More than two years after the Arab Spring began, economic activity remains weighed down by elevated political tensions and continued civil strife in the region. Regional growth accelerated to 3.5 percent in 2012 from minus 2.2 percent in 2011 reflecting mainly a rebound in Libya’s crude oil production to pre-war levels that doubled real GDP and a weak growth recovery in Egypt (to 2.2 percent in FY2012 from 1.8 percent in FY2011). Iran, the region’s largest economy, slipped into recession, with GDP falling by an estimated 1.9 percent due to international sanctions and lower oil output while Algeria’s growth remained subdued at 2.5 percent, supported by expansionary fiscal policy. Domestic demand and exports in Syria collapsed last year as the civil war intensified, with spillovers affecting activity in Jordan and Lebanon. Drought in Morocco reduced growth to 2.7 percent from 5.0 percent in 2011.
Outlook for 2013-15
Regional prospects depend critically on the evolution of domestic and cross-border political tensions. Aggregate regional growth is forecast to slow to 2.5 percent in 2013 mainly due to weakness in the region’s three largest economies, before recovering to 4.2 percent in 2015 as tensions ebb and the Euro Area, the region’s main trading partner, recovers.
Within the region, Egypt’s GDP growth is forecast to slow to 1.6 percent in FY2013 on elevated political tensions and worsening macroeconomic imbalances, before recovering to about 4.8 percent in FY2015 as political tensions recede and reforms are undertaken, although there remain considerable downside risks to this forecast. GDP in Iran is forecast to contract for the second straight year by 1.1 percent due to sanctions and soaring inflation before recovering to about 1.9 percent in 2015. Growth in Algeria is expected to rise modestly to 2.8 percent due in part to temporary disruptions to oil production, before firming to about 3.5 percent in 2015. Elsewhere, growth in Iraq and Libya is expected to remain relatively buoyant driven by their mineral sectors, although rising violence poses a risk to near term stability in Iraq. Meanwhile rising farm output in Morocco and strengthening external demand over the medium term should help lift growth towards potential in Morocco and Tunisia. Jordan’s and Lebanon’s GDP growth is expected to remain subdued in 2013 reflecting spillovers from Syria.
Risks and vulnerabilities
Political uncertainty, polarization and conflict. Prolonged political crises and conflicts—elections are upcoming in several economies and conflicts are gaining intensity in Iraq and Syria—pose risks to near term recovery, and to long term potential growth rates by depressing investment and increasing the likelihood that urgent structural reforms are delayed. More generally the long term structural challenges facing the region – which are a source of current volatility – remain the same as before the Arab Spring. A failure of political consensus needed to tackle these structural weaknesses will mean that they will likely contribute to low growth rates even when calm returns to the region.
Weakening macroeconomic fundamentals and rising fiscal sustainability risks. Rising fiscal outlays to fund difficult-to-reform food and fuel subsidies are generating serious fiscal and current account imbalances among oil importers – a situation exacerbated by rising borrowing costs and exchange rate depreciation, although the recent moderation in global food prices could provide some respite in the near term.
Euro Area and US recovery. Protracted weakness in the Euro zone would hurt economies with close trade, investment and financial ties to it. Any increase in global risk aversion would also reduce already depressed capital inflows into the region. On the upside, better-than-expected economic outcomes in the US and Euro Area should support growth, particularly in economies where political tensions are relatively muted.
Commodity price and geo-political developments: Oil exporters in the region could be very vulnerable if the projected gradual decline in commodity prices occurs more sharply than in the baseline. While benefitting importers, it would cut into incomes, government revenues and foreign currency earnings of oil exporters – forcing potentially significant adjustments.
Middle East and North Africa regional forecast (annual percent change unless indicated otherwise)
Source: World Bank. a. Growth rates over intervals are compound weighted averages; average growth contributions, ratios and deflators are calculated as simple averages of the annual weighted averages for the region. b. GDP at market prices and expenditure components are measured in constant 2005 U.S. dollars. c. Sub-region aggregate excludes Iraq and Libya, for which data limitations prevent the forecasting of GDP components or Balance of Payments details. d. GDP measured at PPP exchange rates. e. Exports and imports of goods and non-factor services (GNFS). f. Geographic region includes high-income countries: Bahrain, Kuwait, Oman, United Arab Emirates and Saudi Arabia. g. Selected GCC Countries: Bahrain, Kuwait, United Arab Emirates, Oman and Saudi Arabia.
Middle East and North Africa country forecasts (annual percent change unless indicated otherwise)
Source: World Bank. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time. Djibouti, West Bank and Gaza are not forecast owing to data limitations. a. GDP growth rates over intervals are compound average; current account balance shares are simple averages over the period. b. GDP measured in constant 2005 U.S. dollars. c. The estimate for GDP decline in Syria in 2012 is subject to significant uncertainty.
Middle East and North Africa net capital flows US$ billions
Source: World Bank. Note: e = estimate; f = forecast.