On shaky ground

October 16th, 2012

… what the World Economic Outlook says about growth prospects for the Middle East and North Africa region … a recent OECD report on what needs to be done to improve the role of women in regional economic growth – Published on Al-Ahram weekly online, by Niveen Wahish, 11 – 17 October 2012.

Growth forecasts for oil importing countries in the North Africa and Middle East (MENA) region, including Egypt, continue to be negatively affected by the aftermath of the Arab Spring … //

… On the external side, the contraction of activity in advanced Europe – a major trading partner for most economies in the group – has also been holding back growth. And should things take a turn for the worst, oil importers will feel the pinch. The Euro area is set to see negative growth of -0.4 per cent in 2012 and a modestly better 0.2 per cent in 2013.  

Another concern voiced by the report is the negative effect that possible increases in food and fuel prices could have on internal and external balances. “Because of extensive food and fuel subsidies in most economies, the immediate concern with spikes in commodity prices is not the effect on inflation and disposable income, but rather the strain on budgets and foreign exchange reserves.”

In fact, as the report says, the budgets and foreign reserves of oil importing countries are already strained by the urge to meet social demands, such as food and fuel subsidies and increased wages, at a time when growth has slowed and political uncertainty has increased.

The report recommends that oil importers focus on rebuilding macroeconomic stability while defining and implementing a reform agenda to accelerate growth.

It also said that “structural fiscal reforms aimed at reorienting government spending towards poverty reduction and the promotion of productive investment will be crucial to improving the budget outlook.” And it said that “improved targeting of subsidies, especially through fuel subsidy reforms, will be an important step in this respect.”

Oil exporters of the region meanwhile are in much better shape. They will grow at 6.6 per cent in 2012 and 3.8 in 2013. The strong growth in 2012 is attributed to a strong rebound of activity in Libya since late 2011. The boost from Libya will moderate in 2013, the report says, slowing down the growth of oil exporters.

The report says that for oil exporters, the priority is to take advantage of current high oil prices to diversify their economies. That, the report said, can be done by a greater focus on productivity-enhancing spending on human capital and infrastructure investment. It stressed that oil exporters need to “contain increases in spending on entitlements that are hard to reverse.”

Risks to the near-term outlook for oil exporters, according to the report, emanate from a slowdown in global growth because it could cause oil prices to drop. The IMF’s forecast for global growth was marked down to 3.3 per cent this year and a sluggish 3.6 per cent in 2013. And it said that the global financial system remains fragile.

“For oil exporters, government expenditures have risen to such a degree that substantial declines in the price of oil could undermine fiscal positions. Despite significant accrued financial buffers, such declines could put at risk ongoing infrastructure investment and growth.” However the report also pointed out that geopolitical risks, such as those related to Iran, could keep oil prices high.

“Institutional and regulatory reform to stimulate private sector activity and ensure greater and more equal access to economic opportunities and measures to address chronically high unemployment, particularly among the young,” is the report’s recipe for achieving a more inclusive medium term growth for the whole region and thus securing economic and social stability. It said governments must do that while keeping an eye on macroeconomic stability.
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