By Siddiqi, Moin A.
The Middle East
The Middle East and North Africa (MENA) region faces a period of uncertainty, with near-term growth prospects contingent upon whether the region is engulfed in new military actions. Business confidence could be severely undermined by the growing risk of `Gulf War II', thereby disrupting trade and investment flows and leading to sharp fluctuations in oil prices. The World Bank warns: "The region will continue to bear the high costs of conflict and political uncertainty," and "This situation stifles private investment as well as reform efforts, with negative consequences on long-term growth."
MENA is heavily reliant on a narrow range of revenue sources, particularly crude oil/natural gas, private remittances and tourism. The balance of payments current account and fiscal balances broadly follow trends in world oil markets. This unhealthy reliance increases the potential for vulnerability to external shocks.
The political and economic fallout of the 11 September terrorist attacks is still being felt across the region. Tourism business remains depressed because of regional security concerns and foreign direct investment (FDI) outside hydrocarbons projects has slowed. Egypt suffered large falls in FDI, as bearish global conditions dampened the prospects for privatisation-related FDI, particularly in the aviation and telecommunications sectors.
There is, however, evidence of diversification in energy-exporting countries. The United Arab Emirates, Oman, Bahrain and Iran have been able to offset weaker activity in their energy sector through growth in the non-oil economy. The International Monetary Fund (IMF) stresses the importance of economic reforms. "If these economies are to remain attractive to both foreign and domestic investors, a broadening and deepening of structural reform is required, in the areas of trade and exchange rate reforms, price liberalisation, financial sector deregulation, public-enterprise restructuring and privatisation, and labour market and social safety net reforms," the Fund added. The Gulf Cooperation Council (GCC) countries, which constitute the bulk of MENA's gross domestic product, already have liberal trade, exchange rate (pegged to the US dollar) and price systems, together with free capital flows.
Most countries are pursuing sound macroeconomic policies. The `boom-bust' cycle of the 1980s and early 1990s, associated with steep increases and decreases in public expenditures as oil revenues rose and fell, has been much more subdued. Firmer crude prices, averaging $25.8 a barrel over 2000-02, have not resulted in booming government spending across the oil-rich Gulf. The authorities have utilised `oil windfalls' prudently to redeem national debt, accumulate external (official) assets and increase investment on infrastructure and other fixed capital outlays.
After exceptionally robust growth in 2000 and 2001, MENA fell into a sluggish growth cycle during last year, amid lower oil production and exports, resulting from the OPEC cartel's supply-restraints and rising geopolitical instabilities. According to the World Bank, real GDP growth among oil-exporters averaged 2.4%, whilst diversified exporters--namely Egypt, Morocco, Tunisia and Jordan--faced harsh external conditions, with growth declining to 2.2%, down from 4.3% in 2001. The sagging Eurozone economy has reduced export demand and contributed to a downturn in regional tourism. Internal factors such as unfavourable weather conditions and stringent monetary/fiscal policies, coupled with an unstable exchange rate regime in some MENA countries, have also depressed economic activity. Mustapha Nabli, the World Bank's chief economist for MENA, commented: "The bleak growth prospects in MENA have also made an already difficult social situation critical, as ever more newcomers to the labour market join the ranks of the unemployed."
Regional prospects should improve during 2003, assuming the global economy stages a sustainable recovery, oil prices remain within OPEC's preferred target of $24-$25 and the general security environment normalises. …