Abu Dhabi, UAEFriday 10 April 2020

Countries across the world need bold reforms to lift growth and create jobs

In the year ahead, the growth outlook for oil exporters, excluding Iran and conflict countries, is projected to improve

Oil prices climbed 1.3% in early trading on Wednesday. AFP
Oil prices climbed 1.3% in early trading on Wednesday. AFP

In 2019, global growth was at its slowest since the global financial crisis. A synchronised slowdown affected most countries, with a relatively limited impact on the Middle East and North Africa (Mena) economies. Going forward, growth is projected to pick-up modestly in 2020 and beyond. However, global headwinds are blending with longstanding regional strains to keep growth in Mena below the level that could help address the high level of youth unemployment plaguing the region.

Looking ahead, the main priority for Mena policymakers will be to deliver more equitable and inclusive growth. This will help the region face the relatively modest global pickup, geopolitical uncertainties and mounting domestic vulnerabilities in some countries. Indeed, low growth and dwindling job opportunities have led to a rise in social unrest in some countries, which has become more widespread in recent months.

Policymakers in the Mena region need to deliver the measures necessary to strengthen economic resilience generate jobs over time to meet the needs of their people

The global uncertainties expose two key challenges to the outlook in the Mena region in 2020. First, lower and more volatile oil prices. Ongoing supply and demand factors – such as rising US shale oil production and weaker global growth – mean that oil prices may not recover much from current levels. This points to weaker growth prospects in oil exporters and thus fewer positive spillovers to other countries in the region. Bouts of oil price volatility resulting from global trade tensions and geopolitical risks may add to these challenges in both oil exporters and oil importers as economic management becomes more complicated.

Second, trade tensions represent a direct risk to the region, mainly through reduced demand in key trading partners. This is not only the case, for example, in oil exporters where strong trade links with China expose these countries to spillovers from a slowdown there, but also in oil importers as they rely heavily on demand conditions both within the region and beyond, including Europe.

In the year ahead, the growth outlook for oil exporters, excluding Iran and conflict countries, is projected to improve to 2.8 per cent. This outlook mainly reflects the assumed expiration of the Opec Plus agreement in March 2020 and improving non-oil sector activity in some countries, in line with ongoing infrastructure projects. Yet, oil exporters will continue to face the prospect of lower global growth and oil prices, exposing some countries to rising fiscal vulnerabilities. Across the region, the pace of fiscal consolidation has unfortunately slowed or reversed in recent years. Yet the effects of additional spending on growth have proven more modest than in the past, reflecting a less productive composition of spending, including on large public sector wage bills and energy subsidies.

In the Mena oil importers, average gross domestic product growth is set to improve to 4.4 per cent in 2020 from 3.9 per cent, compared to respective average growth rates of 3.4 and 3.5 per cent in other emerging and low-income economies. However, oil importers will have to address acute fiscal challenges, with public debt levels rising to 85 per cent of GDP on average and thus limiting space for growth-enhancing fiscal measures and much-needed social spending. While debt levels have declined in recent years in some countries, in others, this ratio has risen to very high levels. This run-up in debt stems from many factors, including the combination of sustained decline in growth compared to the previous decade and high public spending, as well as an increased reliance on borrowing to meet these fiscal needs, given limited resources. Indeed, the fiscal slippages of the past have proven difficult to reverse and been made worse by lackluster growth.

The Mena region holds significant economic potential that can meet the aspirations of the young populations through higher and more inclusive growth. Achieving this outcome, however, requires bold reforms and supportive economic conditions. Fortunately, much of the region has embarked on reform agendas with inclusive growth and job creation taking centrestage. But progress has been slow and recent growth outcomes have failed to satisfy the needs and aspirations of ordinary citizens. Going forward, policymakers in the Mena region need to deliver the measures and reforms necessary to strengthen economic resilience in the near-term and generate jobs over time to meet the needs of their people. This means tackling two common challenges.

First, take measures to help lift medium-term growth. Creating an enabling environment for vibrant private sector activity would spur innovation, attract investment, and generate jobs. To this end, improving infrastructure, increasing access to finance, and implementing structural reforms to enhance legal and regulatory frameworks, further improve the business climate, and limit the role of state-owned enterprises in the economy would help raise economies’ potential and attractiveness to foreign capital.

Second, address rising fiscal vulnerabilities. This requires fiscal consolidation to reduce excessive debt obligations and rebuild buffers, though reducing unproductive expenditure and mobilising additional revenue in ways that protect the vulnerable in society. In particular, while a rise in public spending may be necessary in the face of social tensions, governments should ensure that this money is well-targeted to those most in need, while guarding against longer-term budget impacts that can be difficult to reverse. Addressing fiscal strains in this way will generate space for growth-enhancing and productive social spending. To ensure that near-term fiscal gains are sustained, countries across the region should strengthen their fiscal frameworks, both to help decouple the evolution of spending from volatile oil receipts in oil exporters and to improve the quality, efficiency and transparency of public spending.

The new year provides us a fresh opportunity to address long-standing challenges and make lives better. Higher and more inclusive growth that meets the needs of the people in the region is our ultimate shared goal. With decisive leadership that inspires confidence to citizens, creative thinking to charter the way forward and deliberate measures within well-articulated plans, we can work ever harder to that end.

Jihad Azour is the director of the Middle East and Central Asia Department at the International Monetary Fund

Updated: January 6, 2020 09:31 AM

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