III European Monetary Union: Impact on the MENA Region
  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund
  • | 2 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund


Peter Allum, Klaus Enders, and Karim Nashashibi

Peter Allum, Klaus Enders, and Karim Nashashibi

This chapter discusses the implications of European Economic and Monetary Union (EMU) for the countries of the Middle East and North Africa (MENA) region.1 The potential importance of EMU for these countries is highlighted by their strong trading links with the European Union (EU), accounting for 40–50 percent of exports and imports (60–70 percent for the Maghreb countries). In addition, MENA countries are affected by European exchange and interest rate developments (20–30 percent of MENA external debt is denominated in EU currencies). These linkages have both a direct impact on MENA production and trade as well as longer-term repercussions as foreign and domestic investment flows respond to the new external environment.

As a result of EMU, trade flows between participating EU countries (henceforth: EMU countries) are likely to increase, as the elimination of currency risk and currency-related transaction costs further levels the playing field between exporters from EMU countries and national suppliers. (The current paper uses as a plausible estimate that EMU could generate cost savings for EU producers of up to 5 percent.) Thus, the competitiveness of EMU exporters in EU markets will rise relative to MENA suppliers, and the latter will continue to face currency volatility, although this may be partly offset by cost savings for MENA exporters, especially those exporting into several European countries. This shift in comparative advantage will reduce, to some extent, demand for MENA exports as well as the attractiveness of setting up new foreign direct investments in the MENA region. Notwithstanding these substitution effects away from MENA exports, lower trading costs within the EMU can be expected to foster faster economic growth in the EMU (projected at perhaps 1 percent), with positive implications for the demand for products from the MENA region. On the basis of these parameters, the “substitution effect” away from MENA exports as EU producers become more competitive (estimated at 0.9 percent of MENA exports and 0.2 percent of MENA GDP) would be offset by an equivalent “income effect” as faster EU growth translates into improved export opportunities for MENA products. These income and substitution effects and the implications for trade and investment are reviewed below.

In addition to the direct impact of EMU on trade flows and economic activity, there may be effects operating through financial markets. Under a well-managed EMU with supportive economic and financial policies, the international value of the euro would be expected to remain relatively stable, while European interest rates would converge to lower levels. Depending on the exchange regime of MENA countries, movements in the value of the euro against other currencies could have implications for the competitiveness of MENA exporters in European and other markets. At the same time, currency realignments could contribute to shifts in the MENA countries’ debt-service ratios through changes in the relative valuation of debt-service flows and current receipts. For MENA countries with external debts denominated in EMU countries’ currencies, debt-service ratios would be increased to the extent that EMU contributes to higher European interest rates. Over a longer time horizon, a convergence of investment returns in Europe following EMU could lead investors to seek higher returns through portfolio diversification to non-EMU countries, including selected MENA countries. The third section reviews the potential impact of such developments on the MENA region. In addition, it provides an assessment of the potential long-term financial implications for the region of the consolidation of EU currencies.

The fourth section discusses possible policy responses to the challenges posed by EMU. A change in the macroeconomic policy mix may be appropriate for MENA countries with strong trade links to the EU, and the urgency of structural reforms aimed at making factor markets more efficient and generally improving the supply responsiveness of the economy would be increased. In particular, further regional and multilateral trade liberalization by MENA countries would reduce adverse competitiveness and hub-and-spoke effects. Accelerating the lowering of trade barriers vis-à-vis Europe and among MENA countries will be an important stepping stone in this regard, facilitated by existing institutional structures (such as the Arab Maghreb Union) and cultural affinities. This could also pave the way for deeper regional economic integration well beyond the removal of trade barriers, much as happened in Europe itself in the past decades.

Impact on Trade and Investment

This section reviews the possible consequences of EMU for trade, investment, and growth in the MENA region. In practice, such consequences can be expected to vary widely across MENA countries, depending on the nature of each country’s ties to EMU. The MENA countries most dependent on EMU export markets would likely bear the brunt of any decline in relative competitiveness, but would also be expected to benefit most from any expansion of activity and demand as a result of EMU. The magnitude of the substitution effects faced by MENA suppliers will depend, to some extent, on their existing competitiveness as well as the nature of their exports. Some MENA suppliers may remain highly competitive, even after EMU. particularly oil exporters, where the advantages to suppliers among EMU countries will be minimal. The consequences of EMU will also depend on the nature of any preferential trading agreements between MENA countries and the EMU participants, most notably the Association Agreements between a number of MENA countries and the EU (AAEU). In addition to these specific consequences for trade and investment, EMU could affect the external environment for MENA countries to the extent that it paves the way for parallel reforms to EU social and economic policies, including in the areas of labor markets, migration, and social security.

Trade Between MENA and the EU: An Overview

The importance of trade with the EU varies across the MENA region, with geographic proximity to EU markets being an important factor. Of the oil-exporting economies, those in North Africa (Algeria and Libya) trade predominantly with the EU; 77 percent of their exports and 65 percent of their imports were with EU countries during 1990–96 Table 3.1 and Figure 3.1). By contrast, for the major Gulf oil exporters (Islamic Republic of Iran, Kuwait, and Saudi Arabia), trade with the EU is more modest, representing 24 percent of exports and 40 percent of imports.

Figure 3.1.
Figure 3.1.

Oil-Exporting Countries’ Trade with EU Countries

Source: IMR Direction of Trade Statistics.1 Islamic Republic or Iran. Kuwait, and Saudi Arabia. Data for I.R. of Iran not available prior to 1981.
Table 3.1.

MENA Countries’ Merchandise Trade with European Union Countries, 1990–96

(As a percentage of total exports and imports)

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Source: IMF, Direction of Trade Statistics database.

EU-15 excluding Denmark Greece, Sweden, and she United Kingdom.

Among the non-oil economies, Morocco and Tunisia have the strongest trading links with the EU, which accounts for about 70 percent of total exports and 63 percent of total imports (Table 3.1 and Figure 3.2). For other MENA countries, trade with EU countries varies widely, ranging from 55 percent of total exports in the case of the Syrian Arab Republic to just 5 percent in the case of Jordan. For these countries as a whole, trade with the EU accounts for about one-third of total exports and 40 percent of imports.

Figure 3.2.
Figure 3.2.

Non-Oil-Exporting Countries’ Trade with EU Countries

Source: IMF, Direction of Trade Statistics.1 Egypt, Jordan, Pakistan, and Syrian Arab Republic.

In terms of the products traded. MENA countries imports from the EU are. for the most part, manufactured goods, which represent over 80 percent of total imports (Table 3.2). For MENA exports, levels of manufacturing development vary widely across the region. Tunisia stands out as an exporter of manufactured goods (accounting for 80 percent of total exports to the EU), though its degree of product specialization as measured by intra-industry trade (IIT) data is significantly lower than that of Israel and broadly equivalent with that of Turkey (Table 3.3 and Table 3.4).2,3 For Egypt and Morocco, exports of manufactures account for 48 percent and 56 percent of total exports to the EU, respectively, though product specialization (as measured by IIT) is low, like that in other MENA countries including Jordan and the Syrian Arab Republic.

Table 3.2.

Selected MENA Countries’ Imports from the EMU Region by Product Type, 19961

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Source: IMF staff estimates.

EMU region defined as EU-15 excluding Denmark, Greece, Sweden, and the United Kingdom.

Simple averages.

Table 3.3.

Selected MENA Countries’ Exports to EMU Region by Product Type, 19961

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Source: IMF staff estimates.

EMU region defined as EU-15 excluding Denmark, Greece, Sweden and the United Kingdom.

Simple averages.

Table 3.4.

Intra-Industry Trade Indices for Selected MENA Economies, 1992–94

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Source: Havrylyshyn and Kunzel (1997).

Simple averages.

Trade in services—mostly tourism—is important in a number of MENA countries and is similarly dominated by trade with Europe. For example, tourism accounted for 6 percent of Tunisia’s GDP and tourism receipts were equivalent to merchandise exports in 1996, with European tourists accounting for an estimated 90 percent of total receipts.4

Impact on Economic Activity in the MENA Region

Competitiveness Gains for EMU Producers

The costs of business are higher for exporters selling into foreign markets than for domestic suppliers, among other things because exporters face costs associated with foreign currency hedging as well as additional transaction costs.5 By eliminating such costs, EMU will reduce export prices for intra-EMU trade and increase EMU suppliers’ comparative advantage relative to MENA exporters in European markets. The size of this comparative advantage is difficult to quantify. For trade hedged through the financial markets, the cost reduction on account of EMU is estimated at up to 2–3 percent, depending on the currencies involved.6 In addition, there are costs associated with currency conversions (1–2 percent). Costs also arise where exporters internalize hedging operations by including a margin in export prices sufficient to offset modest adverse exchange rate movements without increasing prices. For the purposes of the current paper, 5 percent is used as a plausible estimate of the maximum potential impact of EMU in reducing costs to EMU exporters.

To assess the consequences for MENA countries, econometric estimates have been made of the demand by EU countries for MENA exports.7 This exercise identifies a significant explanatory role for relative export prices, with an elasticity averaging about -0.6; excluding Jordan, which seems to be somewhat of an outlier, the average elasticity of MENA countries with respect to relative prices would be about -0.3(Table 3.5 and table 3.6).8 On this basis, a 5 percent decrease in intra-EU export cost would, other things being equal, reduce the demand for MENA exports up to 3 percent. Taking into account the share of EU exports in overall trade, this would reduce total MENA exports by amounts ranging from 0.6 percent (Egypt) to 1.3 percent (Tunisia) (see table 3.6). Somewhat surprisingly, these effects are relatively unrelated to the importance of EU trade for the various MENA countries. Thus, although Jordan has a below-average dependence on EU markets, the projected impact of EMU on export growth is in line with the MENA average because the price elasticity of demand for its exports is estimated to be relatively high.9

Table 3.5.

Estimates of the EU’s Demand for Exports from Selected MENA Countries, 1970–961

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Sources of data for regression: IMF International Financial Statistics, Direction of Trade Statistics, and World Economic Outlook.

The table reports the results of regression for each country following the Stock-Watson specification as used in Reinhart (1995), that is, xt = a + bPxi/P + cY + lags of the independent variables + ei where xi, are the real exports of country i to the EU, Pxi, the export unit value (in U.S. dollars) of country ft exports, Y and P, real GDP and the price level (CPI) of the EU, respectively, and e, an error term assumed to have standard properties. T-statistics are in parentheses.

Table 3.6.

Possible Effects of EMU on MENA Exports and GDP

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Source: IMF staff estimates.

In the absence of a well-determined estimate of the relative price elasticity, the estimated figure of-0.10 was replaced with an estimate more closely In line with minimum estimates for other MENA countries (that is. –0.25).

The potential loss of exports discussed above would reduce the real GDP of MENA countries by about 0.2 percent (see Table 3.6). The estimated impact is virtually nil for Egypt, where exports represent a low share of GDP, and largest (0.4 percent of GDP) for Tunisia, the MENA country most dependent on EU trade. In addition, however, lower merchandise exports might be compounded, for some MENA countries, by lower competitiveness in regard to exports of services. Thus, to the extent that Egypt and Morocco are, for example, major exporters of services (notably tourism), the impact on GDP could be larger than that indicated in the exercise described above.

Of the MENA countries, the impact of EMU on competitiveness is likely to be smallest for the oil exporters. Rather than offering exports at fixed prices in European currencies and hedging against currency fluctuations, exporters of petroleum products typically set prices in U.S. dollar terms, with regular adjustments implemented on the basis of developments in international commodity markets. To this extent, the comparative advantage of European and MENA exporters in European markets will be relatively unaffected by EMU.

Impact of EMU on Economic Activity

By reducing trading costs in Europe, EMU could contribute to higher productivity and overall economic output. Indeed, by eliminating currency volatility, EMU could increase the mobility not only of traded goods, but also of skilled labor and investment. Higher levels of activity in Europe would, in turn, have favorable spillover consequences for neighboring regions including MENA. On the basis of the econometric estimates discussed above, MENA exports to the EU are highly sensitive to the strength of demand. On average, a 1 percent increase in real GDP in Europe is associated with an increase in MENA exports to the EU of about 2.7 percent (see Table 3.6).10 Combined with data on existing trading patterns, these estimates provide a rough guide to the potential income effects for MENA countries from EMU-based productivity gains in Europe.

For the purposes of this chapter, it is assumed that such productivity gains boost the aggregate level of real GDP in EU countries by 1 percent in the near term. On the basis of the share of EU exports in total trade, this would boost MENA countries’ exports by an average of 1 percent, ranging from 0.3 percent (Algeria) to 1.9 percent (Tunisia),11 Allowing for the share of exports in GDP, this would contribute to an increase of about 0.2 percent in MENA countries’ GDP.12 Exceptions are the Syrian Arab Republic and Tunisia, where the estimated GDP impacts are substantially larger (0.4 percent and 0.6 percent, respectively), reflecting a combination of relatively large income elasticities, strong trading links with the EU, and exports somewhat higher than for the other MENA economies as a share of GDP.

While the relative importance of the income and substitution effects discussed above are subject to a wide margin of error, the impact on the MENA region of the parameter estimates considered here are broadly offsetting, with a 0.2 percent loss of real GDP on account of a 5 percent loss in competitiveness broadly offset by a similar gain in GDP through expansion of the EU market. Nevertheless, at a country level, Tunisia, the Syrian Arab Republic, and Egypt are estimated to be net gainers (by 0.1–0.2 percent of GDP), while Algeria and Jordan are net losers (by 0.1 percent of GDP); for Morocco the two effects are exactly offsetting.

The exercise above also illuminates the potential impact on MENA countries under the scenario of a difficult EMU transition associated with weaker European activity. A 1 percent decline in real GDP in the EU would reduce GDP in most MENA countries up to 0.2 percent, with significantly larger consequences for Tunisia and (to a lesser extent) the Syrian Arab Republic. At the same time, for countries facing a fairly elastic demand for their products (such as the oil-exporting countries), the impact could be considerably less, to the extent that exports can be diverted to other markets, thereby mitigating the impact on domestic production. However, given the size of the EU, which accounts for about 18 percent of world oil demand, slower growth in the EU could depress oil prices.

Another potential impact of EMU operating principally through trade channels, albeit difficult to quantify, might derive from the possibly greater synchronization of business cycles within a monetary union, a trend that may already have been under way in recent years. Given the importance of Europe as a trading partner for many MENA countries—an importance that is likely to grow even further as a result of EMU—this trend would imply wider swings in the demand for MENA exports and would in turn lead to a stronger synchronization of business cycles in MENA countries with the EU. Such a development would pose challenges for macroeconomic policy in MENA countries, because the authorities will have to create greater room for maneuver for countercyclical monetary and fiscal policies, and strengthen the ability of financial systems to smooth out consumption and investment cycles.

Association Agreements Between MENA Countries and the EU

For many MENA countries, the evolution of trading relations with the EU will be affected over the coming years not only by EMU but also as a result of the EU’s Mediterranean Initiative and the implementation of Association Agreements with the EU.13 To date. Association Agreements with the EU have been concluded with Jordan (1997), Morocco (1996), and Tunisia (1995). These AAEUs call for the implementation of free trade in industrial products within a 12-year period, progress toward free capital movements between the partner countries, harmonization of trade-related regulations and standards, and enhanced cooperation in a number of economic areas. For agricultural products, in which most MENA countries have a comparative advantage, the AAEUs only call for a review of EU agricultural policy beginning in 2000, while providing for some modest growth of the limited existing preferential access (tariff quotas). In addition, and perhaps most importantly, enlargement of the EU toward Eastern Europe would bring into the EU exporters that have been major competitors for MENA countries in many sectors (such as textiles, leather, and so forth). Even before the ratification by all EU member states, Tunisia had already started to implement the agreement on a unilateral basis. Similar agreements are under negotiation with other MENA countries (Algeria, Egypt, Lebanon, and the Syrian Arab Republic). To support these reforms and the maintenance of overall macroeconomic stability, participating MENA countries would receive increased financial support from the EU.

The AAEUs represent a first step in a more ambitious project for establishing a Euro-Mediterranean free trade area by 2010 also involving the elimination of barriers to trade between MENA countries. Consistent with this objective, the AAEUs with Morocco and Tunisia provide specific incentives for intra-Maghreb integration by allowing under certain conditions value added originating in Algeria to be treated as Moroccan or Tunisian when incorporated in Moroccan or Tunisian exports.

The implication of the AAEUs have been analyzed in a number of papers.14 Regarding trade liberalization, the agreements will strengthen the position of EU exporters in MENA markets vis-à-vis MENA suppliers through the trade creation effects, and visa-vis third country suppliers through the trade diversion effects of preferential tariff reduction by MENA countries. There may be offsetting effects to the extent that the AAEUs promote increased trade integration in the MENA region, including through the provision of financing to support economic and financial liberalization. The position of MENA exporters in the EU would also be strengthened by the EU lowering access barriers through (i) reduced quantitative restrictions, especially for textiles and agriculture, (ii) economies of scale related to the unified European market, and (iii) support for the harmonization of standards and norms allowing easier certification of quality. Through these latter effects, the AAEUs would at least partly offset the EMU-induced loss of competitiveness of MENA suppliers relative to EU suppliers.

Foreign Direct Investment in the MENA Region

The AAEUs are likely to yield dynamic gains far larger than the static effects discussed above. Higher capacity and productivity growth should be fueled by a number of elements in the AAEUs. Domestic and foreign investment levels should increase because of the reduction in uncertainty implied by the adoption of EU standards and regulations and the “locking in” of reforms through the agreement—much as happened in Spain and Portugal during and after their accession to the EU. Increased competitive pressures should contribute to greater efficiency, and the increased openness at least to European goods and technology should raise the rate at which best practices are absorbed in the economy. To the extent that AAEUs succeed in reducing tariffs and nontariff barriers facing MENA exporters in EU markets and, more important, by strengthening incentives within MENA economies to reallocate resources toward areas of comparative advantage, they may also increase the feasibility of export operations, leading to increased foreign direct investments.

The advent of EMU and a single currency is likely to have a major psychological impact on market participants. This would favor locating investment within the EMU market rather than at the periphery. To the extent that EMU reduces the costs of trading between EMU countries, and to the extent that the cost of investing in Europe is reduced (relative to investing elsewhere) as currency-related uncertainty declines and economies-of-scale effects are enhanced, there will be an added incentive to locate new foreign direct investment in the EMU market rather than the MENA region. This trend will be reinforced by the AAEUs, which reduce the external tariffs of MENA countries, strengthening the scope for production facilities based in Europe to service both EU countries and the MENA region.15 In such circumstances, investors may find that servicing the EU and MENA markets is more straightforward using plants located in the “hub” rather than at the extremity of the “spokes.”

The potential for a relocation of foreign direct investment (FDI) toward the hub EMU countries will depend on the factors motivating such investments. Diversion effects are likely to be strongest where the goal of FDI is to establish low-cost export bases, though even here the impact of EMU on the relative merits of alternative production locations is likely to be modest. Diversion effects are likely to be more limited where FDI is attracted by expanding market opportunities in the MENA region.

Although data on the motivations for and nature of FDI are limited for MENA economies, it seems likely that prospects will vary across the region. The risks of diversion of FDI away from MENA countries to the EMU hub may be strongest for Morocco and Tunisia, where FDI is associated, in part, with exports of manufactured goods to EMU markets (see Table 3.3). In other cases, prospects for FDI appear more stable, being associated with the expansion of tourism in MENA countries or efforts to service the expanding consumer sector in MENA economies. In this context, recent equity inflows to MENA countries have focused on the banking and financial service industries, the construction sector (including cement manufacturing), and beverages (focused on the tourist market). While parallel equity investments in the chemicals sector might appear more vulnerable to relocation to the EMU market, proximity to petrochemical inputs is likely to be an important consideration.

The prospects for the diversion of new investments from the MENA region to the EU will also depend, in part, on the policy response of MENA countries. Progress toward regional trade integration would alleviate the hub-and-spoke problem and help promote greater foreign direct investment. For instance, should Algeria, Morocco, and Tunisia dismantle trade and tariff barriers among themselves, they would constitute a large enough integrated middle income market (66 million people) to justify establishing modern manufacturing facilities with economies of scale. Similarly, structural reforms designed to liberalize domestic business opportunities and export potential would reinforce incentives for improved investment performance, including through FDI inflows.

Transfers of Migrant Workers

Although EMU has no direct bearing on EU structural policies, it may accelerate the implementation of policies to address the high levels of unemployment in some EU countries. In current EU labor markets, many MENA migrants have been able to benefit from an unsatisfied level of demand for low-wage labor. To the extent that EU countries are successful in implementing measures to increase labor flexibility, including through the promotion of wage flexibility and reducing unemployment compensation, competition for low-wage jobs is likely to increase. Given the relatively large prevailing differences between European and MENA countries’ wages, however, such effects would be rather small. The opportunities available to MENA migrants could also be reduced by policies aimed at further tightening EU immigration rules. These policy changes would be particularly relevant for a number of MENA countries, notably in the Maghreb, where foreign exchange receipts from migrants working in the EU represent a major contribution to national incomes.

Financial Sector Issues

Exchange Regime, Exchange Rate Volatility, and Competitiveness

An important consideration for MENA countries is the potential impact of EMU on the performance of the euro against other leading currencies. While EMU will eliminate intra-EMU exchange rate movements, it could be associated with large movements against non-EMU currencies. For example, uncertainty about the policy objectives of the European Central Bank (ECB) could lead investors to reduce their euro exposure, contributing to depreciation of the euro against other currencies.16 Similarly, the success of EMU countries in coordinating fiscal policies is unsure, and concerns about potential imbalances between fiscal and monetary policies could also contribute to fluctuations in the value of the euro. These risks to the euro will diminish as the EMU authorities build credibility. In the short term, however, changes in the value of the euro could have important repercussions for MENA countries.

One consequence pertains to trade competitiveness. In the event of a depreciation of the euro relative to other international currencies, for example, MENA countries with strong currency links to the U.S. dollar could face a loss of competitiveness in European markets. On the other hand, EMU will also give MENA countries a degree of additional exchange rate assurance, to the extent that the introduction of a single currency would eliminate the risk of large devaluations of individual currencies within the EU group. For example, the devaluations carried out by Spain and Italy in the early 1990s significantly affected external competitiveness of certain MENA exporters—for example, leather producers based in Morocco.

Changes in the valuation of the euro can also have implications for the terms of trade of MENA countries that are dependent on EMU markets for exports—but non-EMU markets for imports (or vice versa)—if export prices are determined by the currency of the export market and import prices by the currency of the country of origin. For example, for Morocco and Tunisia the share of the EMU group in their exports is about 8 percent higher than in their imports (see Table 3.1). Assuming that trade with the EMU group is priced in euros, and all other trade in U.S. dollars, a 10 percent devaluation of the U.S. dollar against the euro would improve the terms of trade of Morocco and Tunisia by about 0,8 percent.17 These considerations highlight the importance of the choice of exchange regime for MENA countries. Should they seek to maintain stability against the euro, even as it fluctuates against other international currencies? Or should they seek to insulate themselves from such movements by, for example, pegging against the dollar? These issues are discussed below.

In the MENA regions, countries currently maintain a variety of exchange arrangements and pursue widely different exchange rate policies. In Morocco, central bank intervention in the interbank market is aimed at maintaining a nominal peg of the domestic currency to a basket of foreign currencies, while in Tunisia intervention maintains a “real” peg against a similar basket—which for both countries broadly reflects trade shares and thus a dominant role for European currencies. Most other MENA countries’ exchange rate policy—whether in the context of announced pegs or not—is aimed at maintaining nominal stability vis-à-vis the U.S. dollar,18 Egypt maintains a nominal exchange rate anchor to the dollar, while in the case of Lebanon intervention policy in recent years has aimed at an upward crawl against the dollar. Algeria has pursued a fairly flexible exchange rate policy in recent years, mainly driven by reserve and economic diversification objectives.

The different exchange rate policies in MENA countries have had divergent implications for real exchange rate performance. The countries with strong links to currency baskets (Group Table 3.7) have tended to move in line with EU currencies rather than the dollar—not surprisingly, given the weight of European currencies in the baskets. Thus, during 1993–96, the standard deviation of movements in the real exchange rate against EU currencies was less than one-third that against the dollar. For countries with pegs or close links to the dollar (Group B in Table 3.7), there was considerably higher exchange rate variation relative to the EU.19 For a third group of countries (Group C in Table 3.7), high rates of inflation led to instability in real exchange rates against both the dollar and the EU currencies, regardless of exchange regime.

Table 3.7.

Indicators of Exchange Rate Linkage, 1993–96

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Source: IMF. World Economic Outlook database.

For the period 1993–96, using indices rebased to 1993 = 100.

Jordan, Kuwait, and Saudi Arabia.

Egypt, Lebanon, and the Syrian Arab Republic.

For the countries that already have links to EMU currencies, through the currency baskets underlying their exchange rate policy (Group A), implementation of exchange rate policy to manage external competitiveness need not be changed in view of potential changes in the value of the euro. These countries depend on EU market and will therefore probably wish to continue following the euro relatively closely so as to maintain competitiveness in European markets, which would automatically happen under the current regime, once the currencies of EMU participants are replaced by the euro. For the countries with currencies closely linked to the dollar (Group B), shifts in the valuation of the euro could be more worrisome, since such shifts could imply large changes in their competitiveness in European markets. In regard to exports, euro fluctuations would be primarily important for Syria and Egypt, where EU markets account for 55 and 44 percent of total exports, respectively (see Table 3.1). For the oil-exporting countries pegged to the dollar, export prices are determined in world markets, and competitiveness is relatively unaffected by exchange rate movements. In regard to imports, changes in the value of the euro could lead to sharp increases in import costs (euro appreciation) or a loss of competitiveness against euro-area exporters (euro depreciation). These effects would be important for most countries pegged to the dollar, where imports from the EU range from 33 percent of total imports (Jordan) to 65 percent (Libya).

For the non-oil countries with currencies linked to the dollar and large trade shares with the EU countries, there may be merit in considering linking to a broader basket or switching to a more flexible exchange rate policy that might better preserve relative price stability against European markets. This decision depends on a variety of factors including the effectiveness of exchange rate adjustment in achieving relative price movements; the nature of the shocks affecting the MENA region, the EMU, and other currency areas; and the currency composition of merchandise trade flows, trade in services, debt-service obligations, and migrant workers’ remittances, A number of these considerations are discussed in greater detail in the sections below.

Consolidation of the EU Currencies

The scope for benefiting from closer linkage to the euro is underlined for MENA countries by the potential size of the euro export market in relation to existing EU national markets. At present, about two-thirds of MENA exports are accounted for by seven or eight national export markets Table 3.8).

Table 3.8.

Diversification of Merchandise Exports by Currency Involved, 1995

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Sources: IMF, Direction of Trade Statistics Yearbook.

Limited EMU comprising EU-11 (members other than Denmark, Greece, Sweden, and the United Kingdom).

Full EMU comprising all 15 current EU members.

Currency of largest trading partner post-EMU, defined as in note 1. The EMU countries are considered as a single trading partner after the currency union.

Simple averages.

Following EMU, the same share of MENA exports will be accounted for by just four or five separate markets (in terms of different currencies). This process will be even more dramatic for the MENA countries with the strongest trading links with the EU. For the Maghreb countries, the number of key foreign markets is reduced from six to two; for the Syrian Arab Republic from five to two; and for Egypt from eight to four. On the other hand, countries with export markets largely outside the EU (such as Jordan and Lebanon) would tend to be unaffected by this phenomenon.

The consolidation of EMU currencies will have relatively straightforward implications for MENA countries that wish to maintain links to a trade-weighted basket of currencies (currently Morocco and Tunisia). In such cases, the weights of the currency baskets would be adjusted, with the euro receiving the former weights of the constituent EMU currencies. In principle, this could result in currency baskets dominated by the euro. This raises the more fundamental question of whether MENA countries attracted by the transparency of a link to a single currency may wish to base exchange rate policy on the euro, taking advantage of its broad market coverage (but without necessarily adopting a fixed exchange rate regime).

To the extent that MENA countries choose to focus their exchange rate policies on the euro, this would open up the possibility of the euro becoming a “benchmark” currency for the MENA region. In the past, the diversity of trade patterns with EU countries has limited the scope for reference to a single European currency. While France was the major trading partner for Morocco and Tunisia, Italy was the lead trade partner for Egypt, Algeria, and Libya, and Germany was the largest trading partner for the Syrian Arab Republic. To this extent, EMU could prepare the ground for a gradual shift away from do liar-oriented exchange regimes to an increasing focus on the euro.

Currency Composition of External Debt

In addition to its impact on trade and investment flows, EMU may have consequences for the debt-service costs of MENA countries. As of 1995, an estimated one-third of selected MENA countries’ debt was denominated in EU currencies Table 3.9), representing the largest component, followed by U.S. dollar-denominated debt (with a slightly less than one-third share).

Table 3.9.

Currency Composition of External Debt of MENA Region

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Sources: IMF staff estimates.

Simple averages.

Excluding the Islamic Republic of Iran.

Based on creditor composition, that is, debt in EU currencies estimated to represent debt to Austria, France, Germany, Italy, and the United Kingdom.

Debt to the United States included in “other”

The effect of EMU on the debt-service costs of MENA countries will depend on market confidence in EMU financial policies and the associated direction of EMU interest rates. In addition, to the extent that EMU contributes to changes in the value of the euro, MENA countries will face associated valuation changes to debt-service on euro and other external liabilities. The magnitude and direction of these valuation effects will depend on the direction of euro movement, the degree of linkage between MENA currencies and the euro, and the relative magnitudes of euro and other currency debt. These influences on the debt-service outlook for MENA countries are discussed in greater detail below.

interest Rate Effects

For selected MENA countries, external debt service averages about 21 percent of current external receipts, of which about 6 percentage points represents debt service to the EU (Table 3.10).20 While precise data are not available for all countries, as an illustration, if floating-rate debt in EU currencies were to account for 20 percent of total EU debt (as is estimated in the case for Morocco), a 1 percentage point rise in EU interest rates because of EMU would increase the debt-service ratio of MENA countries by an average of about 0.2 of a percentage point. The largest impact would be for Morocco and the Islamic Republic of Iran (0.4 of a percentage point), reflecting a combination of higher-than-aver-age debt-service ratios and higher-than-average reliance on EU credits. In neither case would this undermine external viability. In addition, many MENA countries have long-standing access to international capital markets or are reestablishing favorable credit market ratings. For these countries, it would be possible to choose the currency denomination of new borrowing so as to minimize expected debt-service costs. Moreover, it may be possible to reduce the impact of an increase in euro interest rates on outstanding debt by refinancing a portion of such debt at lower interest rates in other currency denominations. Note also that EMU could as likely lead to lower interest rates for a number of EMU countries, as they benefit from more efficient financial markets and a stronger nominal anchor. This, in turn, will contribute to lowering debt-service costs for MENA countries to the extent they have borrowed in relatively high-interest European currencies.

Table 3.10.

Impact on Selected MENA Countries of Higher EU Interest Rates

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Source: IMF staff estimates.

Assumes debt service in EU currencies is proportional to the share of total debt in EU currencies as estimated in Table 3.9.

Based on 1996 interest obligations for Egypt, Jordan, Lebanon, and Morocco, Assumed equal to 6.0 percent for other countries.

Assumes 20 percent of debt vis-à-vis the EU is at floating rates, and the average EU-debt interest rate is equal to average debt interest rate.

Debt service measured in percent of exports of goods.

Exchange Rate Effects

The impact on MENA countries of changes in the value of the euro is expected to depend on their exchange regimes and export mix. For all MENA countries, euro appreciation will increase debt-service costs on euro-denominated liabilities, as measured in U.S. dollar terms. At the same time, however, countries with currencies linked to a basket (Morocco and Tunisia) will see a rise in their export prices (expressed in U.S. dollar terms) as the euro appreciates (and their currency follows). On the basis of estimated trade elasticities, the increased valuation of exports in dollar terms is projected to more than offset the rise in debt-service costs, resulting in a decline in the debt-service export ratio (Table 3.11). These countries, thus, face greater risks to their debt-service outlook from a depreciation of the euro. The reverse is the case for MENA countries whose currencies are pegged to the dollar (Egypt, the Islamic Republic of Iran, and Jordan) or whose export prices are determined on world oil markets (Algeria and Islamic Republic of Iran). For these countries, the U.S. dollar value of exports is largely independent of the valuation of the euro, and their debt-service ratio rises as the euro appreciates. Of the MENA countries under review, the potential impact of variations in the value of the euro on debt-service ratios is estimated to be smallest for Lebanon, where external debt to the EU is modest, and a 20 percent euro depreciation raises the estimated debt-service ratio (measured as a share of merchandise exports) by 0.7 percentage point. For other countries, the impact of similar variations in the value of the euro (appreciation or depreciation) results in changes in the debt-service ratio of between 1.6 and 2.8 percentage points Table 3.11).

Table 3.11.

Debt-Service-to-Export Ratios of Selected MENA Countries: Impact of Currency Movements

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Sources: IMF staff estimates.

Countries are assumed to maintain peg against export-weighted basket of currencies.

Portfolio Diversification Effects

In participating EU countries, EMU is likely to lead to a convergence of rates of return on investments, thereby limiting the potential for asset diversification by investors. Indeed, in the fixed-income markets, the higher returns formerly available on government paper issued by the southern EU countries (Italy, Portugal, and Spain) have largely been eliminated as yields have converged to German levels. This convergence has been driven by the success of these countries in achieving fiscal consolidation and lower inflation and the associated higher probability of their participation in EMU. Any remaining differential (notably on domestic currency obligations) will be further compressed following the adoption of a single currency. At the same time, the performance of equity markets in EMU countries may become more closely correlated after union, not only because of the elimination of differential currency valuation effects, but also because of the expected convergence of EMU countries’ economic performance following the move to a common monetary policy and as national markets become more closely integrated at a regional level.

As performance converges in EMU financial markets, investors are likely to move beyond EMU borders in search of investment opportunities offering higher returns and portfolio diversity. Emerging markets would be among the beneficiaries of this trend. Central and Eastern European countries such as the Czech Republic, Hungary, Poland, and Slovenia are likely to be among the recipients of such additional investments reflecting their progress in regard to macroeconomic and political stability, structural reform, financial market development (including well-developed stock markets), and close links to the EU.

At the same time, a number of MENA countries offer similar characteristics. Egypt and Tunisia have investment grade ratings,21 while Morocco has a rating just below investment grade. Macroeconomic performance of these countries has been generally favorable, reflected in low inflation and limited fiscal and external deficits, and structural reform programs have recently been strengthened through important privatization efforts (Egypt and Morocco). Access to international capital markets has already improved for these countries, reflected in a pickup in market financing in 1996 and 1997—though from levels that were low by the standards of, say, Turkey or Israel Table 3.12).

Table 3.12.

Financing of MENA Countries by International Capital Markets, 1990–97

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Source: EMF.

Ratings for long-term foreign-currency debt as of March 5, 1996. Investment-grade ratings are italicized.

Capitalization in U.S. dollars for February 1998, from Middle East Money Weekly. GDP estimates for 1997 from IMF, International Financial Statistics.

The same countries have also begun to intermediate foreign investments through domestic financial markets. For Egypt and Morocco, national stock markets are capitalized at about $12 billion, while the figure for Tunisia is about $2 billion (see Table 3.12).22 Reflecting privatization, foreign direct investments in Morocco exceeded $1.2 billion in 1997, compared with $0.4 billion a year earlier. Similarly, stock market activity in Egypt was sharply higher in late 1996 and 1997, with nonresidents accounting for about one-third of total demand.

As Egypt, Morocco, and Tunisia consolidate their stabilization and reform efforts, and as their links with the EU are strengthened, they are likely increasingly to share in the capital flows associated with EMU portfolio diversification. With prudent macroeconomic and financial policies, this process could contribute to higher investment and economic growth in the MENA region.

International Reserve Issues

EMU and the advent of the euro are likely to lead to some changes in the composition of reserves and reserve management practices of MENA countries. Although data on reserve composition are generally not available, it is possible to assess the general trends, at least qualitatively, even if the impact will vary greatly between countries depending on their individual circumstances. A number of factors will play an important role.

First, the euro is likely to acquire significant importance as a major reserve currency and, therefore, other things being equal, the euro share in the foreign reserve holdings of most MENA countries would be likely to increase beyond the existing share of currencies of EMU participants, to the detriment of the U.S. dollar and the yen.

Secondly, to the extent that EMU might lead to higher (lower) euro interest rates relative to other reserve assets, and taking into account exchange rate expectations, it would become more (less) profitable for countries to hold a larger (smaller) share of those assets in the form of euros.

A third important factor, not directly a result of EMU but accentuated by it, would be the growing economic integration between the EU and those MENA countries that have entered or are entering into Association Agreements with it; the euro would undoubtedly play a more prominent role in external transactions and thus the share of euro in the foreign exchange reserves of those MENA countries would probably also increase.

Policymakers in MENA countries would have to take into account these various elements when formulating their management strategy for foreign exchange reserves. To the extent that the volatility of the euro vis-à-vis the dollar increased as a result of EMU, and greater and more frequent realignments occurred, substantial fluctuations in the value of the stock of reserves or their ratio in months of imports might arise simply because of currency valuation effects. Thus, it might become more difficult to implement an efficient reserve management strategy. Conversely, if greater cross exchange rate stability were to result from EMU, the management task would be easier. In any event, countries with a flexible exchange rate policy and the ability to guard against exogenously induced large fluctuations in the real effective exchange rate would be better equipped to deal with rapidly changing terms of trade and currency realignments and carry out a more efficient reserve and debt management strategy.

Policy Responses to EMU and Conclusions

For the MENA region, EMU will further increase the pressure for a greater integration in world markets over the period ahead. EMU will reduce transaction costs in the European market and strengthen European competitiveness vis-à-vis MENA countries. Psychological and dynamic effects of EMU may also favor locating investment (at the margin) within the European Union (instead of abroad), but the income effects of higher growth will also have beneficial income effects on MENA countries, offsetting some of the loss of competitiveness.

Bilateral Association Agreements being negotiated under the EU Mediterranean Initiative will lead to greater freedom for trade in goods and services and investment between most MENA countries and the EU. In addition, a number of MENA countries are also liberalizing their trade and investment regimes on a regional and multilateral basis, including in the context of negotiations with the WTO. In each of these cases, MENA countries are adjusting to often significant changes in effective protection and competitiveness. Moreover, in regard to exchange rates and interest rates, international market conditions are difficult to forecast and volatility is always a risk, regardless of the potential impact of EMU. For these reasons, the appropriate response to EMU is for MENA countries to broaden and deepen their existing structural policies aimed at liberalizing trade and payments for maximizing the benefits of a closer integration in the world economy. An overview of some of the key elements of this strategy are reviewed below.23

Trade Liberalization

Liberalization of MENA countries’ trade regimes will improve the profitability of the export sector relative to the import-substitution sector, and will benefit exporters dependent on imported materials and components. This may significantly boost export competitiveness where tariffs, formerly at prohibitive levels, required the use of inferior domestic inputs and where higher profitability of domestic markets preempted allocation of resources to export sectors. At the same time, the export sector would benefit from supporting measures to eliminate remaining nontariff barriers, increase customs efficiency, improve the transportation infrastructure, and reduce shipping and air freight costs. More broadly, measures to improve the supply responsive ness of domestic producers will likely contribute to improved export performance. In this regard, for a number of MENA countries, a high priority should be given to privatization, including privatization of state-owned banks and insurance companies with a view to promoting a strong domestic supply network and financial system. Structural reforms along the lines discussed above are currently being implemented in a number of MENA countries.

Prospects for export growth will also depend on measures to promote trade between MENA countries. At present, intra-regional trade accounts for about 8 percent of total exports and imports, compared with 18 percent for Western Hemisphere countries, and over 60 percent for the EU.24 MENA’s past record of focusing for its exports on industrial countries, and notably on EU export markets, has tended to reduce overall export growth. This has been characteristic not just for the MENA countries with the strongest trading links with the EU, but also for Egypt, Jordan, and the Syrian Arab Republic, whose exports to EU markets expanded at a 14 percent annual pace during 1970–96 (in U.S. dollar terms), almost twice the rate of growth of exports to non-EU markets (7.6 percent) (Table 3.13).25 For Egypt alone, the contrast is more striking still, with exports to the EU (including oil) having increased at a 13 percent average annual rate, compared with just 5 percent for non-EU markets.

Table 3.13.

Selected MENA Non-Oil Exporters: Export Growth to EU and Other Markets, 1970–96

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Sources: IMF staff estimates, and Direction of Trade Statistics.

In U.S. dollars.

Weighted by export shares.

Recent efforts to boost intra-regional trade include preliminary discussions on a free trade area between Egypt, the Syrian Arab Republic, and the Gulf Arab countries, and efforts are also under way among or involving Maghreb countries. Free trade among them would result in a large, integrated middle-income market instead of small, segmented markets. This, for example, would allow MENA producers to gain experience in improving product quality by exporting to familiar markets before launching into the markets of industrialized countries and would also minimize the hub-and-spoke effects stemming from the AAEUs, It would also increase the attractiveness of investing in these countries.

Exchange Rate Policies

As the MENA economies move to increasingly open regimes for current and capital transactions, there may be advantages in promoting increased exchange rate flexibility quite independent of the introduction of the euro. This consideration would bear. In particular, on MENA countries that have a nominal exchange rate anchor. In addition to facilitating adjustments in relative prices as external reforms lead to changes in MENA countries’ equilibrium real exchange rates, greater exchange rate flexibility would also allow MENA countries to respond in a flexible manner to shifts in the value of the euro relative to other currencies during the EMU transition period and shifts in competitiveness or foreign direct investment behavior following the onset of EMU. Of course, the advantages of greater flexibility need to be balanced against the “optimum currency area” arguments in favor of close links to the currency of a major trading partner such as the EMU area. To the extent greater flexibility is to be achieved through managed floating, however, intervention policy could still be guided, among other things, by the exchange rate vis-à-vis the euro if the EMU were the pivotal trading partner.

Supporting Macroeconomic Policies

Reforms in the areas discussed above will require supporting macroeconomic policies. In regard to exchange rate policy, any move toward greater flexibility would require improved arrangements for monitoring external developments and the development of market-based instruments of monetary control.

Given the ongoing tariff reform and loss of revenue from reduced protection, it will be important that offsetting fiscal measures are adopted to preserve an appropriate budgetary stance. Fiscal adjustment may also be required to offset any softening in the domestic tax base as corporations adjust to a more competitive external environment. To maximize MENA countries’ ability to respond to the challenges and opportunities from EMU—and more general globalization pressures—reforms will need to encompass the adoption of tax systems that are broadly based and with tax rates that do not act as disincentives; adoption of goods and services taxes or value-added taxes and reforms of taxation will be key. Public expenditure policies also will have to play a key role. Cuts in nonproductive expenditure can contribute to the needed fiscal adjustment, in particular as regional cooperation eases security concerns. Strengthening support for basic education and health and productivity-enhancing infrastructure will be a critical ingredient for higher growth, because it allows making use of the potential for faster technological progress that greater openness in goods and capital markets would create.

Structural reforms—and in particular a greater liberalization of factor markets—will be essential to creating an environment that attracts foreign investment and allows factors of production to be reallocated toward the areas of comparative advantage. This reallocation will require reform of existing labor market regulations to permit greater labor mobility, to reduce obstacles to employing the young or less qualified, and to strengthen incentives for the development of formal as opposed to informal labor markets. Financial sector reforms are needed to improve the allocation of capital and mobilize savings. In particular, to make efficient use of the greater availability of foreign capital, strong and financially sound banking systems are important to intermediate higher capital inflows and manage the associated risks. Finally, reforms of the regulatory framework are essential to stimulate private, including foreign, investment. Cutting red tape and restrictions on investment in “strategic” sectors and providing a transparent and effective judicial system will help to reduce uncertainty and other barriers to investment and private sector activity.

Table 3.14.

Exchange Regimes for Selected MENA Economies

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In sum, the MENA region faces a number of challenges as it adapts to an increasingly competitive global market for trade and investments, and EMU represents just one of several factors behind the changing EU-MENA relationship. In common with other changes, EMU offers MENA countries both challenges and opportunities. While there could be an initial substitution of EU goods for MENA exports as EMU reduces internal trading costs, this effect could be broadly offset, over time, by the expansion of EU markets. The ability of MENA countries to take advantage of this market growth as well as to weather the transition to a higher level of external competition will depend crucially on economic policies supportive of macro-economic stability and a flexible and dynamic private sector.


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Countries included in the study are Algeria, Egypt, the Islamic Republic of Iran, Jordan and Kuwait. Lebanon. Libya, Morocco, Saudi Arabia, the Syrian Arab Republic, and Tunisia. The exchange regimes for selected MENA countries arc detailed in an appendix table at the conclusion of this paper (Table 3.14).


Israel stands out as having a highly developed industrial base, with manufactures representing 85 percent of total exports to the EMU region.


IIT data indicate the extent to which bilateral trade is characterized by high levels of both imports and exports within the same commodity categories. In practice, most developed economies are marked by high IIT ratios and developing countries by lower ratios. See Havrylyshyn and Kunzel (1997).


In Morocco, tourism receipts were equivalent to 19 percent of merchandise exports, with European tourists accounting for 80 percent of total arrivals (and likely an even larger share of receipts). In Egypt, net tourism earnings were equivalent to 9.7 percent of GDP and accounted for the equivalent of 71 percent of merchandise exports: Europeans accounted for 51 percent of nights spent (and again likely a much larger share of receipts). In Jordan, travel receipts amounted to 21 percent of current receipts in 1996, with Europeans accounting for about 8 percent of total arrivals (but a likely larger share of receipts).


Monetary union will result in a broad range of cost savings through, for example, the elimination of costs associated with currency conversion and accounting in multiple currencies, and the cost of hedging exchange risk.


In the over-the-counter market, the cost of buying a nine-month option to insure against lira depreciation relative to the deutsche mark has fallen from a peak of about 2.5 percent of the amount insured in the mid-1990s to about 0,4 percent in late 1997. This decline, which reflects market anticipation of the impact of EMU, probably represents an upper limit on the reduction in average hedging costs for EMU exporters since volatility of the lira-deutsche mark exchange rate is higher than for most bilateral EMU currency relations.


The estimation follows the approach described in Reinhart (1995). The co-integration techniques used help to quantify long-run impacts; short-run developments will depend on many additional factors.


These results are in the same range as those reported by Rein-hart (1995) for developing countries as a whole (-0.5), where estimates ranged from -0.4 for Latin America to -1.4 for Africa. For Morocco, the only MENA country covered by Reinhart, the latest elasticity estimate of -0.26 is close to Reinhart’s estimate of -0.4. As in Reinhart (1995), there is significant evidence for most MENA countries of a stable long-run relation (co-integration) between EU demand for the MENA country’s exports, GDP of the EU. and relative prices.


To some extent, this may reflect that Ionian competes in markets that in turn are more closely tied to the EU.


This is at the upper end of the range of estimates reported by Reinhart (1995), where the elasticity of developing countries’ exports with respect to industrial countries’ GDP ranged from 1.3 (Africa) to 2.5 (Asia). However, for Morocco, the only MENA country included in the Reinhart study, the estimated elasticity of 1.8 is close to the latest estimate of 1.6.


The analysis is conducted with respect to the EU rather than just EMU members for reasons of availability of data, as well as the likelihood that EMU will have similar effects on EU members that do not participate. Similarly, recent IMF simulations assumed implementation of EMU with supportive fiscal and structural policies to increase the average level of real GDP of EMU members by I percent after three to four years and by almost 3 percent after a decade (see IMF, 1997).


This is in line with recent estimates for developing countries under the aforementioned simulation exercise as a whole, using the IMF’s MULTIMOD model (see IMF, 1997).


See Nsouli. Bisat, and Kanaan (1996) for further reference.


This pattern of trade and investment has been summarized by the term “hub-and-spoke,” with the EU representing an integrated market (or hub), while trade by MENA countries is primarily with the EU (along the spokes) rather than with other MENA neighbors.


Equally, some analysts have referred to the possibility of a near-term appreciation of the euro against other currencies if the ECB initially pursues very tight financial policies to establish its anti-inflation credibility.


The elasticity of the terms of trade with respect to a depreciation of the U.S. dollar vis-i-vis the euro is approximately given by X£- Mj; where Xz, are the shares of euro-denominated exports and imports in total exports and imports, respectively, assuming that all non-euro trade is denominated in U.S. dollars.


The GCC countries, the Islamic Republic of Iran, Libya, and the Syrian Arab Republic are pegged Firmly to the dollar, while for Egypt and Jordan intervention policy has resulted in broad stability against the dollar


The success of the Group B countries in achieving real exchange rate stability vis-à-vis the dollar depended on their inflation rates. Countries with inflation of 3 percent or less (Jordan, Kuwait, and Saudi Arabia) achieved a high degree of stability. For the other countries (Egypt, Libya, and the Syrian Arab Republic), high rates of inflation led to a progressive erosion of their real exchange rates against the dollar.


The estimated EU share of debt service is based on the currency composition of external debt. In some instances, the currency composition of external debt was unavailable and has been proxied using information on debt disaggregated by creditor country.


As of mid-1998, Egypt had an investment grade rating from Standard and Poor’s but a be low-in vestment grade rating From Moody’s.


For Morocco, stock market capitalization represents about 35 percent of GDP, higher than in Israel or Turkey.


For a survey of MENA trade relations and related policy issues, see Alonso-Gamo, Fennell, and Sakr (1997).


The 7.6 percent growth rate to non-EU markets suggests average annual growth in export volumes of under 3 percent, based on a 4.9 percent average annual increase in the U.S. producer price index.