By the end of 2010, MENA countries had largely recovered from the global financial crisis, and growth rates were expected to reach pre-crisis levels in 2011. In early 2011, a series of pro-democracy movements began that resulted in swift regime change in Tunisia and Egypt, and spread to Bahrain, Libya, Syria and Yemen. The unrest and uncertainty associated with these movements have affected the short-term macroeconomic outlook and the status and speed of economic
reforms in the region. The medium-run growth prospects are likely to improve, especially if the political changes are associated with more open and accountable governance and more rapid reforms. While political change will bring short-run challenges the transition has the potential to significantly boost economic growth and raise living standards in the medium term. If the political changes lead to greater accountability and transparency in governance, countries could relax a key constraint to growth and steer resources more effectively to productive uses while reducing unproductive rent-seeking behaviour. Better rule of law will promote competition and political stability will attract investment, facilitating more rapid growth in a sustainable way. More voice for civil society will prevent the unequal application of regulations, and can lead to more inclusive growth. While the challenges are many, the opportunities are more.
Challenges ahead
Transitions from other regions suggest that the medium-run gains from moving to more open and accountable governments are sizable. Income growth tends to stabilise at a higher average rate in the decade after transition, and income volatility at a lower rate, as compared with the previous period. The results will depend on how swiftly and credibly governments can commit to reform. In the meantime, as investors wait for political uncertainty to be resolved in countries affected by political turmoil, it is inevitable that investment will be delayed and economic challenges will emerge. Evidence from earlier transitions shows that these difficulties tend to be limited; growth
typically dips for only one year and then returns to or exceeds previous levels. These challenges alter the short-term economic outlook and subject it to significant uncertainty in several countries in the region. The forecast is for 3.6 percent growth in 2011, down from 5 percent growth expected in January of this year. The decline is largely due to the sharp drop in Egypt’s and Tunisia’s economic activity, but also because of weaker growth in developing oil exporters. The GCC will support the region, with robust growth above 5 percent. Overall, the growth effects are expected to differ by country, depending on whether the country is an oil exporter or an oil importer and the degree to which unrest and political changes disrupt country’s economic activities.
· Growth of oil importers in North Africa is expected to be 1.9 percent in 2011, down by 3.2 percentage points relative to January projections for 2011. The main factors for the weaker outlook are a drop in tourism, business disruptions, and reduced investment, resulting from political uncertainty.
· Growth of oil importers with strong GCC links is expected to be around 4.4 percent, which is two percentage points lower than pre-unrest estimates. The decline is due to rising political tensions
in Jordan and Lebanon, and disruptions in intra-regional trade.
· Developing oil exporters are expected to grow at 1.7 percent in 2011. Despite rising oil prices, growth of this group is less than half of the previous projection for 2011. The slowdown is due to Iran’s weak economic performance and unrest in Yemen and Syria.
· Economic expansion in the GCC countries is expected to be stronger in 2011 than in 2010 and reach 5.2 percent this year, boosted by rising oil prices and Qatar’s projected double-digit growth from
increased natural gas production.
Financial market movements reflect a modest tightening of financing conditions for sovereigns as well as the corporate sector, which is expected to dampen regional growth. FDI inflows are likely to decline and short-term capital outflows to rise in the countries affected by unrest, putting downward pressure on exchanges rates. The extent of the decline in investment will depend on how long it takes for uncertainty to be resolved.
Government spending expected to rise
On the demand side, government spending is expected to rise throughout 2011 as MENA governments have moved quickly towards expanding supportive policy measures and social transfers to help the unemployed and ease the burden of high commodity prices. Partly because of these actions, but also because of rising fuel and food prices, inflation rates are expected to increase in many MENA countries in 2011. The fiscal stance of oil importers in North Africa is expected to
worsen in 2011, as revenues decline in response to reduced business activity and expenditures increase reflecting the supportive social policy measures provided by governments. Oil exporters will also see increased expenditures, but these will be offset by higher oil revenues, leading to improvements in their fiscal balances relative to those reached in 2010 and the pre-unrest forecasts. Yemen and Syria however are exceptions. The main risk to the forecast is prolonged instability and lack of clarity about the future political transition in the affected countries in the region. Most importantly, until a reasonable level of
political stability returns, investment will be compromised. Prolonged tensions would also amplify the negative impact on tourism receipts, which have been a large share of GDP in a number of countries, and could translate into increased cost of capital, further dampening growth prospects.
Looking ahead
Looking forward, the forecast is for improvement in the economic prospects of the MENA region in 2012 compared with 2011. The increase comes from about a 2 percentage point jump in growth in developing MENA. Growth in the GCC is likely to retreat slightly from 2011 rates, as oil prices stabilise. The boost in expected growth in developing MENA in 2012 assumes a move to enhanced political stability. If governments in the countries experiencing unrest are able to gain a reasonable level of legitimacy and begin a credible reform program, growth is likely to quickly return to or surpass pre-revolution levels. Of utmost importance is citizen security and political stability. With security and stability, a few steps toward government reform will reassure investors and the
growth rate will improve. There is, of course, a good deal of uncertainty, but the opportunity to move to a path of stronger and more inclusive growth is present. If the MENA countries take the
demands of the population for more accountable and transparent governance seriously, and move to a structure that promotes competition and inclusiveness, this will promote robust growth in the
region which ultimately will have a positive impact on the port industry.