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2018 Economic Outlook for the Middle East and North Africa

07 January 2018

Middle East and North Africa (MENA) economies seek to adapt with the consequences of six years of economic and financial hardships emanating from falling global oil prices and ongoing wars. Wide-ranging measures were taken to control public finances, improve the investment climate, boost social safety nets as well as diversify economic partnerships and increase capital spending.

Although these measures would have a relatively positive impact in 2018 and 2019, performance of the region’s economies will remain vulnerable to several risks due to armed conflicts, refugee crises as well as potential protests over social grievances and failure of some governments to achieve good economic performance. 

Although the economic outlook for this region is expected to improve, internal stability in MENA countries will continue to face various challenges due to surprising developments.

Several Factors 

Major factors expected to shape economic trends in  MENA in 2018 can be outlined as follows: 

1- Recovery of Economic Growth. Although MENA  economies have not completely recovered due to security and political tensions that have persisted in the past six years. But the prospects for economic growth in 2018 and 2019 are expected to improve, supported by global trade, increasingly stable commodity markets alongside economic reforms in some regional countries. According to the World Bank, growth in MENA is projected to increase from 2.1% to 3% and 3.4% in 2018 and 2019, respectively. However, prospects for better economic activity in this region will hinge on geopolitical developments and the dynamics of oil prices on global markets. 

2- Mega Projects. In the past, economic growth was boosted in some MENA countries by pumping investment into capital and infrastructure projects run by the public sector in partnership with the private sector. Slow economic growth in some oil exporting or importing countries increasingly makes it important to fund a large number of mega projects, including infrastructure, to improve their economic growth.

For instance, the Turkish government in 2017 announced that it will invest US$64 billion in infrastructure in the coming years, a plan that will support Turkish companies, in the construction industry in particular. Other countries rely on production projects to support their growth. Iran, for instance, signed a deal with French oil and gas company Total to develop phase 11 of Iran’s South Pars field. Jordan too is planning to build a new capital, which will stimulate the country's various sectors and the construction industry in particular.  

3- Reconstruction of Liberated Areas. Conflict-hit countries in MENA may not be able to initiate comprehensive reconstruction and rehabilitation projects in areas destroyed by ongoing fighting. Massive construction requires huge funds estimated at $1 trillion. 

Nonetheless, affected countries can initiate a process in partnership with the international community to reconstruct some areas liberated from armed terrorist organizations. Yemen, for instance, is seeking to establish a $10 billion fund to reconstruct areas such as Aden, according to statements made by Minister of Planning and International Cooperation, Mohammad al-Saadi.

With total funds of $750 million in financial assistance from the World Bank, the Iraqi government initiated an effort to recover, reconstruct and rehabilitate priority infrastructure to restore delivery of public services in areas of Iraq newly liberated from ISIS in the Salah Ad-Din and Diyala governorates, as well as in the governorates of Anbar (including Ramadi), Kirkuk, Ninawah (including Mosul) and the Kurdistan Regional Government’s (KRG’s) governorate of Dohuk. But these are only factions of the total amount required, estimated at $100 billion, according to the national plan for reconstruction.

4- Rising Bitcoin Terrorism. The financial position of a large number of terror organizations deteriorated over the past years, due in particular to the intensified international campaign on terrorist funding. ISIS’ military defeat in Iraq has depleted its once abundant financial resources generated from oil trade, extortion and looted antiquities. But this does not negate the fact that the group is seeking to renew its funding mechanisms in MENA and beyond. The virtual currency Bitcoin could be one of the new tools. The possibility is supported by the fact that in December 2017, US federal prosecutors charged Zoobia Shahnaz, a Pakistani-U.S woman, with bank fraud, conspiracy, multiple counts of money laundering and allegedly attempting to fund ISIS terrorists in Syria.

Shahnaz was not the first individual to be accused of using Bitcoin to fund terrorists. In 2015, Indonesian government data showed that ISIS was funding its elements in Indonesia using Bitcoin and taking advantage of privacy and secrecy of the digital currency. 

5- Diversifying Partnerships. The MENA region appears to be continuing to elevate economic partnerships with China and Russia using the two countries’ interest in leveraging their economic clout in the region. Over the past years, China boosted its trade and investment relations with a number of MENA countries while the role of the region’s other partners, such as the US and EU, was receding. 

Russia’s military intervention in Syria in September 2015 helped consolidate its influence in the region including economic involvement. This is evidenced by Russian companies’ increasing presence in the region, especially in the markets of Turkey, Egypt, Jordan and Sudan, in addition to their strong activity in Syria. 

6- Strengthening Economic Reforms. Over the past six years, economic reform plans in MENA made significant progress, including in controlling public finances, improving the investment climate, boosting social safety nets and diversifying economic partnerships and increasing capital expenditure. Recently, North African countries took large-scale measures including cutting fuel subsidies, increasing fees for basic services and imposing taxes. 

Due to persistent financial burden, governments in MENA will take further measures this year to address economic and financial distortions. In Tunis, for instance, raised fuel prices 2.85% as part of plans to reduce subsidies and budget deficit. 

7- Social Protests. Cutting fuel and basic services subsidies in MENA countries in recent years has triggered social unrest, especially in countries lacking efficient social protection plans. Moreover, these governments' failure to reduce unemployment and stabilize prices could lead to new protests. In Iran, the government’s failure to utilize the lifting of economic sanctions in January 2016 to improve poor living standards has triggered popular protests across the country experiencing a 12.5% unemployment rate while inflation is running at nearly 10%. 

8- Limited Numbers Returning Refugees. The crisis of refugees in MENA exacerbated in the past years creating a financial and social burden on host countries. Currently, Syrians are the biggest refugee and displaced group in the region, followed by Iraqis, Libyans and Yemenis. By the end of 2016, the Syrian refugee population reached 5.4 million, with 2.6 million of them (more than 75%) living in two countries, Lebanon and Jordan.

In addition to financial burdens, large refugee inflows also threaten social stability in some host countries. But restoration of security stability to some areas, and the launch of reconstruction efforts in some areas in Syria and Iraq can increase the number of returning refugees from Jordan.

9- Increasing Debt. Countries in this region are likely to issue more government bonds to cover public budget deficits in the coming years. According to Thomson Reuters, Middle East debt issuance reached $57.4 billion during the first half of 2017, 53% more than the proceeds raised during the same period in the previous year. Due to limited access to borrowing from local lenders, MENA regions are expected to be more open to tapping international markets. For the first time in Jordan, the Finance Ministry issued a $1 billion worth of dollar Eurobonds in October 2017. 

10- Dispute over Resources. Last year, in conflict-hit countries, various armed terrorist groups fought each other for control of resources such as oil. Libya is just one such country facing such a conflict. 

It appears that the same trend will continue throughout year, especially because such resources not only can provide sufficient revenue for such groups but also represent a primary mechanism for putting political pressure on rivals. Moreover, conflict between various groups on resources may also mean that infrastructure and critical economic facilities, and oil installations in particular, will continue to be targeted. This was the case in Libya, where an explosion in late December hit a pipeline pumping crude oil to Es Sider port, Libya’s biggest export terminal, cutting the country’s output by up to 100,000 barrels per day. 

In conclusion, the economic outlook for the Middle East appears to be improving, yet the stability of the economic situation remains likely to face many challenges, given sudden developments in the region.