A.2. MENAP Oil Importers: Slowly Gaining Traction
- International Monetary Fund. Middle East and Central Asia Dept.
- Published Date:
- May 2010
The MENAP oil importers are recovering from last year’s slowdown. Trade is rising along with the global recovery and remittances are holding up well. Investment and bank credit growth, although still muted, are beginning to pick up.
Notwithstanding these positive developments, growth will remain below precrisis levels in the next two years. Facing high debt in several countries, governments are beginning to cut back on fiscal expansion. Persistent weakness in EU demand, appreciated real exchange rates, and competition from other emerging markets will hamper prospects for export growth in the future.
In this environment, unwinding crisis-related stimulus and proceeding with structural reforms to enhance the competitiveness of these economies will be key to raising growth and creating employment to absorb the large and expanding labor force. The authorities will want also to take steps to guard against a potential increase in nonperforming loans.
Sources: IMF, Regional Economic Outlook database; and Microsoft Map Land.
Note: The country names and borders on this map do not necessarily reflect the IMF’s official position.
Growth Is Slowly Picking Up …
The region’s economic recovery is gradually gaining traction. Conditions vary across countries, with projected growth rates for 2010 ranging from under 3½ percent in Morocco and Pakistan, to more than 8 percent in Afghanistan. However, the majority of countries are experiencing some pickup in growth.
Overall, the pickup has been relatively slow. Capital inflows have not been as quick to return as they have to other emerging markets, and investment has generally continued to fall relative to GDP. While limited financial and trade ties contained the immediate impact of the global financial crisis, this year’s combined output growth of 4.1 percent is projected to be only slightly higher than in 2009. That level of growth puts the region at the low end among emerging and developing economies on a per capita basis and is insufficient to effectively absorb a rapidly increasing labor force (Figure A.2.1). But if the global recovery continues, the region’s output growth could accelerate to nearly 5 percent in 2011.
The region’s receipts from abroad are reviving along with the global recovery (Figure A.2.2). Tourism and remittances have been relatively resilient but goods exports and foreign direct investment were hard hit by the global crisis, and pulled imports down in parallel. As the global recovery set in and commodity prices rebounded, the region’s trade started to bounce back in mid-2009. With exports now growing faster than imports, the current account deficit is projected to narrow to 4.2 percent of GDP in 2010.
Figure A.2.1Lagging Growth
Source: IMF, World Economic Outlook.
Figure A.2.2External Receipts on the Mend
Sources: IMF, World Economic Outlook; national authorities; and IMF staff estimates.
1 Excludes Afghanistan and Djibouti.
2 Excludes Afghanistan, Mauritania, and Pakistan.
The rebound in the tradable sector is providing the basis for more broad-based increases in activity. Growth in credit to the private sector is starting to revive after having declined in nominal terms from a weighted average of almost 20 percent before the crisis to about 2 percent in the year to October 2009. Nevertheless, low credit growth—especially in Egypt, Jordan, and Pakistan—continues to be a drag on the recovery in most of the region (Section A.3).
… But Government Budgets Remain Under Pressure
The overall sluggish recovery is causing fiscal balances to deteriorate. Slow economic growth—and, in some cases, tax reductions—have cut into fiscal receipts, with the subregion’s revenue as a share of GDP projected to fall by more than 1 percentage point in 2010. In addition, some countries—notably Jordan—also are receiving fewer external grants.
Given high debt levels in several countries, fiscal room in the region is generally tight (Figure A.2.3). Accordingly, most countries are restraining government expenditure. As a result, for the region as a whole, the fiscal deficit is projected to widen only modestly, to 6 percent of GDP in 2010. With countercyclical fiscal policy largely having run its course, most oil importers are projected to reduce their deficits and debt levels relative to GDP in 2011.
Financial Markets Are Recovering, But Capital Inflows Remain Low
Stock markets took an early lead out of the downturn, but have since advanced at a more moderate pace. Although quite small, most of the region’s exchanges surged in 2009 and generally have outperformed the emerging market average (Figure A.2.4). One exception is Jordan, where stocks have remained subdued after the country experienced what was perhaps the steepest decline in economic growth among the MENAP oil importers. At the other end of the scale, Tunisia’s stock market bucked the global downturn and is currently in record territory, on the back of efforts to diversify the financial sector and abundant liquidity in the economy. Tunisia aside, however, regional stock markets are still far from their precrisis peaks.
Figure A.2.3Fiscal Situation
Sources: National authorities; and IMF staff estimates.
Figure A.2.4Stock Markets Still Far from Peak
1 Morgan Stanley Capital International Index, emerging markets.
Figure A.2.5Lower Risk Premiums
Inflows are reviving gradually, but the surge in capital flows to emerging markets since the first quarter of 2009 has mostly bypassed the MENAP oil importers (Section A.4). Corporate external borrowing fell steeply in 2009, to less than one-third of the average during 2006–08, and there has been almost no new international equity issuance. At the same time, despite declining interest spreads on foreign-currency debt (Figure A.2.5), governments have been hesitant to resume private borrowing abroad after markets froze in late 2008. An exception is Lebanon, which successfully placed several external bonds over the past year. In addition, Egypt has just recently completed its first external sovereign bond issue in more than two years. However, governments in the subregion are still relying mainly on domestic financing and, in some cases (Afghanistan, Djibouti, Mauritania, and Pakistan), official lending.
Interest rates in the region generally have stabilized in recent months and leave little space for additional monetary stimulus. The scope for lower policy rates has largely come to an end, given output near potential and relatively high inflation in much of the region, and interest rates beginning to rise abroad. With limited room to reduce policy rates, some countries have implemented unconventional measures aimed at stimulating credit. For example, Lebanon grants exemptions for banks’ reserve requirements tied to local currency lending at reduced rates.
Competitiveness Remains the Overarching Challenge
Most of the oil importers have seen their real exchange rates appreciate from precrisis levels. Apart from Pakistan, and to a lesser extent Morocco and Tunisia, currencies of countries in this group appreciated strongly in late 2008, along with a strengthening U.S. dollar. In addition, the oil importers had higher inflation than their trading partners in 2008—in the case of Egypt and Pakistan, by a margin of about 15 percentage points. While inflation has generally come down, and several of the currencies have depreciated since then, the real effective exchange rate remains appreciated relative to early 2008 in many of these countries (Figure A.2.6). Moreover, inflation remains relatively high in many cases—especially in Egypt and Pakistan, where it recently has edged up beyond 10 percent mainly as a result of higher food and energy prices.
A lagging performance relative to other emerging markets is not new. At 4.7 percent, the oil importers’ average annual real GDP growth during the past decade, although higher than before, was some 1¼ percentage points lower than the average for emerging and developing economies. In per capita, terms, the shortfall was even larger, as population growth at almost 2 percent a year was more than 0.5 percentage points higher.
Figure A.2.6Real Exchange Rates Appreciated from Precrisis
Source: IMF, Information Notice System.
Moreover, in contrast to Asian emerging markets where exports have surged, the region’s per capita exports have remained relatively low, at about 20 percent of the world average (Figure A.2.7). The region’s exports did comparatively well during 2008–09—in large part reflecting its relative isolation from the global crisis—but these countries again are losing ground in 2010, as exports are rebounding more strongly in other emerging markets.
The shortfall in export performance compared with other emerging markets underlines the region’s difficulty in keeping up with its competitors. One important obstacle has been a cumbersome business environment. While such measures are only indicative, this is reflected in international rankings of competitiveness. Many of the countries in the region tend to have low scores in these rankings, although Jordan and Tunisia are close to the average for emerging and developing economies (Figure A.2.8).
The need to improve the business environment has been well recognized, and the oil importers in the past few years have been among the most active reformers worldwide. Helped by a period of exceptionally strong global growth, these reform efforts have paid off with marked increases in foreign direct investment, exports, and output throughout the region, albeit from a low starting point. Nevertheless, most of the oil importers have some distance to go in promoting a more business-friendly environment in order to keep up with the more dynamic emerging markets.
Figure A.2.7Lagging Trade Performance
Source: IMF, World Economic Outlook.
Growth Slated to Remain Slow, and Unemployment Looms Large
Looking ahead, the oil importers risk an extended period of slow growth in their largest trading partners. Accounting for more than 40 percent of the region’s exports, EU imports are projected to grow, in real terms, by an average of 4 percent a year from 2011 and over the medium term. That figure is 1½ percentage points lower than the average during 2000–08 and reflects the relatively weak recovery expected in advanced economies. This deceleration, along with increased competition from other faster-growing emerging markets, suggests that the region’s economies will see less of a boost from higher exports in the medium term than they did before the crisis. Official development aid also may be less forthcoming.
Figure A.2.8A Challenging Competitive Environment
Sources: World Bank; and World Economic Forum.
Note: Regional averages weighted by GDP at purchasing power parity.
Accommodating a fast-growing labor force will be a continuing challenge for the region’s economies. Growing by close to 3 percent a year, the region’s working-age population has almost doubled since 1990, and many are struggling to find employment. Although economic growth increased over the past two decades, unemployment has stayed high, averaging about 12 percent and only falling slightly during 2006–08 (Figure A.2.9). Reducing unemployment in this environment will require major labor-market reforms and much higher economic growth rates.
Figure A.2.9Unemployment Has Stayed High
Sources: National authorities; and IMF staff estimates.
1 Egypt, Jordan, Morocco, and Tunisia.
Centering Policy on the Medium-Term Growth Agenda
With the recovery well underway, authorities in the region can exit from countercyclical measures and instead take a longer-term perspective to addressing the region’s challenges. Financial sector policy should focus increasingly on the regulatory environment, including to address a potential increase in nonperforming loans as the impact of the recent economic slowdown continues to permeate across sectors. Fiscal positions can, in many cases, be bolstered by improvements in revenue administration to enhance tax collection and the scaling back of costly and distorting subsidies. Syria’s recent reform of its petroleum subsidies is a good example in this regard.
The region also will need to focus more on advancing structural reforms. A more business-friendly regulatory environment is needed with some urgency, given the authorities’ objective to maintain high growth and reduce unemployment. Further opening of the financial sector and efforts to develop local capital markets would support this process and attract investment. Persistently high unemployment calls for more labor-market flexibility, less reliance on government jobs, and improvements in educational systems. By helping unleash the region’s large labor potential, such measures also could help address the region’s lagging external competitiveness.
|Real GDP Growth||4.4||6.3||5.9||5.0||3.8||4.1||4.8|
|(Annual change; percent)|
|Afghanistan, Rep. of||13.3||8.2||14.2||3.4||22.5||8.6||7.0|
|Consumer Price Inflation||4.0||7.1||6.9||15.9||10.0||8.9||6.4|
|(Annual change; percent)|
|Afghanistan, Rep. of||10.3||7.2||8.6||30.5||-8.3||-1.5||5.0|
|Central Government Fiscal Balance||-4.7||-4.7||-4.9||-5.8||-5.5||-6.0||-5.4|
|(Percent of GDP)|
|Afghanistan, Rep. of||-0.9||-2.9||-1.8||-3.7||-0.7||-1.4||-1.5|
|Pa k is ta n 1||-2.7||-3.7||-4.0||-7.3||-5.0||-4.6||-3.8|
|Current Account Balance||-0.4||-1.6||-2.4||-4.8||-4.5||-4.2||-4.0|
|(Percent of GDP)|
|Afghanistan, Rep. of||-7.0||-4.9||0.9||-1.6||0.7||-1.7||-1.3|