Oil importing countries to face economic pressures in 2012

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The International Monetary Fund’s Regional Economic Outlook for the Middle East and Central Asia, projects mild growth for oil-exporting countries while predicting a dramatic slowdown in the oil importing countries.

Regional growth

The region’s oil-exporting countries Algeria, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, Sudan, the United Arab Emirates, and Yemen, excluding Libya are forecast to expand by 4.9 per cent in 2011, thanks to higher oil prices and oil production. But growth among the region’s oil importers, Afghanistan, Djibouti, Egypt, Jordan, Lebanon, Mauritania, Morocco, Pakistan, Syria, and Tunisia will register just under 2 per cent.

Deterioration in economic outlook

Since the beginning of this year, deterioration in the international economic outlook and the buildup of domestic social pressures has resulted in an economic slowdown in many of the region’s oil-importing countries. As for the region’s oil-exporting countries, the political and economic transformations occurring in several of them are advancing slowly and are expected to extend well into 2012. Together with a worsening economic outlook in Europe and globally, the region is seeing a sharp drop in investment and tourism activity. As a result, the recovery in 2012 is expected to be weaker than anticipated, with growth projected at just over 3 per cent, according to the IMF report.

Expanding subsidies

“Undoubtedly, the year ahead will be challenging for many countries, with continued political uncertainty, a deteriorating global economic outlook, and higher financing costs impeding a quick economic recovery. Measures aimed at restoring confidence and fostering inclusive growth will help countries enhance activity and ultimately address the needs of the population,” Ahmed said.
In response to growing social unrest, the economic downturn, and higher commodity prices, governments in the region have significantly expanded subsidies and transfers. The cost of this social spending remains high. In the near term, such spending measures are appropriate to lessen the impact of the downturn. But from an efficiency and equity standpoint, it is better for governments to gradually replace universal subsidies with social safety nets that are targeted at the less well-off part of the population, the IMF report states. Resources can then be used for critical investments in infrastructure and education and for supporting much-needed reforms.

Rising population

Meeting the rising demands of the population will not be easy, the report notes particularly as most countries have already used their fiscal and international reserve buffers to respond to deteriorating economic conditions in the wake of the Arab Spring, and have less room left to respond to future shocks. Regional partners and the broader international community can facilitate this transition through financing and greater market access for exports. The report notes conflict has taken a massive human toll in addition to its enormous economic costs. Economic activity is also weak in Pakistan, a result of devastating floods and recent urban riots. The immediate priority for these countries is to avoid further humanitarian crisis and, post conflict, to pursue an agenda of reconstruction and reform.

Inflationary pressure

In some countries, inflation will remain high in 2012 because of domestic factors: scaling back of commodity subsidies and structural factors and entrenched expectations of high inflation in Pakistan. Inflation has been stable thus far in 2011, as the expansion of domestic food and fuel subsidies has muted the impact of rising global food and energy prices. The road ahead is challenging says the report noting that the regional downturn has highlighted the challenge of preserving macroeconomic stability while maintaining social cohesion. In the near term, an expansionary fiscal stance is appropriate to mitigate the impact of the downturn, but limited fiscal space, and efficiency and equity concerns, call for replacing universal subsidies with targeted social safety nets.

Investment in human capital

The report recommends reducing rigidities in labour markets can help to create jobs and lower unemployment which is particularly high among youth. Reforming education systems will boost the pool of skilled workers demanded by the private sector and will enhance opportunities for investments in human capital, thereby aiding social mobility. Decreasing the regulatory and tax burden in product and labor markets and improving the quality of institutions and governance can help reduce the size of the informal economy and make growth more inclusive. Workers will thereby gain better social protection, benefits and career prospects. Improving the region’s business environment will be important in reducing the costs of doing business and strengthening competitiveness. Improvement in corporate governance and disclosure and deepening capital markets will help businesses, especially small and medium sized enterprises, to access credit and attract investment.