By Moin A Siddiqi

Oil revenues, workers’ remittances, and the services industry, including tourism, banking and finance, as well as construction, provide the mainstay of economic activity across much of the Middle East and North Africa (MENA) region. The strengthening terms of trade over 1999-2000, thanks to firmer oil prices, were instrumental in boosting activity, with gross domestic product (GDP) growth surging by 2.5 per cent to 5.5 per cent in 2000, the highest since the early 1990s.

The external and domestic conditions in 2001 were generally less favourable for most MENA economies. Predictably, the main reasons have been continuing oil market volatility, the global economic downturn, and a total lack of progress on regional peace. According to the World Bank, the region as a whole experienced mild “growth slowdown” to 3.4 per cent, down from almost four per cent in 2000. The main factors undermining robust regional growth included declining oil production, in line with lower OPEC export quotas, weaker oil prices in the fourth-quarter, and economic woes in the industrialised (OECD) countries, thus affecting demand for goods and services from the region. The International Monetary Fund (IMF) recently said that growth will be adversely affected by lower oil prices, weaker remittances and tourism revenues, and a worsening regional security situation.
The Gulf producers are rebuilding their official foreign assets, depleted during 1998-99
In the core oil-producing countries (Saudi Arabia, Iran, the United Arab Emirates, Kuwait, and Libya), total GDP output and export volumes have declined compared to buoyant 2000 levels. Current account surpluses, which reached 14.9 per cent of GDP in 2000, fell to 8.4 per cent in 2001, according to the World Bank’s estimations.
Although oil prices are currently below OPEC’s preferred band of $22-$28 a barrel, the probability of an oil market crash (as in late 1998) is remote. Therefore, oil-exporters’ fiscal and external accounts should remain manageable in the near-term.
Fiscal discipline is being enforced in order to prevent a boom-bust cycle of the past. Since 2000, most oil-exporters have recorded balanced budgets or surpluses. This marked improvement in fiscal position was carried into 2001. The windfall gains from higher oil revenues have in general been used to reduce short-term external debt and/or redeem domestic debt, particularly in Saudi Arabia and Iran. The Gulf producers are also rebuilding their official foreign assets, which had depleted substantially during the 1998-99 period. They should have no problems in managing their fixed exchange rates (pegged to the US dollar). The Saudi Monetary Agency (Central Bank) boasts $83 billion in external assets, mostly comprised of US Treasury bonds, and other fixed-income investments. While Iran has deposited about $10 billion of windfall earnings into a special oil stabilisation fund. The Iranian government plans to unify its exchange rate regime in fiscal year 2002/03.

Interest rates in the GCC countries have fallen quitesteeply during the year

The Washington-based Petroleum Finance Corporation said the stronger oil prices of recent years increased financial reserves and reduced public debt to sustainable levels in OPEC countries, thereby providing them with a financial cushion.
Following sustained monetary easing in the US, interest rates in the Gulf Co-operation Council (GCC) countries, (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE) have fallen quite steeply during the year. This in turn, should be supportive of domestic demand. Lower interest rates across the GCC area have injected increased private liquidity, thereby underpinning consumer and business spending and investments in the coming months.
However, recent oil price volatility reinforces the need for greater economic diversification in order to ensure more sustainable growth and development in oil-producing countries. In December, the OPEC export basket price fell below $18 a barrel, down from an average $25, between January and September 2001.
The IMF advises: “Maintaining prudent macro-economic policies, together with increasing the pace of privatisation, trade liberalisation, and other structural reforms, would help promote private-sector led investment and growth, which is particularly needed in the non-energy sectors of the economy.”
Sluggish world output growth in 2002, projected by the IMF at
2.4 per cent could undermine energy consumption
The international financial institutions see evidence of stronger growth in the Maghreb area, especially in Morocco, fuelled by a marked recovery in agriculture from the previous year’s severe drought and a revival in domestic demand — thanks to increasing agricultural incomes. Whilst, among the Mashreq countries, (Egypt, Syria, Jordan, and Lebanon), Syria grew briskly — mainly reflecting higher agricultural production and investment in the oil sector. But in Egypt — the region’s second-largest economy after Saudi Arabia — real GDP growth is anticipated at 3.3 per cent, down from 5.5 per cent a year during 1996-2000. The underlying reasons have been a reduction in bank credit to the private sector, and the downturn in the tourism and construction sectors. However, the 25 per cent depreciation of the Egyptian pound against the dollar since mid-2000 should, over time, help stimulate non-oil export growth. Economic weaknesses are most acute in Lebanon, where budget deficit and public debt have reached unsustainably high levels. The IMF advises that a comprehensive strategy to address fiscal deficiencies must be implemented rapidly.
Egypt, Morocco, Tunisia, and Jordan are vulnerable to the risk of a protracted period of subdued growth in the European Union area
Commenting on the Mashreq countries’ prospects, the IMF notes: “Reforms directed at further trade liberalisation and developing a supportive business environment would improve the longer-term outlook for growth.”

Read the full story in the January 2002 edition of The Middle East Magazine

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