Some governments in the Middle East have rushed to implement reform programs in cooperation with international financial institutions such as the IMF, with the aim of combating the economic hardships they are currently facing in light of the drop in oil prices and the increased state of conflict in the region. This includes the continued structural crises that have been building up for years and have caused immense economic problems such as increased deficits, instability in the exchange market, and a slowdown in economic growth.
In order to be able to get past these problems, some governments have undertaken a number of reforms that aim to achieve economic stability. These reforms included the flotation of the local currency, increasing taxes, and freezing new hires, as well as reforming the structure of the subsidy program. These steps will undoubtedly lead to a reasonable amount of stability in the financial markets on the short run, and on the long run help to revive the economy, yet the political and social costs of these reforms is quite high. The long term success is also linked with other reforms that include tax reform, and income diversity.
A Number of Problems:
Increased instability the Middle East in the last two years, along with the retreat in oil prices and an increased state of conflict, have caused a number of consequences represented in the following:
1. A Slowdown in Economic Growth: a number of assessments by international institutions have indicated that the slowdown in economic growth in the Middle East region and North Africa is very apparent, especially amongst the oil exporting nations. Appraisals by the World Bank note that the real GDP of the Middle East for the year 2016 has gone down to its lowest levels since 2013 to reach 2.3%, which is less than that of the previous year by half a point.
This weak performance is attributed to the continued shrinking of the main sectors in the region such as oil, tourism and agriculture. This is in light of the retreat in oil prices and the ongoing conflicts in Syria, Iraq, Libya and Yemen.
2. Deficits in State Budgets: with the decrease in the income of oil exporting states and the ongoing increase of economic burden, it is expected that the net budget deficit for the region will reach 9.3% of the overall GDP for the year 2016. This is an increase of half a point from the previous year, as per the World Bank.
3. Increased Trade Deficits: a number of factors such as the retreat in oil prices, lack of foreign currencies, and a shortage of power have led to a reduced capacity of regional states in their ability to export, while also having to face increased costs of importation. In return, this has increased the overall trade deficits of the region from being in a surplus of 4.4% in the year 2014 to a deficit of 4.5% of the total GDP in the year 2015 and is still expected to increase to 6.2% at the end of 2016.
Reform Packages:
In order to be able to get past the current spate of crises, some governments have rushed to take a number of economic reform measures that have included the following:
1. Flotation of Local Currencies: a number of countries in the region, such as Egypt and Sudan, have freed the controls over their local currencies to have a more flexible exchange market in order to try and adjust the situation that arose over the past couple of months due to the difficulty in acquiring foreign currencies in the official markets. This has led to the rise of the black market in the aforementioned states as well as an increase in the costs of a transition. The Egyptian and Sudanese governments have tried to amend the problems of pegging their currencies due to the fact that it was very costly for their foreign currency reserves.
In accordance with this step, Egypt has taken a very important step in the month of November, of floating the currency in the banks to go above 13 pounds instead of 8.8 pounds previously. In the same month the Central Bank of Sudan raised the price of the Dollar in the banks and investment firms to 131% that is 15.8 pounds to the dollar, this was as opposed to its previous price of 6.5 pounds to the dollar.
Morocco also announced plans to free float their currency and the Governor of the Central Bank hinted in July 2016 that the government is beginning to gradually move to a free float of the Dirham against the Dollar in order to adjust to the external shocks without too many losses.
2. Reforming the Subsidy Regime: one of the most common measures taken by the governments in the region towards implementing the reform programs is an attempt to restructure the subsidy program, which included Oil and Electrical Services as they have the biggest share in government spending. The IMF also estimates that the value of the two together, towards the end of 2015, approximately come together to cost 154.02 Billion dollars or almost 3% of the GDP of the region.
In 2012, Jordan took its first steps towards reform of the oil services as the government decided to lift prices at the time which was between 16 and 32% as grade 90 gas rose from 700 fils to 800 fils and Diesel and Gas rose from 515 fils to 685 fils.
In a similar fashion, Tunisia, Jordan, Egypt and Sudan all increase prices over various periods and in order to reduce government spending. The Tunisian government in the year 2014 increased the price of Petrol to 1.670 instead of 1.570 Dinar. In the same year, Egypt increased gas and oil prices to between 11% to 122% and in the same month of November increased them again to between 30% and 47%. Sudan also took the step recently to lift subsidies off of fuel and medicines to increase the price of gas to 6.17 pounds as opposed to 4.6 pounds, diesel also increased to 4.11 pounds from 3.11 pounds.
In line with the financing that was received by Jordan, 723 million dollars, from the IMF it is also noted that they would take measures to adjust the taxes in order to increase government revenues, lift subsidies as well as introduce new tax on products and services in order to reduce the current public debt from 88% to 77% by the year 2021.
3. Increasing Taxes and Hire Freezes: some governments took austerity measures such as Algeria that introduced in 2017 to increase taxes, specifically value added taxes, to 17% and 19%. They also increased taxes on residential properties, fuel, and tobacco as well as modernizing the electricity bill collection on all meters. The Tunisian government also sought to increase pay and salaries in the year 2019, similar to Algeria that sought to reduce spending and freeze hiring.
Direct Consequences:
It is expected that the economies of the region of the Middle East will be affected in the following manner from the reform programs:
1. Inflation Pressures: the developments that are relating to the flotation of the currencies, including the increased taxes, will increase inflation at a very fast pace amongst the states in the region. As an example of this, it is expected that the inflation rate in Algeria will reached 5.9% in the year 2016 as opposed to 4.8% in the year 2015. It is also expected in Egypt to have inflation jump to 10.2% in the year 2016 and 17% by the end of 2017.
2. Slow Economic Growth: it is expected that the austerity measures adopted by most countries in the region are coming at the same time with a reduction in investment spending, freeze hires and hence there will be a reduction in consumption till the growth. Economic growth will slow down in the coming 2 years as it is expected that the regional economies will record very slow growth between 3.1 – 3.5 percent in the years 2017 and 2018.
3. Containing the Deficit: with the measures being taken to control the general financial situations, it is expected to reduce the financial deficit for the states of the region over the coming two years and it is expected to reach, by the end of 2016, from 9.3% to 6.2% and 4% by the end of 2017 and 2018 respectfully. Even with this the deficits will remain high in some states such as Algeria, which will push them to, like the rest of the region, borrow internally and externally which will push them to issue bonds locally in dollars to plug these deficits.
Taking a Step Forward:
All this is a prelude of the social costs that will be burdened by the middle and lower classes as a result of the reform programs in the region. It is expected that these austerity measures will eat up the real income of the individual, increase poverty rates as well as unemployment. This is what some of the governments in the region have asked for in order to create a social safety net that is more just and equally spread in order to contain the negative effects of the reform programs.
Despite the negative impacts of these reform programs, it is without a doubt a prelude to a more stable economic region on the whole, especially in the medium and long term. So long as governments move to, in line with previous arrangements, take measures to become economically diverse and reinforce a tax regime as well as enforce transparency and oversight, it will ensure the success of the reform programs and achieve real growth in the region. It seems, however, that they are hard to reach at the moment in light of the regional and international developments.
To conclude, it can be said that austerity measures are only a chapter in a series of arrangements that governments in the region are being forced to take in the current period, in order to support stability economically and socially, especially that the chance is there now for change.
