While an upturn is predicted in global activity by late 2002, difficulties in the Middle East’s external environment and lower demand for oil are likely to restrain growth in the region, forecasted a recently released World Bank report, titled Global Development Finance 2002.
The report projects that the global Gross Domestic Product (GDP) growth would reach 3.6 percent in 2003, an improvement over 2001 and 2002, but still short of the strong 3.9 percent performance of 2000. MENA’s GDP growth, however, is anticipated to fall to 2.7 percent in 2002, while recovery over the 2003-2004 period may be protracted relative to other developing regions.
The rebound of the global economy in late 2002 should help stabilize growth in the Middle East and North Africa (MENA), but the region’s near-term prospects for growth are challenged by the decline in oil prices, reduced tourism receipts and the weakening of economic activity in the region’s largest trade partner Europe, compared to that of North America and East Asia.
Diversified exporters like Jordan and Tunisia will benefit from the expected upturn in global activity in late 2002 and the fading of the impacts of September 11 on tourism. However, the intifidah in the West Bank and Gaza may cause more acute concerns for tourism in the region.
”This recent experience shows again the extent to which MENA countries continue to suffer from a high degree of volatility, which constrains their prospects for growth,” says Mustapha Nabli, chief economist of the World Bank’s MENA operations.
According to the report, the global economic slowdown is exceptionally deep and broad, as the deceleration in growth rates has been equally rapid for rich countries and developing countries. In the last 40 years, the deceleration of world GDP was sharper only in 1974, during the first oil crisis.
Countries dependent on commodities exports have been hit especially hard, with prices for commodities as diverse as coffee, cotton, rice, soybeans and precious metals at or near historic lows. Countries that rely on tourism have also suffered due to the drop in travel following the September 11 terrorist attacks on Washington and New York.
In the MENA region, gross capital flows from international markets rose during 2001 by $2.7 billion, an increase of 26 percent. Commercial bank financing continues to dominate flows to the region, reaching $7.7 billion. That this increase occurred in a context when bank financing to other regions declined reflects the unique characteristics of oil-exporting economies. Oman, Iran, Saudi Arabia and Egypt remain the principal recipients of bank financing.
Similarly, Foreign Direct Investment (FDI) flows into MENA increased, particularly to oil-exporting countries. FDI rose from $1.2 billion in 2000 to $2.6 billion in 2001. For the first time in three years, Saudi Arabia experienced net positive inflows of one billion dollars, as limited foreign participation in hydrocarbon projects was approved.
However, many diversified exporters such as Egypt and Jordan experienced a considerable fall in FDI, as current global conditions suggest that the prospects for privatization-related FDI, particularly in telecommunications and aviation, will be dampened through the medium term.
Countries with a sound investment climate – including effective policies, governance and institutions, adequate infrastructure, and appropriate regulations – are in the best position to increase the volume and to improve the productivity of both domestic and foreign investment, the report asserted.
For example, poor countries with better policies enjoyed much more rapid increases in FDI than poor countries with worse policies, and were more able to absorb the advanced technology and skills that often accompanies FDI. Residents of poor countries with better than average investment climates sent only one sixth as much capital out of the country as residents of countries with worse-than-average investment climates.
In Egypt, for example, the poor economic situation has led the government to consider immediately a range of policies to improve the business climate, including capital market reforms and the independence of the central bank. Tax reforms are also being considered to ease the corporate tax burden and encourage compliance.
“Most countries of the MENA region are working on improving the climate for private investment, but progress is slow in view of the scope and depth of reforms needed to strengthen domestic private investment and attract significantly steady foreign investment,” says Nabli.
Better policies have enabled some poor countries to attract more diversified FDI flows—the share of FDI going to poor countries that was devoted to exports of natural resources fell sharply in the 1990s. Similarly, countries that established the competitive conditions required to attract foreign banks experienced an improvement in the efficiency of their domestic banks and thus a decline in the costs of financial intermediation.
Improvement in external conditions should also boost the diversified exporters, particularly Jordan and Tunisia where export volumes have exceeded export market growth in 2001. Conditions in Egypt point to continued domestic weakness in 2003, as the government is likely to lower the fiscal deficit while the economy slows down from the 1990s level.
Moroccan growth is heavily reliant on weather conditions, but will also be affected by low prices for its commodity exports and faces the challenge of increasing the competitiveness of its manufacturing sector as it implements the next states of its EU Association Agreement. — (menareport.com)
© 2002 Mena Report (www.menareport.com)
