Regional investment system would smooth out MENA political turbulence: analyst

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Variations in growth performance within the MENA region and the high degree of volatility during the pressing events occurring in the Middle East have highlighted stability concerns and enormous political and economic challenges, putting a high “pressing need” to activate the role of financial institutions for economic stability and prosperity.

Dr. Florence Eid, Founder & CEO of Arabia Monitor told Al Arabiya this week in an exclusive interview that in order to evaluate the growth rate within MENA, we should look at the period since the 1980s, where the average real GDP growth in the GCC has been accelerating more rapidly than in the rest of the Arab countries. Whereas, between 2010-2012, MENA ex-GCC averaged real growth rates is about half of those posted in the GCC, with unemployment on the rise.

“If we compare oil importers with oil exporters, the increasing divergence also holds: For 2012, MENA oil exporters are expected to record a GDP weighted average growth of 10.4% compared to 0.4% for oil importers. The trend is expected to continue in 2013 with GDP weighted average growth of 5.0% and 3.2% respectively”, she said.

“While oil exporters, thanks to large fiscal surpluses, have managed to largely hedge the risks of recent turmoil, oil importing countries, hit with rising oil prices are faced with increased subsidies inflationary pressures, and high unemployment. The deteriorating fiscal balances will create rising debt burdens, and possibly a prolonged period of stagflation in some countries, heightening risks of unrest”, she added.

However, according to Dr. Eid, responses of GCC policymakers have been enormous to accommodate economic and social pressure during the aftermath of the Arab spring. “To date, the GCC has pledged USD 45B in assistance to the rest of the MENA region through budget support, disbursements to regional central banks, debt purchasing and planned private sector investment. For example, GCC transfers to Egypt following the “Arab Spring” surpassed even the heavily touted USD 4.8 IMF loan package, and were a stabilizing factor in helping moderate currency pressures”, she said.

She argued that a coherent system of regional investment and economic policy formulation, including a regional development bank, would help institutionalize and harmonize regional imbalances and smooth out political turbulence. Existing organizations such as the Inter-Arab Investment Guarantee Corporation need to be reconsidered and either brought to the fore or cede the way for more dynamic players. There are at least 10 other regional organizations to dust off

With adequate regional support and on the back of an unprecedented decade of intra-regional FDI flows, most “Arab-Spring” countries could avoid the multiple boom and bust scenarios, defaults, and relapses to dictatorship that accompanied transitions to democracy in Latin America for instance.

At this point, Egypt for instance has largely suffered from economic mismanagement and non-inclusive growth policies. Though inequality is not uncommon in populous emerging economies, with powerhouses Brazil, Nigeria or India experiencing similar or higher levels, the key lies in social infrastructure development.

She explains that historically successful measures have included:

i. The implementation of socially responsible redistribution schemes, attached to the right incentives (similar to the Bolsa Familia program in Brazil, which attached educational and health-related incentives to hand-outs) rather than promoting indiscriminate and costly generalized subsidies).
ii. Higher education reform, to ensure synergy with local labor market needs.
iii. Public investment programs geared at initiating regeneration projects in the regions that need it most (Tunisia is currently heeding the example with the implementation of the CDC fund, specialized in private sector investment in the country‘s interior regions).

In addition, Egypt should be prioritizing the revival of capital inflows, especially FDI, moving forward, and we see a revival in GCC investments in Egypt as very likely.

She argues that restarting the public private partnership (PPP) law is likely to push forward investments in Egypt‘s infrastructure sector. The law has been stalled since the beginning of the revolution in Q1 2011. However, Rising political instability in the form of renewed unrest and street violence have dimmed the prospects of a swift economic turnaround, yet the country’s fundamentals remain strong and could provide the basis for an attractive investment environment given a return to calm.

On the case of Tunisia, Dr. Eid sees the slowdown in external demand represents the main challenge. The key for the government going forward will be to pursue its public investment plan in the country‘s interior, with the double benefit of maintaining stability while driving input-led growth and curbing unemployment.

“Full recovery in Libya would represent a major opportunity for the Tunisian economy, and initial results have proven encouraging. Libyan demand for Tunisian foodstuffs and basic necessities has already boosted exports, while a return to stability will allow the return of Tunisian workers and help lower unemployment”, she concluded.