II. Recent Developments in the Macroeconomy
Author:
Mr. Mohamed A. El-Erian https://isni.org/isni/0000000404811396 International Monetary Fund

Search for other papers by Mr. Mohamed A. El-Erian in
Current site
Google Scholar Close
and
Ms. Susan Fennell
Search for other papers by Ms. Susan Fennell in
Current site
Google Scholar Close
Language:
English
Print Publication Date:
11 Nov 1997
Keywords:
BOOK; MENA economy; economy; GCC country; country; MENA country; rate of inflation; private sector activity; Palestinian economy; economies' ability; reconstruction program; Inflation; Oil; Fiscal stabilization
Download PDF (1.6 MB)

Abstract

As recognized by governments throughout the region, sustaining a high rate of growth is the primary economic challenge facing the MENA economies. This is needed to enhance national prosperity, reduce unemployment in non-oil economies of the region, and generate jobs for the growing number of young people joining the labor force.

A. Overview

As recognized by governments throughout the region, sustaining a high rate of growth is the primary economic challenge facing the MENA economies. This is needed to enhance national prosperity, reduce unemployment in non-oil economies of the region, and generate jobs for the growing number of young people joining the labor force.

International experience, as well as a well-established body of literature, confirms that macroeconomic stability enhances economies’ ability to sustain a high growth rate. Accordingly, this section discusses the extent to which the MENA economies have progressed in establishing macroeconomic stability. In the following section, another critical ingredient of the growth dynamics—the evolving structures of the economies and their relations with the international economic system—is discussed.

Available data for the MENA region as a whole indicate that, after over a decade of deteriorating or, at best, stagnant macroeconomic performance, the economic picture improved considerably in 1996, and remained favorable in 1997 (Table 1). This is most visible in the developments detailed below relating to the traditional set of macroeconomic outcomes (economic growth, inflation, and balance of payments), as well as the intermediate macroeconomic policy targets (such as the budgetary position, the external current account, and domestic credit developments).

Table 1.

MENA: Basic Economic Indicators, 1976–97 1/

article image
Source: IMF, World Economic Outlook.

PPP weighted averages.

Excluding Kuwait in 1990 and 1991.

Oil exporters include Algeria, Bahrain, the Islamic Republic of Iran, Kuwait, Libya, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

Excludes Israel.

The improvement in 1996 reflected the favorable impact of both domestic and external factors. Domestic factors included positive market reactions to government’s efforts to tighten fiscal and monetary policies and, to a lesser extent—given the less advanced stage of reforms—their efforts to widen and deepen structural reforms. These factors were greatly accentuated by favorable external factors in the form of the sharp increase in international oil prices and favorable weather conditions for the Maghreb economies after a period of prolonged drought. Appropriately, given the volatile nature of the region’s external conditions, countries, especially the oil-producing ones, used the more favorable external environment to consolidate their financial position rather than to increase spending.

In comparison to 1996, MENA’s economic improvements in 1997 have been primarily the result of domestic policies. The economic and financial conditions of the region are responding favorably to several countries’ success in further strengthening macroeconomic fundamentals and gaining greater credibility with respect to their willingness and ability to move away from the legacy of years of inward-oriented, public sector-led development strategies, particularly in the non-oil economies.

These changes have been recognized domestically, regionally, and internationally. In most, though not all, economies they have been compensating for the less favorable external factors, be it the lower international oil prices (by 5 percent up to September) or the unfavorable weather conditions. There have also been setbacks to the Arab–Israeli peace process.

In the rapidly globalizing world economy, countries’ attractiveness for investment is judged not only against their own historical record and prospects, but also vis-à-vis developments in other countries. In this regard, MENA’s macroeconomic conditions compare favorably relative to those in emerging markets (Chart 1). In most countries with growing international financial linkages, relatively sound economic fundamentals provide an important cushion against the disruptive impact on the real economy of sudden reversals in capital flows, such as experienced in Mexico (1995) and Thailand (1997). However, MENA’s implementation of structural reforms, while accelerating, continues to lag that in many other emerging markets. As a result, the region’s investment and saving rates remains well below those in the average developing country, let alone those in developing economies having recorded high rates of economic growth (Chart 2).

Chart 1.
Chart 1.

Macroeconomic Conditions are Relatively Sound…

Source: IMF. World Economic Outlook.1/ Excludes Kuwait in 1990–93.
Chart 2.
Chart 2.

But Investment and Savings Rates are Still too Low…

Source: IMF, World Economic Outlook.1/ Excludes Djibouti, Lebanon, and Sudan.2/ Excludes Lebanon.

Unfortunately, not all economies have been participating in the generalized improvements in the region. The Palestinian economy, in particular, has been suffering another year of major disruptions caused by frequent border closures and, until October, Israel’s withholding of tax revenues accruing to the Palestinian Authority. These two factors have contributed to worrisome unemployment rates, disrupted public investment, and undermined private investment. Some other economies, such as Lebanon, continue to face challenging financial’ conditions as they manage the complex task of massive reconstruction and macroeconomic stabilization (Box 1).

B. Macroeconomic Outcomes in 1996–97

Growth in the MENA region picked up to 4.8 percent in 1996, and is projected at about 4 percent in 1997. In line with this favorable development, real GDP per capita has also increased for the group as a whole, reversing the declining trend of the previous three years. As a result, the region’s real per capita income level is back to its level of 1990. Performance in this respect has been particularly noteworthy among the non-oil exporters, where real per capita GDP is estimated to have grown by about 3 percent in 1996 and a further 1.5 percent in 1997.

Egypt, the Islamic Republic of Iran, and Sudan are among the countries registering increasing real economic growth rates. Growth in Jordan remained relatively high at above 5 percent, albeit below the annual average of 6 percent recorded in the 1990s.

Not all economies registered increasingly buoyant economic growth rates. In Lebanon, for example, the growth rate has been below recent trends reflecting the slowdown in construction and the impact of the April 1996 bombings. Syria also experienced lower growth, as did Morocco owing to the less favorable weather conditions in 1997 and after a year of sharp recovery in GDP. Developments in the Palestinian economy were more worrisome, with output estimated to have remained stagnant or to have contracted for the second consecutive year. Indeed, the pickup in confidence and signs of sustained growth observed earlier have been undermined by recent disruptions to the regional peace process—a process accentuated by border closures and the interruption of revenue transfers. Growth in Israel slowed in 1996–97 owing to the winding down of the effects of the large wave of immigration during 1990–91, the deteriorating security situation, and high domestic interest rates.

Lebanon’s Reconstruction Program

Since the end of the civil war, Lebanon has embarked on an ambitious program of reconstruction and economic stabilization. The reconstruction effort was initiated in 1992 with the National Emergency and Reconstruction Program (NERP). In 1994, this was integrated into the much more ambitious and widely known Horizon 2000 program, which has become the envelope for all government financed and/or sponsored reconstruction efforts:

  1. The Vision. The Horizon 2000 program outlines the government’s investment plans for the 1995–2007 period. It goes beyond the initial emergency works under NERP and targets primarily the rehabilitation and expansion of the infrastructure capital stock so as to lay the foundations for future economic growth. In the preparation of the program, the government targeted an annual average real GDP growth rate of 8 percent so as to double per capita GDP by 2007. Taking into account that a sufficient stock infrastructure capital is an essential part of an enabling environment for private sector growth, a frontloaded path for government capital expenditure was a key element of the plan, allowing the public sector to be the catalyst for a general recovery in the economy. Later, growth was envisaged to be driven mainly by private sector activities and investment, allowing the government to reduce its budget deficits and its debt.

  2. The Achievements 1993–96. The acceleration in government capital expenditure coupled with the nominal stabilization efforts was associated with high rates of economic growth, with the average annual growth rate during 1993–96 amounting to 7.4 percent. Moreover, the target of Phase I of the Horizon 2000 program, the rehabilitation of basic infrastructure, has largely been achieved. Major benefits are already tangible, including the 24–hour electricity provision for most users, better functioning telecommunication systems, rehabilitated road networks in Beirut and its northern and southern suburbs, and some 1,200 renovated public schools.

  3. The Future. The Horizon 2000 Program has always had the character of an indicative framework, allowing the government to adjust to actual needs and macroeconomic constraints. Given recent macroeconomic and public finance developments, the government is adapting its plans accordingly:

    • Focus on social infrastructure. During Phase II, the authorities are now shifting their attention from basic infrastructure to social infrastructure projects to achieve a well–balanced distribution of the reconstruction benefits across sectors, regions, and groups, and to ensure an environmentally sustainable growth. During Phase II, public capital expenditure will target projects in the education, health, water supply, wastewater, and solid waste sectors. Estimates of Phase II projects vary, but investments in the order of US$5 billion over the period 1998–2002 are foreseen.

    • Greater private sector participation. Given the budgetary constraints and its intention to promote the roles of the private sector and foreign direct investment in the economy, the government has started to increase private sector participation in the reconstruction, including through B.O.T. (Build–operate–transfer) and O.T. (operate–transfer) projects.

    • More foreign financing. The government also hopes to increase the share of long–term concessional foreign financing, which has been lower than envisaged so far, thereby reducing the budgetary interest burden resulting from the relatively high domestic interest rates. In December 1996, during the “Friends of Lebanon” meeting, the international community pledged grants and concessional loans in the order of US$3.2 billion to support the reconstruction efforts for 1997–2001.

Earlier progress in reducing inflation has been consolidated. The region’s average inflation rate, as measured by changes in consumer price indices, declined to 12.4 percent in 1996, and to an estimated 9.6 percent in 1997. This represents a significant reduction from the levels registered in the early 1990s (of 15–18 percent). It reflects the pursuit, in many countries, of greater fiscal restraint and prudent monetary policies. The rate of inflation was 6 percent or below for more than one–half of the countries, and for countries with above average rates, such as the Islamic Republic of Iran, Sudan, and the Republic of Yemen, the rate of inflation was on a sharply declining trend. Inflation in Israel, after showing a rising trend early in 1996, was brought back down by a sharp tightening of monetary conditions in mid–1996 and is likely to fall below 10 percent in 1997. The lower inflation in the region has not only imparted a certain degree of financial stability, but is also helping with efforts to protect the poorest segments of the population.

MENA’s outstanding external public debt, while still high in some countries, has been on a declining trend while foreign exchange reserves continue to increase. The ratio of external debt to GDP has been reduced from over 35 percent in the early 1990s to 31 percent in 1996, and an estimated 29 percent in 1997. This ratio has declined from 100 percent to 70 percent in the non-oil exporters, while for the oil exporters, it increased initially from 14 percent in 1991 to 22 percent in 1994, before declining to 13 percent in 1997, Likewise, MENA’s debt burden, as measured by the ratio of total debt service to total exports of goods and nonfactor services, has declined to 11 percent in 1996 from over 16 percent just two years previously. A further decline is projected for 1997.

The recent decline in the external debt indicators reflects both the pursuit of more prudent fiscal policies, with a consequent reduction in the need for external financing of those deficits, as well as, in some country cases, exceptional debt relief from official creditors. For the GCC countries, the improvement in debt indicators reflects the repayment of foreign loans contracted to pay for outlays related to the 1991 regional crisis.

In view of these favorable developments, it is not surprising that we have also witnessed a continuing decline in market risk premia and related borrowing costs. Moreover, a number of countries have obtained in 1997 relatively favorable ratings from international credit rating agencies, including at the investment grade level.

C. Intermediate Policy Targets

As expected, these improvements in macroeconomic indicators have reflected strengthening intermediate policy variables.

MENA’s sustained improvement in the, fiscal balances has been particularly impressive. The overall government deficit for the region declined from close to 9 percent of GDP in 1986–90 to less than 3 percent of GDP in 1996, and an estimated 1.8 percent of GDP in 1997, The reduction has been most pronounced in the oil–producing countries, where the fiscal balance is projected to be only slightly in deficit (of 1 percent of GDP) in 1997. Clearly, the sharp increase in oil prices in 1996 and consequent impact on oil revenues explains in part the dramatic fiscal improvement. In virtually all cases, the gains from the oil price increases were not used to relax spending constraints but were directed toward reducing public indebtedness and/or increasing official reserves. In fact, in many countries undertaking fiscal reforms, consolidation efforts have been intensified in the past two years.

The improved budgetary position has facilitated the implementation of prudent monetary policy while alleviating constraints on the provision of noninflationary credit to productive private sector activities. The expansion in liquidity associated with the heavy financing requirements of the budget, particularly in the non–oil exporting economies—growth in broad money averaged about 22 percent in the early 1990s for this group—had fueled inflationary pressures. However, with the adoption of fiscal restraint and an improvement in budgetary positions, broad money growth for these countries has been reduced to 16.5 percent in the past two years, permitting a reduction in inflation and an improvement in external positions. Within the overall credit expansion, there has been a change in composition, allowing resources to be redirected in support of private sector development.

The external current account position has strengthened. The region as a whole recorded a small current account surplus of 0.7 percent of GDP in 1996, with the same projected for 1997. The non–oil exporting countries registered a deficit of 4.7 percent of GDP in 1996, reflecting primarily higher import costs associated with the rise in oil prices and higher cereal prices. The oil exporters benefited from oil export price increases, which together with relatively stable net service receipts, resulted in a current account surplus of 4 percent of GDP in 1996, with a somewhat smaller surplus projected for 1997.

In sum, the favorable reversal of past economic trends in the region reflects the strengthening of reforms by a number of countries. Some MENA countries that initiated macroeconomic stabilization programs in the early 1990s, or even earlier—for example, Israel, Morocco, Tunisia, Egypt, and Jordan—have been reaping rewards for a relatively sustained period and are now moving more vigorously to implement structural reforms (Box 2). Others, which have recently embarked on comprehensive macroeconomic stabilization programs—for example, the Islamic Republic of Iran and the Republic of Yemen—have already begun to show favorable results. Still others have yet to embark on full–fledged economic reform programs and have thus not shared sufficiently in the economic turnaround experienced by many countries in region.

Within Same Series

Other IMF Content

Other Publishers Content

  • Collapse
  • Expand
Cover The Economy of the Middle East and North Africa in 1997
The Economy of the Middle East and North Africa in 1997
ISBN:
9781557757111
Publication Date:
11 Nov 1997
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9781557757111.071
Pages:
40
Chart 1.

Macroeconomic Conditions are Relatively Sound…
Chart 2.

But Investment and Savings Rates are Still too Low…