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Arab Spring nations have limited policy options — IMF

Thursday, May 03, 2012

Gulf News

Dubai The slow political transition in the Arab Spring economies in the Middle East and North Africa (Mena) region could derail the economic stability of these countries, a senior International Monetary Fund (IMF) official said yesterday.

“In the Arab Spring countries, political transition, pressing social demands and an adverse external environment have combined to increase the near-term risks to macro-economic stability. Events in 2011 have proved the transition is not going to be as easy as initially anticipated,” said Masoud Ahmad, Director of the IMF’s Middle East and Central Asia Department.

With growth faltering, unemployment rising and continued fiscal and external pressures, the IMF expects 2012 to be an equally challenging year.

In its latest regional economic outlook, the IMF observed that the Arab Spring countries are left with limited economic policy options as their foreign exchange and fiscal buffers have depleted severely as a result of actions they took last year to defend their currencies and to meet budgetary requirements.

Fiscal woes

With the recession in Europe adversely impacting tourism and export revenues of many Mena countries, the oil importers of the region are facing mounting fiscal woes caused by high oil prices.

Mena oil importers had to manage higher commodity prices, lower global growth and negative spill-over from the euro area and from within the region. As a result, except in Morocco, per capita incomes stagnated or contracted in 2011, and more young people are without jobs today than a year ago, according to the IMF.

Governments across the region responded to surging global commodity prices with higher spending including on wages and food and fuel subsidies. As a result, fiscal deficits increased to about 8 per cent of GDP on average and domestic government borrowing has begun to crowd out credit to the private sector. External positions have also weakened, with a drawdown of international reserves. This was most evident in Egypt, which led to the deterioration of credit ratings and other financial market indicators.

In the face of rising social pressures, most governments of oil-importing countries increased spending on generalised subsidies, while partially offsetting this increase by cutting back in other areas including capital expenditure, resulting in lower job creation.

Tax revenues fell as a result of tax breaks in some countries. As a result, fiscal balances deteriorated in these countries.

Faced with worsening credit ratings and rising borrowing costs in international markets, governments increasingly relied on domestic financing.

The authorities also typically maintained an accommodative monetary policy and limited exchange rate movements by tapping into international reserve buffers.

Given the deteriorating economic conditions in many economies that are going through political transition, economists fear the prospect of widespread social unrest in these countries.

“The region faces the grave danger of social unrest because of the growing unemployment and frustrated expectations. Social and economic changes have not kept pace with the expectations of the masses,” said Dr Nasser Saeedi, Chief Economist of the Dubai International Financial Centre.

By Babu Das Augustine?Deputy Business Editor

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