Economy of the Middle East and North Africa In 1997 [1 ed.] 9781455299027, 9781557757111
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Copyright © 1997. International Monetary Fund. All rights reserved.
Copyright © 1997. International Monetary Fund. All rights reserved.
The Economy of the Middle East and North Africa in 1997
Mohamed A. El-Erian and Susan Fennell
Copyright © 1997. International Monetary Fund. All rights reserved.
Middle Eastern Department
International Monetary Fund
© International Monetary Fund November 1997
Cover Design: IMF Graphics Section Cataloging-in-Publication Data El-Erian, Mohamed A., 1958The Economy of the Middle East and North Africa in 1997 / Mohamed A. El-Erian and Susan Fennell. —[Washington, D.C.] : Middle Eastern Dept., International Monetary Fund, 1997. p.
cm.
ISBN 1-55775-711-9 1. Middle East—Economic conditions—1979. 2. Middle East— Economic policy. 3. Africa, North—Economic conditions. 4. Afric North—Economic policy. I. Fennell, Susan. II. International Monetary Fund. Middle Eastern Dept.
Copyright © 1997. International Monetary Fund. All rights reserved.
HC415.15.E43
1997
Price: $15.00 Address orders to: International Monetary Fund, Publication Services 700 19th Street N.W., Washington D.C. 20431, U.S.A. Telephone: (202) 623-7430 Telefax: (202) 623-7201 E-mail: [email protected] Internet: http://www.imf.org
Acknowledgments
Copyright © 1997. International Monetary Fund. All rights reserved.
The authors are grateful for valuable comments from colleagues in the Middle Eastern and European I Departments. They are grateful for the contributions on country examples provided by Patricia Alonso-Gamo, Amer Bisat, Eric Clifton, Annalisa Fedelino, Thomas Helbling, Alexei Kireyev, Shahpassand Sheybani, and Sherwyn Williams. Special thanks are due to Rahul Dhumale for his contributions on investment and growth issues and to Peter Kunzel for his exceptional research assistance. Thomas Enger prepared the Annex on oil and natural gas in the GCC. Martha Bonilla, of the External Relations Department, edited the publication. Joan Wise and Anne Yee were very helpful in thefinalpreparation of the manuscript. The views expressed in this study are the sole responsibility of the authors and do not necessarily reflect the views of the Executive Directors of the IMF or other members of the IMF staff.
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Copyright © 1997. International Monetary Fund. All rights reserved.
Contents Page Acknowledgments
iii
Executive Summary
1
I. II. III. IV. V.
Introduction Recent Developments in the Macroeconomy The Intensification of Structural Reforms The Next Step Forward Conclusion
2 3 10 23 25
27 28 32
References
37
Recent IMF Publications on the Middle East and North Africa Region (1994-97)
38
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Annexes I. MENA at a Glance II. Economic Developments in the GCC Economies III. GCC Oil and Natural Gas
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Copyright © 1997. International Monetary Fund. All rights reserved.
Executive Summary • After a decade of stagnating economic performance, the economic picture in the Middle East and North Africa (MENA) region improved considerably in 1996 and has remained favorable in 1997. Economic growth is estimated to be about 4 percent, and per capita income to have increased for the second consecutive year in 1997. Financial balances have also improved for the region as a whole, with a further reduction in the fiscal deficit and continued improvement in the external position. • This performance reflects, in part, favorable external factors (the sharp increase in international oil prices in 1996 and favorable weather conditions for the Maghreb economies), but most important, particularly in 1997, the effect of appropriate domestic economic policies—including government efforts to tighten fiscal and monetary policies. • Progress is also being made in overcoming the structural impediments in many countries. Steps have been taken to redefine the role of government; enhance financial intermediation; address inefficiencies in the labor market and introduce training schemes; deregulate domestic markets and production structures; liberalize highly protective external trade regimes; and strengthen institutions. However, M E N A ' s implementation of structural reforms, while accelerating, continues to lag that in many emerging markets. Further efforts are needed to increase investment and saving rates so as to place the economies on a higher growth path, address the difficult employment challenge and, for some countries, deal with disappointing social indicators.
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• In moving forward, M E N A countries face a number of challenges. Most of all, they must move rapidly to restructure their economies in order to participate in the evolving globalization and reap the rewards, while minimizing the risks. With a less favorable outlook in this external environment, the onus of adjustment falls squarely on the M E N A countries themselves. • Those M E N A countries that are more advanced in macroeconomic stabilization and structural reform will need to widen and deepen those reforms, and embark upon a second generation of reforms aimed at advancing the transformation of the role of the state in the economy and increasing economic transparency. They face the additional challenge of "managing their growing success" in the increasingly complex global economy. For those countries that have not yet begun to reap the rewards of reform, determined action is needed in the short term to set a sound foundation for growth and avoid being marginalized in the rapidly globalizing world economy.
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I. Introduction The economy of the Middle East and North Africa (MENA) has continued to strengthen in 1997, notwithstanding particularly difficult situations in certain individual economies.1 Annual economic growth has been in the 4 percent range, resulting in a second consecutive year of much needed positive per capita income growth. Financial conditions have continued to improve as reflected in lower inflation, higher foreign exchange reserves, and a more manageable debt burden. These short-term improvements in the macroeconomic indicators of the region are to be welcomed. They are a further illustration of the region's potential to put behind it years of foregone economic welfare gains, erosions in living standards, and undue marginalization in the rapidly globalizing world economy. As important are the underlying changes in the structures of the economies. These changes will determine the sustainability of the region's economic improvements; the extent of beneficial linkages with the international economy; and, most fundamentally, its ability to generate employment for its growing population and to raise living standards. The purpose of this paper is to document the recent developments in the MENA economy and the challenges that lie ahead. It complements the analyses that have been presented in a number of recent publications on the region by the International Monetary Fund (see listing at the back of this study).
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The paper is organized as follows. Section II details recent macroeconomic developments, while Section III reviews the accompanying structural changes. Against this background, Section IV discusses the challenges for the period ahead as MENA economies seek to sustain higher economic growth and benefit to a greater extent from developments in the global economy. The discussion in this paper is supported by a number of boxes that provide greater details on both the experience of certain countries and key policy issues facing the region. Developments in the six member countries of the GCC2 and in the oil market are discussed in Annex II and Annex III, respectively.
1For the purpose of analysis in this paper, MENA is defined to cover the economies of members of the Arab League, the Islamic Republic of Iran, and Israel (see Annex I). 2 Members of the GCC (formally known as the Cooperation Council for the Arab States of the Gulf) are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.
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II. Recent Developments in the Macroeconomy A.
Overview
As recognized by governments throughout the region, sustaining a high rate of growth is the primary economic challenge facing the MENA economies. This is needed to enhance national prosperity, reduce unemployment in non-oil economies of the region, and generate jobs for the growing number of young people joining the labor force. International experience, as well as a well-established body of literature, confirms that macroeconomic stability enhances economies' ability to sustain a high growth rate. Accordingly, this section discusses the extent to which the MENA economies have progressed in establishing macroeconomic stability. In the following section, another critical ingredient of the growth dynamics—the evolving structures of the economies and their relations with the international economic system—is discussed. Available data for the MENA region as a whole indicate that, after over a decade of deteriorating or, at best, stagnant macroeconomic performance, the economic picture improved considerably in 1996, and remained favorable in 1997 (Table 1). This is most visible in the developments detailed below relating to the traditional set of macroeconomic outcomes (economic growth, inflation, and balance of payments), as well as the intermediate macroeconomic policy targets (such as the budgetary position, the external current account, and domestic credit developments).
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The improvement in 1996 reflected the favorable impact of both domestic and external factors. Domestic factors included positive market reactions to government's efforts to tighten fiscal and monetary policies and, to a lesser extent—given the less advanced stage of reforms—their efforts to widen and deepen structural reforms. These factors were greatly accentuated by favorable external factors in the form of the sharp increase in international oil prices and favorable weather conditions for the Maghreb economies after a period of prolonged drought. Appropriately, given the volatile nature of the region's external conditions, countries, especially the oil-producing ones, used the more favorable external environment to consolidate their financial position rather than to increase spending. In comparison to 1996, MENA's economic improvements in 1997 have been primarily the result of domestic policies. The economic and financial conditions of the region are responding favorably to several countries' success in further strengthening macroeconomic fundamentals and gaining greater credibility with respect to their willingness and ability to move away from the legacy of years of inward-oriented, public sector-led development strategies, particularly in the non-oil economies. These changes have been recognized domestically, regionally, and internationally. In most, though not all, economies they have been compensating for the less favorable external factors, be it the lower international oil prices (by 5 percent up to September) or the unfavorable weather conditions. There have also been setbacks to the Arab-Israeli peace process.
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Table 1. MENA: Basic Economic Indicators, 1976-97 1/ 1976-80 1981-85 1986-90 2/ 1991-95 2/
1996 1997
(Percent a year)
Real GDP Growth MENA
4.8 4.3 5-5 3.7
3.9
3.6 4.5
3.7 3.8 3.6 2.7
-0.6 -2.2 1.4 -1.1
-0.4 -1.5 1.0 -1.5
2.4 1.9 3.0
-0.8
0.1 -1.2 2.1 -5.4
1.4 1.4 15 -0.6
14.9 13.2 17.6 11.7
15.6 8.6 27.7 1.3
15.0 10.1 22.0 1.1
17.6 17.8 17.5 2.6
12.4 12.5 12.3 1.4
9.6 8.2 11.5
-2.9
3.0 2.1 4.5 6.8
3.7 3.0 4.8 -1.0
MENA
-0.9 -2.6
GCC
Oil exporters 3/ Others GCC
2.5 1.7
3.9 3.8 2.5
Real Per Capita GDP Growth Oil exporters 3/ Others
1.8
1.3
Inflation
MENA
Oil exporters 3/ Others GCC
0.9
(In percent of GDP) Central Government Fiscal Balance -3.1 MENA Oil exporters 3/ 3.8 Others -15.2 GCC 14.4
-8.0 -2.9 -16.1 -0.7
-7.5 -10.6 -12.0
-6.1 -5.9
-1.9
-6.4 -10.8
-4.3 -2.4
-1.8 -0.8 -3.2 -0.2
-3.8 -3.8 -3.4 -6.2
0.7 4.0 -4.7 4.4
0.5 3.2 -4.0 4.3
-8.8
Current Account Balance
MENA Oil exporters 3/ Others GCC
8.1 12.6 -6.0 20.6
1.4 3.7 -6.3
7.2
-1.6 -1.1 -2.6 0.2
-0.8 -0.8 -0.4 0.6
0.3 0.5 -0.2 1.4
0.9 1.7 -1.1 3.3
-0.6 1.2 -5.9 2.6
-2.9 -3.3 -1.7 -4.1
-2.1
18.5 10.5 50.4 5.9
21.4 9.9 66.0 7.3
30.2 13.3 72.9 8.4
35.1 17.7 82.6 9.2
30.9 14.8 72.4 6.9
28.5
Overall Balance
MENA 4/ Oil exporters 3/ Others 4/ GCC
-2.4 -1.7 -3.3
External Debt Copyright © 1997. International Monetary Fund. All rights reserved.
MENA 4/ Oil exporters 3/ Others 4/ GCC
12.8 69.1
7.1
(In percent of exports of goods and services ) Debt Service
MENA 4/ Oil exporters 3/ Others 4/ GCC
3.8 2.6 14.9 0.7
7.9 4.8 29.6 0.6
14.1 9.3 34.0 1.4
15.0 10.7 32.2 2.8
11.3 7.9 23.6 4.2
9.3 6.6 19.0 2.3
Source: IMF, World Economic Outlook. 1/ PPP weighted averages. 2/ Excluding Kuwait in 1990 and 1991. 3/ Oil exporters include Algeria, Bahrain, the Islamic Republic of Iran, Kuwait, Libya, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. 4/ Excludes Israel.
-5In the rapidly globalizing world economy, countries' attractiveness for investment is judged not only against their own historical record and prospects, but also vis-a-vis developments in other countries. In this regard, MENA's macroeconomic conditions compare favorably relative to those in emerging markets (Chart 1). In most countries with growing international financial linkages, relatively sound economic fundamentals provide an important cushion against the disruptive impact on the real economy of sudden reversals in capital flows, such as experienced in Mexico (1995) and Thailand (1997). However, MENA's implementation of structural reforms, while accelerating, continues to lag that in many other emerging markets. As a result, the region's investment and saving rates remains well below those in the average developing country, let alone those in developing economies having recorded high rates of economic growth (Chart 2). Unfortunately, not all economies have been participating in the generalized improvements in the region. The Palestinian economy, in particular, has been suffering another year of major disruptions caused by frequent border closures and, until October, Israel's withholding of tax revenues accruing to the Palestinian Authority. These two factors have contributed to worrisome unemployment rates, disrupted public investment, and undermined private investment. Some other economies, such as Lebanon, continue to face challenging financial conditions as they manage the complex task of massive reconstruction and macroeconomic stabilization (Box 1). B.
Macroeconomic Outcomes in 1996-97
Growth in the MENA region picked up to 4.8 percent in 1996, and is projected at about 4percent in 1997. In line with this favorable development, real GDP per capita has also increased for the group as a whole, reversing the declining trend of the previous three years. As a result, the region's real per capita income level is back to its level of 1990. Performance in this respect has been particularly noteworthy among the non-oil exporters, where real per capita GDP is estimated to have grown by about 3 percent in 1996 and a further 1.5 percent in 1997.
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Egypt, the Islamic Republic of Iran, and Sudan are among the countries registering increasing real economic growth rates. Growth in Jordan remained relatively high at above 5 percent, albeit below the annual average of 6 percent recorded in the 1990s. Not all economies registered increasingly buoyant economic growth rates. In Lebanon, for example, the growth rate has been below recent trends reflecting the slowdown in construction and the impact of the April 1996 bombings. Syria also experienced lower growth, as did Morocco owing to the less favorable weather conditions in 1997 and after a year of sharp recovery in GDP. Developments in the Palestinian economy were more worrisome, with output estimated to have remained stagnant or to have contracted for the second consecutive year. Indeed, the pickup in confidence and signs of sustained growth observed earlier have been undermined by recent disruptions to the regional peace process—a process accentuated by border closures and the interruption of revenue transfers. Growth in Israel slowed in 1996-97 owing to the winding down of the effects of the large wave of immigration during 1990-91, the deteriorating security situation, and high domestic interest rates.
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Chart 1. Macroeconomic Conditions are Relatively Sound.
Real GDP Growth 1/
Inflation
(Annual changes, in percent)
(Annual changes, in percent)
8 ,
,8
80
80
- 70
70 Developing countries
*
60
•• •
# • • » •
50
60 • * « • •
0 0
Developing countries
40
• • •
0
«
0
*
* • *
* • * »*
50
• • • • • •
0* 0
—
40
* •
30
30 MENA
20
^
10 I
-2
.
I
.
I
.
I
1980 1982 1984 1986 1988 1990 1992 1994 1996
-2
i
,
i
,
i
i
20
S~
10 1
,
1
,
1
0
1980 1982 1984 1986 1988 1990 1992 1994 1996
Central Government Fiscal Balance
External Current Account
(In percent of GDP)
Copyright © 1997. International Monetary Fund. All rights reserved.
,
*%
(In percent of GDP) 15
15
10
10
Developing countries 0 Developing countries
-5
-10
-15
1980 1982 1984 1986 1988 1990 1992 1994 1996
Source: IMF, World Economic Outlook. 1/ Excludes Kuwait in 1990-93.
-5
-10
I
L
_
1980 1982 1984 1986 1988 1990 1992 1994 1996
-15
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Chart 2. But Investment and Savings Rates are Still too Low...
Gross Fixed Capital Formation (In percent of GDP)
Asia
30
30 Developing countries
20
20 Western Hemisphere
10
1980
1982
1984
1986
1988
1990
1992
1994
1996
10
Gross National Savings
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(In percent of GDP)
30
30
20
20 Western Hemisphere
10
10
1980
1982
1984
Source: IMF, World Economic Outlook. 1/ Excludes Djibouti, Lebanon, and Sudan. 2/ Excludes Lebanon.
1986
1988
1990
1992
1994
1996
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Box 1. Lebanon's Reconstruction Program Since the end of the civil war, Lebanon has embarked on an ambitious program of reconstruction and economic stabilization. The reconstruction effort was initiated in 1992 with the National Emergency and Reconstruction Program (NERP). In 1994, this was integrated into the much more ambitious and widely known Horizon 2000 program, which has become the envelope for all government financed and/or sponsored reconstruction efforts: 1. The Vision. The Horizon 2000 program outlines the government's investment plans for the 1995-2007 period. It goes beyond the initial emergency works under NERP and targets primarily the rehabilitation and expansion of the infrastructure capital stock so as to lay the foundations for future economic growth. In the preparation of the program, the government targeted an annual average real GDP growth rate of 8 percent so as to double per capita GDP by 2007. Taking into account that a sufficient stock infrastructure capital is an essential part of an enabling environment for private sector growth, a frontloaded path for government capital expenditure was a key element of the plan, allowing the public sector to be the catalyst for a general recovery in the economy. Later, growth was envisaged to be driven mainly by private sector activities and investment, allowing the government to reduce its budget deficits and its debt. 2. The Achievements 1993-96. The acceleration in government capital expenditure coupled with the nominal stabilization efforts was associated with high rates of economic growth, with the average annual growth rate during 1993-96 amounting to 7.4 percent. Moreover, the target of Phase I of the Horizon 2000 program, the rehabilitation of basic infrastructure, has largely been achieved. Major benefits are already tangible, including the 24-hour electricity provision for most users, better functioning telecommunication systems, rehabilitated road networks in Beirut and its northern and southern suburbs, and some 1,200 renovated public schools. 3. The Future. The Horizon 2000 Program has always had the character of an indicative framework, allowing the government to adjust to actual needs and macroeconomic constraints. Given recent macroeconomic and public finance developments, the government is adapting its plans accordingly:
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• Focus on social infrastructure. During Phase II, the authorities are now shifting their attention from basic infrastructure to social infrastructure projects to achieve a well-balanced distribution of the reconstruction benefits across sectors, regions, and groups, and to ensure an environmentally sustainable growth. During Phase II, public capital expenditure will target projects in the education, health, water supply, wastewater, and solid waste sectors. Estimates of Phase II projects vary, but investments in the order of US$5 billion over the period 1998-2002 are foreseen. • Greater private sector participation. Given the budgetary constraints and its intention to promote the roles of the private sector and foreign direct investment in the economy, the government has started to increase private sector participation in the reconstruction, including through B.O.T. (Build-operate-transfer) and O.T. (operate-transfer) projects. • More foreign financing. The government also hopes to increase the share of long-term concessional foreign financing, which has been lower than envisaged so far, thereby reducing the budgetary interest burden resulting from the relatively high domestic interest rates. In December 1996, during the "Friends of Lebanon" meeting, the international community pledged grants and concessional loans in the order of US$3.2 billion to support the reconstruction efforts for 1997-2001.
—9— Earlier progress in reducing inflation has been consolidated. The region's average inflation rate, as measured by changes in consumer price indices, declined to 12.4 percent in 1996, and to an estimated 9.6 percent in 1997. This represents a significant reduction from the levels registered in the early 1990s (of 15-18 percent). It reflects the pursuit, in many countries, of greater fiscal restraint and prudent monetary policies. The rate of inflation was 6 percent or below for more than one-half of the countries, and for countries with above average rates, such as the Islamic Republic of Iran, Sudan, and the Republic of Yemen, the rate of inflation was on a sharply declining trend. Inflation in Israel, after showing a rising trend early in 1996, was brought back down by a sharp tightening of monetary conditions in mid-1996 and is likely to fall below 10 percent in 1997. The lower inflation in the region has not only imparted a certain degree of financial stability, but is also helping with efforts to protect the poorest segments of the population. MENA's outstanding external public debt, while still high in some countries, has been on a declining trend while foreign exchange reserves continue to increase. The ratio of external debt to GDP has been reduced from over 35 percent in the early 1990s to 31 percent in 1996, and an estimated 29 percent in 1997. This ratio has declined from 100 percent to 70 percent in the non-oil exporters, while for the oil exporters, it increased initially from 14 percent in 1991 to 22 percent in 1994, before declining to 13 percent in 1997. Likewise, MENA's debt burden, as measured by the ratio of total debt service to total exports of goods and nonfactor services, has declined to 11 percent in 1996 from over 16 percent just two years previously. A further decline is projected for 1997. The recent decline in the external debt indicators reflects both the pursuit of more prudent fiscal policies, with a consequent reduction in the need for external financing of those deficits, as well as, in some country cases, exceptional debt relief from official creditors. For the GCC countries, the improvement in debt indicators reflects the repayment of foreign loans contracted to pay for outlays related to the 1991 regional crisis. In view of these favorable developments, it is not surprising that we have also witnessed a continuing decline in market risk premia and related borrowing costs. Moreover, a number of countries have obtained in 1997 relatively favorable ratings from international credit rating agencies, including at the investment grade level.
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C.
Intermediate Policy Targets
As expected, these improvements in macroeconomic indicators have reflected strengthening intermediate policy variables. MENA's sustained improvement in the fiscal balances has been particularly impressive. The overall government deficit for the region declined from close to 9 percent of GDP in 1986-90 to less than 3 percent of GDP in 1996, and an estimated 1.8 percent of GDP in 1997. The reduction has been most pronounced in the oil-producing countries, where the fiscal balance is projected to be only slightly in deficit (of 1 percent of GDP) in 1997. Clearly, the sharp increase in oil prices in 1996 and consequent impact on oil revenues explains in part the dramatic fiscal improvement. In virtually all cases, the gains from the oil price increases were not used to relax spending constraints but were directed
-10toward reducing public indebtedness and/or increasing official reserves. In fact, in many countries undertaking fiscal reforms, consolidation efforts have been intensified in the past two years. The improved budgetary position has facilitated the implementation of prudent monetary policy while alleviating constraints on the provision of noninflationary credit to productive private sector activities. The expansion in liquidity associated with the heavy financing requirements of the budget, particularly in the non-oil exporting economies— growth in broad money averaged about 22 percent in the early 1990s for this group—had fueled inflationary pressures. However, with the adoption of fiscal restraint and an improvement in budgetary positions, broad money growth for these countries has been reduced to 16.5 percent in the past two years, permitting a reduction in inflation and an improvement in external positions. Within the overall credit expansion, there has been a change in composition, allowing resources to be redirected in support of private sector development. The external current account position has strengthened. The region as a whole recorded a small current account surplus of 0.7 percent of GDP in 1996, with the same projected for 1997. The non-oil exporting countries registered a deficit of 4.7 percent of GDP in 1996, reflecting primarily higher import costs associated with the rise in oil prices and higher cereal prices. The oil exporters benefited from oil export price increases, which together with relatively stable net service receipts, resulted in a current account surplus of 4 percent of GDP in 1996, with a somewhat smaller surplus projected for 1997.
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In sum, the favorable reversal of past economic trends in the region reflects the strengthening of reforms by a number of countries. Some MENA countries that initiated macroeconomic stabilization programs in the early 1990s, or even earlier—for example, Israel, Morocco, Tunisia, Egypt, and Jordan—have been reaping rewards for a relatively sustained period and are now moving more vigorously to implement structural reforms (Box 2). Others, which have recently embarked on comprehensive macroeconomic stabilization programs—for example, the Islamic Republic of Iran and the Republic of Yemen—have already begun to show favorable results. Still others have yet to embark on full-fledged economic reform programs and have thus not shared sufficiently in the economic turnaround experienced by many countries in region.
III. The Intensification of Structural Reforms A.
Addressing Structural Impediments
Full development of the economic potential of the region has in the past been constrained by macroeconomic instability and serious structural impediments.3 With several 3
Israel differs in economic circumstances from most countries in the region. It is considered among the advanced economies in the sense that its economic structure is most akin to that of the industrial countries (a distinguishing feature of its industrial sector is the preponderance of high-tech industries). Furthermore, its economy is highly integrated in the world economy.
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Box 2. Egypt: From Stabilization to Structural Reform Egypt has made commendable progress in achieving macroeconomic stability since the early 1990s. Key indicators for 1996/97 demonstrate continued progress: • Inflation moderated to 6.2 percent (from 21 percent in 1990/91). • A prudent fiscal policy resulted in a deficit of 0.8 percent of GDP (from 18 percent in 1990/91). • Tight monetary conditions were maintained. • The external position strengthened, with surpluses on both current and capital accounts, and an overall balance of payments surplus US$1.3 billion. Reserves stand at more than US$20 billion—equivalent to 16 months of imports. Building on the success of stabilization measures, the authorities have begun to turn their attention to the structural reform effort. Privatization. The program was initiated in 1996, and has recently been intensified. Majority divestitures of government shares have been completed for 42 companies, including in the industrial, agricultural, construction, retail, and tourism sectors. More than one-fourth of the stateowned enterprise sector is now in private hands. Tax and civil service reform. GST coverage has been extended and the income tax system reformed, so as to reduce distortions, encourage compliance, simplify administration, and widen the tax base. Civil service reform encompassing measures to streamline and reduce manpower is in progress. Financial sector reform. The government has recently divested majority public holdings in jointventure insurance companies and banks and has announced plans to divest ownership in a major public bank. Prudential regulation and bank supervision have been strengthened, and instruments for active use of indirect monetary policy are being developed. Trade liberalization and exchange system. Tariff rates and import surcharges have been reduced; import bans have been eliminated and replaced with tariffs; and steps have been taken to enhance the operations of the foreign exchange market. The capital account is free of restrictions. Deregulation. The regulatory framework is being simplified to encourage private sector investment, and steps are under way to liberalize the rental property market. Energy price distortions are being removed.
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As a consequence of recent actions..... Buoyed by strong macroeconomic performance and structural reform, confidence has risen, as demonstrated by the following developments: • Real GDP growth increased to 5 percent. • Egypt's access to international capital markets has increased and the terms, improved. • Private sector investment has risen. • Portfolio and foreign direct investment has increased. • Stock market activity has surged. Investors are now looking to the further intensification of the structural reform program.
-12countries having achieved significant improvements in their macroeconomic positions, emphasis is now firmly being placed on eliminating structural impediments that have undermined investment and factor productivity gains. These impediments have also distorted the region's interlinkages with the rapidly globalizing world economy while limiting the beneficial spillover effects domestically of the economic and financial improvements. While it is difficult to quantify the extent of structural rigidities in MENA, a review of three basic features of the region provide an important, albeit far from comprehensive indication, of the structural constraints that have inhibited economic growth and employment creation. These features are now being addressed as governments in the region establish the conditions for sustained economic growth. • First, the region's investment performance has been disappointing. Looking at three indicators of investment activity—domestic (private and public) investment, foreign direct investment, and portfolio investment (Box 3)—it can be seen that the MENA region has been insufficiently attractive in both absolute terms and relative to other regions.4 While political and other risk factors have had an impact, the main factor is an insufficiently strong domestic economic "enabling environment," including structural impediments to a high return/low risk outcome for domestic, regional, and international investors.
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• Second, the government's dominant role in the economy has tended to undermine productive private sector activities rather than support them.5 In some cases, it has also encouraged the emergence of a rather insular private sector that is more comfortable living on rents and off the largess of the government rather than follow the example of the successful Asian economies in competing internationally for the more prosperous world markets. • Third, the region's institutional and human development strategies have lagged, weakening a fundamental pillar of a successful development strategy. Public institutions in several countries in the region suffered gradual erosion, while the private sector progressed slowly in establishing an internationally competitive corporate culture and structure. Spending on social sectors, while relatively high for the region as a whole, has been shown to have had relatively low productivity.6 As a result, the contribution of one of the region's key attributes—its human resource base—has been well below potential. Many countries of the region have now turned their attention to structural reform and economic liberalization in an effort to create an environment that is conducive to investment, while ensuring that policies needed to maintain financial balance remain in place.
4
See Bisat, El-Erian, and Helbling (1997); and El-Erian and Sheybani (1997). See Eken, Helbling, and Mazarei (1997); and World Bank (1995). 6 This is discussed in Shafik (1994) and Serageldin (1996). 5
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Box 3. Investment as the Spur for Growth—How Has MENA Fared? Growth performance in the 1980s through the mid-1990s has been disappointing in MENA, especially in comparison with the high rates achieved in other regions of the world. Given the importance of investment to growth, a review of MENA's investment performance might help to explain the underlying causes of weak growth in the region. (For more detailed analysis, see Bisat, El-Erian, El-Gamal, and Mongelli, 1996; and Bisat, El-Erian, and Helbling, 1997.) Past investment performance in MENA has been weak.... •
The MENA region has suffered from an unimpressive investment performance since the early 1980s, particularly when compared with the high investment rates of the 1970s in MENA and the high rates characteristic of the fast growing Asian countries. The slowdown in investment coincided with the fall in oil prices of the 1980s, which dramatically reduced government revenues available to support the large capital investment programs that had been pursued by governments in oil producing states. Non-oil exporting countries experienced an even greater decline in investment, as they found it necessary to curb expansive public investment programs in view of deteriorating macroeconomic balances.
•
The flow of foreign direct investment (FDI) into the MENA region has also been sluggish at best. Since the 1980s, FDI has averaged between 0.5 percent and 0.7 percent of GDP, most of which was directed to the energy sector. In Asia, FDI averaged more than 1 percent of GDP a year over this period. Portfolio investment has also traditionally been low in most countries of the region.
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But there are recent signs of an improvement.... •
A recent pickup in investment in both oil and non-oil MENA countries reflects growing private sector confidence. Capital inflows to the region have increased, most notably in Egypt and Jordan. A number of countries have seen renewed access to international capital markets (Egypt, Jordan, Lebanon, Morocco, and Tunisia). Many have experienced a surge in portfolio investment as evidenced by stock market activity (Egypt and certain GCC countries). Some MENA countries have received investment grade ratings by international ratings agencies.
•
Also noteworthy is the dramatic shift from public to private sector investment in the region, especially in the Maghreb countries. Traditionally, public sector investment has overshadowed private sector investment activity in MENA, in contrast to the pattern observed in developing countries as a group and in the high growth Asian economies (see chart). While this characteristic reflects in part the dominance of investment by the state in oil-related activities in MENA, it also represents, more generally, the legacy of the policies pursued in the 1970s, which placed the state at the center of most productive activity. Since 1991, there has been a gradual reversal of this pattern, with private investment increasing and public investment declining, reflecting the liberalization of policies, including privatization and deregulation, which has boosted private sector investment.
- 14 Box 3. (Concluded) Foreign Direct Investment, 1980 - 95 (In percent of GDP) 3.0
3.0
0.0
0.0
-0.5
-0.5
-1.0 1980
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-1.0 1995
Private and Public Investment, 1980 - 96 (In percent of GDP)
Public Investment
1980-84
1985-89
1990-94
1995-96 MENA •
1980-84 Developing countries H
1985-89
1990-94
1995-96
Asia
Private and Public Investment in the MENA Region, 1980 - 96
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(In percent of GDP) 16
16
14
14
12
12
10
10
1980
1981
1982
1983
1984 1985
1986
1987 1988 1989
1990 1991
1992 1993 1994 1995 1996
-15As detailed in recent IMF publications on the region (see listing at the back of this study), at the forefront of the structural policy agenda, to varying degrees across the region, are reforms aimed at: •
enhancing financial intermediation;
•
addressing inefficiencies in the labor market and training schemes;
•
deregulating domestic markets and production structures;
•
liberalizing highly protective external trade regimes;
•
strengthening institutions; and
•
improving the availability and coverage of data to permit more timely analysis and policy responses, as well as better functioning markets.
The objective of this combination of policies is to develop more flexible economies that are guided by market forces and that can quickly respond to structural changes in the domestic and world economies. At the same time, the role of the State is being redefined to be more supportive of productive private sector activities. While much remains to be done (as described in Section IV), there are signs that progress has been made in these areas and that the momentum for reform is accelerating in several countries in the region. Indeed, after being essentially marginalized from the process of globalization of financial markets, the region is now finding a more enthusiastic reception on the part of international capital markets: the flow of foreign capital to the region is increasing, sovereigns and corporates are finding a healthy appetite abroad for their debt and equity issues, and international credit ratings agencies have awarded relatively strong ratings to several countries and companies in the region. We are also witnessing increased interest on the part of foreign direct investment. The following subsections discuss some of the more important ongoing structural changes.
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a.
Redefining the role of the government
A key element of structural reform among MENA countries has been to facilitate a more efficient allocation of resources and to reduce and redefine the role of government consistent with the requirements of a modern and dynamic economy. As part of this effort, privatization programs are underway in many MENA countries, although the pace and scope of these programs varies considerably, with Egypt, Kuwait, and Morocco making the most progress (Box 4 outlines Kuwait's privatization program). Privatization efforts are spreading to most countries in the region. Most recently: •
Jordan has expanded significantly the range of its privatization effort;
•
the Islamic Republic of Iran has resumed the divestiture of government shares in industrial enterprises through sales on the Tehran Stock Exchange; and
•
Israel intensified its privatization program. In July, the government signed an agreement to sell 12.5 percent of the electric company's stock as part of a plan
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Box 4. Kuwait's Privatization Program Origin - Large government equity participation originated in the form of state support for economic development projects in the private sector, and subsequently, the acquisition of equity held by the private sector in the aftermath of the financial market crisis of the early 1980s. - In 1994, the government adopted a comprehensive privatization program that encompasses the sale of government equity shares in existing companies (with the exception of the core oil activities), as well as the transfer of management of public utilities, ports, and health services to the private sector. Objectives - Broaden the scope of private sector activity and thereby increase the overall efficiency of the economy. - Strengthen the ties to the domestic economy by enhancing local investment opportunities. - Deepen the stock market. - Create employment opportunities for Kuwaiti citizens. - Contribute to the strengthening of public finances. Divestiture of government shares - At the outset of the privatization program, the Kuwait Investment Authority's (KIA) holdings of both listed and unlisted shares in some 50 companies were valued at KD 850 million, and represented between 5 percent and 99 percent of total equity, depending on the company. Since mid-1994, the KIA has sold equity shares in 22 companies, for a total of KD 760 million. The remaining holdings, now valued at some KD 1 billion, are expected to be sold over the next two years.
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- The pace of the divestiture is largely driven by the absorptive capacity of the market. Privatization methods have included public subscription of shares, open auctions, as well as a combination of the two. Most of the public offers have been largely oversubscribed. Next step: Privatization of public services and utilities - Privatization of public utilities, including telecommunications, and water and electricity—currently administered by government ministries—is awaiting the adoption of a Privatization Bill before the National Assembly. - In addition to issues related to the method and scope of privatization, the law covers the regulatory and pricing regime of the utilities concerned in view of their monopolistic nature. Issues of competition are also being addressed in the preparation of the privatization of the public transportation company and Kuwait Airlines. Moreover, plans are under way for the privatization of some 30 retail gas stations.
-17to reduce the state's share from 76 percent to 51 percent and, in early September, 43 percent of a major bank was sold. A number of countries are joining the privatization effort. Algeria has published a list of firms selected for privatization over the coming few years. The Republic of Yemen has also initiated its program, which is expected to proceed once initial difficulties related to the bidding process are resolved. MENA's privatizations have had a number of direct and indirect beneficial effects. In terms of direct impact, and while information is not yet comprehensive in view of the limited set of observations, initial indications are that several of the privatized firms are being more productive, have enhanced their capital, and have not pursued massive layoff programs. The indirect effects have included an important impetus to the development of domestic stock markets, attraction of foreign capital to related activities and, very importantly, a signal to the private sector as to the government's reform seriousness. Facilitating greater reliance on market mechanisms has also encompassed price and marketing reform, allowing the private sector into activities previously reserved only for the public sector, and upgrading the regulatory structure. In this regard, several MENA countries have taken further steps to remove price distortions (including Egypt, the Islamic Republic of Iran, Morocco, Sudan, and the Republic of Yemen).
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Algeria has taken far-reaching measures to liberalize price-setting mechanisms, including most recently, eliminating generalized food subsidies (Box 5). Jordan has undertaken an important overhaul of the subsidy system to reduce waste and mistargeting while ensuring government support for private sector importation, storage, and distribution of certain food items. The Republic of Yemen is currently developing a system for more efficiently targeting food subsidies. Public enterprises in the Syrian Arab Republic are now permitted greater price flexibility and the private sector may set its prices freely (with official monitoring)—a step toward full market determination of prices. Many countries have eliminated the concessional and preferential credit allocations in favor of more market-oriented approaches to promoting development of priority sectors. At the same time, recognizing the enormous financing needs for infrastructure developments, several MENA countries have opened up sectors recently reserved exclusively for the public sector. This includes power generation, airports, and roads. Such measures have, in turn, helped to strengthen the structure of the budget by reducing budgetary transfers to privatized enterprises, limiting the expansion of spending on wages and salaries, and cutting outlays on transfers and subsidies. Some countries have also taken measures on the revenue side to broaden the revenue base so as to reduce dependence on volatile revenue sources and better prepare themselves for reductions in external tariffs, including in the context of the Association Agreements with the European Union. For example, Egypt, Jordan, and Morocco have expanded the scope of their general sales tax, while Djibouti has extended the corporate tax to all enterprises and established a progressive tax on properties.
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Box 5. Algeria: Letting the Markets Set Prices The Algerian reform package launched in April 1994 is aimed at establishing a market-based outward-oriented economy. Thus, a cornerstone of the package was the necessary realignment of relative prices and subsequent price liberalization. This strategy was pursued through the following key measures: • Pursuit of an active exchange rate policy. At the onset of the program, a 50 percent exchange rate devaluation corrected for the overvaluation of the dinar. A gradual shift in the exchange rate regime from a peg to a managed float allowed for greater flexibility in the event of adverse shocks. In addition, an interbank foreign exchange market was introduced at end-1995. Overall, between 1993 and 1996, the real effective exchange ratexiepreciated by about 30 percent as a result of nominal depreciation combined with tight demand management and incomes policies. • Liberalization of interest rates. Notwithstanding a partial liberalization in the early 1990s, interest rates were still negative in real terms in 1994. The deregulation of interest rates, together with the deceleration in inflation brought about by tight demand management policies, has led to the emergence of positive real interest rates since 1996. • Liberalization of prices. At the beginning of 1994, Algeria had a generalized system of subsidies, which cost the budget more than 5 percent of GDP while giving rise to shortages and black markets. In 1994, prices of inputs for agriculture and housing construction were freed, and controls on retail prices and profit margins were lifted for most goods and services, except for a limited number of products including a few essential food staples, energy products and public transportation fares, which remained subsidized. The generalized subsidies on these goods were eliminated over the following two years. This was done progressively so as to mitigate the social impact and repercussions on the general price level. The remaining consumer subsidy on gas and electricity tariffs (less than 1 percent of GDP in 1996) is to be phased out by end-1997.
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• Reform of social safety net. To cushion the impact of the exchange rate depreciation and the elimination of generalized subsidies on the most vulnerable groups of society, the authorities reformed the social safety net. They replaced cash transfers that were both poorly targeted and costly to the budget by a decentralized public works program and an increase in the transfers received by pensioners and the disabled. • Trade liberalization. The realignment in relative prices was accompanied by a major liberalization of the external trade and payments system, to provide appropriate market incentives to the productive sector. In 1994, the authorities dismantled the cumbersome system of exchange controls, giving importers free access to foreign exchange for all but a short list of imports. This negative list was eliminated at the end of 1994. In addition, the authorities lowered the maximum custom duty rate from 60 percent in 1994 to 45 percent as of January 1, 1997, and consolidated its tariffs into five rates. Algeria accepted Article VIII obligations in September 1997, and the Algerian dinar will be fully convertible for current account transactions by end-1997.
-19b.
Development of the private sector
As a complement to reducing the role of the state, most MENA countries are taking steps to encourage the development of the private sector through deregulation, opening their economies to greater foreign participation, adopting transparent civil and commercial procedures, and harmonizing tax provisions. Until now, a number of MENA countries have been characterized by a complex bureaucratic network of regulations that have inhibited investment. Indeed, the bureaucracy of the region had assumed almost legendary proportions in the perceptions of certain investors. While the policy agenda remains large, it is encouraging that some countries have recently introduced legislation aimed at simplifying investment procedures and streamlining business applications (the guichet unique in Mauritania, the one-stop shop for licensing of new investment projects in Lebanon, and the Unified Investment Law in Egypt). Morocco has recently adopted a new commerce code and corporate law, increasing the transparency of the legislative framework governing foreign and domestic private investment. Similar steps have been taken by Jordan. Labor market concerns are rightly at the forefront of the policy agenda for most MENA countries. This is also the case for the members of the GCC, which, while having no major unemployment problems at this time, face the prospects of a rapidly increasing labor force.7 The labor situation is rendered more complex by the interaction of the fiscal retrenchment and civil service reform being undertaken by countries where the government has essentially played the role of employer of first and last resort. Measures outlined above aimed at expanding private sector activity have as a central objective the absorption of the increasing number of nationals seeking work. In support of that goal, some countries have taken action to strengthen training and education programs, so as to provide the population with the skills needed by the emerging private sector. At the same time, however, while development plans of certain MENA countries set out clear goals for reducing structural rigidities in the labor market, concrete steps remain to be taken in most cases. The difficulties that Europe is having in this regard serve as an important reminder as to the complexity of the policy challenge and the need to move decisively.
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c.
Reforming the financial and external sectors
Financial sector reform in progress in many MENA countries is helping to enhance the integrity of financial systems, promote financial intermediation, and improve the investment climate. Its importance cannot be overstressed. The financial sector acts as the nerve center of the economies and problems there often spread to other sectors. Moreover, the history of banking problems in a very large number of industrial and developing countries illustrate the importance of maintaining progress, especially during the "boom times" when the seeds of future problems are often sown.
7
See El-Erian and Sassanpour (1997) and Sassanpour and others (1997).
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Some countries of the region have taken, or are considering, steps to open the banking sector and local stock markets to greater foreign participation. Prompted by past difficulties in the banking sector and, in certain countries, concern about moral hazard, prudential regulation and bank supervision have been strengthened in many countries. In addition, with the recent explosion in the activities of local stock markets, the authorities of the countries concerned are taking actions to ensure stronger market infrastructure, particularly with respect to payments and settlement, custodian services, and information disclosure. Israel has been undertaking an extensive program of financial liberalization for a number of years.8 As the financial markets in the region have tended to be rather thin until recently, the banking authorities in some countries have taken steps to deepen the financial sector through the introduction of new instruments (the Islamic Republic of Iran, Jordan, and Lebanon), reform of the stock market (including, for example, by privatizing the management—Morocco and Tunisia), and development of a secondary market (Egypt and Jordan). (Boxes 6 and 7 outline recent progress in Jordan and Tunisia.) MENA economies, particularly the non-oil ones, have among the most protective external trade regimes in the world.9 Recognizing the benefits of globalization, and the need to compete in an increasingly integrated world environment, a growing number of MENA countries have committed regionally and internationally to opening their markets through exchange and trade liberalization. Such commitments have been made in the context of World Trade Organization (WTO) membership, Association Agreements with the European Union, reinvigoration of the Arab free-trade initiative, and unilateral actions. Some countries have already undertaken concrete steps to ensure greater market access to foreign goods and services. For example, Egypt has recently implemented two further rounds of tariff-cuts that are expected to enhance competition, as well as improve the welfare of consumers. Jordan has also reformed the tariff system, and reduced import restrictions significantly. Looking forward, both countries, as well as Lebanon and the Syrian Arab Republic, will face the challenges being confronted by Israel, Morocco, and Tunisia as they implement the free-trade component of Association Agreements with the European Union.
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d.
Strengthening institutions and enhancing information dissemination
Institution building is an important part of structural reform programs of many countries. Efficient and transparent institutional structures, whether those carrying out key government functions and policies, or those providing the judicial and legislative framework for commercial activity, are key to creating an enabling environment for investment and promoting a vibrant private sector. The challenge is a particularly acute one for the lowincome economies of the region and those emerging from years of disruptions or occupation.
8 9
See Clifton (1994). See Alonso-Gamo, Fennell, and Sakr (1997).
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Box 6. Jordan: Recent Financial Sector Reforms .
The Central Bank of Jordan (CBJ) has implemented a number of important measures over the last year to deepen and liberalize the financial system. • Reserve requirements. To allow more flexibility in holdings of required reserves, regulations on reserve requirements were changed in November 1996. Banks are now permitted to maintain a daily minimum balance of 80 percent of their reserve requirements with the CBJ during a one-month maintenance period and may hold the remaining 20 percent on a period-average basis during the maintenance period. Moreover, to eliminate discrimination against intermediation in the Jordan dinar (JD), the reserve requirement on foreign currency deposits was lowered from 35 percent (remunerated) to 14 percent (nonremunerated). Regulations on reserve requirements on dinar and JD deposits are thus identical. • Resident and nonresident accounts. To facilitate banking operations, the distinction between these accounts was abolished for several types of operations in November 1996. These include identical treatment of resident and nonresident foreign currency deposits (FCDs) with respect to current payments, elimination of the ceiling on residents' FCDs, permission to banks to manage investments in foreign currencies for both residents and nonresidents, and the application of identical regulations governing margin foreign exchange transactions to residents and nonresidents. • Swap operations. To enhance the efficiency of the foreign exchange markets, swap operations in foreign exchange are now permitted as of November 1996, allowing bank clients to sell foreign exchange at the spot rate and repurchase it at a forward rate for any period of time. • Auctions of CBJ Certificates of Deposit (CDs). Starting last April, the authorities have modified the auction procedure for CDS, allowing more flexibility in interest rates while also lengthening the maturities of CDS offered (to include 12 months in addition to 3 and 6 months maturities).
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• Liberalization of the capital account. The CBJ liberalized all transactions in foreign exchange last June. Restrictions on foreign investment have been relaxed and the rules and regulations relating to the Amman Financial market have been improved, contributing to increased investor interest in Jordan. In addition to these measures, the authorities are also undertaking reforms in the areas of money market development, banking supervision and regulation, payment system reform, and the introduction of deposit insurance.
Djibouti and Mauritania are taking steps through civil service reform and by enhancing policymaking capacity, with support from the international community. Nowhere is the importance of institution building more clear than in the Palestinian economy, which has had to establish the major institutions required to administer and implement economic policy. Here, the authorities, together with the international community, are putting in place sound budget procedures and tax administration, as well as set in place the basic functions
-22-
Box 7. Tunisia: Recent Financial Sector Reforms Shift to indirect instruments of monetary policy • General controls on interest rates were abolished in 1994. Preferential interest rates under a mandatory lending scheme, whereby banks had to lend at least 10 percent of total deposits to certain priority sectors (agriculture, export activities, and small- and medium-sized enterprises) were abolished in November 1996. Public sector's preferential access to savings reduced • Since 1989, the system of mandatory holding of treasury bills by banks (legally abolished in 1994) has been replaced by auctions. In 1991, the treasury ceased the issuance of low-interest bearing development bonds (bons d'equipements). The introduction of longer term treasury instruments (bons du tresor negociables) since 1993, sold via public offerings to banks and tradable on the stock market, has contributed to the development of nonbank long-term financing. Banking supervision strengthened and competition increased • Since 1991, prudential supervision by the Central Bank of Tunisia (BCT) has been strengthened, and commercial banks have been moving toward meeting tighter central bank rules on provisioning and a minimum capital-to-risk-weighted-assets ratio of 5 percent, which is considered broadly equivalent to the 8 percent Cooke ratio. The BCT has agreed with individual banks on action plans to phase in full compliance with the new prudential standards by the end of 1997. • Through a partial restructuring of the government-owned agricultural bank (BNA) in 1996, BCT removed a substantial portion of problem loans from the banking system. The average return on assets has been steadily increasing from 0.6 percent in 1993 to 0.9 percent in 1996. The average return on equity declined during 1992-94 reflecting major recapitalization operations, in particular by public banks in 1992 and 1994, which tended to increase the share of private ownership. In particular, the government effectively privatized Banque de Sud, the country's sixth largest bank in October 1997, reducing its stake from 42 percent to 30 percent by not participating in a recent share issue. • To foster competition, an amendment to the banking law in 1994 and subsequent legislation lowered the barriers between the commercial and development banks, while permitting the establishment of new financial institutions (investment banks) that provide financial services such as project finance, equity participation, and portfolio investment. The requirement to open at least one rural branch for every four new branches a commercial bank opens was abolished in late 1996.
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Securities market reform • Based on reforms of the legal and regulatory framework of the stock market in 1989 and 1994, banking and brokerage functions were separated, and management of the Tunis bourse was transferred to the brokers' association. In 1996, an independent supervisory commission (Conseil du marche financier) was set up to ensure transparency of transactions in the stock market and to enforce disclosure and prudential requirements of publicly traded firms. In addition, the Tunis stock market acquired an electronic quotation system. Financial deepening • Various measures of the depth of financial markets confirm the progress made to date. The ratio of M4 (broad money including the bons cessibles) to GDP, an indicator of financial deepening, has approached in recent years levels prevalent in France. Stock market capitalization and turnover have increased sharply since 1993, albeit from a low level. Real interest rates have been positive since the mid-1980s, and have broadly converged during the 1990s toward the level of comparable rates in France.
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required of government, including the conduct of monetary policy. In its massive efforts to reconstruct and rehabilitate after the war, Lebanon is strengthening its institutional framework; most recently in the fiscal area through important steps to strengthen tax administration and computerization. Countries in the region are also starting to recognize the importance of timely compilation and public dissemination of comprehensive information on all sectors of the economy. As recent experience in other regions has demonstrated, dissemination of data is a crucial element in maintaining the confidence of private investors and in ensuring the sound management of the economy. In this light, and given the relatively limited regional tradition of economic data dissemination, many countries of the region have initiated action to strengthen data collection and enhance information systems. Some countries have already begun to disseminate economic data via the Internet (e.g., Israel, Jordan, Kuwait, and Lebanon). e.
Protecting the poor from the adverse effects of reform
The implementation of macroeconomic and structural reforms inevitably have an adverse impact on certain segments of the population, at least in the short term. At times, it is the poorest segments of the population that are least able to protect themselves. Accordingly, effective social safety nets are an integral component of successful economic development efforts.
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To protect the poorest segments of the population that are adversely affected by adjustment, some MENA countries are implementing social safety nets and other social programs, often with the assistance of the World Bank and other creditors and donors. It is recognized that such programs should be appropriately targeted and should, to the extent possible, have limited distortionary effects on economic efficiency and incentives. With these objectives in mind, the Republic of Yemen has established a social welfare fund, introduced an employment generating scheme for unskilled workers, and set up a vocational training program. Jordan is implementing a social productivity package, incorporating a community development fund, a job training and placement service for the unemployed, and a credit facility to encourage the establishment of small enterprises. A Social Fund has been in operation in Egypt for some time with similar objectives. Social issues have come to the forefront in Lebanon, and Phase II of the reconstruction program emphasizes building up the social infrastructure.
IV. The Next Step Forward Despite the improvements in economic prospects in many MENA countries outlined above, much remains to be done in terms of consolidating progress achieved and extending the benefits of macroeconomic stabilization and reform more deeply and widely. The extent of the challenge facing countries in the region should not be underestimated: there are hurdles that must be overcome and opportunities to be seized.
-24-
•
First, many countries in the region are attempting to overcome years of economic underperformance, with entrenched vested interests and deep-rooted structural weaknesses.
•
Second, the external environment, while relatively favorable to many MENA countries in the past two years, cannot and should not be relied upon to generate the windfall gains recently experienced by some countries.
•
Third, the world economy is evolving structurally at an accelerating pace, generating large rewards for reforming economies. As a result, MENA countries face a stark choice: they must either move rapidly to restructure their economies so as to participate in the evolving globalization and reap the rewards such a process offers, or maintain the status quo and risk missing out on the potential to generate the wealth-enhancing effects that will bring greater affluence to their people.
•
Finally, recent setbacks to the establishment of a comprehensive, just, and durable peace continue to undermine potentially positive region-wide economic activities.
As a result of these factors, the onus of comprehensive adjustment and reform falls squarely on the MENA countries themselves. They must create the conditions for sustainable growth if they are to be able to meet the needs of their rapidly-growing populations.
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Given the different starting points of individual MENA economies—in terms of both policies and initial income and wealth conditions—there is no single set of recommendations that fit all countries in the region. However, for presentational purposes—and at the risk of some overgeneralization—it is possible to think of MENA countries as being classified into two groups. In the first group, we find countries that have advanced in macroeconomic stabilization and structural reforms, and that are being increasingly recognized by domestic, regional, and international investors. These countries must maintain their policy efforts, especially in deepening and widening structural reforms which, in international comparison terms, are still lagging. This is critical if they are to succeed in raising savings and investment rates, improve total factor productivity and, thereby, sustain a high rate of economic growth. This will require, in addition to intensifying the reform efforts outlined above, the move to a second generation of reforms that would further advance the transformation of the role of the state in the economy and increase the transparency of government economic operations. These countries also face the challenge of "managing their growing success" in an increasingly rewarding but complex world economy. This year's financial and economic turbulence in Southeast Asia serves as an important reminder of the complexity and stakes of the challenge. The rapid and sizable capital flows that are an important feature (and benefit) of globalization also present countries with a need to maintain a consistently vigilant approach to policymaking. While capital inflows reinforce and reward good policies, policy slippages can generate rapid and destabilizing capital outflows, creating
-25-
unsustainable exchange rate pressures and exposing weaknesses in the financial system. Countries can also be subject to contagion effects—the transmission to the domestic economy of shocks occurring elsewhere in the international economy. There are important lessons to be drawn from other countries' experience with greater integration into the international financial system: there is no room for complacency, even—or perhaps especially—when economic conditions are good. MENA countries will need to manage carefully the risks that accompany the enormous advantages associated with globalization. Diligence in monitoring risks is crucial. In this regard, efforts to increase transparency in financial and government operations and to disseminate to the public timely and comprehensive data on all aspects of the economy will be key to ensuring successful monitoring by both the private and public sectors and to facilitating rapid policy response by the authorities concerned. Outlined above are the challenges facing those countries that have already progressed down the road of economic reform. For the second group of countries, those that have yet to embark decisively on this journey, the path is even clearer. Determined action is needed in the short term if they are to set a sound foundation for growth and avoid being marginalized in the rapidly globalizing economy. For some countries, the immediate challenge is to reverse unfavorable macroeconomic and debt dynamics. For others, there is a need to tackle longstanding weaknesses in the structural aspects of their economies, starting with the exchange and payments system, the financial sector, and the regulatory structures.10 While the initial adjustment is likely to be difficult, the payoff will be large in terms of providing for the basic needs of, and ensuring employment opportunities for, the rapidly growing populations in these countries. Indeed, these countries should draw encouragement from the experience of other economies in MENA. The speed with which the latter have benefited from improvements in investor sentiment—domestic, regional, and international—provides an important demonstration effect as to what is both possible and desirable.
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V. Conclusion Recent economic performance for the region as a whole has been favorable, reflecting not only positive developments in certain aspects of the external environment but, more importantly and increasingly, the pursuit of appropriate domestic policies in many countries. As a result, growth has picked up, inflation has moderated further, and the financial balances—domestic and external—have improved. Of course, performance has varied across countries in the region. Those implementing sustained, far-reaching reforms have generally fared commensurately better. Others, including those facing particularly difficult noneconomic factors, continue to lag with large immediate and medium-term costs for their population.
10
The main areas of reforms are analyzed in IMF (1996).
-26Looking to the future, countries in the region will not be able to, and should not, rely on a favorable external environment to spur growth and achieve their broader social and economic objectives: oil price developments over the medium term are unlikely to be as favorable as they have been in the past two years; a comprehensive, just, and durable peace settlement remains elusive; and many countries will continue to be adversely affected by the vagaries of weather. On the other hand, there are many aspects of the global environment that offer promise for the region, particularly globalization and its impact on increasing trade opportunities, enhancing capital flows, and accelerating the transfer of technology and managerial knowhow. It is clear that MENA countries themselves must take the measures necessary to benefit from the possibilities presented by the evolving global economy. Only by intensifying economic stabilization and market opening reforms will they be in a position to reap the potential benefits of globalization. They will also need to keep in mind that the advantages accompanying greater integration in the global economy bring added risks, for example, sudden reversals of capital flows, and certain limitations on various policy instruments. These are risks that are not only worth taking, but can also be minimized through steadfast economic policy management.
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For those countries that have successfully established sound macroeconomic fundamentals, the next steps will involve creating an environment that will encourage higher domestic savings, and larger and more productive investment, which in turn will promote sustainable growth over the longer term. For the remaining countries, success in meeting the needs of the population will only be attained if action is taken now to address the financial imbalances and reduce the structural impediments to high and sustained growth.
-27ANNEXI
MENA at a Glance Coverage. The MENA region is defined to encompass the economies of the Arab League (Algeria, Bahrain, Djibouti, Egypt, Iraq, Jordan, Kuwait, Lebanon, Libya, Mauritania, Morocco, Oman, Palestine, Qatar, Saudi Arabia, Somalia, Sudan, the Syrian Arab Republic, Tunisia, the United Arab Emirates, and the Republic of Yemen), as well as the Islamic Republic of Iran and Israel.11 The region possesses abundant natural resources and, on average, enjoys a reasonable standard of living. However, individual countries exhibit a broad diversity of characteristics. They vary substantially in natural resources, economic and geographical size, population, and standards of living. Size. The MENA region covers an area of more than 15 million square kilometers and contains more than 300 million people, roughly 6 percent of the world's population. The population of individual countries varies considerably—the smallest among them have a population of about half a million (Bahrain, Djibouti, and Qatar) and the largest have populations of some 60 million (Egypt and the Islamic Republic of Iran). The nominal GDP of the region amounted to some US$720 billion in 1996, roughly 2.5 percent of world GDP and about 14 percent of developing countries' GDP. Population growth. Many MENA countries are experiencing rapid population growth and have a high proportion of young dependents among their population. The average increase in population in recent years has been about 3 percent, although a group of countries (Kuwait, Libya, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) have registered a higher rate of growth of 3.5 percent. Bahrain, Egypt, Lebanon, Morocco, and Tunisia have recorded relatively low rates of population growth (of about 2 percent) compared with the average for developing countries as a group. Per capita income. The region includes some of the poorest countries in the world, with per capita incomes about US$200 (Somalia and Sudan), as well as countries among the high-income group, with per capita incomes ranging between US$14,000 and US$18,000 (Israel, Kuwait, Qatar, and the United Arab Emirates). Regional subgroupings. Many subgroupings have been used in the literature. The most common include:
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• Oil economies. Ten MENA countries are classified as oil-exporting countries. They are Algeria, Bahrain, the Islamic Republic of Iran, Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. Although other countries (such as Egypt, the Syrian Arab Republic, Tunisia, and the Republic of Yemen) also export oil, the role of this sector in their economies is relatively limited. • Cooperation Council for the Arab States of the Gulf(GCC). Member countries of the GCC are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. • The Arab Maghreb Union. The member countries are Algeria, Libya, Mauritania, Morocco, and Tunisia. • Mashreq. This group consists of Egypt, Israel, Jordan, Lebanon, the Syrian Arab Republic, and the West Bank and Gaza Strip.
11In view of the limited availability of data for Iraq, the aggregate figures presented in this publication generally do not include information on this country.
-28ANNEX II
Economic Developments in the GCC Economies As in MENA as a whole, recent economic performance in the GCC has been favorable, reflecting not only the sharp increase in oil prices in 1996, but also the pursuit of fiscal restraint and other reforms. In many respects, the policy issues facing the countries of the GCC are similar to those facing the region as a whole, although the particular nature of the GCC economies—most notably their oil wealth, which accounts for more favorable initial conditions but greater vulnerability to international oil prices; and the segmented structure of their labor markets—present the authorities of these countries with particular nuances (Box 8). This is reflected in the medium-term plans that have been adopted, or are being discussed in these countries.
Macroeconomic performance has been favorable Real GDP grew by 3.7 percent in 1996 and is expected to slow somewhat in 1997 to 2.4 percent (Chart 3). Taking into account terms of trade effects, real per capita income grew sharply in these two years as compared to the early 1990s. Inflation has been low in the GCC, averaging less than 1.5 percent in the past two years, reflecting prudent policies and the de facto peg of the GCC currencies to the U.S. dollar in an open economic system. The most impressive element of economic performance among the GCC countries has been the dramatic improvement in the fiscal balances. Many countries were faced with substantially weaker budgetary situations following the regional crisis of 1990-91. The large expenditures associated with that crisis, together with the slowdown in economic activity in the rest of the world and a decline in oil prices, led to a deterioration in their budgetary positions, with an average fiscal deficit for the group (excluding Kuwait) of 15 percent of GDP in 1991. The drawdown in foreign assets also weakened the "built-in stabilization" role played by the region's investment income.
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Recognizing the need to restore the favorable fiscal positions characteristic of the GCC in the 1970s and early 1980s, these countries have in recent years strengthened the fiscal adjustment effort initiated in the late 1980s, with the objective in most cases of achieving a balanced budget by 2000. Despite high oil prices and the consequent increase in oil-related budgetary revenues, this fiscal effort, particularly expenditure restraint, was maintained in 1996. As a result, the fiscal position improved substantially—to a deficit of 2.3 percent of GDP in 1996. Given the continuation of fiscal consolidation in 1997, the fiscal situation is expected to improve further, with a balanced fiscal position projected for the year as a whole. The higher oil prices in 1996 were also reflected in a strong improvement in the external current account balance of the GCC, which registered a turnaround after five years of deficits, to a surplus of 4.4 percent of GDP in 1996, with only a slightly lower surplus expected in 1997. The external debt of the GCC countries has demonstrated a sharply declining trend in recent years, as a consequence of tighter fiscal policies, together with the repayment of borrowing incurred in the aftermath of the regional crisis.
Structural reforms are progressing On the structural front, the GCC economies are not encumbered with structural rigidities to the same extent as other MENA countries. For example, they have more open exchange and trade regimes, and their financial systems are generally more developed. Nevertheless, and as recognized by governments, there is benefit in pursuing further structural reforms in the areas of labor markets and
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Box 8. Selected Economic Characteristics of the GCC Countries Heavy dependence on petroleum • The hydrocarbon sector dominates the GCC economies. These countries account for 53 percent of the world's proven petroleum reserves and 24 percent of world production. They also hold 14 percent of world's proven natural gas reserves. • This sector contributes about 35 percent of GDP in these countries. • Oil and gas exports account for more than 60 percent of total exports, ranging from 37 percent in Bahrain to 90 percent in Oman. • Oil and gas revenues represent on average 70 percent of total government revenues. Thus, the GCC countries' revenue base and overall fiscal position are highly vulnerable to developments in the international oil markets. Relatively high per capita income • The average per capita income of the GCC of US$10,718 is more than double the world average. Nevertheless, within the GCC, per capita income varies considerably, from US$5,345 in Oman, to US$18,068 in Kuwait. Liberal exchange and trade regime • The GCC countries have pursued exchange systems based on de facto pegs to the US dollar. Monetary policy has been aimed at maintaining stability of the exchange rate as a nominal anchor for the economy. Consequently, inflation has been low and relatively stable, a policy that has served to enhance private sector confidence. • These countries are characterized by relatively open exchange and trade regimes, with virtually no capital controls, full currency convertibility, and fairly liberal trade policies.
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Limited economic diversification Given the heavy dependence on the oil sector in GCC economies, a primary challenge facing these countries has been the diversification of the economic base beyond the petrochemical sector. Policies to promote diversification have included, to varying degrees, development of downstream petrochemical activities, establishment of free trade areas, liberalization of foreign participation laws, establishment of investment promotion agencies, pursuit of privatization programs. A segmented labor market Most GCC countries have segmented labor markets, with heavy reliance on expatriate workers hired on fixed-term contracts (representing from 40 percent to more than 80 percent of the labor force in different GCC countries). The vast majority of GCC nationals are employed in the public sector, which generally pays higher salaries and offers more benefits than the private sector. The national labor force is growing rapidly (given the high population growth rates in the region—3.5 percent a year) presenting difficult challenges for the GCC governments in terms of job creation.
-30-
Chart 3. Macroeconomic Conditions in GCC Countries are Relatively Sound...
Real GDP Growth 1/
Inflation
(Annual changes, in percent)
(Annual changes, in percent) 12
80
10
70 -
8
80 70
y'\ * *
60
•
4
~
60
6 4 2 0 CNI
-4
50 40
50
Developing countries
40
•
30
•
—
30 20
20 10
**•*- 10
GCC
-6 -8 -10
0
0 1
-10
1980 1982 1984 1986 1988 1990 1992 1994 1996
Central Government Fiscal Balance
Copyright © 1997. International Monetary Fund. All rights reserved.
30
20
20
10
10
Developing
-10 countries
.
i
1980 1982 1984 1986 1988 1990 1992 1994 1996
Source: IMF, World Economic Outlook. 17 Excludes Kuwait in 1990-93.
.
1
,
1
,
1
,
-10
(In percent of GDP)
30
• i
1
External Current Account
(In percent of GDP)
-20
.
1980 1982 1984 1986 1988 1990 1992 1994 1996
40
30
40
GCC
30
20
20
10
10
-10
-10
-20
-20
Developing countries
-10
-20
1980 1982 1984 1986 1988 1990 1992 1994 1996
-31the fiscal sector. However, in other respects, their structural problems are similar to those of the broader MENA group, particularly with regards to labor market rigidities, vulnerable structural elements in the budget, and limited competition in certain sectors. The authorities recognize the challenges in these areas, and are implementing reforms. Despite the fiscal measures taken by GCC countries, the dependence on oil-related revenues remains high, with non-oil sources contributing little to the total revenue effort. The structure of spending is also an issue. Spending on government wages and salaries represents a large proportion of total spending. Some countries have begun to take preliminary steps to broaden the revenue base. Saudi Arabia has increased fees and charges and reduced subsidies, and Qatar has increased certain non-oil taxes, and fees for health care and education. More marked progress has been made in the GCC as a whole in restraining current spending, in part through better expenditure management and controls, although capital spending has borne the brunt of adjustment in some countries. Privatization is on the policy agenda for all of the GCC countries, although comprehensive action plans remain to be established in most of them. Noteworthy has been Kuwait's privatization program, which has thus far involved divestiture of government shares totaling KD 760 million (some US$2.5 billion), representing between 5 percent and 99 percent of total equity in individual enterprises. The divestiture program in the United Arab Emirates has gained momentum, and private participation in new joint ventures has been successful, with projects in shipbuilding, insurance, banking, and some utility sectors. The GCC countries are also moving toward allowing greater foreign participation as they endeavor to diversify their productive base, particularly into downstream petrochemical activities. Several large state infrastructure and heavy industrial projects in Saudi Arabia and Oman involve private financing, as do the Equate petrochemical complex in Kuwait and the gas facility projects in Qatar and Oman.
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Financial sector enhancement has encompassed measures to diversify and deepen the market, including through the development of new products. All GCC countries have taken steps, to varying degrees, to strengthen banking supervision and regulation, and the bourses in some of the GCC countries are beginning to permit trading by non-nationals. GCC countries that are seeking to further open their financial sectors include Kuwait, Qatar, and the United Arab Emirates as well as Oman, where the government has drafted a law to increase opportunities for foreigners to participate in trading on the Muscat securities market, and Saudi Arabia, which has witnessed the launch of a mutual fund open to nonresidents. Creating employment opportunities for their growing populations is a key policy objective in a number of GCC countries. Thus far, the focus of policy measures has been on promoting private sector development through various measures, and enhancing education and training programs, with the objective of providing new entrants to the labor market with the skills required for private sector jobs.
-32ANNEX III
GCC Oil and Natural Gas12 GCC economies are heavily dependent on oil production The countries of the GCC are endowed with abundant reserves of hydrocarbons, particularly crude oil. Proven crude oil reserves in the GCC region (estimates of which have increased since the mid-1970s) amount to 464.5 billion barrels, or about 46 percent of global proven reserves in 1995. However, there are wide disparities in petroleum endowments among the GCC countries. Saudi Arabia has the dominant share, more than double the combined share of the next two largest producers—Kuwait and the United Arab Emirates. Oman and Qatar have markedly smaller shares, while Bahrain is a very small producer. In 1995, the average reserve to production ratio in the GCC countries was about 75 years, ranging from more than 120 years in Kuwait and the United Arab Emirates to 15 years in Oman (Table 2). These countries account for about 21 percent of the world's oil production and about 33 percent of global crude oil exports (Tables 3 and 4). Although exports of liquid natural gas (LNG)—derived from natural gas production—from the GCC region have been small in the past, they are set to increase significantly when several export projects are completed in the medium term. Not surprisingly, crude oil production dominates economic activity in the GCC countries. Oil contributes about 35 percent of GDP, 60 percent of export earnings, and 70 percent of revenues on average. In the last decade, petroleum exports have been supplemented by exports of petrochemicals and, more recently, exports of LNG in some countries.
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Given the heavy dependence of GCC countries on oil production, GCC economies are vulnerable to developments in the international oil market. Since 1970, crude oil spot prices have been volatile, although the volatility has declined considerably in recent years compared with earlier periods (Chart 4).13 These fluctuations have added an important element of uncertainty to policymaking among the GCC. Recognizing their vulnerability to developments in the international oil market and the adverse impact of volatile oil prices on economic growth, the GCC countries initiated efforts in the 1980s to diversify their productive base so as to reduce dependence of the domestic economy on oil exports. Typically, crude oil producers sought to increase the value added of the petroleum sector by developing the production of petrochemicals from their abundant supplies of natural gas, propane, butane, and ethane. By 1996, a fairly broad range of petrochemicals were being produced, including basic fertilizers, industrial alcohols, fuel oxidizing agents, synthetic fibers, and plastics. More recently, diversification has also included the development of energy intensive production of metals, including aluminum and iron. The government plays a predominant role in the petroleum sector of GCC economies. The role of upstream foreign investment has been limited in the major oil producing countries, owing to restrictions governing foreign participation. Typically, foreign participation has been confined to joint ventures in refining and petrochemical production. However, the smaller GCC oil producers have encouraged greater upstream foreign participation using production sharing arrangements in exploration and oil field development. These arrangements have been successful in increasing crude oil production capacity.
12
This section has been prepared by Thomas Enger. The standard deviation of real oil prices, a measure of volatility, declined from 14.8 in 1970-85 to 1.9 in 1986-96. 13
-33-
Table 2. GCC Proven Crude Oil Reserves (In billions of barrels unless otherwise noted)
Qatar Kuwait2 Oman Saudi Arabia2 United Arab Emirates Total GCC Proven Reserves Memo Items: Global Proven Reserves GCC share (percent) OPEC Proven Reserves GCC share (percent)
1975
1985
1990
1995
(Years) 1995 R/P Ratio1
5.9 71.2 5.9 151.8 32.2
3.3 92.5 4.0 171.5 33.0
3.0 97.0 4.2 260.1 98.0
3.7 96.5 5.0 261.2 98.1
21 129 15 88 121
267.0
304.3
462.3
464.5
75
666.7 40.0 463.1 44.1
708.9 42.9 535.8 47.2
1,005.6 46.0 771.4 50.6
1,017.0 45.7 785.1 50.2
Source: OPEC; and British Petroleum. 1The Reserve/Production ratio. 2 Includes Neutral Zone.
Table 3. Crude Oil Production, 1989-97 (In millions of barrels a day unless otherwise noted)
Qatar Kuwait1 Oman Saudi Arabia1 United Arab Emirates
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Total GCC Memo Items: Neutral Zone Output2 Global Crude Supply3 GCC share (percent) OPEC Crude Supply GCC share (percent) Crude Oil Price (In billions of U.S. dollars)4
1989
1990
1991
1992
1993
1994
1995
1996
Proj. 1997
0.38 1.47 0.64 5.07 1.91
0.40 1.72 0.68 6.41 2.12
0.39 1.12 0.71 8.23 2.42
0.40 0.31 0.75 8.40 2.29
0.42 1.06 0.79 8.14 2.17
0.41 1.89 0.82 8.10 2.22
0.45 2.14 1.87 8.16 2.20
0.49 2.05 1.92 8.16 2.23
0.59 2.09 1.97 8.27 2.20
9.46
11.33
12.86
12.15
12.58
13.43
14.81
14.85
15.12
0.37 66.06 14.3 23.80 39.7
0.30 66.92 16.9 23.00 49.3
0.13 66.79 19.3 23.30 55.2
0.36 67.09 18.1 24.40 49.8
0.36 67.45 18.7 24.70 50.9
0.39 68.56 19.6 25.00 53.7
0.43 69.94 21.2 25.10 59.0
0.48 72.00 20.6 25.80 57.6
0.54
17.84
22.97
19.33
19.03
16.82
15.89
17.17
20.42
19.38
Sources: IEA; and IMF staff estimates. 1Includes Neutral Zone Share. 2 Shared equally by Kuwait and Saudi Arabia. 3Includes processing gains and OPEC Ngls. 4 Simole average of WTI, Brent, and Dubai.
— 34 — Table 4. Exports of Crude Oil (In thousands of barrels a day unless otherwise noted)
Qatar Kuwait Oman Saudi Arabia United Arab Emirates Total GCC Memo Items: Global Exports GCC share (percent) OPEC Exports GCC share (percent)
1989
1990
1991
1992
1993
1994
1995
320 850 591 3,336 1,650
348 645 628 4,500 1,895
336 85 643 6,526 2,195
362 696 689 6,582 2,060
341 1,440 732 6,293 1,970
323 1,264 743 6,234 1,955
333 1,186 780 6,291 1,925
6,747
8,016
9,785
10,389
10,775
10,517
10,515
25,817 26.1 14,880 45.3
27,099 29.6 16,060 49.9
27,801 35.2 16,960 57.7
28,995 35.8 17,410 59.7
30,176 35.7 17,900 60.2
31,277 33.6 18,020 58.4
32,065 32.8 18,070 58.2
Sources: OPEC; IEA; and IMF staff estimates.
Factors affecting petroleum production All GCC countries, except Oman and Bahrain, are members of OPEC and therefore have assigned quota allocations for crude oil production or oil supplied to the market. The current quota allocations are: Kuwait-2.0 mbd; Qatar-0.378 mbd; Saudi Arabia-8.0 mbd; and the United Arab Emirates-2.161 mbd. The evolution of the overall OPEC production depends, to a large extent, on developments in the global demand for oil and non-OPEC production. Considering the expected evolution of these latter factors, together with the magnitude of their proven reserves, several GCC countries are making efforts to increase crude oil production capacity over the medium term, with the objective of increasing crude oil production capacity by about 2.0 mbd by 2002. The GCC countries thus plan to invest in the range of $4 billion to $6 billion in oil field development in the medium term.14 The trend in the development of crude oil production capacity has been to develop fields that have light, sweet crudes that typically sell for a premium in Asia. In addition, GCC countries have been increasing the production of condensates with the development of new oil and gas fields.15
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Current situation with regard to natural gas production Total proven natural gas reserves (LNG) for the region quadrupled between 1975 and 1995, from 5,100 billion cubic meters (bcm) to 20,100 bcm. Proven associated and nonassociated natural gas reserves vary widely among the GCC countries (Table 5). Consequently, natural gas production has increased over this period, from 48 billion cubic meters (bcm) to 97 bcm (Table 6).
14
This conservative estimate does not include (1) investments in planned expansions where the costs are unknown as yet; and (2) investments needed to maintain the output of existing fields, which could be large because they involve natural gas and water injection. 15 Commonly referred to Ngls and are by-products of both crude oil and natural gas production. They include natural gasoline, naphtha, benzene, and pentane.
Sources: IMF, International Financial Statistics; British Petroleum Co.; and IEA. 1 1970-87 Arab Light; 1988-96 Dubai. 2 In 1990 prices.
(In U.S. dollars per barrel)
Chart4. Nominal and Real Crude Oil Prices, 1970-96 1/
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-35-
-36Table 5. Proven Gas Reserves and Production in 1995 (In billions of cubic meters unless otherwise noted) Proven Reserves1 Bahrain Kuwait Oman Qatar Saudi Arabia United Arab Emirates GCC Total World Total GCC Share (percent)
Production
(Years) R/P Ratio2
147 1,494 283 7,070 5,341 5,831
1.9 6.0 4.8 13.6 40.3 30.1
77 250 58 520 132 194
20,166
96.8
208
150,241 13.4
2,207.0 4.4
Source: Cedigaz. Estimated at 1/1/1996. 2 The Reserve/Production ratio.
Table 6. GCC Total Natural Gas Production (In billions of cubic meters unless otherwise noted)
Bahrain Kuwait Oman Qatar Saudi Arabia United Arab Emirates GCC Total World Output GCC Share (percent)
1985
1990
1995
4.5 4.2 1.8 5.5 18.8 13.2
5.8 4.2 2.6 6.3 30.5 20.1
1.9 6.0 4.8 13.6 40.3 30.1
48.0
69.5
96.7
1,670.1 2.9
1,988.8 3.5
2,119.6 4.6
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Sources: BP; and Cedigaz.
Reflecting changing government strategies, the development of natural gas reserves has become a priority in recent years for several reasons. First, economic growth and population growth in the GCC countries indicate increased demand for gas to generate electricity for both business and residential use. Second, urban and agricultural development have increased the demand for water, which requires electrical power for desalination. Third, governments have recognized the important contribution to domestic budgetary revenues from exports of LNG and associated condensates, as well as from the domestic sale of natural gas for feedstock. Fourth, natural gas feedstock is the basis for the further development of the petrochemical business in the region—an important element of governments' economic diversification strategy.
-37-
References Alonso-Gamo, Patricia, Annalisa Fedelino, and Sebastian Paris Horvitz, 1997, "Globalization and Growth Prospects in Arab Countries," IMF Working Paper No. 97/125 (Washington: International Monetary Fund). Alonso-Gamo, Patricia, Susan Fennell, and Khaled Sakr, 1997, "Adjusting to the New Realities: MENA, the Uruguay Round, and the European's Mediterranean Initiative," IMF Working Paper No. 97/5 (Washington: International Monetary Fund). Clifton, Eric, 1994, "Financial Liberalization in Israel," IMF Paper on Policy Analysis and Assessment 94/14 (Washington: International Monetary Fund). Bisat, Amer, Mohamed A. El-Erian, and Thomas Helbling, 1997, "Restoring the Boom: Growth, Investment, and Savings in the Arab World," IMF Working Paper No. 97/85 (Washington: International Monetary Fund). Eken, Sena, Thomas Helbling, and Adnan Mazarei, 1997, "Fiscal Policy and Growth in the Middle East and North Africa Region," IMF Working Paper No. 97/101 (Washington: International Monetary Fund). El-Erian, Mohamed A., and Cyrus Sassanpour, 1997, "GCC's Macroeconomic Policies," in The GCC in the Twenty-First Century, ed. by Julia Devlin (Washington: Georgetown University). El-Erian, Mohamed A., and Sheybani, S., 1997, "Private Capital Flows in the Development of the Arab Countries," paper presented at The Cairo Papers' Sixth Annual Symposium: The Middle East and Development in a Changing World, January. International Monetary Fund, 1996, "Building on Progress: Reform and Growth in the Middle East and North Africa" (Washington). International Monetary Fund, 1997, World Economic Outlook, Spring and Fall (Washington). Sassanpour, Cyrus, Ghazi Joharji, Alexei Kireyev, and Martin Petri, 1997, "Labor Market Challenges and Policies in the Gulf Cooperation Council Countries," in Financial Systems and Labor Markets in the Gulf Cooperation Council Countries (Washington: International Monetary Fund).
Copyright © 1997. International Monetary Fund. All rights reserved.
Serageldin, Ismail, 1996, paper presented to the Arab Regional Conference on Populations, Cairo. Shafik, Nemat, 1994, "Big Spending, Small Returns: The Paradox of Human Resource Development in the Middle East" (Washington: World Bank). World Bank, 1995, "Claiming the Future: Choosing Prosperity in the Middle East and North Africa" (Washington: World Bank).
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Recent IMF Publications on the Middle East and North Africa Region (1994-97) Books and Seminar Volumes Financial Policies and Capital Markets in Arab Countries, edited by Said El-Naggar, 1994. The Uruguay Round and the Arab Countries, edited by Said El-Naggar, 1996. Currency Convertibility in the Middle East and North Africa, edited by Manuel Guitian and Saleh M. Nsouli, 1996. The Social Impact of Economic Reform on Arab Countries, edited by Taher Kanaan, 1997.
Occasional Papers No. 117. Resilience and Growth Through Sustained Adjustment: The Moroccan Experience, by Saleh M. Nsouli, Sena Eken, Klaus Enders, Van-Can Thai, Jorg Decressin, and Filippo Cartiglia, 1995. No. 120. Economic Dislocation and Recovery in Lebanon, by Sena Eken, Paul Cashin, S. Nuri Erbas, Jose Martelino, and Adnan Mazarei, 1995. No. 136. Jordan: Strategy for Adjustment and Growth, edited by Edouard Maciejewski and Ahsan Mansur, 1996. No. 150. Kuwait: From Reconstruction to Accumulation for Future Generations, by Nigel Chalk, Mohamed A. El-Erian, Susan Fennell, Alexei P. Kireyev, and John Wilson, 1997. Forthcoming. Macroeconomic Stabilization and Systemic Transformation: The Algerian Experience, by Karim Nashashibi, Patricia Alonso-Gamo, Alain Feler, Stefania Bazzoni, Nicole Laframboise, and Sebastian Paris-Horvitz.
Pamphlets Growth and Stability in the Middle East and North Africa, by Mohamed A. El-Erian, Sena Eken, Susan Fennell, and Jean-Pierre Chauffour, 1996. Policy Challenges in the Gulf Cooperation Council Countries, prepared by staff of the Middle Eastern Department, 1996.
Copyright © 1997. International Monetary Fund. All rights reserved.
Building on Progress: Reform and Growth in the Middle East and North Africa, prepared by staff of the Middle Eastern Department, 1996. Recent Economic Developments, Prospects, and Progress in Institution Building in the West Bank and Gaza Strip, prepared by staff of the Middle Eastern Department, 1997. A Global Integration Strategy for Mediterranean Countries: Open Trade and Market Reforms, by Oleh Havrylyshyn, 1997. Financial Systems and Labor Markets in the Gulf Cooperation Council (GCC) Countries Middle Eastern Department, 1997.
Working Papers No. 94/55. "The Arab Maghreb Union," by Mohamed Finaish and Eric Bell. No. 94/103. "Emerging Equity Markets in the Middle Eastern Countries," by Mohamed A. El-Erian and Manmohan S. Kumar (also published in IMF Staff Papers, Vol. 42, June 1995).
-39No. 94/129. "Dollarization in Lebanon," by Johannes Mueller. No. 95/69. "The Parallel Market for Foreign Exchange in an Oil Exporting Economy: The Case of Iran, 1978-1990," by Adnan Mazarei. No. 95/97. "Imports Under a Foreign Exchange Constraint: The Case of the Islamic Republic of Iran," by Adnan Mazarei. No. 96/7. "Effects of the Uruguay Round on Egypt and Morocco," by Clinton R. Shiells, Arvind Subramanian, and Peter Uimonen. No. 96/30. "Is MENA a Region? The Scope for Regional Integration," by Mohamed A. El-Erian and Stanley Fischer. No. 96/124. "Investment and Growth in the Middle East and North Africa," by Amer Bisat, Mohamed A. El-Erian, Mahmoud El-Gamal, and Francesco Mongelli. No. 96/136. "Mobilization of Saving in Developing Countries: The case of the Islamic Republic of Iran," by Mohamed A. El-Erian and Manmohan S. Kumar. No. 97/5 "Adjusting to the New Realities: MENA, Uruguay Round, and the European Union's Mediterranean Initiative," by Patricia Alonso-Gamo, Susan Fennell, and Khaled Sakr. No. 97/8. "External Stability Under Alternative Nominal Exchange Rate Anchors: An Application to the GCC Countries," by Zubair Iqbal and S. Nuri Erbas. No. 97/47. "Intra-Industry Trade of Arab Countries: An Indicator of Potential Competitiveness," by Oleh Havrylyshin and Peter Kunzel. No. 97/22. "Broad Money Demand and Monetary Policy in Tunisia," by Volker Treichel. No. 97/81. "Financial Sector Reforms in Algeria, Morocco, and TunisiaCA Preliminary Assessment," by Abdelali Jbili, Klaus Enders, and Volker Treichel. No. 97/85. "Restoring the Boom: Growth, Investment, and Savings in the Arab World," by Amer Bisat, Mohamed A. El-Erian, and Thomas Helbling. No. 97/105. "The Egyptian Stabilization Experience: An Analytical Retrospective," by Arvind Subramanian. No. 97/101. "Fiscal Policy and Growth in the Middle East and North Africa Region," by Sena Eken, Thomas Helbling, and Adnan Mazarei.
Copyright © 1997. International Monetary Fund. All rights reserved.
No. 97/125. "Globalization and Growth Prospects in Arab Countries," by Patricia Alonso-Gamo, Annalisa Fedelino, and Sebastian Paris-Horvitz.
Papers on Policy Analysis and Assessment No. 94/14. "Financial Liberalization in Israel," by Eric Clifton.
Forthcoming "Financial Sector Reform in the Countries of the Middle East and North Africa," by Nigel Chalk, Abdelali Jbili, Volker Treichel, and John Wilson. "What Ought to be the Role of the State in the Financial Sector? A Conceptual Framework for Analysis and an Application to the case of Morocco," by Paul Chabrier and Oussama Kanaan.
Other "GCC's Macroeconomic Policies," by Mohamed El-Erian and Cyrus Sassanpour, in Julia Devlin (ed.), The GCC in the Twenty-First Century (Washington: Georgetown University, 1997).
-40"Financial Sector Reform in Morocco and Tunisia," by Abdelali Jbili, Klaus Enders, and Volker Treichel, Finance and Development, September, 1997. "Globalization and the Arab Economies: From Marginalization to Integration," by Mohamed A. ElErian, Working Paper No. 14., Egyptian Center for Economic Studies, July 1997. "The Middle East's Investment Challenge," by Mohamed A. El-Erian, Middle East Policy, 1996. "Middle East Economies' External Environment: What Lies Ahead?" by Mohamed A. El-Erian, 1996. Middle East Policy, Vol. IV, No. 3, pp. 1337-146. "Attracting Foreign Direct Investment to Arab Countries: Getting the Basics Right," by Mohamed A. El-Erian and Mahmoud A. El-Gamal (1997). Paper presented to the Inter-Arab Investment Guarantee Corporation's conference on foreign direct investment, held in Tunisia in March 1997. Forthcoming as an Economic Research Forum Working Paper. "The Arab Experience of Linking to International Financial Markets," by Mohamed A. El-Erian, March 1997; Arab Banker. "Economic Reforms, Growth, Employment, and the Social Sectors in the Arab Economies," by Mohamed A. El-Erian and Patricia Alonso-Gamo, January 1997, in The Social Effects of Economic Adjustment on Arab Countries, edited by T. Kanaan. "Private capital flows in the Development of the Arab countries," by Mohamed A. El-Erian and Shahpasand Sheybani. Paper presented in "The Cairo Papers' Sixth Annual Symposium: The Middle East and Development in a Changing World." "Financial Reform in the Middle-Income Arab Countries: Lessons from the Experiences of Other Developing Countries," by Amer Bisat, July 1996. "Economic performance and Government Interventions in the Arab World," by Rakia Moalla-Fetini, and John Waterburry. "Implications of the Uruguay Round for the Arab Countries: A General Analysis," by P. Chabrier, Mohamed A. El-Erian, and R. Moalla-Fetini, April 1996: in The Uruguay Round and the Arab Countries, edited by S. El-Naggar. "The Association Agreement Between Tunisia and the European Union," by Abdelali Jbili and Klaus Enders. Finance andDevelopment, 1996, pp. 18-20.
Copyright © 1997. International Monetary Fund. All rights reserved.
"The European Union's New Mediterranean Strategy," by Saleh Nsouli, Amer Bisat, and Oussama Kanaan, Finance and Development, 1996, pp. 14-18. "The Paradox of Successful Adjustment Policies," by Mohamed A. El-Erian, April 1996: Arab Banker. "The European Union's New Mediterranean Strategy: A Review of Readiness Indicators of Selected Mediterranean Countries," by Saleh Nsouli, Amer Bisat, and Oussama Kanaan, IMF, November 1995. "Strengthening the Financial Sector in the Arab Economies," by Mohamed A. El-Erian, August 1995: Arab Banker. "Multiple Exchange Rate Regimes: Lessons from the Experience of Arab Countries," by Mohamed A. El-Erian in Finance and Development, reproduced by Middle East Executive Reports, Al Alam Al Youm and Business Recorder. "Middle East Financial Markets: Potential for Development and Internationalization," by Mohamed A. El-Erian, June 1994: Middle East Executive Reports.
Copyright © 1997. International Monetary Fund. All rights reserved.
Copyright © 1997. International Monetary Fund. All rights reserved.