fueled by a range of sectors from the supply side Supply Side Contribution to Real GDP Growth (yoy) Percent (%) 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 -1.0 2010 2011 2012 2013 2014 2015 2016 2017 -1.5 Net Taxes On Product Services Industry Agriculture GDP Sources: Department of Statistics and World Bank Staff Calculations. imports (mirroring higher oil prices). Cur- bility stems from sizable internal and ex- rent transfers and capital inflows are an- ternal imbalances that generate large fi- Outlook ticipated to remain sluggish given sub- nancing needs, which are typically met via dued growth forecasted in the GCC econ- international assistance and transfers from omies. the region. When these sources of finance Jordan’s baseline is expected to remain Jordan is expected to maintain a contrac- are reduced, financial and economic sta- significantly affected by regional events in tionary fiscal and monetary stance. Fiscal bility can be compromised. Iraq and Syria and the slowdown in consolidation will continue to focus on GCC’s economic performance. If the pace revenue-enhancing and expenditure- of economic reforms remains sluggish, we limiting measures as the government ad- expect only a marginal pick-up in the heres to the IMF program. Monetary poli- economy. Services and industry are ex- cy tightening is also expected in order to pected to continue nudging the economy preserve the attractiveness of the Jordani- forward. On the demand side, private an Dinar in light of Fed rate hikes and in consumption and private investment (real support of the dollar exchange rate peg. estate) are expected to regain momentum in the medium term after periods of stag- nation. This is despite CBJ’s contraction- ary monetary efforts which have been Risks and challenges mitigated by government’s efforts to limit crowding out by using external financing With a difficult regional outlook, sluggish to cover its fiscal needs. In addition, the economic reforms, and contractionary recent (end-August) reopening of the fiscal and monetary policies in place, it is Karameh trade route between Jordan and difficult to foresee a strong recovery in Iraq is expected to have a positive impact growth. While the reopening of trade on international trade over the medium routes with Iraq bodes well for improving term, especially through trade corridor consumption and investment sentiments, spillovers. given that the Jordanian economy is out- Jordan’s current account deficit is ex- ward looking and geared to supporting pected to narrow gradually over the medi- markets in GCC, Syria, and Iraq, the re- um term mainly on the back of improving gional violent conflict and displacement merchandise and tourism exports, outpac- will continue to affect the economy. Jor- ing import growth due to higher energy dan’s long-term macroeconomic vulnera- TABLE 2 Jordan / Macro outlook indicators (annual percent change unless indicated otherwise) 2014 2015 2016 e 2017 f 2018 f 2019 f Real GDP growth, at constant market prices 3.1 2.4 2.0 2.3 2.4 2.5 Private Consumption -2.6 8.5 -0.3 0.1 1.1 1.8 Government Consumption 6.5 3.6 8.1 -1.6 0.8 1.3 Gross Fixed Capital Investment 2.1 -8.0 -7.3 2.2 3.1 4.0 Exports, Goods and Services 7.5 -9.0 -2.8 6.7 6.7 4.5 Imports, Goods and Services -0.9 -3.0 -7.1 0.7 3.1 3.1 Real GDP growth, at constant factor prices 3.2 2.6 2.2 2.3 2.3 2.5 Agriculture 7.6 5.0 3.8 1.5 1.5 1.8 Industry 3.9 2.2 1.0 2.0 2.8 2.7 Services 2.7 2.7 2.6 2.4 2.1 2.5 Inflation (Consumer Price Index) 2.9 -0.9 -0.8 3.1 1.9 2.2 Current Account Balance (% of GDP) -7.3 -9.1 -9.3 -8.7 -8.6 -8.5 Financial and Capital Account (% of GDP) 4.3 7.3 8.6 8.1 10.1 8.6 Net Foreign Direct Investment (% of GDP) 5.8 4.3 4.0 3.9 3.9 3.8 1/ Fiscal Balance (% of GDP) -9.3 -3.6 -3.2 -3.3 -1.6 -0.5 Debt (% of GDP)2/ 89.0 93.4 95.1 95.6 94.1 91.8 Primary Balance (% of GDP) 1/ -5.7 -0.1 -0.2 0.1 2.1 3.2 So urces: Wo rld B ank, M acro eco no mics and Fiscal M anagement Glo bal P ractice, and P o verty Glo bal P ractice. No tes: e = estimate, f = fo recast. 1/ Includes fiscal gap o f 1.5% o f GDP in 2018 and 3.0% o f GDP in 2019. 2/ Go vernment and guaranteed gro ss debt. Includes WA J estimated bo rro wing fo r 2017-201 9. growth in lending to “productive” busi- KUWAIT Recent developments ness sectors (this excludes real estate and securities lending) remained resilient at 8.4 percent y/y in July. OPEC-related oil production cuts have External positions remain strong and sup- weighed on growth, with GDP anticipated portive of Kuwait’s currency peg, backed OPEC related oil production cuts have to shrink by 1 percent in 2017, following a by an SWF estimated at over US$500 bil- weighed down growth. However, output 3.6 percent increase in 2016. Hydrocar- lion and supported by a modest recovery should gradually recover supported by bons account for nearly half of GDP, and in oil prices over the past year. Kuwait the OPEC’s June decision to extend pro- posted a current account deficit of 4.5 per- still buoyant non-oil activity and infra- duction cuts until the first quarter of 2018 cent of GDP in 2016, a significant deterio- structure spending, and as oil output is has weighed on oil output and exports. ration from a surplus of 45 percent in ramped up. Pressure on fiscal and cur- Outside the oil sector, activity has re- 2013. Quarterly data show the current rent account balances is easing. Key chal- mained supported by the implementation account balance shifting back into a mod- of the five-year Development Plan est surplus on rising oil receipts. Import lenges include hydrocarbon dependence (2015/16-2019/20) which contains several growth has also remained robust, with and parliamentary opposition to deep large infrastructure, transport and refinery capital goods imports rising by 25 percent structural reforms. projects. In January, the government re- y/y in Q1, reflecting healthy domestic de- leased the New Kuwait 2035 Strategic mand related to government infrastruc- Plan, which aims to transform the country ture projects. into a regional, financial and commercial Although improving, the fiscal position hub as part of long-term economic diversi- remains constrained, reflecting depend- fication efforts. ence on oil revenues for nearly 90 percent Incoming data suggest that non -oil activi- of government income. With low oil prices ty is continuing to expand. Consumer persisting, the government has posted confidence rose in July to its highest level consecutive deficits of the order of 17 per- in almost two years, although it remains cent of GDP (excluding investment in- well below 2014 levels prior to the fall in come from the SWF and after transfers to global oil prices. Consumer spending, as the SWF) over the past two years, a far cry reflected in point-of-sale transactions, from double-digit surpluses prior to 2014. strengthened in Q2, rising 9 percent y/y. However, on a general government basis, The correction in property markets over public sector finances are in a modest sur- the past two years appears to have run its plus. Despite expenditure rationalization course: real estate prices have stabilized in efforts, fiscal reforms remain contentious. recent months, and residential sector sales The government began raising utility pric- rose by a robust 43 percent y/y in July. es in September 2016; however, rate in- While the banking sector remains well creases in the second round of electricity capitalized and generally healthy, bank and water tariff reforms currently being lending to both firms and households has implemented are lower than initially pro- slowed over the past year. However, posed. Plans to introduce a corporation FIGURE 1 Kuwait / Government balances, percent of GDP FIGURE 2 Kuwait / Domestic interest rates Sources: Ministry of Finance, World Bank, Haver. Sources: Central Bank of Kuwait, Haver. tax, at a fixed rate of 10 percent, have also Additional concerns for immigrant been shelved. Accordingly, the govern- workers include unpaid or delayed wages, ment has been forced to look for cost- difficult working conditions and fear of a Risks and challenges savings elsewhere, including to PPPs crackdown. (public private partnerships) to finance infrastructure projects, the implementa- Key external risks include spillovers from tion of a VAT (expected in January 2018) geo-political tensions and conflict. A and privatization of state assets. Kuwait strong resurgence of US hydrocarbon out- issued an inaugural US$10 billion interna- tional bond in March, but gross public Outlook put as business regulations are loosened under a new US presidency could weigh debt remains low at close to 20 percent of on global oil prices, particularly if the US GDP. emerges as a major energy exporter. Despite fuel price increases implemented Growth is expected to rebound to 3.5 per- Longer-term challenges relate to Kuwait’s in September 2016, inflation has remained cent in 2019, as OPEC related production dependence on the hydro-carbon sector. muted, averaging 1.7 percent since the cuts are tapered off and oil output and A poor business environment and the start of the year due to declining housing exports increase. The government plans to large size of the public sector have ham- costs and persistently weak food inflation. invest US$115 billion in the oil sector over pered the development of the private non- The peg to an undisclosed basket of cur- the next five years, which should also oil sector. Comprehensive reforms are rencies, in which the US Dollar has a boost oil production. With additional sup- needed to rebalance the economy away heavy weighting, has meant that the Cen- port coming from public investment from the energy sector to a more diversi- tral Bank of Kuwait (CBK) has raised in- spending, growth should rise to about 2.7 fied growth path underpinned by innova- terest rates in tandem with the US Federal percent over the medium term. Current tion, private sector entrepreneurship and Reserve. However, in June, the CBK opted account and budgetary pressures are ex- job creation, and the quality of its labor to keep its key policy rate on hold despite pected to ease on the back of a partial re- force. the US Federal Reserve hike. covery in oil prices and rising output. The Kuwait is an oil-rich country, where abso- baseline assumes gradual implementation lute involuntary unemploy-ment are of spending and revenue reforms includ- virtually nonexistent. Eighty percent of ing the introduction of a VAT in 2018, employed Kuwaiti nationals work in the which Kuwait is on track to implement. public sector. In contrast, immigrants, who make up two-thirds of the population, constitute the bulk of lower-income residents. TABLE 2 Kuwait / Macro outlook indicators (annual percent change unless indicated otherwise) 2014 2015 2016 e 2017 f 2018 f 2019 f Real GDP growth, at constant market prices 0.5 0.6 3.6 -1.0 1.9 3.5 Private Consumption 4.9 1.5 1.0 2.0 2.0 3.0 Government Consumption 0.8 0.5 0.4 3.4 -1.8 0.2 Gross Fixed Capital Investment 2.7 -0.7 4.3 12.1 8.2 13.9 Exports, Goods and Services 1.4 1.0 5.2 -3.2 2.8 2.3 Imports, Goods and Services 8.0 1.4 6.0 4.5 5.0 5.0 Real GDP growth, at constant factor prices 0.9 -1.4 3.4 -0.9 1.8 3.4 Agriculture 7.3 2.9 2.5 0.7 2.3 3.4 Industry -0.5 -1.8 4.0 -3.5 2.0 1.6 Services 3.5 -0.8 2.5 3.7 1.6 6.4 Inflation (Private Consumption Deflator) 2.9 3.2 2.6 1.7 1.8 1.8 Current Account Balance (% of GDP) 32.5 4.5 -4.5 0.1 1.8 2.8 Financial and Capital Account (% of GDP) -36.1 -8.1 0.8 -3.7 -5.4 -6.5 Net Foreign Direct Investment (% of GDP) -9.0 -12.7 -5.0 -3.0 -2.0 -2.0 Fiscal Balance (% of GDP) 18.7 0.0 0.5 1.7 1.6 2.5 Debt (% of GDP) 3.1 5.2 10.0 22.3 27.6 31.7 Primary Balance (% of GDP) 18.8 0.1 0.5 1.8 1.9 2.9 So urces: Wo rld B ank, M acro eco no mics and Fiscal M anagement Glo bal P ractice, and P o verty Glo bal P ractice. No tes: e = estimate, f = fo recast. subdued GDP growth and high interest LEBANON Recent developments payments mean that the debt-to-GDP ratio will continue its unsustainable path to- ward a projected 155 percent by end-2017. For 2017, the real GDP growth rate is pro- On the external front, a pickup in mer- jected at 2 percent, unchanged from 2016, chandise exports combined with stagnat- The prolonged political stalemate in Leba- with the main driver being services, and ing imports are expected to narrow the non ended with the election of President tourism in particular. During the first five current account deficit by about 2 pp to Aoun in October 2016 and the subse- months of 2017 (5-M 2017), tourist arrivals around 18 percent of GDP in 2017. Despite rose by 12.8 percent (yoy), while hotel the improvement, Lebanon’s external defi- quent formation of a unity government. occupancy rates averaged 65.2 percent, cit remains among the largest in the Since then political leaders have agreed on with the latter registering an increase of world, imposing heavy dependence on the long-disputed parliamentary election 8.4 percentage points (pp) over 2016 and short-term capital inflows, and exposing law, salary scale adjustment and the pub- the highest rate since 2012. From the de- the country to significant refinancing lic-private partnership law. The protract- mand side, the three-year (2014-2016) de- risks. To reinforce confidence, the Central cline in the contribution of private con- Bank, the Banque du Liban (BdL), sought ed Syrian crisis and the slow pace of sumption to GDP growth seems to be to reverse its declining external reserves structural reforms are critical impedi- abiding, as is the offsetting three-year im- and decelerating deposit growth rates in ments to achieving potential growth. Sig- provement in the contribution of gross banks by initiating a large and very gener- nificant macro-financial risks remain. fixed capital formation. For 2017, growth ous (to commercial banks) swap operation seems to be solely driven by net exports of in 2016. The benefits were short lived and goods and services; this is due to a recov- began to reverse in Spring 2017; from ery in exports, a low base effect, and stag- March 2017 until May, BdL reserves de- nation in imports (Figure 1). Structurally, clined by US$2.7 billion, a loss of almost the economy remains heavily based on half of BdL’s gains during the June 2016– services (especially real estate, retail and February 2017 period. In response, BdL financial services) and oriented towards initiated another financial swap operation, the region, rendering it vulnerable to vola- helping a June recovery for reserves in the tility in growth and sizable macroeconom- amount of US$1.8 billion. This, however, ic imbalances. was sourced from a repatriation of banks’ After five years of debate, salary scale foreign assets. In fact, the economy’s net adjustments for the civil service, military foreign asset position in H1-2017 contract- personnel and public sector teachers were ed by US$1.1 billion, highlighting the frag- finally enacted, with cost estimated at ile dynamic. almost 2 percent of GDP. Commendably, government aimed for a fiscally neutral reform, which forced broad revenue Outlook measures. The overall fiscal deficit for 2017 is expected to remain at around 9 Lebanon’s medium-term economic pro- percent of GDP, with a slight improve- spects remain sluggish. Projections of an- ment in the primary balance. However, nual growth persist to be around 2 percent FIGURE 1 Lebanon / Net exports to lead growth in 2017 Percent (%) 8 7 6 5 4 3 2 1 0 -1 -2 -3 -4 -5 -6 2013 2014 2015 2016 2017 f Private consumption Government consumption Gross fixed capital formation Net exports Statistical discepancy GDP Sources: Lebanese authorities and WB staff calculations. over the medium term, and 2.5 percent in net foreign asset accumulation in the face to be paid to the issue of household lever- 2018 due to expected increase in spending of persistent and sizable fiscal and current aging and repayment capacity. (public and private) motivated by the account deficits. More generally, a frail One of the key challenges to improving forthcoming parliamentary elections macro-fiscal framework, underpinned by empirically informed policy is to strength- scheduled in May. This is arrived at as- unsustainable debt ratios and persistent en the data and analytical base of the gov- suming (i) the Syrian war continues and and sizable fiscal and current account ernment, especially in the Central Admin- that spillovers into Lebanon, while signifi- deficits, within the context of a fixed ex- istration of Statistics for poverty measure- cant, remain contained; and (ii) a reform change rate regime, exposes the country to ment and monitoring. An improved data program to boost potential growth will significant foreign exchange and refinanc- system would better inform understand- not materialize. Moreover, exports of ing risks. The reliance on deposits to fi- ing of the micro-implications of the refu- goods and services are projected to contin- nance these imbalances could prove chal- gee crisis. ue recovering from a low base effect, leav- lenging based on recent commercial ing the external sector acting as a drag on banks’ deposit growth data. growth. Critical structural reforms in public fi- On the fiscal side, the election-induced nances, energy, safety nets and the busi- boost to public spending in 2018 and high- ness environment still elude the govern- er interest payments, will be partially off- ment, though some very important deci- set by the revenue-generating measures sions have recently been made. In addi- enacted in 2017, leaving the overall fiscal tion, the new parliament is working to deficit with only a marginal increase. The pass its first official budget since 2005. external balance, on the other hand, will Nonetheless, in the place of a sustained deteriorate more significantly as imports reform effort, the Central Bank activism is begin rebounding and remittances finally facing macro-financial risks. First, the ex- show the lagged negative effects of low oil pected normalization of global interest prices. rates will make it harder to attract hard currency deposits unless domestic interest rates also rise, which is inconsistent with Risks and challenges the objectives of BdL’s interventions to date. Second, the enthusiastic response to BdL subsidized loans has helped boost Security and political challenges continue economic activity but after several years to be Lebanon’s primary concern. Leba- of such lending, more attention will need non is also vulnerable to a slowdown in TABLE 2 Lebanon / Macro outlook indicators (annual percent change unless indicated otherwise) 2014 2015 2016 e 2017 f 2018 f 2019 f Real GDP growth, at constant market prices 2.0 0.8 2.0 2.0 2.5 2.0 Private Consumption 8.0 3.1 -2.9 -0.2 2.3 3.0 Government Consumption -1.6 6.0 10.9 -2.9 3.2 5.1 Gross Fixed Capital Investment -6.8 -2.6 17.8 -1.7 5.0 -0.5 Exports, Goods and Services -9.5 7.2 -5.0 4.4 3.6 1.4 Imports, Goods and Services -0.4 6.9 0.2 -2.2 3.9 2.8 Real GDP growth, at constant factor prices 2.1 0.3 4.6 2.2 2.0 2.0 Agriculture 14.7 -14.0 1.5 -8.5 2.5 0.0 Industry -3.4 -5.5 -2.8 -13.8 3.4 2.5 Services 2.5 2.2 6.1 5.2 1.8 2.1 Inflation (Private Consumption Deflator) 0.2 -3.1 -0.8 3.8 2.5 1.5 Current Account Balance (% of GDP) -24.3 -16.3 -19.8 -17.9 -19.4 -19.5 Financial and Capital Account (% of GDP) 26.6 22.3 18.8 14.0 14.1 12.3 Net Foreign Direct Investment (% of GDP) 3.5 3.4 4.0 4.0 4.0 4.0 Fiscal Balance (% of GDP) -6.3 -7.8 -9.6 -9.2 -9.6 -9.8 Debt (% of GDP) 138.7 142.2 151.0 155.1 158.9 162.7 Primary Balance (% of GDP) 2.5 1.2 0.0 0.8 0.9 1.2 So urces: Wo rld B ank, M acro eco no mics and Fiscal M anagement Glo bal P ractice, and P o verty Glo bal P ractice. No tes: e = estimate, f = fo recast. ties. Budget revenues are expected to LIBYA Recent developments jump strongly in 2017 thanks to the higher hydrocarbon output. They will reach LYD 24.6 billion or 34.6 percent of GDP. How- Despite strong growth performance driv- ever, revenues are just enough to cover en by the oil sector, the Libyan economy is public wages (33.3 percent of GDP), which Despite limited improvements, the Libyan still suffering from political strife that hin- are still high despite efforts to remove economy still remains far below potential, ders it from reaching its potential. Follow- duplicate payments from the payroll hindered by the persistence of violent po- ing four years of recession, the Libyan through extending and enforcing the use economy recovered in 2017-H1, thanks to of the national identification system. Sub- litical conflict. The twin deficits remain the resumption in the production of hy- sidies (8.9 percent of GDP) continue to large and lacking any framework for cor- drocarbon products after the repossession absorb a significant amount of budget rective measures, exacerbating the insta- from militias of the main oil fields last resources, while capital expenditures re- bility of the macroeconomic framework. year. The non-hydrocarbon sectors re- main weak. Overall, the budget deficit is Inflation accelerated, eroding further the mained sluggish inhibited by lack of expected to remain high at 22 percent of funds and security. GDP is expected to GDP (63.9 percent of GDP in 2016). The purchasing power of the population. Over increase by 25.6 percent in 2017, allowing deficit is being financed mainly through the medium term, the challenges go income per capita to substantially im- borrowing from the CBL. The domestic beyond reconstruction to addressing prove to 65 percent of its 2010 level after debt has quickly increased to reach LYD pre-2011 development gaps, diversifying losing more than half of its value. 53.7 billion end March 2017. Prices of almost all commodities contin- The balance of payments is also improv- the economy, and promoting private ued to increase over the first half of 2017, ing, but continues to suffer from the ongo- sector development. which further depleted the purchasing ing political deadlock and low oil prices. power of the population. Inflation hit a The relative improvement of security record level of 28.5 percent over 2017-H1 around the main oil facilities allowed Lib- following the 25.9 percent registered last ya to substantially increase oil export to year. Inflation is mainly driven by acute an average 0.62 million bpd over the first 7 shortages in the supply chains of basic months of 2017, but 1 million barrels per commodities, speculation in the expand- day is achievable with better security con- ing black markets, the de facto removal of ditions. However, production is still en- food subsidies due to lack of funds, and couraging when compared to just 0.27 the strong devaluation of the LYD in the million bpd in the same period of 2016. parallel markets. High inflation coupled Thus, revenues are expected to triple in with weak performance of non- 2017 to reach US$20.8 billion. This perfor- hydrocarbon sectors are likely to have mance is not enough for a sustainable increased poverty and exacerbated socio- current account considering the high de- economic exclusion. pendence of Libya on imports to meet Although improving, public finances are consumption and intermediate goods re- expected to remain strained in 2017, im- quirements. Indeed, imports are expected pacted by continued political uncertain- to recover strongly this year, which will FIGURE 1 Libya / Low revenues, exacerbated by high wage FIGURE 2 Libya / Turmoil in the hydrocarbon sector and bill and subsidies are deteriorating public finance, in % of GDP consumption driven imports deteriorating the balance of pay- ments, in % of GDP 80.0 100.0 60.0 80.0 40.0 60.0 20.0 40.0 0.0 20.0 -20.0 0.0 -40.0 -60.0 -20.0 -80.0 -40.0 -100.0 -60.0 2010 2011 2012 2013 2014 2015 2016 2017 -80.0 2009 2010 2011 2012 2013 2014 2015 2016 2017 Budget Balance Total Revenue Wages and salaries Subsidies and transfers Current account balance Exports Imports Sources: Government of Libya and World Bank staff estimates. Sources: Government of Libya and World Bank staff estimates. keep the current account deficit high at an budget and the current account running provision of services. According to the estimated 8.3 percent of GDP. To finance surpluses expected from 2020 onwards. IOM, in June 2017 there were 226,164 the deficit, Libya will need to draw further Foreign reserves will average around IDPs, 33 percent displaced in 2011-14. on foreign reserves. The latter will drop to US$60 billion during 2018-20. Host communities have absorbed the bulk around US$67.5 billion by end 2017, com- of the IDPs, however, as the situation be- pared to US$ 123.5 billion by end 2012. comes protracted, their resources and The official exchange rate of the Libyan Dinar against the US$ has been kept stable Risks and challenges basic services have become scarce and overstretched. Potential for return is mini- around its SDR peg, while the LYD in the mal in safe areas because the overall secu- parallel market lost 82.5 percent of its val- The baseline macroeconomic scenario rity situation has not allowed for interna- ue due to weak monetary-fiscal incon- presented above is very fragile because it tional assessment and assistance. For most sistency and lack of policy credibility. reflects coping through rapid depletion of of the internally displaced communities — buffers. This calls for immediate actions to including people displaced since the onset bring current expenditures under control, of the crisis in 2011 — there is no immedi- Outlook especially the wage bill and subsidies, and improve governance of the financial sec- ate prospect to return given the prevailing inter-community tensions. tor, which will also contribute to price A more favorable economic outlook de- stability. Over the medium term, the pends crucially on the progress in resolv- country needs broader and deeper struc- ing the political stalemate, which has di- tural reforms to stabilize the macroeco- vided the country, and improved security. nomic framework and promote private The status quo will eventually lead the sector-led job creation. In particular, there Libyan economy to insolvency. At the is a need to improve tax revenues and the current pace of spending, if the context of management of public financial and hu- conflict and insecurity persists, foreign man resources, promoting the develop- exchange reserves will continue towards ment and diversification of the private exhaustion, a prospect which is already sector, reforming the financial sector, and affecting expectations. Over the medium improving the business environment. term, subject to resumed peace and securi- The focus on Libya as a transit route for ty, growth is projected to continue and migrants has obscured an IDP crisis in the become more broad-based over 2019-20. country. The high number of internally Both the fiscal and current account balanc- displaced persons (IDPs) with limited es will significantly improve, with the prospects of return is creating a strain on TABLE 2 Libya / Macro outlook indicators (annual percent change unless indicated otherwise) 2014 2015 2016 e 2017 f 2018 f 2019 f Real GDP growth, at constant market prices -24.0 -6.1 -17.2 15.8 20.1 20.1 Private Consumption -24.0 -6.1 -0.7 2.6 2.8 2.8 Government Consumption -32.1 -4.6 -32.3 -28.0 -10.9 -10.9 Gross Fixed Capital Investment 9.2 9.7 -8.0 23.6 89.8 89.8 Exports, Goods and Services -67.8 -27.1 -18.1 112.4 44.6 44.6 Imports, Goods and Services -24.2 3.4 -3.5 8.7 4.8 4.8 Inflation (Consumer Price Index) 2.4 9.2 3.5 3.0 2.7 2.7 Current Account Balance (% of GDP) -48.1 -64.9 -94.5 -119.1 -86.4 -58.1 Fiscal Balance (% of GDP) -43.5 -77.1 -87.1 -53.1 -16.3 13.7 Debt (% of GDP) 39.3 127.0 286.1 313.4 235.2 176.5 Primary Balance (% of GDP) -41.8 -76.4 -85.1 -51.0 -14.7 14.9 So urces: Wo rld B ank, M acro eco no mics and Fiscal M anagement Glo bal P ractice, and P o verty Glo bal P ractice. No tes: e = estimate, f = fo recast. enue transfers by the Government of Isra- PALESTINIAN Recent developments el (GoI). The PA also managed to reduce its spending in the first half of 2017 mainly TERRITORIES due to lower transfers and the initial im- The latest war in Gaza had severe social pact of decisions to cut spending in Gaza. and economic consequences and caused As a result, the total deficit (before grants) the Palestinian economy to slip into reces- dropped by 16 percent year-on-year. In sion in 2014. Reconstruction efforts al- parallel, aid to the PA treasury declined Following a period of recovery after the lowed growth to recover to an annual by 19 percent resulting in a US$167 mil- 2014 Gaza war, growth in the Palestinian average of 3-4 percent in 2015-16. Howev- lion financing gap and further arrears territories dropped to 0.7 percent in Q1 er, aid receipts for reconstruction have accumulation to the private sector and significantly slowed in 2017 leading to a public pension fund. 2017 as reconstruction efforts decelerated sharp deceleration in reconstruction activ- The external current account deficit and private consumption slowed down. ities. This, along with a slowdown in pri- (including official transfers) is estimated At 29 percent, unemployment continues vate consumption in the West Bank due to to have declined in 2016 to 10.4 percent as to be stubbornly high. Given the ongoing political tensions pushed real GDP growth the trade deficit dropped and private down to a mere 0.7 percent in the first transfers increased. The trade deficit constraints to economic competitiveness, quarter of the year. reached 38.6 percent of GDP in 2016 down medium term growth is projected at 3 At 29 percent, the unemployment rate in from 41.0 percent in 2015 following a drop percent. Lower than expected aid and the the Palestinian territories remains stub- in imports from Israel—the Palestinian possibility of further conflict pose down- bornly high. Unemployment in Gaza, at territories’ main trading partner—due to side risks to growth and employment. 44 percent, is more than twice as high as lower fuel prices and a trend among Pal- that in the West Bank; more than 60 per- estinian consumers to boycott Israeli prod- cent of those aged between 15 and 29 in ucts. Exports continue to be constrained Gaza are out of work. by the ongoing trade restrictions and have Following a slight deflation of 0.2 percent remained low and stagnant at around 18 in 2016, price trends picked up in the first percent of GDP. Private transfers as a months of 2017 before a return to deflation share of GDP doubled in 2016 reaching mid-year. Overall prices declined by 0.7 12.1 percent due to an increase in re- percent in June 2017 (year-on-year), main- mittances from Palestinians working ly reflecting a decline in food prices and abroad. deflation in Israel driven by the appreciat- ing New Israeli shekel – the main curren- cy in circulation in the Palestinian territo- ries. Outlook The Palestinian Authority’s (PA) fiscal situation remained tight in the first half of The economic outlook for the Palestinian 2017 due to lower than needed aid. Public territories remains unfavorable. Assuming revenues performed well due to better tax that the current restrictions remain in administration by the PA and one-off rev- place, the security situation stays relative- FIGURE 1 Palestinian territories / Estimates and outlook: Public finances Sources: Palestinian MoF and World Bank staff estimates. ly calm and aid disbursements accelerate cent. Consequently, the current account could destabilize the political situation in throughout the year to reach their project- deficit is expected to remain high in the the West Bank. ed level, the real GDP growth rate of the coming years at about 13 percent of GDP. Palestinian economy in 2017 is projected at 3.0 percent: 2.7 percent in the West Bank and 4.0 percent in Gaza. This modest growth implies a stagnation in real per Risks and challenges capita income and an increase in unem- ployment. A sustainable economic recovery in the The fiscal deficit (before grants) is project- Palestinian territories is not possible given ed to reach 3.8 percent of GDP (US$1.2 the stalemate in the peace process, ongo- billion) in 2017. At the same time, foreign ing restrictions imposed by Israel on aid in 2017 could fall to about US$666 trade, movement, and access to resources million. After accounting for external debt alongside internal political divisions and a repayment, this results in a financing gap challenging business environment. As a in excess of US$580 million (4 percent of result, downside risks to growth and em- GDP). PA actions alone will not be ployment remain significant. First, clashes enough to fully close the gap. Unless do- recently witnessed in the West Bank may nor aid is significantly stepped up, the gap erupt again, and if this happens, the secu- will mostly be financed through arrears to rity situation will significantly worsen the private sector and borrowing from negatively impacting economic activity. local banks. Also, growth in the West Bank may be The Palestinian territories’ current account worse than expected if the decline in is expected to remain unfavorable in the donor support is sharper than current coming years due to the persistently large projections. As for Gaza, setbacks to the trade deficit. The share of Palestinian ex- reconstruction process are possible and ports in the economy is expected to re- under such a scenario, the resumption of main stagnant at about 17-18 percent in armed conflict cannot be ruled out which the medium term due to the ongoing GoI may cause the economy to slip back into restrictions on trade. With heavy depend- recession. Recent expenditure cuts by the ence on imports to meet even some of PA in Gaza may also lead to social their basic needs, the share of imports in tensions. While there is upside potential in the economy will hover around 55 per- Gaza if relations with Egypt improve, this TABLE 2 Palestinian territories / Macro outlook indicators (annual percent change unless indicated otherwise) 2014 2015 2016 e 2017 f 2018 f 2019 f Real GDP growth, at constant market prices -0.2 3.4 4.1 3.0 3.0 2.9 Private Consumption 3.5 6.2 3.6 4.5 4.5 4.3 Government Consumption 3.7 5.8 0.1 3.5 3.2 3.2 Gross Fixed Capital Investment -10.1 8.1 -0.2 3.0 -1.3 -1.6 Exports, Goods and Services 9.6 2.6 5.5 -5.2 1.2 4.0 Imports, Goods and Services 4.1 9.5 1.8 2.9 3.4 4.1 Real GDP growth, at constant factor prices -2.3 1.6 3.3 3.1 3.0 2.9 Agriculture -7.6 -7.2 -11.0 0.5 1.4 1.6 Industry -13.8 -2.6 6.6 4.0 4.0 4.0 Services 3.1 3.8 3.0 2.9 2.7 2.5 Inflation (Consumer Price Index) 1.7 1.4 -0.2 0.5 1.6 2.0 Current Account Balance (% of GDP) -7.4 -16.3 -10.4 -13.1 -13.2 -13.4 Financial and Capital Account (% of GDP) 4.4 19.4 8.7 10.9 11.2 11.5 Net Foreign Direct Investment (% of GDP) -0.2 0.2 1.2 1.1 1.1 1.1 Fiscal Balance (% of GDP) -2.8 -5.1 -2.4 -3.8 -3.3 -3.2 So urces: Wo rld B ank, M acro eco no mics and Fiscal M anagement Glo bal P ractice, and P o verty Glo bal P ractice. No tes: e = estimate, f = fo recast. edly postponed and the international re- MOROCCO Recent developments serves dropped by almost 20 percent in the period leading up to the envisaged reform. However, the new Head of the After a severe drought in 2016, the Moroc- Government postponed it the day before can economy, which still has a sizable the launching press conference. The social After a poor performance in 2016, a agriculture cycle, is expected to rebound crisis taking place in Al Hoceïma and ex- strong rebound in agriculture output is in 2017. Driven by a better-than-average pectations of a further deterioration in expected to push economic growth up in cereal harvest, economic growth picked public finances and macroeconomic bal- up at 4.3 percent in the first semester of ances may have been behind the postpone- 2017. Meanwhile, non-agricultural activ- 2017 (compared to 1.6 percent during the ment. The fall of international reserves due ity and inflation remain subdued. Alt- same period in 2016). The growth of non- to commercial banks speculations also hough the fiscal deficit has declined slight- agricultural activity remained less pro- influenced the authorities’ decision. ly to 4 percent, the external current ac- nounced however, at 3.3 percent. Services, count deficit widened. The new govern- and to a lesser extent extractives, were the ment is committed to pursue fiscal adjust- main drivers of non-agricultural growth. The unemployment rate rose to 9.3 per- Outlook ment and key program objectives. Yet, cent in the second quarter of 2017, espe- much remains to be done to reduce cially prevalent among the young (23.5 Growth is expected to slow down in 2018 structural unemployment, increase labor percent) and educated (17 percent). Aver- and job creation will remain weak. The age inflation in the first half of 2017 re- good harvest in 2017 will lead to a base force par-ticipation, and secure higher mained low at 0.3 percent, reflecting the effect deceleration in 2018. Estimated and more inclusive growth. decline in food prices. growth of the non-agricultural sector at Prudent fiscal policy helped to further around 3 percent will not be enough to reduce the fiscal deficit in 2017, stabilizing substantially increase the growth rate. Job the public debt at around 65 percent of creation in the new industrial sectors and GDP. On the external front, the trade defi- services is not sufficient to absorb the new cit deteriorated in the first half of 2017. entrants. The 6.6 percent increase in exports as re- Although fiscal deficit is expected to pro- sult of the recovery in phosphates and gressively decline, the current account derivatives could not offset the 7.3 percent deficit is likely to widen. The fiscal deficit rise in imports. The bulk of imports con- will continue to decline as the authorities sisted of energy products due to higher seek to move it to below 3 percent of GDP energy prices while food and capital and bring public debt down to 60 percent goods imports slowed down. Thus, the in 2021. Key fiscal measures include boost- trade deficit reached almost 20 percent of ing VAT revenues and reducing tax ex- GDP. Tourism and remittance flows re- emptions (in the agricultural sector), to mained steady. consolidate the corporate tax regime and The transition towards a more flexible better enforce tax payments by the self- exchange rate regime has been unexpect- employed and liberal professions. The FIGURE 1 Morocco / Fiscal balance and public debt FIGURE 2 Morocco / External deficits Percent of GDP Percent of GDP Percent of GDP -8.0 70 -25.0 -7.0 65 -20.0 -6.0 60 -15.0 -5.0 -4.0 55 -10.0 -3.0 -5.0 50 -2.0 0.0 45 2012 2013 2014 2015 2016 -1.0 0.0 40 Trade Balance Current account 2009 2010 2011 2012 2013 2014 2015 2016 2017e Budget Balance Public Debt RHS Sources: Ministry of Economy and Finance, World Bank staff estimates. Source: Exchange Office. government is determined to reduce the bined with poor coordination between tivity sectors. In addition, the quality of civil service wage bill, including social central and local agencies, results in the education that hinders these changes contributions, to bring it back to 10.5 per- provision of services lagging in many re- needs to be improved to support Moroc- cent of GDP in the medium term. The de- gions, especially poor areas resulting in a co’s future prosperity. pendence on energy imports will be felt widening gap across areas. even more strongly as the energy bill is The risks to the outlook are titled to the expected to increase. The new export in- downside. Delays in implementing key dustries are not projected to expand at a reforms including fiscal and structural higher pace and thus will remain depend- reforms could increase social discontent ent on imports of inputs, limiting their and adversely impact the external sector. current account impact. In sum, even if The protracted exchange rate transition the transfers from abroad and the tourism could lead to market pressures and poten- receipts remain dynamic, the financial tially weakening the current account and deficit will remain large at around 5 per- reserves levels. Weak economic prospects cent of GDP. in the euro area and the continued possi- Over the medium term, the new govern- bility of adverse geopolitical development ment is committed to implement structur- in the region could slow economic activity al reforms to raise potential growth and through lower exports, FDI flows, and promote more inclusive growth, reinforce remittances. the business environment, modernize the Morocco’s growth model suffers from low public administration, and improve access productivity and low investment returns. to quality public services. Morocco aims at Morocco’s growth path is characterized joining the top 50 of the World Bank’s first by low returns on capital accumula- Doing Business ranking by 2021. tion related to the inefficient public sector investment. Secondly, the allocation of labor by sector, which partially reflects Risks and challenges government policy objectives, tended therefore to hamper productivity gains. Sustaining productivity growth requires Spatial disparities in access to services and increasing labor and capital mobility from infrastructure persist despite the regional- low to high value added firms and reallo- ization and decentralization program. cating capital and labor from stagnant Uneven economic development, com- agricultural subsectors to higher produc- TABLE 2 Morocco / Macro outlook indicators (annual percent change unless indicated otherwise) 2014 2015 2016 e 2017 f 2018 f 2019 f Real GDP growth, at constant market prices 2.7 4.5 1.2 4.1 3.1 3.2 Private Consumption 3.0 2.2 3.4 4.0 2.9 2.5 Government Consumption 2.0 2.4 2.5 1.6 1.7 1.8 Gross Fixed Capital Investment -1.3 0.2 9.3 4.4 3.1 3.1 Exports, Goods and Services 9.0 5.4 5.1 6.3 7.1 7.3 Imports, Goods and Services 3.8 -1.1 15.4 5.1 4.9 4.8 Real GDP growth, at constant factor prices 2.0 3.2 0.3 4.1 2.4 3.2 Agriculture -2.3 11.6 -11.3 14.3 -0.5 2.3 Industry 0.7 1.8 1.2 2.1 2.5 2.7 Services 3.7 1.7 3.1 2.5 3.1 3.6 Inflation (Consumer Price Index) 0.4 1.8 1.6 1.0 1.6 1.6 Current Account Balance (% of GDP) -5.7 -3.1 -4.3 -5.2 -5.3 -5.1 Fiscal Balance (% of GDP) -4.7 -4.2 -4.0 -3.5 -3.5 -3.0 Debt (% of GDP) 63.6 63.7 64.7 64.9 65.3 65.2 Primary Balance (% of GDP) -2.0 -1.4 -1.0 -0.5 -0.4 -1.0 So urces: Wo rld B ank, M acro eco no mics and Fiscal M anagement Glo bal P ractice, and P o verty Glo bal P ractice. No tes: e = estimate, f = fo recast. Bank alternatively implemented a gradual OMAN Recent developments rate increase to match the US. Inflation is estimated to increase from 1.1 percent in 2016 to 2.0 percent in 2017 reflecting the Growth in Oman continues to be held ongoing subsidy reform. back this year by lower oil production and Fiscal outturns in the first half of 2017 in- Compounded by participating in OPEC weaker consumption and investment. dicate that the deficit is expected to nar- oil production cuts in 2017, protracted Real GDP growth is projected to slow row to 13.5 percent from 20.8 percent in low oil prices and fiscal austerity continue down to 0.1 percent in 2017 from 2.8 per- 2016. This improvement reflects higher oil cent in 2016. Record high oil production revenue receipts due to higher oil prices, to weigh on Oman’s economy. Fiscal and levels (1 million bd) drove overall growth and savings coming from higher electrici- current account deficits remain large, and in both 2015 and 2016. In 2017, Oman ty tariffs for large consumers and a slight with Oman increasingly resorting to ex- joined most OPEC non-members in partic- uptick in government service fees (such as ternal borrowing to finance its deficits, ipating in oil production cuts, leading to a visa fees). To finance the 2017 budget, contraction of the hydrocarbon sector by Oman has raised US$5 billion from inter- public debt is rising rapidly. However, 2.8 percent. Non-hydrocarbon GDP national debt markets in March and US$2 growth is expected to pick up over the growth is estimated to continue to slow billion from sukuk (Islamic Bond) in May medium term following a boost in oil and down to 2.5 percent in 2017 from 3.4 per- 2017. gas and from expected gains in the non-oil cent in 2016 as public spending declines The main social concern for Oman is the sector resulting from the government’s with knock-on effects on consumption and lack of jobs. ILO estimates unemployment investment. According to the national to be about 20 percent on average, but economic diversification plan. consumer confidence survey, the confi- about 50 percent for the youth—a pressing dence index slowed to 78.8 percent in 2016 problem in a country where almost 40 from 95.3 percent in 2015. The current percent of the population is younger than account deficit is estimated to slightly 25 years old. Young Omanis have a strong improve to 15.7 percent in 2017 from 17.4 preference for public sector jobs, where percent of GDP in 2016 on the back of pay is higher and working hours are higher oil prices. shorter, while the private sector continues The ongoing Gulf sanctions on Qatar had to rely on expatriate labor. Oman will raised concerns over the possibility of the have to generate 45,000 jobs annually to disruption of gas supply to Oman from address the problem, and the ongoing the Qatari pipeline, however, Qatari offi- effort to replace expatriates with Omanis cials have confirmed they do not plan on are insufficient without an improvement closing the pipeline. In fact, Oman has in the environment for private sector job benefitted from this Gulf crisis with its creation. ports increasingly used as a conduit for The National Diversification Program exports to Qatar. (Tanfeedh) provides a roadmap for in- Oman did not follow the recent US policy creasing private sector participation— rate hikes like the other GCC states, but focusing on logistics, manufacturing and given its peg to the US Dollar the Central tourism. However, some diversification FIGURE 1 Oman / Real annual GDP growth FIGURE 2 Oman / General government operations (in percent of GDP) % change % change 7 6.0 0 60 6 5 5.0 50 -5 4 3 4.0 40 -10 2 3.0 30 1 -15 0 2.0 20 -1 -2 1.0 -20 10 -3 -4 0.0 -25 0 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019 Hydrocarbon GDP Non-Hydrocarbon GDP Real GDP Overall Fiscal balance Total expenditure Total revenue Sources: Omani Authorities, World Bank Staff estimates. Sources: Omani Authorities, World Bank Staff estimates. reforms such as the removal of subsidies tinue to rise. Owing to the hike in electrici- reforms. The massive infrastructure would have negative short-term effects on ty tariffs and the VAT, inflation is ex- spending program under the 9th Develop- the population. The government thus fac- pected to inch up to 2.6 percent in 2018 ment Plan is likely to encounter delays as es the challenge of ensuring adequate so- before moderating to 1.8 percent in 2019 the government continues to be fiscally cial protection and mitigation policies. as cost push pressures from subsidy re- strained. The government will look to- Existing beneficiary identification, welfare form dissipate. wards increasing public-private partner- measurement and analysis methods and In January 2017 electricity subsidies were ships which might prove difficult in the institutions may need to be updated and removed for large consumers, who collec- short term due to falling investor confi- revalidated. tively consume over 30 percent of the total dence in the region. The government is energy supply. Moreover, the adoption of also likely to continue to face social unrest a 5 percent VAT expected in 2018 and in response to subsidy reform. Outlook higher corporate income tax are expected to narrow the fiscal deficit to 11.4 percent The overall economic outlook is vulnera- ble to several risks. If the planned consoli- by 2019. Oman’s accumulated resource dation does not materialize, the govern- Economic growth is set to modestly recov- revenue savings are estimated at US$38 ment’s fiscal policy risks losing credibility er over the medium term. In 2018, a boost billion and have been used to partially with negative consequences for financing. in the hydrocarbon sector will drive the finance the fiscal deficit. However greater External risks include further oil price recovery—as the “OPEC plus” restrictions reliance on foreign borrowing will raise shocks and the US interest rate hikes. The on oil supply are lifted and the Khazzan public debt dramatically over the forecast possible weakening of the US Dollar could gas project expands production capacity. period, estimated at over 50 percent of raise import costs and deteriorate the ex- As the gradual recovery of oil prices im- GDP by 2020 from 5 percent in 2014. The ternal balance. A continued slowdown in proves confidence and encourages private current account deficit is projected to im- China, Oman’s main trading partner, sector investment, overall GDP growth is prove to 9.2 percent by 2019 as oil prices would add to downside risks. Financing projected to rebound to 2.9 percent by rise and non-oil exports grow. By 2020, the conditions may become more challenging 2019. The government’s policy reform gas pipeline with Iran is also expected to given the expansion in debt, especially if, agenda remains focused on economic di- increase LNG exports. with higher U.S. rates, investor sentiment versification and fiscal consolidation. Over shifts from emerging markets. These the longer term, pro-business reforms stresses are already evident in the recent such as the foreign ownership law and the FDI law, and the lifting of sanctions on Risks and challenges change in leadership at the Central Bank, which followed a banking system ratings Iran are expected to increase trade and downgrade by Moodys. investment opportunities. Monetary poli- Inclusive economic growth hinges on the cy will remain tight as interest rates con- timely implementation of diversification TABLE 2 Oman / Macro outlook indicators (annual percent change unless indicated otherwise) 2014 2015 2016 e 2017 f 2018 f 2019 f Real GDP growth, at constant market prices 2.5 5.7 2.8 0.1 3.4 2.9 Private Consumption 5.6 2.9 1.9 1.5 2.5 3.0 Government Consumption 9.6 0.8 -2.2 -3.8 0.9 2.4 Gross Fixed Capital Investment 0.8 2.5 1.8 1.7 2.1 2.6 Exports, Goods and Services -2.1 -9.4 2.3 -1.6 2.5 4.1 Imports, Goods and Services -9.8 -3.2 -1.5 -1.1 2.3 3.5 Inflation (Consumer Price Index) 1.0 0.1 1.1 2.0 2.6 1.8 Current Account Balance (% of GDP) 5.2 -15.5 -17.4 -15.7 -11.1 -9.2 Fiscal Balance (% of GDP) -3.6 -16.5 -20.8 -13.5 -12.2 -11.4 Sources: World Bank, Macroeconomics and Fiscal Management Global Practice, and Poverty Global Practice. Notes: e = estimate, f = forecast. debt. The hydrocarbon sector, which con- QATAR Recent developments stitutes 80 percent of export earnings and 90 percent of government revenues, has been largely unaffected. Fiscal consolida- Growth in 2017 is anticipated to slow to 2 tion is continuing, albeit, according to percent from 2.2 percent in 2016, on some reports, at a slower pace. The fiscal Growth prospects have weakened due to weaker activity and sentiment in the non - deficit is projected to decline to 5.7 percent hydrocarbon sector, reflecting the sever- in 2017 from over 8 percent in 2016. the diplomatic rift with GCC neighbors. ing of diplomatic and trade ties by sever- The banking system remains well capital- However large financial buffers are an- al Arab countries, including the King- ized, and asset quality strong. Liquidity choring confidence in the economy, and dom of Saudi Arabia, Bahrain, UAE and injections by the Central Bank and rising Egypt. These countries constitute a small government deposits are also helping to good infrastructure has provided space to share of destination markets for Qatar ’s ease liquidity pressures that emerged mid blunt the impact of sanctions. In the me- exports and a relatively small proportion -summer. Non-resident deposits at Qatari dium term, growth will be supported by of financial and FDI flows. Nevertheless, banks—the bulk in the form of foreign- rising gas output and continued spending the boycott and the disruption of eco- currency deposits, which account for near- nomic ties led initially to a sharp drop in ly a quarter of total banking sector depos- on the 2022 FIFA World Cup. Reforms imports, requiring a (costly) diversion of its—fell by 14 percent during June and protecting foreign household workers and merchandise and services trade and fi- July. However, these outflows were fully introducing permanent residency rights nancial flows through other neighboring offset by a more than doubling of govern- countries. It has also dampened investor ment deposits (particularly foreign cur- for expats will help with longer-term di- sentiment, reflected in the stock market rency deposits), so that total deposits in versification efforts. being down 11 percent at end August the banking system rose. relative to early June levels. In August, Inflation decelerated to just 0.2 percent y/ Fitch became the third major credit rating y in July from 1.2 percent at the start of agency to downgrade the country ’s debt the year, despite the disruption to im- one notch to AA- (on par with Belgium ports, including food (40 percent of which and South Korea) due to the uncertain was sourced from KSA). The country economic outlook. posted a current account deficit of 7.6 High frequency data suggest that the percent of GDP in 2016, its first in 17 economy is adjusting. In September, Qatar years. This is expected to shift into a small inaugurated the US$7.4 billion Hamad surplus in 2017, given the partial recovery seaport, thereby securing alternative trad- in global energy prices at the start of the ing routes. Investor confidence in the cur- year has lifted export earnings, and the rency peg remains anchored by the coun- sharp 38 percent m/m drop in imports in try’s large stock of liquid external assets June (which has since recovered only par- worth nearly US$180 billion (of a total tially) that has further lifted the goods stock of close to US$300 billion), which trade balance. have helped to contain the increase in risk In the context of the National Develop- premiums on sovereign and corporate ment Strategy 2011-16 the authorities have FIGURE 1 Qatar / Goods trade balances FIGURE 2 Qatar / Banking sector claims and liabilities % change, Trade Balance, QR, Bn percent, year-on-year percent, year-on-year yoy Exports 35 140 40 Total claims Imports 30 30 Private sector deposits 120 Public sector deposits, RHS 20 25 100 10 20 80 0 15 60 -10 10 40 -20 5 20 -30 0 0 -40 -5 -20 -50 -10 -40 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Source: Haver. Sources: Qatar Central Bank, Haver. adopted a national relative poverty line and a welfare measurement methodology Outlook financial buffers and the diversification of trade ties. Over the medium term, the to track living standards of the population emergence of new LNG suppliers in the and identify vulnerable households. This Growth will remain subdued by the eco- United States, East Asia and Africa poses threshold is equal to the half of the medi- nomic boycott. Nevertheless, a multi-year downside risks to global LNG prices. an household’s income, and about 8 per- US$130 billion infrastructure upgrade Other external risks include regional insta- cent of Qataris in 2013 lived on an income ahead of the FIFA World Cup and the bility risks, and global financial volatility less than that—a share broadly unchanged launch of the US$10 billion Barzan natural that affects capital flows and cost of fund- from 2007. Lower incomes correlated with gas facility will help to offset these head- ing at a time of weak growth and greater household dependency ratio, job market winds, with growth expected to average 2 economic uncertainty in Qatar. Qatar’s status, educational attainment, female percent in 2017 and 2018, before rising to 3 investment-driven growth strategy over headship, and disability. percent in 2019. Qatar’s peg to the US Dol- the past decade has helped to transform Spatial differences in welfare exist, both lar means that monetary policy will grad- standards of living for citizens, but has for monetary and non-monetary ually tighten in tandem with the US. also given rise to concerns including sus- measures, notably between more urban- Alongside gradual consolidation of recur- tainability in an environment of persis- ized and less urbanized areas. Expatriate rent spending, key tax policy and admin- tently low energy prices, signs of excess workers face additional challenges, com- istration measures, including the intro- capacity and demographic imbalances. plaining about delays or withholding of duction of a VAT and excises during 2018 The development of the non -hydrocarbon wages, poor working conditions, sub- are expected to further contain the fiscal sector is critical. Recent permanent resi- standard employer-provided accommoda- deficit. A recovery in imports, in particu- dency reforms are an important step, and tion, irregular recruitment practices, and lar capital goods related to infrastructure the first among GCC countries, to help lack of information on how to enforce spending, should keep the current account attract and retain highly skilled foreign their rights. During the summer, Qatar surplus modest in the near term. workers needed to achieve long-term ob- announced major labor reforms strength- jectives become a knowledge economy. In ening protections afforded to domestic addition, Qatar will also need to raise the expat workers, and approved a law allow- productivity of its investments, in both ing permanent residency to some expatri- human and physical capital, and under- ates . Risks and challenges take structural reforms to improve the business environment. In the near term, downside risks stem from the ongoing diplomatic crisis, alt- hough these are mitigated by substantial TABLE 2 Qatar / Macro outlook indicators (annual percent change unless indicated otherwise) 2014 2015 2016 e 2017 f 2018 f 2019 f Real GDP growth, at constant market prices 4.0 4.0 2.2 2.0 1.7 3.0 Private Consumption 8.0 8.1 3.5 1.2 1.3 2.0 Government Consumption 8.9 1.1 -21.0 -1.5 0.2 -2.4 Gross Fixed Capital Investment 11.4 1.8 8.0 3.4 5.6 10.3 Exports, Goods and Services 0.5 -0.9 1.7 -0.5 1.0 1.6 Imports, Goods and Services 6.5 -8.9 -3.9 -5.0 4.0 6.0 Real GDP growth, at constant factor prices 4.1 4.0 2.1 1.9 1.7 3.1 Agriculture 25.1 8.7 4.0 0.3 1.1 1.8 Industry 1.9 2.0 2.0 0.4 1.3 2.3 Services 9.4 8.6 2.2 5.3 2.4 4.8 Inflation (Consumer Price Index) 3.1 1.9 2.9 0.6 2.0 2.0 Current Account Balance (% of GDP) 23.9 8.4 -7.6 3.9 3.5 1.9 Financial and Capital Account (% of GDP) -23.1 -7.6 6.5 -5.0 -4.6 -2.8 Net Foreign Direct Investment (% of GDP) -2.8 -2.8 -3.0 -2.9 -3.1 -3.2 Fiscal Balance (% of GDP) 12.6 1.4 -8.3 -5.7 -4.3 -2.7 So urces: Wo rld B ank, M acro eco no mics and Fiscal M anagement Glo bal P ractice, and P o verty Glo bal P ractice. No tes: e = estimate, f = fo recast. by more than 75 percent throughout 2016. SAUDI ARABIA Recent developments Furthermore, the strong decline in imports in both real and nominal terms in the same year meant that the current account The Saudi Arabian economy grew at a deficit almost halved in 2016 reaching 3.9 more moderate rate of 1.7 percent in 2016 percent of GDP. Higher frequency data for The mediocre oil price outlook invigorated as oil prices continued to remain below the first quarter of 2017 suggests a further the Vision 2030 reform agenda. In 2017, $50 for almost the entire year. The data for favorable trend with current account bal- the first half of 2017 suggests that GDP in ance moving into the green territory after the authorities showed commitment to the first quarter deteriorated, registering a two years of deficits. last year’s OPEC deal by restricting oil 0.5 percent contraction on a year over year Though CPI inflation picked up to 3.7 production and introduced major reform basis. The crude oil production index de- percent in 2016, data for the first two quar- initiatives. With unfolding fiscal consoli- clined by 4.4 percent due to the OPEC ters of 2016 show a deflationary trend on a dation efforts, improvements in medium agreement on curbing production. How- year over year basis, which may be associ- ever, non-oil GDP grew by around 0.7 ated with weaker demand in light of re- fiscal outlook were achieved at the expense cent reforms. The Kingdom has percent in the same period. Though offi- of growth, which closely relies on public cial GDP data for the second quarter of maintained its currency to USD, which spending. 2017 has not been released, other indica- contributed to a significant appreci-ation tors suggest continued subdued economic since the Global Financial Crisis. The activity. Saudi Riyal has unrolled previous real The fiscal deficit slightly deteriorated to appreciations by more than 4 percent in 16.6 percent of GDP in 2016 compared to the 7 months since December 2016 with the 15.8 percent a year earlier. In Septem- US dollar losing value, which could help ber 2016, the authorities introduced the rebalance pressures on non-oil exports biggest measure towards fiscal consolida- and reign in imports, albeit at a limited tion within the Fiscal Balance Program by extent. a cut to civil service remuneration apply- On the labor market side, latest available ing to around two thirds of employed data suggests that between the second nationals. However, a decision was taken quarter of 2015 and the same quarter in in April 2017 to reverse some of the cuts 2016 around 459,000 jobs were created. (including all allowances, financial bene- This figure is the highest number of job fits, and bonuses, but not including the creation in the last three years signaling thirteenth month salary payments) after 6 positive developments for job seekers and months and reports of better than antici- the economy. However, the unemploy- pated effects of other measures of fiscal ment rate remained unchanged in 2016 at consolidation that had also been imple- 5.6 percent for the overall population and mented. increased to slightly above 12 percent for On the external side, negative growth in Saudi nationals (up from 11.5 percent a exports reduced significantly despite the year earlier) given the structural labor OPEC agreement since oil prices increased FIGURE 1 Saudi Arabia / Oil and non oil sectors FIGURE 2 Saudi Arabia / Oil production SAR, Trillions Crude Oil Production (bbl/d) 3.0 11.0 2.5 10.5 0.43 0.43 0.41 0.40 0.38 2.0 0.36 10.0 1.5 1.00 1.00 0.97 0.86 9.5 0.92 0.81 1.0 9.0 0.5 0.99 1.04 1.02 1.04 1.10 1.14 8.5 0.0 2011 2012 2013 2014 2015 * 2016 8.0 2010-01 2010-05 2010-09 2011-01 2011-05 2011-09 2012-01 2012-05 2012-09 2013-01 2013-05 2013-09 2014-01 2014-05 2014-09 2015-01 2015-05 2015-09 2016-01 2016-05 2016-09 2017-01 2017-05 Oil Sector Private Non-Oil Sector Public Non-Oil Sector Import Duties Sources: KSA General Authority for Statistics. Sources: US Energy Information Agency and OPEC. market issues, including high reservation in 2017 as the reduction in imports is ex- wages for Saudi nationals. While no official information is available, Outlook pected to outpace the negative growth in exports. The CAB is also projected to in- the Kingdom likely experiences sizable The Saudi economy is projected to under- crease to above 2 percent in the subse- poverty pockets. As in other GCC coun- go a significant moderation growing by quent years with gradual recovery in oil tries, the bulk of low-income residents are around 0.3 percent in 2017, mainly due to prices. migrant workers, but as the citizen popu- a modest outlook in oil prices, OPEC pro- Inflation is projected to be more volatile in lation crosses the 20 million mark, inade- duction quota reduction and the dampen- the coming years, reducing to 1.2 percent quate access to economic opportunities is ing effect of the Fiscal Balance Program. in 2017 and then increasing to below 5 also an issue for nationals. With the pro- However, as the negative short term percent in 2018 as more distortions in pric- spect of low oil prices for longer, the old effects of structural reforms dissipates and es are removed. In 2019 the effects of these social contract—one based on government government balances improve, it is pro- adjustments and weaker demand is ex- employment, generous subsidies, and free jected that growth will rise to over 2 per- pected to reduce inflation back down to public services—is no longer sustainable. cent by 2019. Moreover, the designation of 1.9 percent. The reform agenda in Vision 2030 envis- Prince Salman, the champion of Vision ages deep structural changes that will profoundly impact the population in all 2030, as the crown prince provides a strong signal of a longer-term commit- Risks and challenges aspects of their livelihoods. ment of the government to continue the The authorities are serious about mitigat- path of reforms of reducing dependence Despite assurances by the highest level of ing the negative impact of reforms. They on oil and increasing the role of the pri- the authorities, in the medium term the are launching a new social program to vate sector. main challenge of the Saudi economy is compensate the people for the effect of The fiscal deficit is expected to narrow as the credibility of the Vision 2030 reform subsidy removal. However, identifying a share of GDP in 2017 to around 10 per- commitment. Timely and adequate policy poor and vulnerable groups outside of cent and continue to fall to under 7 per- responses in order to continue reform traditional characteristics (widow, disa- cent as the result of reforms in petroleum signals while not discouraging the private bled, etc) has been difficult, and little evi- product prices, introduction of VAT, fur- sector through fiscal management pose dence exists to inform policies about the ther fiscal austerity measures continue important risks in this path. For example, level of support to be provided. In that and a forecasted gradual increase in glob- the reduction in net foreign assets held by respect, the authorities are currently al energy prices. This should cap the pub- SAMA in the recent years due to contin- building capacity and institutions for wel- lic debt ratio at around 25 percent of GDP ued deficits, could induce overly rapid fare measurement and analysis. in the medium term. fiscal consolidation before growth- The external balance is expected to im- friendly structural reforms are in place. prove and register a surplus of 1.7 percent TABLE 2 Saudi Arabia / Macro outlook indicators (annual percent change unless indicated otherwise) 2014 2015 2016 e 2017 f 2018 f 2019 f Real GDP growth, at constant market prices 3.7 4.1 1.7 0.3 1.2 2.1 Private Consumption 6.1 6.8 2.3 1.8 2.6 2.5 Government Consumption 12.0 -1.8 -18.8 2.0 1.1 1.4 Gross Fixed Capital Investment 7.5 3.6 -15.9 5.5 -0.4 3.8 Exports, Goods and Services -1.9 0.7 1.4 -0.5 1.9 1.7 Imports, Goods and Services 6.6 1.5 -24.3 2.2 2.6 2.8 Real GDP growth, at constant factor prices 3.6 3.5 1.8 0.3 1.2 2.1 Agriculture 2.5 0.6 0.6 0.0 0.2 0.6 Industry 3.1 5.0 2.5 -0.3 1.4 2.0 Services 4.5 1.4 0.9 1.2 1.0 2.4 Inflation (Consumer Price Index) 2.7 2.2 3.7 1.2 4.9 1.9 Current Account Balance (% of GDP) 9.8 -8.7 -3.9 1.7 2.4 2.3 Fiscal Balance (% of GDP) -3.4 -15.8 -16.6 -10.0 -6.3 -4.9 So urces: Wo rld B ank, M acro eco no mics and Fiscal M anagement Glo bal P ractice, and P o verty Glo bal P ractice. No tes: f = fo recast. tially offset by increased dividends from UNITED ARAB Recent developments GREs and higher fees. For example, Dubai increased parking fees and introduced EMIRATES fees for hotels and airport passengers. Overall real GDP growth is estimated to Abu Dhabi introduced a 4 percent munici- further moderate to 1.4 percent in 2017, pality fee on hotel bills and a 3 percent down from 3 percent in 2016. Hydrocar- municipality fee on the annual value of bon GDP growth is estimated to contract expatriates’ rental contracts. This is ex- Non-oil growth is estimated to remain by 2.9 percent in 2017 from 3.8 percent in pected to improve the fiscal deficit slightly resilient in 2017 while OPEC-mandated 2016 in compliance with the OPEC agree- to 3.2 percent of GDP in 2017. The current oil production cuts limit oil growth. How- ment to cut supply. The non-oil sector is account surplus also fell from 19.1 percent estimated to grow by 3.3 percent in 2017 of GDP in 2013 to an estimated 2.6 percent ever, in the medium term firmer oil prices, reflecting higher public investment and a of GDP in 2017 owing to rising nonoil a rebound in global trade and easing of pickup in global trade. The average rate of exports. fiscal consolidation are expected to inflation increased slightly to 2.2 percent Monetary policy continues to track the US strengthen economic activity, especially in 2017 from 1.6 percent in 2016 partly and growth in bank deposits is trending reflecting utility and gasoline price adjust- upwards. The Central Bank continues to as investments ramp up ahead of Dubai’s ments, and higher imported inflation, in maintain the peg to the US Dollar, and Expo 2020. This rebound is faced with addition to an uptick in activity. The cur- thus mirrored the US Federal Reserve several downside risks including lower oil rent account surplus is expected to im- movements—the interest rate on certifi- prices and tighter global financial condi- prove to 2.6 percent of GDP this year cates of deposit were raised three times tions. mainly owing to rising nonoil exports. since December, by 75 basis points in total Fiscal consolidation efforts in the emirates to 2 percent. Growth in bank deposits began in 2015 and continued at a slower continues to trend upward, logging a pace in 2016. Electricity and water tariffs growth rate of 7.1 percent y/y in April, were increased, fuel subsidies were re- surpassing lending growth for the first moved, and capital transfers to Govern- time in two years. Growth in broad mon- ment Related Entities (GREs) were re- ey supply (M2) gradually improved— duced. Despite these measures, the de- from 4.4 percent y/y in March to an over- cline in hydrocarbon revenues has pushed two-year high of 5.9 percent y/y in April. the consolidated fiscal balance down from After a sharp decline in 2015 amid tighter a comfortable surplus of 10.4 percent of regulations, higher housing supply and GDP in 2013 to 4.3 percent deficit in risk aversion, Dubai’s residential property 2016.The deficit was financed through prices have begun to stabilize. In another withdrawals from the sovereign wealth positive development, Moody ’s upgraded funds, bank borrowing and, increasingly, its outlook for UAE from negative to sta- by foreign capital raising. More recently ble in May 2017 citing an effective policy the scaling back of capital transfers to response to the low oil prices and im- GREs bore the brunt of spending cuts. The proved economic performance. decline in hydrocarbon revenues was par- FIGURE 1 United Arab Emirates / Annual GDP growth rate FIGURE 2 United Arab Emirates / General government (percent per annum) operations (in percent of GDP) % change % of GDP % of GDP 8 3 40 7 2 35 6 1 30 0 25 5 -1 20 4 -2 15 3 -3 10 2 -4 5 1 -5 0 0 2014 2015e 2016p 2017p 2018p 2019p 2011 2012 2013 2014 2015 2016 2017 2018 2019 Overall Fiscal balance Total expenditure Real GDP growth Total revenue Sources: UAE authorities and IMF/World Bank Staff estimates. Sources: UAE authorities and IMF/World Bank Staff estimates. Each Emirate has an independent statistics 2018 due to the VAT but is projected to tourism, weaken trade and asset prices, agency, and while the federal-level statis- moderate thereafter. Rent inflation is ex- while increased issuance by others to fi- tical bureau was established in 2009, the pected to remain low if supply continues nance deficits could raise costs of funding. harmonization of statistical agendas for a to increase and demand remains subdued. A faster rise in U.S. interest rates or higher country-level welfare measurement is yet The current account is projected to im- financial market volatility could increase to be accomplished. prove to 3.8 percent by 2022, as oil reve- borrowing costs for banks and GREs, po- nues rise with increased oil production, tentially affecting liquidity in the domestic Outlook complemented by nonoil exports and tourism. banking system. Contingent liabilities continue to be a risk and if megaprojects The diplomatic rift with Qatar is not ex- are not managed prudently, risks for Beyond 2017, overall GDP growth is ex- pected to affect the economic outlook for GREs, banks, and sovereigns would rise. pected to recover to above 3 percent in the the UAE significantly. The direct impact The Expo 2020 also presents risks related medium term. Non-oil growth is projected on the UAE economy through airline to overcapacity, property prices and debt. to rebound (i) as the expected improve- traffic, tourism, real estate investment, ment in oil prices and its positive effects and the financial sector is expected to be on confidence and financial conditions limited as trade with Qatar accounts for dampen the effects of fiscal consolidation; less than 1 percent of the UAE’s total and (ii) as megaproject implementation trade. ramps up ahead of Dubai’s hosting of Expo 2020—expected to draw in many visitors, boosting private consumption and services exports. Real oil GDP growth Risks and challenges is projected to recover in 2018 and contin- ue to improve over the medium term. The The outlook is expected to improve over VAT is not expected to adversely affect the medium term, but risks are skewed growth significantly, but will increase towards the downside. revenues by 1 percent of GDP (according Further declines in oil prices, for instance, to the Minister of Economy). The real es- due to a faster recovery of the US shale tate market is reported to expect head- production or reduced compliance with winds because of rising supply, govern- OPECs oil production cuts, could reduce ment’s fiscal restraint, higher interest fiscal revenues, and consequently invest- rates, and a stronger exchange rate. Infla- ment, and confidence. Negative spillovers tion is projected to rise to 2.9 percent in from other oil exporters could impact TABLE 2 United Arab Emirates / Macro outlook indicators (annual percent change unless indicated otherwise) 2014 2015 2016 e 2017 f 2018 f 2019 f Real GDP growth, at constant market prices 3.1 3.8 3.0 1.4 3.1 3.3 Private Consumption 25.3 -12.0 2.1 1.0 3.2 3.5 Government Consumption 5.8 16.6 -0.9 -0.5 2.5 2.5 Gross Fixed Capital Investment 8.3 10.6 3.0 2.8 7.9 10.3 Exports, Goods and Services 0.2 3.4 1.3 2.5 4.0 4.0 Imports, Goods and Services 12.3 -1.2 1.7 3.0 3.2 3.2 Real GDP growth, at constant factor prices 3.1 3.8 3.0 1.4 3.1 3.3 Agriculture 1.9 3.1 3.0 2.0 3.0 3.2 Industry 1.6 4.6 2.3 2.1 2.3 3.0 Services 4.8 2.8 3.8 0.6 4.0 3.6 Inflation (Consumer Price Index) 2.4 4.1 1.6 2.2 2.9 2.5 Current Account Balance (% of GDP) 13.3 4.7 2.4 2.6 2.7 2.9 Fiscal Balance (% of GDP) 1.9 -3.4 -4.3 -3.2 -1.9 -1.0 So urces: Wo rld B ank, M acro eco no mics and Fiscal M anagement Glo bal P ractice, and P o verty Glo bal P ractice. No tes: e = estimate, f = fo recast. and to 31.6 percent in 2016 (31.2 percent in TUNISIA Recent developments Q2 2017), while female graduate unem- ployment reached 40.4 percent. Unem- ployment rates are also much higher in In 2016, the economy grew by 1.0 percent the hinterland compared to coastal re- following a 1.1 percent in 2015, anemic for gions. Low economic growth and a sharp rıse in a middle-income country. Growth was Tunisia faces large fiscal and external defi- public spending including wages, com- driven mainly by the services sector (4.0 cits. The central government deficit bined with delays in implementing key percent) while industrial output contract- (excluding grants) reached 6.1 percent of ed by 6.6 percent and non-manufacturing GDP in 2016, up from 5.6 percent of GDP reforms have kept fiscal and current ac- industries (i.e., phosphate, oil) contracted in 2015. As a result public debt has risen count deficits elevated. The unemploy- by 1.9 percent, with extractives below to 62.9 percent of GDP in 2016, up from ment remain high, particularly for the historical levels due to social movements 57.2 percent in 2015 and from 45.5 percent youth, women, and in the interior in mining regions. First-half 2017 growth in 2012. In 2016, the current account was was 1.8 percent, largely driven by the agri- estimated at 8.4 percent; combined with regions. The national unity government cultural and services sectors which ex- the deterioration of the capital and finan- —a coalition of the main po-litical parties panded by 3.8 percent each, while non- cial accounts, this is eroding the country’s and social partners—was formed a year manufacturing industries contracted by foreign reserves buffer. The Dinar has ago, to tackle the needed reforms, but 2.6 percent. depreciated gradually in the last twelve identifying a first move has proven Inflation rose from to 5.6 percent (yoy) in months by 18 percent against the Euro July 2017 - with core inflation (which ex- and 10 percent against the US Dollar. Tu- difficult. cludes food and energy items most of nisia’s gross official reserves were estimat- which have administered prices) rising to ed at US$5.9 billion in 2016, which is 6.7 percent due to the rise of imported equivalent to 3.4 months of imports goods and energy prices in line with the (down from US$7.4 billion and 4.1 months depreciation of the Dinar. In the face of of imports in 2015). these inflationary pressures, the Central The national unity government—a coali- Bank has increased its policy rate in two tion of the main political parties, the larg- instances since April 2017 to 5 percent est worker’s and trade union formed a from 4.5 percent. year ago—has set its priorities as strength- Unemployment has declined from its peak ening security, improving the business of 19 percent in 2011 to 15.5 percent in environment, ensuring macroeconomic 2016 (15.3 percent in Q2 2017) despite a stability, fiscal sustainability and restart- low labor force participation, at about 50 ing growth. While the new government percent, mainly due to a very weak partic- was expected to lead to greater political ipation of women (26 percent). Most of the stability due to its inclusive composition, unemployed are low-skilled workers, but it has undergone two cabinet reshuffles university graduates have the highest involving key ministries, such as finance, unemployment rate, which increased from investment, and education. 15 percent in 2005 to 23 percent in 2010 FIGURE 1 Tunisia / Sectoral value added and GDP growth FIGURE 2 Tunisia /Unemployment rate (y-o-y) 20.0 Agriculture Manufacturing 3.5 40.0% Non-manufacturing industries Services 15.0 GDP growth (right axis) 3.0 35.0% 10.0 30.0% 2.5 5.0 25.0% 2.0 0.0 20.0% 1.5 -5.0 15.0% 1.0 10.0% -10.0 5.0% -15.0 0.5 0.0% -20.0 0.0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Q2 Graduates National average Female Sources: Institut national de statistiques, Banque centrale de Tunisie and staff Sources: Institut national de statistiques, Banque centrale de Tunisie and staff computation. computation. Outlook Risks and challenges Growth is projected to expand modestly While the Government is deploying re- by 2.3 percent in 2017 through the gradual sources to improve the security situation, recovery of agriculture, phosphate, and the high level of youth unemployment manufacturing. In the medium term, notably in the lagging regions may result growth is projected to pick up gradually in social tensions, which remain one of the to 3.5 percent in 2019 against a backdrop main risks in the country since the revolu- of improved business climate through tion. The Government is also facing the structural reforms and greater security challenges of balancing between social and social stability. stability and the need for fiscal consolida- The fiscal deficit is expected to remain tion, notably in the civil service, pension, high at 6.2 percent of GDP in 2017. Fiscal subsidy, SOE, and competition reforms. sustainability will require reining in the Moreover, reform implementation to stim- public wage bill and the growing subsidy ulate job creation and entrepreneurship is bill while expanding the tax base. It would key to unleash private sector dynamism also be important to reform the pension and recharge growth. The most pressing system and improve the design of the cash near-term risk is debt sustainability, given transfer programs to create space for in- that the baseline path for already high creased investment and social spending. debt assumes delivery of fiscal consolida- On the external side, the current account tion. deficit is projected to slightly widen to 8.8 percent of GDP in 2017. In the medium term, the current account is likely to bene- fit from the gradual recovery of industry and services trade, and competitiveness gains from the depreciation of the Dinar. TABLE 2 Tunisia / Macro outlook indicators (annual percent change unless indicated otherwise) 2014 2015 2016 e 2017 f 2018 f 2019 f Real GDP growth, at constant market prices 2.3 1.1 1.0 2.3 3.0 3.5 Private Consumption 1.8 2.3 0.8 1.8 2.1 2.4 Government Consumption 4.2 8.8 8.9 3.2 3.4 3.5 Gross Fixed Capital Investment 1.2 -4.5 2.2 4.1 6.0 6.2 Exports, Goods and Services 3.9 -3.2 3.2 2.1 4.5 4.7 Imports, Goods and Services 2.2 2.7 3.9 0.0 0.0 0.0 Real GDP growth, at constant factor prices 2.3 1.1 1.0 2.3 3.0 3.5 Agriculture 2.8 8.5 2.6 2.8 2.9 3.1 Industry -1.1 -1.0 -6.6 -6.9 -3.7 -1.4 Services 3.8 1.0 4.0 5.7 5.3 5.1 Inflation (Consumer Price Index) 4.9 4.9 3.7 5.1 5.0 4.7 Current Account Balance (% of GDP) -9.1 -8.9 -8.4 -8.8 -8.5 -7.9 Fiscal Balance (% of GDP) -5.0 -5.6 -6.1 -6.2 -5.9 -4.4 Debt (% of GDP) 49.0 57.2 62.9 69.7 71.9 72.0 Primary Balance (% of GDP) -3.2 -3.7 -3.9 -3.9 -3.3 -1.9 So urces: Wo rld B ank, M acro eco no mics and Fiscal M anagement Glo bal P ractice, and P o verty Glo bal P ractice. No tes: e = estimate, f = fo recast. country. These hurdles are particularly YEMEN challenging given that Yemen had previ- Recent developments ously imported approximately 90 percent of its food, and the conflict has exacerbat- Since the escalation of violent conflict in ed the need for fuel and imported medical March of 2015, Yemen’s economy has de- equipment. teriorated sharply. Although official sta- UN OCHA estimates that a total of 20.7 The violent conflict in Yemen has caused tistics are no longer available, evidence million Yemenis are in need of hu- a dramatic deterioration of the economic suggests that Yemen’s GDP contracted by manitarian assistance, of which 9.8 million and social conditions in the country. Out- about 37.5 percent cumulatively since Yemenis are in acute need of assistance to 2015 while employment opportunities in sustain their lives. There has been signifi- put has contracted sharply. FAO the private sector have significantly di- cant damage to vital infrastructure and estimates that over 7 million people are at minished. Economic activity in agricul- private residences, contributing to a de- risk of famine in 2017, and cholera ture services, and oil and gas produc- cline in service deliveries and quality (like outbreaks are ravag-ing the country with tion—the largest components of GDP, water), crippled civilian health and educa- nearly 450,000 sus-pected cases having remains limited due to the ongoing con- tion facilities, and to an internal displace- flict. Furthermore, the commensurate dra- ment over 10 percent of the population. resulting in nearly 2,000 deaths per end The advent of cholera and other infectious matic decrease in government revenues, of August. especially from the much reduced oil and diseases on a context of prevailing poor gas production, have contributed to the health and malnutrition, has further di- implosion of the formal social safety net minished peoples’ welfare and eroded and infrequent payment of public salaries. their ability to lead productive lives. In addition, the conflict has led to increas- Households’ ability to cope is at a break- ing inflation and pressure on the exchange ing point and large swaths of the country rate, which further undermined house- are facing famine and cholera outbreaks. hold income at a time when approximate- According to FAO estimates, approxi- ly 40 percent of households reported to mately 7 million people are on the verge of have lost their primary income source famine in 2017. There have been 443,166 (according to the 2016 Gallup World Poll). suspected cholera cases and 1921 associat- Imports have greatly contracted given the ed deaths reported as of August 1st, 2017. dwindled foreign reserves of the Central The humanitarian response in Yemen con- Bank of Yemen (CBY). Critical food and tinues to support the basic needs of a sig- energy imports are facilitated exclusively nificant share of the population in difficult through private channels without support circumstances. There are approximately from financial trade services offered earli- 122 humanitarian partners on the ground, er by the CBY. Additionally, the involve- 84 national non-government organizations ment of Yemen’s key ports in the conflict (NGO’s), 30 international NGO’s, and 8 have further undermined the ability to UN agencies. The World Bank supports import key commodities including food, the most vulnerable groups with approxi- fuel, and medical supplies to parts of the mately US$800 million through three large FIGURE 1 Yemen / Public Finances FIGURE 2 Yemen People in need of humanitarian assistance (in millions) In % of GDP In % of GDP 35 0 3.0 30 -2 2.6 2.5 2.4 25 -4 2.0 20 -6 1.6 1.6 1.5 1.5 15 -8 1.0 1.0 1.0 0.8 0.9 0.7 10 -10 0.7 0.5 0.6 0.5 0.4 0.4 0.4 0.5 0.3 0.3 5 -12 0.1 0.0 0.0 0 -14 Al-Hodeida Abyan Aden Sana'a Al-Mahweet Hadramout Laheg Mareb Shabwah Saadah Al-Maharh Socatra Taiz Al-Jawf Remah Amran Hajja Dhamar Al-Baida Ibb Al-Dhale 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Total domestic revenues Grants Current expenditure Capital expenditure Fiscal deficit excl. grants (Right Axis) Sources: Yemen Ministry of Finance/Yemen Statistical Office World; staff of the Sources: 2017 United Nations Humanitarian Response Plan. IMF and the World Bank. emergency operations providing for criti- cal health services and complementary income opportunities to combat famine Outlook Risks and challenges and impoverishment while maintaining Economic prospects in 2018 and beyond Making peace sustainable in Yemen will critical institutional capacity. will critically depend on rapid improve- require diversifying the economy, making However, coverage by humanitarian part- ments in the political and security situa- employment more productive, designing ners is not uniform across the country, tion, and ultimately whether an end to the fiscal and other policies, which will sup- where only 200 out of 322 districts in the on-going conflict will allow for rebuilding port investment to create jobs and income country are classified as “relatively acces- the economy and Yemen’s social fabric. If for the large share of Yemenis who were sible” by the humanitarian response. Ap- violence can be contained by the end of unemployed and excluded even before proximately 51 districts are classified as 2017, GDP is projected to begin recovering the conflict. Leveraging support for recov- having “high or extremely high access in 2018 and 2019, with projected GDP ery and reconstruction to improve eco- constraints.” Thus, there are pockets growth to be about 9 and 14 percent annu- nomic and social inclusiveness could help where people in need cannot be reached. ally, respectively. Restoration of more mitigate the risk of conflicts arising in the peaceful conditions will likely allow for future. resumption of hydrocarbon production, which will help restore government reve- nues. Given the bleak outlook in Yemen, massive foreign assis-tance would continue to be required for recovery and reconstruction in a post-conflict period. In particular, foreign assis-tance would be needed to help restore basic services and rebuild confidence in Yemen’s institutions . TABLE 2 Yemen / Macro outlook indicators (annual percent change unless indicated otherwise) 2014 2015 2016 e 2017 f 2018 f 2019 f Real GDP growth, at constant market prices -0.2 -28.1 -9.8 -2.0 8.5 13.5 Private Consumption 0.1 -19.4 -0.8 -2.8 0.1 4.5 Government Consumption -7.1 -22.4 -8.8 -14.6 16.7 14.2 Gross Fixed Capital Investment -3.6 -83.7 -22.7 53.4 182.1 62.2 Exports, Goods and Services -4.1 -65.7 -71.0 27.0 265.0 86.1 Imports, Goods and Services -6.1 -43.0 0.7 -5.0 37.4 28.8 Real GDP growth, at constant factor prices -0.4 -28.8 -10.6 -2.0 8.5 13.5 Agriculture 1.0 -25.0 -6.0 -3.0 3.0 8.0 Industry -3.2 -36.3 -21.6 1.7 28.4 29.2 Services 1.0 -25.0 -6.0 -3.5 0.2 5.0 Inflation (Consumer Price Index) 8.2 39.4 5.0 20.0 29.5 21.0 Current Account Balance (% of GDP) -1.7 -5.5 -5.6 -2.3 -2.4 -2.1 Fiscal Balance (% of GDP) -4.1 -10.6 -13.5 -9.9 -6.6 -2.5 Debt (% of GDP) 48.7 66.7 85.4 83.5 71.0 55.0 Primary Balance (% of GDP) 1.5 -3.1 -5.3 -2.4 1.0 4.9 So urces: Wo rld B ank, M acro eco no mics and Fiscal M anagement Glo bal P ractice, and P o verty Glo bal P ractice. No tes: e = estimate, f = fo recast. WORLD BANK MIDDLE EAST AND NORTH AFRICA REGION MENA ECONOMIC MONITOR, OCTOBER 2017 Refugee Crisis in MENA: Meeting the Development Challenge http://www.worldbank.org/en/region/mena/publication/mena-economic-monitor