The short-term economic prospects in Arab countries are suffering due to the tough political transitions, increasing regional doubts that were flared up by the Syrian war and its repercussions on Lebanon and Jordan, and the successive security developments in Iraq, Libya, Yemen, Egypt and Tunisia. The International Monetary Fund (IMF) expects the average economic growth in the Arab countries to be less than 4% in 2014. Given the tough challenges that the region is facing, this is a modest figure that does not meet the level needed to reduce the high unemployment rates, especially among the youth, and to improve the low living standards, especially in oil-importing countries.
While the GDP growth was less than 2% in 2013, it is expected to reach 4% in oil-exporting Arab countries in 2014. Oil prices have been under conflicting pressure due to two main factors. First, the delicate security situation in Libya, Iraq and Yemen and the repetitive disruption of oil supplies to these countries have stirred up regional geopolitical doubts and pushed prices to rise. Second, global oil demand has slackened due to slowing economic growth, and unconventional energy sources have been on the rise, thus pressuring oil prices to decrease.
The overall surplus of governmental budgets of oil-exporting countries, which constituted 4.25% of the GDP in 2013, indicates a clear contrast between countries. Thus, they face different future risks.
Since the outbreak of the Arab uprisings, local social pressures and regional tensions have pushed governments to increase the salaries of governmental employees and to raise the budget allocated for subsidies and various welfare transfers. As a result, the governments started to increasingly rely on oil revenues to maintain their ability to finance their budgets.
Although oil prices have increased in an unprecedented way and have reached $70 a barrel [and well above] since the start of the 21st century, countries like Algeria, Bahrain, Iraq and Libya cannot balance between their spending and revenues, given the current global oil prices. Moreover, the surpluses of foreign accounts of oil countries are dwindling because oil production has declined on the one hand, and local consumption has quickly increased, on the other. Besides, most countries have limited tools to face unexpected shocks or to ensure permanent spending levels for future generations.
Analyzing the economic prospects requires decision-makers in oil states to lay down the foundations for controlling spending inflation by rationalizing their revenues and engaging seriously in infrastructure reforms. This would foster the growth of a wide and diverse base in the private sector, provide job opportunities and attenuate regional and social differences alike.
It is worth mentioning that employment policies that are based on providing citizens with stable high-income jobs in the governmental sector distort the labor market and impede efforts to develop the private sector and diversify the economy.
The economic prospects seem blurrier in oil-importing Arab countries, especially in Syria, Egypt and Tunisia, where security concerns harm the general investment environment and hamper economic activity. Moreover, the slow economic growth exacerbates social anger and breeds more strikes and protests that delay economic recovery. As a result of this controversy, efforts to achieve political transition stall further and countries such as Tunisia, Egypt and Yemen fall into a vicious cycle that threatens the trust of the people in the future.
Geopolitical tensions might lead to a drastic increase in oil prices, thus hampering economic growth and exacerbating internal and external deficit. The countries of the Arab Maghreb are especially suffering from the persistent slowdown of growth in the European Union, which is considered their main economic partner. The negative effects of the European setback might extend to the sectors of tourism, export and foreign remittances.
The foreign cash reserves of oil-importing countries are growing weaker, the deficit of their current accounts is increasing and their public debt is growing. All this makes them more prone to external blows. Despite the positive developments in the current accounts in Egypt, Jordan, Morocco and Tunisia thanks to the issued international bonds and received foreign grants and aids, these countries still rely hugely on local banks to meet their funding needs. As a result, the bank credit available to the private sector has decreased.
Arab oil-importing countries are under increasing foreign pressure to control the deficit in their governmental budgets. The governments of these states fear possible social tumults that might be sparked by any austerity policies under political circumstances that are still delicate.
Basically, the pressures focus on reallocating a budget for fuel subsidies for two reasons. First, this is important to revive economic activity through governmental investments that enhance growth and create job opportunities. Second, it aims at reforming the system of comprehensive support for fuel prices by granting governmental aids to targeted categories that are most in need. The governments of Jordan, Morocco and Egypt have taken various measures to boycott the comprehensive support system. The coming months constitute a decisive phase in evaluating their success.
In most Arab countries, the work environment is fragile and lacks transparency, especially in middle-sized and small companies. Moreover, the labor market is not integrated due to the size of governmental employment, the expanding informal sector and the strict bylaws that regulate recruitment in the formal private sector. As a result, human capital distribution has become distorted. These factors altogether weaken productivity and drain the competitive ability of enterprises in the absence of deep structural reforms. If present, such reforms can limit the fluctuation of economic growth and foster the economy’s ability to create good job opportunities that contribute to improving the standards of living.
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