The International Monetary Fund (IMF) has forecast a reduction in Gross Domestic Product (GDP) growth rate of oil importing countries - from 4.7 percent in calendar year 2010 to 2.3 percent in 2011.
Masood Ahmed, Director, Middle East and Central Asia Department revealed in a report published in International Economic Bulletin, Carnegie Endowment for International Peace dated May 19, 2011 that the Middle East and North Africa region (MENA) is undergoing a period of unprecedented change, marked by social unrest and surging commodity prices.
The unrest is weighing on investor confidence, tourism, and foreign direct investment. Meanwhile, higher oil prices are strengthening the region's oil exporters, but combined with rising food prices weakening its oil importers. The report maintains that the effects of last year's floods are holding back growth in Pakistan.
Higher food and fuel prices in oil importing countries including Pakistan will inflate import bills by (on average) about $15 billion or nearly 3 percent of GDP thereby either raising inflation or worsening fiscal balances (depending on the extent of a country's subsidies). Meanwhile, political turmoil is expected to constrain tourism and investment. This, along with higher interest rates and demand for greater government spending, will add to fiscal pressures. Measures will be needed to raise revenues and reduce waste in public spending. In addition, well-targeted social safety nets will have to replace general subsidies, the report adds.
Throughout the region, countries must create more jobs and generate inclusive growth. Their immediate challenge is to maintain social cohesion and macro-economic stability. Aiming for the former, governments have understandably increased spending, but this is not a long-term solution. Each country must develop its own approach for political, social, and economic transformation, while the international community needs to support these changes with technical assistance and financial aid, the report continues.
Higher food and fuel prices and social unrest have led both oil exporting and oil importing countries to increase spending. More specifically, countries expanded food and fuel subsidies, raised civil service wages and pensions, and approved additional cash transfers and tax reductions to offset the impact of rising commodity prices, provide support for the unemployed, and alleviate housing constraints. The resulting fiscal packages range widely, from 1.0 percent of GDP or less in the oil-importing countries of Egypt, Lebanon, and Pakistan, to about 22 percent of GDP in the oil-exporting country of Saudi Arabia (spread over several years). Some countries can easily afford this spending, but others will find public finances and debt levels strained. Until late 2010, the MENA region was on track for recovery. Growth had accelerated from 2.1 percent in 2009 to 3.9 percent in 2010; but then social unrest and surging commodity prices changed the outlook, improving prospects for oil exporters and diminishing them for oil importers.
The report highlights that driven by rising oil prices and expanded oil production, average growth in the region's oil exporters (excluding Libya, owing to the country's uncertain economic situation) is expected to increase from 3.5 percent in 2010 to 4.9 percent in 2011 while the GDP growth in the oil importing including Pakistan may have a reduction in the GDP growth from 4.7 percent in the calendar year 2010 to 2.3 percent of GDP.
The report suggests that it is equally important for the international community to support the MENA region's transformation by providing technical assistance and helping to meet countries' financing needs to contain the buildup of debt. The International Monetary Fund, for example, could allocate about $35 billion to the region if requested.
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