Revolutions and unrest have disrupted economic activity across almost every country in the Middle East and North Africa region (MENA) over the first half of 2011, and will continue to restrain growth in a number of countries at least for the year, and potentially for more. For those parts of the region where unrest has been less marked, higher oil prices (linked tightly to developments in MENA) will be a boon for some and a drag on growth for others. Higher food prices will exact a toll on external balances across all countries (MENA is the world’s largest oil exporting region, but also the largest food importer).
Economic and social impacts are likely to be substantial in the short term as production, trade, services and other elements of economic activity slip, and fiscal revenues, tourism and FDI receipts come under increasing pressure. Several among the non-oil group of economies—Morocco and Tunisia—rely on rain-fed agriculture, with wheat crops often exposed to adverse weather; these countries are now experiencing escalating import bills and pass-through to headline inflation. Consumers are further affected as inflation heats up; or fiscal deficits will swell should governments choose to subsidize the spikes in staples prices.
The near-term economic costs of the ‘Arab Spring’ are manifesting in disruptions to industrial production, trade, worker remittances, foreign direct investment, and importantly for Egypt and Tunisia, a sharp decline (45%) in the number of international tourist arrivals (first-quarter 2011, y/y). An example of the potential impact of a sustained fall in tourism: should Egypt’s tourism revenues fall by 18% during the year, calculations based on multipliers for the industry prepared by the World Travel and Tourism Council (WTTC) suggest a 1.2 point loss of GDP. Similar results might apply to Tunisia, Morocco, Jordan and Lebanon (figure-1).
Political-economy developments in countries where protests- and authorities’ responses occurred earliest—Tunisia and Egypt—could play a strong role in shaping other outturns in the region. And as evidenced from the first months of 2011, there are a variety of political responses across the Arab world. Progress may be more likely in countries like Tunisia, as well as in the monarchies (Jordan and Morocco) where popular pressure will continue to have well-established channels in which to be expressed. In contrast, political and social difficulties continue in Libya, Syria, Yemen, and to a lesser degree, in Bahrain and Algeria.
In the broader view of the World Bank, if these political events and economic externalities are followed by sound transitions to better governance structures, then looking forward, they should provide a unique opportunity to change the Middle East and North Africa’s political and social landscape. The economic costs of ‘transition’ should begin to diminish, while the benefits of reform start to accrue. Under the assumption that some form of “normalization” takes place across countries—a revival in domestic demand becomes feasible, as does the ability of countries to participate in a rebound in international activity, through goods trade, tourism and investment flows. On these grounds, views for GDP growth in 2012-13 are moderately optimistic for the developing region--though still below pre-‘Arab Spring’ expectations—at 3.5 and 4 percent respectively, following the compression of growth to 1.9 percent in 2011 (figure-2).