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Can the Middle East and North Africa Break the Vicious Cycle of Low Growth and Political Instability?

Lili Mottaghi's picture
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Arne HoelEgypt’s Petroleum Minister Sherif Ismail announced last week that spending on petroleum subsidies is expected to increase by 10 percent in the current fiscal year ending June 2014.

The announcement comes at a time when growth is slow, unemployment is high and the economy is still suffering from already ballooning subsidies -amounting to 9 percent of GDP- that have kept Egypt’s fiscal deficit at an exceptionally high 13.7 percent of GDP.  At least seven countries in the Middle East and North Africa Region (MENA) —including all those in transition after the Arab Spring (such as  Egypt)--are trapped in a low-growth-poor-policy loop. Political instability has stood in the way of advancing overdue economic reforms needed to spur growth. The resulting slow growth and rising fiscal deficits further constrained governments, intensifying social tensions. Short-term actions such as increasing fuel subsidies or public sector wages have exacerbated deficits, weakening investment and growth further. The cycle is repeating itself in different ways in Egypt, Tunisia, Jordan, Libya, Lebanon, Yemen and Iran. The MENA Chief Economist Office’s latest Quarterly Economic Brief argues that these countries should seize the opportunity provided by the Arab Spring to advance structural reforms needed to break this vicious circle of slow growth and political instability, paving the way for job creation and inclusive growth. 

“Governments in these countries cannot afford to continue short term policy actions such as increasing public sector wages and subsidies”, says Shanta Devarajan, World Bank Chief Economist for the Middle East and North Africa region.  “These policies exacerbate the situation, which is driven by long-standing structural weaknesses, including labor market rigidities, complicated and opaque regulations, infrastructure deficiencies, regressive and inefficient subsidies, and inadequate social safety nets”.

The report, entitled Middle East and North Africa: Growth slowdown heightens the need for reforms, assesses the macroeconomic situation in seven of the region’s most vulnerable economies-- Egypt, Tunisia, Iran, Lebanon, Jordan, Yemen and Libya -- post Arab Spring and emphasizes the urgency of the reforms needed to reverse the downward spiral of these economies.  Policymakers have so far resisted reforms to avoid further increasing social discontent.  But reforms can both create fiscal space and help restructure the economy towards job creation and inclusive growth.

The report outlines reform priorities and challenges for these countries. It cautions that raising general subsidies and public sector wages will only impose fiscal pressures on the government and reduce the fiscal space available for spending priorities on health, education and investment in infrastructure.

Egypt, Tunisia, Jordan and Lebanon suffer from years of underinvestment especially in industry and infrastructure. In Egypt, the barriers to doing business are numerous and cronyism dominates the private sector.  In Tunisia, where a political consensus on the constitution and transition government was reached two weeks ago, social and economic disparities across regions remain key economic challenges. The Lebanese economy suffers from inadequate public services, overcrowded public schools and limited access to government clinics and hospitals for low income people especially in rural areas. In Jordan, urgent reforms including streamlining business regulations, removing labor market rigidities, and improving the efficiency of public spending, are needed for macroeconomic stability. And the influx of Syrian refugees has stretched all of these sectors to the limit. The mismanagement of petroleum resources heightens the urgency for economic diversification in order to address long-term financial and economic stability in Iran, Yemen and Libya.  Public and quasi-public sectors are large and hindering private sector development in these countries. Governments’ fiscal positions in Yemen and Libya are deteriorating and short and medium term financing needs remain large.

The second issue of the MENA Quarterly Economic Brief, is now available online and accessible through MENA Facebook as well as MENA Chief Economist website of the World Bank.

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