ECONOMIC IMPLICATIONS OF EVENTS IN SOME ARAB COUNTRIES

Iun 10th, 2011 | By | Publicat in categoria Nr. 1 Mai 2011, Revista nr. 1 Mai 2011

March 2011 Last updated at 22:26 GMT

 Oil prices rise as Libyan conflict intensifies

Oil prices have moved closer to recent highs as conflict in Libya intensified.

 

   Brent crude futures rose $2.40 to almost $118 a barrel, before falling back below $116.50, while US light, sweet crude rose $2.75 to $102.40.

   The increases followed news of an air strike in Libya near an oil terminal in the east of the country.

   Libya’s top oil official, Shokri Ghanem, chairman of the National Oil Corporation, also said prices could reach „$130 or more in the next month”. He said that the country’s usual output of 1.6 billion barrels-per-day had been reduced to less than 750,000 barrels by the conflict.

   Saudi Arabia previously said it is covering all of the extra demand not met by Libya.
Unfolding Developments in the Arab World and its Implications for the region

Ms. Shamshad Akhtar

Kuwait Economic society Meeting, March 14, 2011

   I am honored to be here among you tonight to discuss an important issue for the Arab world.  What I propose to discuss is the ongoing regional unrest and its implications.  I will divide my talk into two parts.  In the first part, I will sketch out the economic repercussions of the ongoing unrest.  In the second part, I will dwell on some long term development challenges highlighted by the unrest.

 

Economic Impact of the Unfolding Developments

 

   Just prior to the political turmoil, the Middle East and North Africa (MENA) region was on a path of economic recovery as the global economy rebounded.  The World Bank projections, undertaken in last quarter of 2010, for the MENA region foresaw a relatively robust performance for the period 2011-12.  MENA was projected to grow at 4.2% and Tunisia and Egypt, just to single out the two countries which saw their political leaders toppled, were projected to grow at 5% and 6%, respectively. These rates are higher by about one percentage point than the growth rates observed in 2010.

    For the countries currently being affected by the unrest, namely Tunisia, Egypt, Yemen, Libya and Bahrain, slippages in economic growth, fiscal revenues and tourism and FDI receipts are now inevitable.   Since events are still unfolding it would be premature to project with any precision the economic outlook for 2011 or 2012.  However there are few trends which capture well the impact of the economic disruptions and swift policies responses announced.

 

Fiscal and external pressures are likely to be high.

    A number of developments are likely to complicate macroeconomic management particularly in countries facing high public debt/GDP ratio and deficit on external account.  To preempt public and under pressure of unions, most Governments have announced generous wage increases, enhanced subsidies, generated more public sector jobs, and are in process of preparing a range of development programs to generate additional employment and address poverty concerns.  Some preliminary estimates suggest that cost of these concessions could be anywhere around $500 million or so for vulnerable economies like Yemen and $5 billion in Kuwait.  While this spending is affordable for oil exporting countries benefiting from rising oil prices in wake of the decline in Libya’s oil production, such expenses are likely to result in significant slippages in fiscal deficit that have added financing burden of rising oil bills.  On external front, the slowdown in FDI is quite significant for a number of countries, and in some instances outflows have resulted in drawdown of reserves for now.

 

Impact on Tourism sector of current events is likely to be sizeable.

     First, tourism is an important part of GDP for most MENA countries –at 13% and 16% respectively for Egypt and Tunisia in 2010.  Second, tourism has been for sometime central for employment generation for these two countries – responsible for 11% and 15% of the total employment in 2010 and a disruption to has implications for people which are already afflicted by double digit unemployment rates. Third, the sector is also a main provider of hard currency revenues (for Egypt, these were estimated at over $14 billion in 2010, close to 30% of all exports). Any prolonged instability can carry serious adverse short-run effects for this key economic sector—as tourists can easily switch to alternative holiday destinations.

 

Rising Spreads in debt markets.  The turmoil in the MENA region and the consequences of a possible civil war in Libya dominated debt and stock markets around the region in February. Credit Default Swap (CDS) spreads increased to a varying degree in a number of countries, with Bahrain and Saudi Arabia experiencing the most increase. There has been a number of sovereign credit rating downgrades in the region, notably Tunisia, Egypt, Bahrain and Libya. The stability of domestic financial systems and capital flight in the MENA region are of potential concern, beyond higher financing costs as represented by the increase in spreads via financial markets. On the other hand, the risk for an increase in risk premium for developing countries in general is low.

 

Volatility in stock prices in the MENA region and around the world increased significantly as the effect of higher oil prices outweighed positive news about the recovery in the US. For instance, in MENA region, the stock exchange in Egypt remains closed after falling 16 percent and implications of its opening have yet to emerge.  In Tunisia, trading was suspended twice and the overall drop was 11 percent. In Saudi Arabia, the stock market fell by nearly 20 percent since mid-February. The political turmoil may also be dampening the recovery of credit activity in several countries.

 

   The critical concern for the global economy and the region lies in the potential for the spread of instability to large oil exporting economies. We have already seen the impact on oil prices of the events unfolding in Libya. Oil prices–the most immediate channel of transmission of this regional shock to the global economy – have clearly risen in the past three weeks. It should be noted, however, that a pre-existing trend rise in oil prices started already in the second quarter of 2010—way before the political unrest.

 

The Middle East Bailout

NATIONAL INTEREST, APRIL 13, 2011

 

   Political turmoil across the Middle East and North Africa means trouble for the global economy. With two presidents out (in Tunisia and Egypt after largely peaceful revolutions), foreign military intervention in Libya’s civil war, unresolved crises in Bahrain and Yemen, constitutional change in Morocco, government dissolution in Jordan, and protests spreading in Syria, there is no going back, and the economic implications will not stay confined to the region. The governments still clinging to power are hampered by floundering domestic economies and are now less likely than ever to implement much needed reform. The world has no choice but to sit up and take notice.

While more change has occurred in the last two months than in the previous 50 years, this is just the beginning. In the face of uncertainty, the outside world needs to support the region economically to reduce the financial consequences of the unrest. Today, there are four major economic risks—two for the region and two for the world—and there is no time to lose in recognizing them and taking steps to contain them.

Deteriorating fiscal situationsWith governments now forced to essentially „buy” peace with domestic handouts and new spending packages, the macroeconomic stability of the region is in danger. And as the investment climate continues to get worse and the tourism industry takes a major hit, the pressures on both new and old regimes will only increase. This will make it harder for the region’s leaders to respond in ways that will contribute to long-term economic growth.

 

Lost faith in liberal economic reformUnlike the fall of the Berlin Wall when revolution aspired to a liberal economic system, change in the Middle East is about refusing an autocratic political system and calling for democracy—without a clear vision for what economic system should be put in place. There is a significant possibility that the governments that ultimately emerge out of this crisis will renounce previous economic reforms as misguided and argue that they contributed to the region’s plight. This would be a major step backwards.

 

Oil Shocks. A major rise in oil prices is, correctly, the most feared negative impact facing the global economy. Already, analysts estimate that the turmoil may have added 25 percent to the price of crude. If unrest continues to spread in the Gulf area—which accounts for 40 percent of the world’s oil reserves—oil production and transportation could be severely compromised. Against a background of rising demand and lagging supply growth, any number of events in the region could lead to a protracted surge in oil prices, and, in an extreme scenario, potentially even abort the global economic recovery. Even in the best of worlds, prolonged political uncertainty is likely to lead to both higher and more volatile oil prices for many years to come.

It is essential that the United States, Europe, and the BRICs—particularly China and India as large oil importers—support the region economically during its transition. The World Bank and International Monetary Fund need to rapidly deploy their considerable know-how and resources in that direction. Interventions could range from balance of payments lending, to technical assistance on fiscal, governance and civil service reform, and, as World Bank President Robert Zoellick has recently proposed, financial support for civil society. It is in the large economies’ own interest to ensure that economic reforms continue apace with political reforms. Otherwise the risks only get worse.

Arab spring: international bodies are funding the after-revolution

April 20th, 2011 in Development

   The 187 member states of the International Monetary Fund (IMF) and the World Bank (WB) asked the two Washington institutions last Saturday to watch over the Arab countries, which are now suffering of the economic impact of popular revolts.

   The immediate economic impacts of the tragic events in Japan and developments in some Middle East and North African countries require particular attention for the International Monetary and Financial Committee (IMFC), the body that determines the political guidelines of the IMF.

The IMF and World Bank at the bedside of the Arab countries

   The IMF has been responsible for an economic evaluation regarding a joint action plan of five international institutions in charge of helping North Africa, the Near and the Middle East. The Development Committee, which advises the IMF and the World Bank, has also asked the Bank to strengthen its support for the Middle East and North Africa.

   According to its projections, in 2011 the Arab oil importers should experience growth of around 2%, which is very poor compared to their population growth, in a context of high energy and food prices.

“Of course, we are ready to help in terms of technical assistance and financing,” said IMF Managing Director Dominique Strauss-Kahn at a press conference after the meeting. He stressed the need to share more equitably the fruits of economic growth.

A multilateral plan of action by the end of May

   The World Bank, the African Development Bank, the European Investment Bank and the European Bank for Reconstruction and Development, in collaboration with the Islamic Development Bank will also join to develop a common action plan

   By supporting the aspirations of citizens from the Middle East and North Africa, the plan aims to invest in sustainable economic growth and in a better and transparent governance.

   The decision to combine these various international institutions was taken at a meeting chaired by Timothy Geithner, U.S. Treasury Secretary and his French counterpart, Christine Lagarde, on the sidelines of meetings of the Group of Twenty and the Group of Seven before spring meetings of the IMF and the World Bank.

Financial support for the Libyan rebellion

   Finally an international conference on Libya in Qatar announced the creation of a fund to help Libyan rebellion and stress the need for a departure of Colonel Muammar Gaddafi to resolve the crisis.

   The first meeting of the Contact Group on Libya, in Doha, stressed the need to provide the rebels who hold the Eastern countries with the means to defend themselves, while refusing to involve explicitly in the aid of military equipment.

   The meeting, under the joint chairmanship of Great Britain and Qatar, was attended by some twenty countries and organizations about four weeks after the start of the multinational armed intervention under the UN mandate to protect civilians.

   The Contact Group decided to set up a temporary financing mechanism to provide the Transitional National Council, the political body of the rebellion, ways to manage aid and urgent needs in the areas controlled by the rebels. The Group also stressed the need for Colonel Qaddafi to relinquish power in order to resolve the crisis.

 After Revolutions, Rising to North Africa’s Economic Challenges

LOS ANGELES TIMES, APRIL 28, 2011

As Egypt and Tunisia move away from their former regimes, the political path seems much clearer than the economic one. Both countries are setting the foundations to shift to a democratic political regime that will give all political movements the right to participate through free and fair elections. Disagreements may surface over details. But consensus exists on the transition to a pluralist party system that derives its legitimacy from the people.

     The process of economic transition, however, appears more contentious. Some observers argue for greater trade and financial liberalization and for opening up more space for the private sector. They blame the rentier economy, the prevalence of corruption and the dominance by those close to the regime for limiting real economic competition.

   Meanwhile, others demand that the state intervene more in the economy. In their opinion, privatization and excessive reliance on market mechanisms contributed to a rise in unemployment, poverty and inequality between the rich minority and the deprived majority.

    This divergence of views is occurring amid critical global economic circumstances. The trust the world has in the market economy — long perceived as the most effective model of economic management — is deteriorating. This limits Arab states’ ability to learn from examples transpiring today. When Eastern European states moved from socialist regimes to market economies in the 1990s, Western European countries offered successful economic models.

 

As a result, economic transition in Arab states will be complicated and risky and likely to influence politics.

 

    Arab states’ economies, especially Egypt — which has a population of more than 80 million and needs to create more than 700,000 new jobs annually — cannot continue to depend on tourism revenues, the Suez Canal and migrants’ remittances to cover its glaring trade deficit. Egypt and Tunisia must fundamentally rethink their economic strategies.

 

Transition to democracy will not automatically lead to higher economic growth or more employment opportunities. In fact, it could have the opposite effect if both countries, Egypt and Tunisia depend excessively on the state budget and public debt without setting priorities to spur their economic transitions.    But, hopefully, policymakers will use the political legitimacy they gain as they move toward democracy to introduce the economic reforms both countries need.

 

Bibliografie:

 

http://www.bbc.co.uk/news/business-12619017

http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/MENAEXT/0,,contentMDK:22865708~pagePK:146736~piPK:146830~theSitePK:256299,00.html

http://www.carnegieendowment.org/publications/?fa=view&id=43574

http://www.afriqueavenir.org/en/2011/04/20/arab-spring-international-bodies-are-funding-the-after-revolution/

 

Leave Comment