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Sada - Analysis

Snapshot of the Economic Crisis in the Arab World


According to recent reports by the International Monetary Fund (IMF) and World Bank, the global recession set off by the financial crisis in late 2008 has strained Middle Eastern economies, but early signs suggest that the downturn in the region has not been as severe as it has in other emerging markets. Arab  economies are, on the whole, weathering the crisis better than others in the short term. In the long term, however, a prolonged recession is likely to create the potential for social and political instability. Oil economies have managed to maintain high levels of capital spending despite the decrease in oil revenues. Non-oil producing countries, on the other hand, might show delayed effects as capital inflows from remittances, foreign investment, and tourism revenue fall and affect the rest of their economies. Countries less integrated into the global economy are not likely to see severe losses.

Gross domestic product (GDP) growth for the entire Middle East in 2008 was 6 percent, but is projected to fall to 3.1 percent in 2009. This is a radical departure from the IMF earlier forecast of 5.9 percent growth for 2009, but still compares favorably to other emerging economies, such as Latin America’s, where GDP growth fell from 4.2 percent in 2008 to -2.2 percent in 2009.
Middle East and North Africa Forecast Summary
annual percent change unless indicated otherwise
Which Arab countries are faring best and worst in the global economic crisis, and what steps are governments taking to respond?
Oil Exporters: Effects of the Crisis
Oil-exporting countries experienced a sharp decline in oil revenues at the onset of the economic crisis. Although forecasts show relative increases in oil prices, it is unlikely revenues will soon return to the all-time highs they reached prior to the crisis.  
Which Arab countries are faring best and worst in the global economic crisis, and what steps are governments taking to respond?  
Lower oil prices and declining government revenues in Gulf Cooperation Council (GCC) economies created significant deficits in fiscal balances, which affected investor confidence and contributed to a drop in equity prices.
Which Arab countries are faring best and worst in the global economic crisis, and what steps are governments taking to respond?
The real estate market, a major investment market in the Gulf, reflected similar investor fears and a credit crunch.
Which Arab countries are faring best and worst in the global economic crisis, and what steps are governments taking to respond?
Despite the fall in oil and gas revenue, the decline of the stock markets, and the problems of the real estate sector, the region’s oil exporters (including GCC countries, as well as Algeria and Libya) have proven resilient, due to sustained high oil prices in the pre-crisis boom and government responses that helped mitigate the effects of the downturn. Between 2005 and 2008, high oil prices facilitated robust economic growth, including various diversification efforts throughout oil economies, leading to increased non-oil growth between 2005 and 2008. This helped oil-exporting countries build up foreign assets and lower government debt, cushioning their financial systems, although they did suffer losses from investing in foreign assets.
Oil Exporters: Responses to the Crisis
According to IMF reports, aggressive government responses to the downturn included fiscal stimulus and rescue packages and sustained high governmentspending. Saudi Arabia increased government spending for 2009 by 15.8 percent, with a $124.7 billion stimulus package. After a long period of political deadlock, Kuwait passed a stimulus package of $5.2 billion in April 2009 to help speed up economic recovery. The United Arab Emirates provided some $32.7 billion in subsidies and assistance to its financial and investment institutions. GCC sovereign wealth funds, though they lost significant percentages of their values, also played a role in mitigating the effects of the crisis by providing liquidity and increasing financial stability. The funds’ increased involvement in financial transactions has brought them under greater scrutiny by regulators throughout the world.
Which Arab countries are faring best and worst in the global economic crisis, and what steps are governments taking to respond?
Although GCC countries face significant reductions in economic growth over the next two years, their overall performance will largely be determined by the duration of the global recession and the fluctuation of oil prices. As these economies try to ride out the crisis, economists stress the importance of coordinated policy responses, tighter control of financial structures, and greater measures to improve investor confidence.
Oil Importers: Effects of the Crisis
Net oil importers including Morocco, Tunisia, Egypt, Jordan, Syria, and Lebanon are likely to see a delayed impact of the downturn. Economists, including Masood Ahmed, director of the Middle East and Central Asia department at the International Monetary Fund, predict that pressure will intensify throughout 2009, as major industries in these countries suffer the effects of decreased remittances, which are a significant source of national income. These countries will also suffer an overall decline in foreign direct investment, and lower tourism revenues―notably Jordan and Morocco, where international tourism made up 10 and 9 percent of GDP respectively in 2008.
Remittances totaled $33.7 billion across the Middle East’s oil-importing economies in 2008, constituting 8 percent of GDP in Morocco, 14 percent in Jordan, and a remarkable 20 percent in Lebanon. Remittances across the region are expected to fall from a total of $33.7 billion in 2008 to $29 billion in 2009. Though the drop in remittances seems marginal, coupled with an anticipated $11 billion decline in foreign direct investment across these economies from 2008 to 2009, the effects are likely to be painful for individual households. In addition to a decrease in annual exports and imports, capital flows are also expected to fall. The effects of the tightening financial conditions in the GCC countries are already discernable in the form of decreased FDI flows to non-oil countries, which traditionally targeted the industrial sector, infrastructure, and real estate markets.
As Middle Eastern economies are not deeply integrated into the global economy and have fewer links to global financial institutions, they have not been as hard hit by the crisis. But they are likely to suffer secondary effects resulting from decreased capital flows, slumping further into poverty and higher unemployment. Unemployment rates are expected to jump from 9.5 percent in 2008 to 10.3 percent in Morocco in 2009, for example, and from 8.4 percent in 2008 to 13.9 percent in 2009 in Egypt. Inflation has also increased following a spike in commodity prices in early summer 2008, causing social unrest in Tunisia, Lebanon, Morocco, Egypt, and Mauritania.
Which Arab countries are faring best and worst in the global economic crisis, and what steps are governments taking to respond?
Economists expect the impact of the crisis to intensify as Middle Eastern countries’ trading partners and leading investors focus on their own recoveries, and as the global economy experiences slower, if not altogether stymied, growth. As long as the major industrialized countries continue to experience uncertainty about their own growth prospects, the future of direct investment in Middle Eastern economies will also face uncertainty.
Oil Importers: Responses to the Crisis
Most oil importers have responded to the crisis by adopting fiscal and monetary policies to ease the pressure and reducing fiscal deficits. Tunisia, Jordan, and Morocco have taken measures to ease monetary pressures by lowering interest rates, but until now, policy measures have been largely inadequate due to limited resources. International Monetary Fund economists stress the need for these countries to pursue better coordinated measures including structured fiscal reforms, improved financial supervision, and long-term planning.
Which Arab countries are faring best and worst in the global economic crisis, and what steps are governments taking to respond?
The recovery of Arab economies is likely to be slow, protracted, and inextricably bound to the global recovery. In order to come out of the crisis stronger, governments in the region must think long term, establish strong economic institutions, and consider serious economic reforms.
Intissar Fakir is assistant editor of the Arab Reform Bulletin and was previously program coordinator for the Middle East and North Africa Program at the Center for International Private Enterprise.


Comments (3)

  • Patricia Wilson
    Would it not be profitable for each of those Arab countries to begin diversifying their products. Oil and gas are limited and something must come along soon to replace it. Since the land is 75%+ desert could some engineers not see what is possible in terms of wind and sun. They have sun 89% of the year not including the sandstorms. As a Chinese man mentioned on PBS last week--what good is a desert other than it's sun and wind. He was beginning to build wind tunnels in one of China's larger deserts. Why is this not possible in the Muslim countries--Asian and African??
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  • Hassan Al-Husseini
    Hassan Al-Husseini, Al-Khobar, Saudi Arabia. [July 10] Good report! I wish you had some more numbers in addition to percentage changes, and indicate currency used ($?) and units (millions, billions?).
    Perhaps in all such analyses, we should recall the major factors within the region's control that truly hold back advances in the Arab World and the Middle East. These are (a) spending on weapons and wars, encouraged mostly by the usual arms vendors ; (b) absence of a meaningful solution to the Arab Israeli conflict, spurred by Israel's renewed desire to be a "Jewish State"; (c) holding back of women's advancement in our societies in the name of religion; (d) borders that prevent regional exchange and integration; and (e) uncontrolled population growth. Perhaps 1% of annual GDP growth could be added for each obstacle that could be largely removed. See how little Bahrain, Dubai, Lebanon or Tunisia have such high achievement records despite being resource-poor. They are striving to be open societies.
    A special mention to Israel. Remaining a permanent colonial fortress outpost of 19th Century thinking won't be sustainable forever. Study the South African model for a possible solution integrating Palestinians and Israelis in a peaceful model of coexistence.
    The Arab World/MENA could easily join the ranks of China and India as a region of 300-500+ million in terms of potential growth. The 500 million number comes from adding Turkey (80 million), Iran (80 million) and Ethiopia (80 million) to the 300 million in the Arab World who would make for quite a significant market similar to the European Union, the Russian federation or even the United States.
    Our greatest future challenges will be to assure adequate water and energy as our rivers, acquifers, oil and gas are depleted. I agree that we must focus on wind and solar energy, and even nuclear energy.
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  • sara
    Tourism is one the choices that these countries could focus on. Most of them have historical aspects , sun and sea. of cource, tourists themselves are in financial crisis.
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