While there is no shortage of social, political and security issues for governments to contend with, economic growth is set to edge up this year in most parts of the region.Published in MEED, 22 June 2014

While the storm clouds gathering in Iraq following the June offensive by the Islamist forces of the Islamic State in Iraq and Syria (Isis) are casting dark shadows across the region, the economic outlook is improving.

“The good news is that the economic situation in the Arab transition countries is looking up, [with] higher exports, higher public investment and signs that private investment will rise,” Christine Lagarde, managing director of the Washington-based IMF, told the Economic, Social & Environmental Council in Rabat on 8 May.

Good progress

“Countries like Morocco are reaping the fruits of their efforts by diversifying and spurring both exports and foreign investment,” she said. “None of this is accidental. Over the past three years, countries have made great progress on the policy front. For example, Jordan has moved away from generalised energy subsidies and towards genuine safety nets, while Tunisia is reforming its banking system.”

There are certainly reasons to believe the economic situation in these countries is set to improve, and not just because of the reforms that have been made by the domestic authorities. For the countries of North Africa in particular, a revival in the economic fortunes of Europe offers the chance to boost exports to their most important trading partner. The IMF expects the region’s oil importing countries to grow GDP by just 2.8 per cent this year, but by as much as 4.1 per cent next year.

Even so, there is no shortage of social, political and security issues that could yet derail progress around the region. Most acute has been the rapid deterioration of the security situation in Iraq, which threatens to extend Syria’s sectarian conflict into one of the world’s most important oil producers. The Iraq crisis has the potential to destabilise the region.

A more persistent problem is unemployment, which is at 13 per cent across the post-Arab uprising countries and a far higher 29 per cent among the young in those states.

Jobs shortage

This situation will get worse before it gets better. Every year, some 3 million people join the jobs market across the Arab world, and nowhere near enough employment is being created to absorb them all. Such issues helped to propel people on to the streets during the Arab Uprisings and could cause more political ructions.

There is at least some help coming from the Gulf states, notably for Egypt, but also Jordan, Lebanon and others. The World Bank and the IMF have helped out in other cases.

“In the post-Arab Spring states, especially Egypt, there’s a sense that order is starting to coalesce,” says Simon Williams, chief economist at HSBC Middle East. “The transition is imperfect, but it is moving forwards. The funding needs are significant, but they have access to funding from the Gulf and that is buying them time. Engagement with the World Bank and, in some cases, the IMF also provides room for manoeuvre.”

Just as the North African economies are benefiting from a recovery in Europe, so an improving global economy should also give the Gulf’s oil producers a boost.

Rising GDP

According to the IMF, GDP for the region’s oil exporters should rise by 3.4 per cent this year, increasing to 4.6 per cent next year. Libya is expected to be among the strongest performers as oil production gets back on track after years of instability; the same optimism was true of Iraq before the outbreak of violence in June. Qatar is expected to do well in the coming year. Its anticipated GDP growth of 7.1 per cent puts it well ahead of its GCC counterparts, which are expected to grow by between 3 and 4.4 per cent in 2015.

But despite the efforts made in terms of diversification over recent years, the Gulf economies remain overwhelmingly dependent on oil and gas revenues. That could lead to problems down the road if the US’ booming shale oil sector – coupled with a return to the market for Libya and possibly Iraq and Iran – leads to prices falling substantially in the years ahead. At a time when government spending is so high, this is likely to mean the budget surpluses of the recent past are fast eroded and more countries will, like Bahrain, start having to find ways to fund budget deficits.

Positive view

Even so, in the immediate future such concerns appear to be outweighed by optimism. “From a market perspective, there is a very strong positive view towards the GCC,” said Ashok Aram, CEO of Deutsche Bank in the Middle East, at an event held by the Dubai Economic Council and the IMF on 6 May. “Most of the activity seems to be in Saudi Arabia, the UAE and Qatar. Bahrain, Kuwait and Oman are more restrained from a market access perspective, but that could change with time.”

Nuclear accord

Beyond the GCC, Iran’s economy is showing signs of picking up in the wake of the interim accord signed with the US and others in November 2013. If a comprehensive deal on Iran’s nuclear programme is agreed, allowing sanctions to be fully lifted, the country’s economy could be one of the fastest-growing in the region in the coming years. However, there are plenty of things that could still prevent that happening, not least domestic opposition to such a deal in the US and Iran and the disquiet among some US allies such as Israel and Saudi Arabia. The Iraq crisis adds yet another element to the negotiations.

The economic situation is still extremely difficult for the authorities in Tehran. President Hassan Rouhani’s government has been cutting back on subsidies on items such as fuel to protect the country’s fiscal position. If not handled carefully, such policies could prompt demonstrations, particularly at a time when the economy is performing so poorly overall. GDP growth this year is expected to be just 1.5 per cent, although that does at least mark a welcome change after two years of recession.

Rouhani also needs to tackle Iran’s inflation, which is the highest in the region. This year, the country’s consumer price index is expected to rise by 23 per cent, and next year by 22 per cent, according to IMF estimates. The only other country with a comparable rate of inflation is Sudan, where it is estimated at 20.4 per cent for this year, falling to 14.3 per cent in 2015.

Elsewhere in the region, inflation is broadly under control, with most countries managing to keep annual price rises down to 4 per cent or below.

Syria crisis

If an agreement over Iran’s nuclear programme is at least possible, the same cannot be said of a deal to end the civil war in Syria. The UN’s refugee agency, the UNHCR, estimates that as many as 6.5 million people are internally displaced in the country and says the cost of basic commodities has skyrocketed, with the price of bread up 500 per cent in some areas since 2011.

The crisis is also having a serious effect on neighbouring countries. The five main host countries of Jordan, Lebanon, Turkey, Iraq and Egypt have 3 million Syrian refugees between them. “The humanitarian spill-over of the crisis in Syria has resulted in severe burdens for the countries sitting around this table,” said Jordan’s foreign minister Nasser Judeh at a meeting of officials from the five countries and the UNHCR in Amman on 5 May.

Jordan’s external financing needs are now running at their highest level in a decade, according to London-based ratings agency Fitch Ratings, reaching 120 per cent of current account receipts and useable reserves in 2013. The Amman government has at least been assisted by its richer allies, with a US-guaranteed bond and $2bn in grants from the GCC. More has been pledged from the Gulf, but even so the country is clearly vulnerable.

Refugee situation

Lebanon has also been struggling to cope with the people pouring across its borders from Syria. Refugees are estimated to make up a quarter of the population, and traditional drivers of growth, such as the real estate, construction and tourism sectors, have been undermined by the delicate security situation.

Despite all these differing experiences over recent years, most countries in the region face a few rather similar problems. In particular, with so many young people leaving school and university every year, economic growth levels need to be higher and many more jobs created, particularly in the private sector.

In her Rabat speech, Lagarde made some suggestions about how to inject much-needed pace into the economies that have undergone political turmoil. She spoke about the need to boost small and medium-sized enterprises and to reduce the dominance of a few large firms with close connections to the state. She also called for more support for entrepreneurs, more social mobility and a need to share the dividends of growth more widely.

“In too many countries, the state is too intrusive and the public sector stakes out a position that is too dominant,” she said. “[The state] needs to become less of an employer, and more of an effective and impartial regulator and enabler of the private sector.”

Such policy positions have long been the calling card of the IMF and are not always welcomed. But what is striking is that, for oil exporters and importers alike, the issues Lagarde identified are apparent in economies across the region. For all the disparity of wealth between the Gulf, and North Africa and the Levant, the challenges they face in the years ahead are, in some ways at least, remarkably similar.