MENA Economic Update, October 2019: Key Messages

Report Key Message

GDP growth across the Middle East and North Africa region is projected to be 0.6% in 2019, a fraction of what is needed to create enough jobs for the fast-growing working-age population. Even in those few countries that have had periods of higher growth, poverty remains high, suggesting a need for reforms to instill fair competition and promote inclusive growth.

Sluggish performance is expected in 2019. The region's growth forecast for 2019 is revised down by 0.8 percentage points from the April 2019 projection, driven by Iran's larger-than-expected economic contraction and voluntary oil production cuts from OPEC members.

Regional growth is expected to rise in 2020 and 2019 to 2.6% and 2.9% respectively. However, MENA's economic outlook is subject to substantial downside risks�most notably, intensified global economic headwinds and rising geopolitical tensions.

In per capita terms, the region's average income is expected to decline by 0.9% in 2019. This follows a contraction of 0.6% in 2018. What is more, poverty rates remain high in the region, even in countries that have experienced relatively high economic growth such as Egypt and Djibouti.

The GCC economies are expected to grow at 1.1% on average in 2019�below their 2.0% growth in 2018 and 0.9 percentage points lower than the April estimate. These downgrades largely reflect lower-than-expected oil revenue, due to oil production cuts and falling oil prices since April 2019. However, GCC countries have made efforts to add economic activities other than oil.

The slowdown of the global economy has already started to affect MENA, mainly through falling oil prices and oil production cuts�which hurts export revenue of oil exporters and complicates their spending decisions.

A further slowdown of the global economy, or worse, a global recession, would significantly affect MENA as external demand would severely weaken and oil prices would plunge.

Moreover, global financial volatility associated with slower growth would also worsen the ability of MENA countries to borrow, or, worse, could trigger capital outflows from highly indebted countries, such as Lebanon.

A transition from an administered to a market economy is essential to sustain the region's necessary growth, but this prospect arouses considerable mistrust in the region, where many blame market liberalization for the rise of a crony capitalism of a few connected firms.

It is time for MENA countries to focus on both demonopolizing their markets and harnessing the collective domestic demand of their economies to achieve export-led growth regionally and internationally.

Although steps such as reducing tariffs, solving poor logistics and creating cross-border payment systems will undoubtedly help with regional integration, they are insufficient. At the heart of the inability of MENA countries to integrate domestically and regionally are the almost impenetrable barriers to firms entering or leaving crucial markets�or, as economists put it, the lack of market contestability.

The economies of MENA have favored incumbent firms�whether private sector or state-owned. The lack of contestability leads to cronyism and what amounts to rent-seeking activity�including, but hardly limited to, exclusive import licenses which reward the holders and discourage both domestic and foreign competition.

To unlock domestic and regional integration, the wall of vested interests in MENA countries must be torn down. In practice, the tear-down could translate to creation of regulatory watchdogs to champion competition.

An integral part of the competition and contestability agenda is transparency and data availability. Countries in the MENA region trail other similar middle-income countries on government transparency and the disclosure of data in critical areas that measure the evolution of poverty, the degree of competition in sectors, and assessment of domestic debt levels and contingent liabilities associated with government guarantees.

Source: The World Bank