MENA: Change On The Horizon

MENA oil exporters are facing the challenging task of achieving adequate growth rates in an environment of low oil prices and public spending cuts.

We expect real GDP growth in the GCC to be broadly flat as oil GDP declines by 2.6% due to oil production cuts under the extended OPEC agreement. Non-oil growth, however, is expected to pick up slightly to 2.1% in 2017 and 2.3% in 2018 as fiscal consolidation eases and global trade improves. Headwinds from tight financial conditions and a real exchange rate appreciation continues to pose challenges for non-oil activity.

Progress has been made by most MENA countries to adjust to the new economic environment. Oil exporters in the region have responded to the sharp deterioration in fiscal accounts by launching much-needed fiscal reforms, which have so far focused on cuts in fuel subsidies and capital expenditure.

Additional adjustment in the coming years will focus more on mobilization of non-oil revenues (including fees, excise taxes, and introduction of VAT in 2018 at 5%) and privatization. Oil importers have also made progress to rationalize government spending and reduce fuel subsidies.

Banking Systems In Tact

Banking systems are still well positioned to cope with low oil prices, although bank liquidity has declined, market interest rates are rising, and profitability of banks is declining. GCC banks have enhanced their risk management and implemented countercyclical capital buffers and loan loss provisions to limit systematic financial sector risks.

We do not expect a change in the exchange rate regime in the GCC, Jordan, Iraq, and Lebanon. These countries will maintain their currencies pegged to the dollar at least for the next few years, supported by adequate foreign currency assets. In addition the flexibility of the labor market in the GCC, combined with implementation of structural reforms, would improve competitiveness without the need for currency adjustment.

In addition to achieving macroeconomic stability, further progress in reforms will be needed to strengthen the business climate and competitiveness to bolster private sector growth, diversification, and job creation. Needed reforms

include simplifying ways for starting a business, streamlining business regulation, expanded access to finance SMEs, and vocational training programs tailored to private sector needs. In addition, measures to expand the female labor force participation could substantially boost the region’s economic potential.

About Garbis Iradian

Based in Washington, D.C. as chief economist for the Middle East and North Africa Department with the Institute of International Finance (IIF), Garbis Iradian focuses his work and research on Morocco, Egypt, Lebanon and the United Arab Emirates (UAE). He received his BBA and MBA from the American University of Beirut, and his PhD in economics with an emphasis on macroeconomics and econometrics from the University of Freiburg, Germany. He is fluent in Arabic, English, French and German and has published several articles and working papers, including: “What Explains the Rapid Growth in Transition Economies”, and IMF staff paper, November 2009.