Arab Economies Face Structural Problems
“The impact of increased oil revenues of the Gulf states will be partly offset by the weak dollar, because oil is traded in US dollars in the international markets and most of the Gulf currencies are pegged to it.”
Mushtak Parker
LONDON, 10 March 2003 — Uncertainties over the Iraq crisis and political strife in Venezuela may have given the oil market a shot in the arm, with Brent blend prices touching $36 per barrel in early March 2003 compared to $20 per barrel in February 2002. The news of increased revenues for oil-producing states, especially in the Gulf Cooperation Council (GCC) countries, should be music to the ears of Treasury officials.
But beware such gifts lest they are considered in the context of the huge economic structural challenges in the Gulf, and the damage they may wreak on the global economy. Fears of an imminent war against Iraq have already sent the dollar to new lows against the euro and sterling, and forecasts about any rebound post-Saddam Hussein are mere speculation.
The price of gold has also risen, and bonds too are up, but equities continue to take a beating. The impact of increased oil revenues of the Gulf states will be partly offset by the weak dollar, because oil is traded in US dollars in the international markets and most of the Gulf currencies are pegged to it. However, according to the International Monetary Fund (IMF), a sustained $5 per barrel increase in the price of crude oil would decrease global GDP growth by as much as 0.3 percent. Lost GDP growth year-on-year February 2002 is estimated at $1.1 billion per day. The impact of such a development would be even worse on the US and European economies.
The basic scenario is that if the Iraq crisis is resolved this side of 2003, then the US economy, supported by an accommodating Bush administration, would rebound in the second half of 2003 with real GDP growth forecast at 2.6 percent. The upswing in the UK is projected at an encouraging 2.4 percent, but the Euro zone will experience a more sluggish recovery at 1.3 percent and Japan stagnate at a negative real GDP of 0.2 percent.
The emerging markets too will improve, although there remain concerns over whether Turkey, Brazil, Argentina, and Venezuela will be in a position to service their foreign debt. Most analysts agree that any contagion is likely to be regional and modest.
For the Arab world, however, the exceptional oil revenues will mean that growth will be liquidity-driven (both in 2002 and 2003), a scenario which economists such as Brad Bourland, the chief economist of Saudi American Bank (SAMBA), warn could mask the inherent structural weaknesses of Arab economies.
Last November’s IMF Consultation IV report on Saudi Arabia, for instance, commended the Kingdom for its reform program, but stressed that the pace of reform is too slow and urged greater fiscal discipline and transparency. This lack is not confined to the Kingdom but pervades almost all the Arab economies.
In 2001, Saudi Arabia had the largest GDP in the Arab World at $188 billion, followed by Egypt at $98 billion; the UAE at $55 billion; and Kuwait at $35 billion. This compared to the major economies such as the US at $10,200 billion; Japan at $4,200 billion; Germany at $1,900 billion; the UK at $1,400 billion; Mexico at $574.5 billion; and Switzerland at $240.3 billion.
SAMBA projects Saudi GDP growth in 2003 to be just under 4 percent (compared with an estimate of 0.7 percent in 2002). Only Algeria, Bahrain, Qatar, the UAE and Tunisia are projected to reach real GDP growth above 4 percent in 2003. But according to Bourland, key weaknesses remain in the Arab economies — they are still growing more slowly than their populations and labor forces; and governments rarely exercise strong fiscal discipline.
Saudi Arabia’s real GDP growth in 2002 of 0.7 percent pales against the annual growth of 4.9 percent in its local labor force. In neighboring Qatar the gap is even bigger: 1.5 percent GDP growth against a 6.6 percent rise in the labor force. This means that the real GDP growth relative to sustainable growth potential is negative in all Arab economies.
Unemployment hangs over the Arab economies, with some of the politically most volatile and dysfunctional countries having the highest estimates. Algeria has an unemployment rate of 26.4 percent; Tunisia at 15.6 percent; Oman at 17.2 percent; Libya at 11.2 percent; Jordan at 14.4 percent; Morocco at 14.5 percent; and Egypt at 8.7 percent, with a propensity toward disguised unemployment everywhere.
Despite rising oil prices, most Arab countries are still plagued by budget deficits in 2002, although the short-term effect if oil prices are sustained at current levels may reduce deficits in 2003. However, this will depend on whether governments can curb public expenditure. And if the Arab economies lack strong fiscal discipline and transparency, as the IMF stresses, the persistency of the deficits are likely to continue unless structural reforms are institutionalized.
On the question of reform, while analysts welcomed the opening up of more sectors to foreign investment, especially Internet services, printing, data exchange, insurance, advertising and PR, they rue the fact that other activities including fixed-line and mobile phone services and oil exploration are still barred. A number of the reforms and new laws are drawn-out and are not retrospective, and some of them will only take effect in two years time.