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Major Economic Challenges Faced by MENA Countries
By admin January 31, 2018

Note: Graph from the World Bank

The MENA countries contribute around $3.3 trillion in GDP every year, which accounts for about 4.5% of the world’s total economy. Most of the population in the MENA region concentrate in middle-income countries, which are home to about 60% of the world’s oil and 45% of the world’s natural gas, and therefore play an important role for the global economic outlook. Eight of 12 OPEC member countries are included in the MENA region.

The broad MENA region is composed of the Arab states in the Middle East and North Africa—Algeria, Bahrain, Djibouti, Egypt, Iraq, Jordan, Kuwait, Lebanon, Libya, Mauritania, Morocco, Oman, Qatar, Saudi Arabia, Somalia, Sudan, the Syrian Arab Republic, Tunisia, the United Arab Emirates, and Yemen—plus the Islamic State of Afghanistan, the Islamic Republic of Iran, Pakistan, and the West Bank and Gaza. The economies of the MENA region are very diverse. The region is best known for producing oil and oil business significantly impacts the economy. Although some countries already experienced the development of a “Post-Oil “economy and do not rely on oil heavily, the MENA countries are still facing several major economic challenges due to their common culture and social institutions.

1) Oil price
Fluctuating oil prices are tough for the region as MENA countries have faced a lot of policy challenges relating to oil in recent years. The biggest challenge for the oil exporting countries is to manage their financial and diversification strategy when oil price is kept below $45 a barrel. Global oil supply and demand are seriously imbalanced, leading to the plummet of the international oil market prices in 2014 and 2015. The reason for that round of the decrease in oil prices is quite mixed. The primary factor is still the weak global oil demand exacerbated by lower than expected economic growth in the euro area, Japan, and Russia which has inhibited the growth of global energy demand. In addition, the once world’s largest oil importer, the US, has significantly reduced the dependence on oil imports after the “shale gas revolution.” However, the more important reason contributing to the cause of international oil prices falling is still with the oil supply side. At the end of November 2014, facing continuous decline of international oil prices, OPEC group made a decision not to cut production, and Saudi Arabia and other major oil-producing countries have pushed oil production close to the up-limit of capacity, which led to the volatile global oil price’s rapid collapse.


Figure: Crude Oil Price from 1990 to 2015
Source: www.tradingeconomics.com

Persistently low oil prices, lower fiscal revenues and currency shortages have forced MENA governments to take austerity measures including cutting capital and current spending. Twenty billion dollars in projects were cancelled in Saudi Arabia and the refugee crisis is draining the fiscal revenue in the other countries. Additionally, the private sector, the source of the job creations, has been slowing down, driving up the unemployment rate. The recent statistics showed that unemployment rate remained stubbornly high in Egypt, Iran, Iraq, Jordan, Morocco and Tunisia in 2016. The World Bank projected that the real GDP growth in MENA will stay at its lowest level for the fourth consecutive year, around 2.6% in 2016. All three sub-groups (GCC countries, developing oil exporters and oil importers) will have significant deficits. The oil exporting countries’ growth remains subdued because of the deep drop in GCC countries. Gulf countries’ GDP growth fell to 1.8 percent in 2016, a 50% reduction from 2015, forcing the governments to take austerity measures leading to spending cuts. However, the spending cuts have also hurt the growth in the non-oil sector within the countries as well.

2) Regional Security
The regional security situation in the MENA region continues to deteriorate. Conflict, terrorism and other security issues remain the overwhelming problems the MENA region faces. Since 2010, the MENA countries have experienced continuous turmoil. Syria, Iraq, Libya and Yemen are now in civil war. Millions of people have lost their homes, and many have fled to the countries which are economically vulnerable and fragile, causing the largest refugee crisis since World War II. The most striking event in the region occurred in 2014 when the “Islamic State” sieged Iraq’s capital, Baghdad. Terrorist attacks and the additional insecurity factors have suppressed the countries’ economy as well as their neighbors.

Throughout the region, war and violence have significantly destroyed human and social capital in the war-torn countries. The results are devastating and long lasting as a UN report has noted that more than 13 million children are out of school in those countries. Besides the loss in human and social capital, the war has also damaged many physical assets. The Syria Center for Policy Research estimated the capital stock damage at USD 72 billion in Syria between 2011 to the end of 2014. A separate study estimates Libya’s infrastructure needs to be USD 200 billion over the next ten years. The pace of recovery in mid-term depends on whether the country is rich in natural resources. The statistics show that real GDP growth recovered more slowly in the oil importing countries than the oil exporters. Lebanon took 20 years after the war for its GDP to recover but it still remains much below the pre-war level. However, if a peaceful environment is established in Syria, Iraq, Libya and Yemen, it could lead to a swift rebound in oil output and exports, allowing them to increase fiscal space, improve current account balances, increase foreign reserves, and boost economic growth in the medium term. This could then bring positive spillovers to the rest of the region.

3) The weak recovery of Euro area and global economy stagnation
The debt crisis in the euro zone economy continues to deepen and its economic growth is almost stagnant, not only dragging the global economic recovery, but also resulting in a negative impact to the tourism industry in the MENA region. Tourism, foreign aid and investment have undermined MENA’s economic performance. Should the euro zone economy to rebound, it is likely that the MENA region would benefit from its improvement in aid and investment projects as well as the increased number of tourists.

4) United States tapering from the quantitative easing
With the expectation of an interest rate hike in the US and the financial recovery, the tapering of quantitative easing will result in the MENA economy experiencing a negative impact due to the dollar appreciation, capital outflow and underinvestment. As a pre-reflection of this impact, since June 2014, the US Dollar linked local currencies including Iran, Morocco, Tunisia, Turkish currencies, largely depreciated which has had almost the same magnitude of an impact as the declining oil prices have.

To sum up, global oil price and regional security are still the dominant concern for the economic development of MENA countries. On the other hand, due to their heavy reliance on imports and exports or known as outward economies, the global economic situation and American monetary policies are also playing important roles in influencing economic growth and financial stability throughout the MENA region.

 

For Further Reading:

The World Bank MENA region overview:

Active with MENA, OECD Report:

Growth and Stability in the Middle East and North Africa by IMF:

Google Books: Challenges and Reforms of Economic Regulation in MENA Countries:

 

 

 


Thanks for sharing !


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