MENA Event at the Leadership Forum - Capitol Hill

MENA Event
Leadership Forum
Capitol Hill
20th June, 2011

A. Introduction

1. Drivers of change are at work in the Middle East and North Africa (MENA).    The present round of events in MENA is quite historic and unique.  For the first time in modern memory, internal forces have joined hands to seek a fundamental change in the existing implicit social contract. They are demanding accountability, inclusion, transparency in the governance of their countries.

2. Political developments are still unfolding in the region.  But short term challenges are clear already.  Security and macroeconomic stability has to be high on the agenda in order to keep risks contained and lay the ground for a smooth transition.   A lot of work is required to change social contracts and promote private sector-led growth so benefits are shared widely.  Improving the welfare of people is critical to both stabilize the situation and generate higher domestic demand. 

3. Governance is critical to economic development.    The region’s development is held back as its citizens’ choices and voices are ignored, thereby compromising their role in social and economic accountability.  Excessive dependence on the state for delivery of social services, distortions in state resource allocation and deployment mechanisms, and, the lack of an enabling policy environment have all stifled growth opportunities.  Growth has been further subdued in the region because of the lack of economic diversification and the neglect of laggard regions.  While reforms have been underway, the quality of implementation was low, with the administrative set-up manipulated to serve the privileged.  

4. Some countries in the region, as expected, are struggling to hold on to old practices, while others are availing of the opportunity to define their course.  With uncertainty being a reality, it’s hard to draw long-term inferences.  As such my remarks will offer perspectives on:

(i) MENA’s short term economic developments and prospects;
(ii) MENA’s initiatives and challenges to restore private sector confidence; and
(iii) International community’s efforts to play an effective and supportive role in MENA’s transformation.

B. Economic Developments and Prospects

5. It’s important to remind ourselves upfront that MENA has illustrated a fair degree of resilience. The region managed its economic recovery from the global crisis well at the end of 2010.   Although growth contracted significantly, particularly in economies dependent on foreign inflows, export markets and financial linkages, stimulus packages helped the Region revert its growth trajectory to pre-crisis levels.  The impact of the global crisis, however, had penetrated more deeply on the poor and vulnerable.  The coping mechanism and social protection systems remained “subsidy driven” which are costly, ill-targeted and inefficient, entailing adverse distributional implications. Recovery was predictably unsustainable. This is largely because it was not accompanied by a fundamental change in the private sector enabling environment. 

6. Short term macroeconomic stabilization and social support is urgently needed to restore confidence and set the stage for the medium term.     Economic losses as a result of disruption to tourism, foreign inflows, businesses and trade have significantly lowered the economic growth in Egypt, Tunisia, Libya, Syria, Yemen etc. -- although the GCC is doing reasonably well.  Given the GCCs output contribution, regional GDP will be in the range of 3.6% (close to one and half percent lower than projected level) offsetting much lower growth of oil importers in MENA which is forecasted anywhere between 1.5- below 2%.

7. Macroeconomic imbalances have come under significant stress, particularly for economies with issues surrounding debt sustainability.   Both Egypt and Jordan, with high public debt/GDP ratios, can ill-afford slippages in fiscal deficit/GDP ratios.  Tunisia has more room for maneuverability. Conflict in Libya has significant repercussions on its neighbors and trading partners. For instance, Libya accounts for 5% of Tunisian exports and 10% of its tourism receipts.  Cross border flow of migrants to Egypt and Tunisia add more social and economic complications.  External current account deficits came under more pressure in the non oil economies as FDI declined, and as import prices of food and oil grew.  With growing demands, a fall in foreign exchange reserves in Egypt and Tunisia and the downgrading of credit ratings, recourse to official development assistance was inevitable.

8. Greater analysis is needed to examine the social consequences of economic stress.  Already most countries are reporting an increase in unemployment rates.  Regional unemployment averaged prior to these events at 10% but this masks the high unemployment rate of about 40% or so among graduates and women.   

C. MENA’s Private Sector: Challenges and Initiatives

9. To restore confidence and trust in the private sector, governments are attempting to stabilize security and the macroeconomic situation.  Early actions and dialogue is underway for more effective resolution of the issues facing private sector.  To quote a few examples, the Egypt PM has formed a permanent committee to discuss and resolve bottlenecks facing industrial and commercial activities.  In Tunisia, a large investors’ conference took place last week. Additionally:
 
(i) Administrative and regulatory reforms are being launched.   GAFI in Egypt has abolished the requirement of prior approval of industrial projects by the Industrial Development Agency, accelerated the registration of foreign company representative and branch offices to 3 to 7 days (relative to 4-6 months in the past),  introduced electronic registration of businesses, and simplified clearance of imports and export certification process.

(ii) Dialogues are being held with the GCC partners for support in different areas. 

(iii) Reforms and restructuring of the SME sector are being fast tracked.  Besides developing a credit information bureau and a collateral registration mechanism, Governments are open to restructuring the existing funds supporting SMEs, providing credit guarantee support and supportive capacity building and market access.

(iv) Public-private partnership Programs for infrastructure development are under discussion.  The World Bank has been working closely with countries to develop legal, regulatory and institutional frameworks for PPP and has set up an Arab Regulatory Framework to move the region towards harmonization of regulations. 

(v) Reviews of financial systems are underway.  Egypt managed to reopen its banks in an orderly way, and the stock market is also picking up after its reopening. A sharp contraction in economic activity across the region will have implications for banks’ portfolios. In some cases adequate capital cushions are available as capital adequacy has been high in a number of countries. Central banks will need to be vigilant and issue tighter regulations to address concerns related to conflict of interest, preferential lending and overexposure to sector and parties. Governance of central banks and public sector banks, and the issuance of corporate governance codes are also on reform agenda.  The World Bank’s recently issued Financial Sector Flagship report discusses the next round of reforms for the financial sector, and is providing technical assistance where needed including for Recovery of Stolen assets. 

10. To complement these efforts the Bank has launched regional programs for promoting energy diversification through renewable energy sources, infrastructure connectivity and trade facilitation.  Three transactions have been fast tracked.  The Arab Infrastructure Facility is a WB Group and IsDB partnership offering loan and other financing options for regional public, private and PPP infrastructure.  Second, a 1 GW Concentrated Solar Power Development Program will be kicked off with Morocco’s 500 MW solar project.  Third, the MSME regional facility has also been fast tracked to be kicked off with a first loan to Tunisia of $50 million but this financing window can be tapped by other regional borrowers.  The World Bank has been closely working with Arab Funds and Institutions to develop their capacities and work collaboratively at the country and regional level.   European institutions are also important development partners and are anticipated to work closely on a number of transactions, bringing their experience in transition and development.

D. Response of the International Community

10. There is a growing recognition of MENA’s significance as its stability is intricately linked to the global and regional stability.   Security and management of MENA’s oil and gas reserves, given its scale, has worldwide economic implications including for MENA oil importers. At the same time, MENA has the potential to serve as an important trading corridor if nurtured effectively.  With its present and future youth bulge projections, maintaining the Region’s social stability is of utmost priority.  Empowering youth with the right skills will offer a win-win solution by creating migration opportunities for a skill deficit Europe and offering remittances opportunities for the region’s oil importers.   Aside from re-examination of bilateral aid frameworks and support, a multilateral effort is underway within the G8 context to ensure a coherent and coordinated approach to ensure proper pacing and sequencing of aid flows and its development impact. 

11.  The World Bank along with G8 development partners including IsDB, AfDB, EU, EIB and IMF were entrusted to prepare a Strategy for New Partnership for Inclusive Growth which is supplemented by a Joint Action Plan for MENA.   Laying the foundations for a new partnership and institutional framework, this strategy recognizes issues and constraints, and offers a coordinated and prioritized framework for development agencies.   The broad thrust of the framework focuses on four major, inter-related blocs:
 
12. Governance, Transparency and Accountability and Citizen Participation.  There is a recognition that public tolerance for MENA’s age old political, social and economic contractual frameworks, that served few and the privileged, has run out.  Strengthening governance will help empower people through voice and participation, de-centralize power and decision making, and remove administrative discretion.  Together these elements will help ensure economic gains are shared in an equitable and fair manner.  Leading the effort, the World Bank is now coordinating programs that focus on open access to data and information and internet services and media – all key tools for voice, advocacy and accountability.  We are working with governments and the MDBs on the simplification and transparency of public procurement – a key source of business and state resource use.  Other priorities include introducing proper codes of conduct and conflict of interest regulations, etc. In this, as well as in other areas, Tunisia is leading by example

13. Social and Economic Inclusion:  A large proportion of the population has not benefited from the growth realized in the past.  As a result, the region has exceptionally high unemployment, and limited access to credit for people and small business.  Subsidies and social programs have been large in value, but low in impact.  Offering relief following political developments, countries widely expanded subsidies, offered wage and pension increases etc.  Spending in these areas has, partly warranted because of commodity price inflation, been in the range of 2 to 3.5% of GDP.  Such measures at best temporarily mitigate adverse social consequences. Sustainable approaches to social and economic inclusiveness call for efficient and well targeted programs to reach the poor and address regional disparities.  Efforts are being launched in these areas.  For example, Tunisia is starting targeted social and regional programs, supported through fiscal transfers.   Across the region, there is a need to ramp up social safety net programs and careful decentralization.

14. Job Creation.  Unemployment is high at around 10% and growing, and is higher for youth (24% versus 15% world-wide) and graduates and among women (above 40% in some countries).  67% of the work force is deployed in low productivity jobs and contribute 27% of GDP. Constraints impede job creation. For instance: the public sector role in job creation has not been conducive – it offers benefits to few and distorts incentives; private investment is capital intensive; and, labor market policies are rigid.  Unemployment is a structural problem so cannot be resolved in the short term.  The World Bank’s analytical work shows that employment response packages in public sector can help facilitate transitions provided these are well targeted and can be managed fiscally.  Packages have to create

• incentives for firms to create short term opportunities – this could involve employment subsidies to refunding part of wage costs and social security or labor tax costs etc. (options being examined in Tunisia and Morocco);
• mechanisms to offer public support for private provision of social care services;
• income support and stipend for on-the-job training for the unemployed;
• special labor intensive programs involving communities in their development; and
• promoting worker’s mobility. 

15. Over the medium term, the right policies and incentive framework will help the private sector generate jobs backed by effective labor market policies, adequate access to microfinance and SMEs. To promote job creation: (a) Tunisia is restructuring the National Employment Program 21/21 and has transferred its oversight from President’s office to the Ministry of Regional Development; (b)  Egypt is developing an Employment Strategy and exploring newer options for intermediating SME funding to promote job creation; and (b) Jordan is overhauling SME policies, regulations and supportive infrastructure.  Advisory support from World Bank is being offered across the region to help in development of job creation programs and labor market reforms.

16. Accelerating Private Sector Led Economic Growth.  This will be critical for sustainable and efficient job creation and innovation.  Continued efforts to remove impediments and competitiveness will be critical.  MENA is one of the least integrated regions; efforts to promote trade, investment technologies and market access and connectivity will facilitate growth and job creation.     Investment can thrive better in a competitive environment, with a fair and predictable rule of law, and efficient and transparent regulations.  Opportunities to nurture businesses are substantial but there are infrastructure deficits in transport, water, energy and agriculture, with challenges relating to environment sustainability.

17. To support the new partnership, the G8 adopted a Joint Action Plan, and the multilateral development banks announced a strong package of cumulative assistance including the IMF, bilateral and World Bank support.  On the World Bank side, new commitments of close to $6 billion are made available for Egypt and Tunisia over next 24 months. 

18. To conclude, while excessive generalization is not possible given the different state of political movements and the ensuing short term challenges, the transitions, where set on course, have the potential to significantly boost economic growth and living standards.  Greater accountability and transparency and removal of impediments to private sector involvement will relax key constraints to growth and steer resources more effectively while reducing some rent seeking behaviors.  Political transitions from other regions suggest medium term gains from achieving open and accountable governments are sizeable.  Credibility and quality of reforms with inclusive growth will be critical for inclusive growth and to restore confidence of public and private sector.

Shamshad Akhtar/Monday, June 20, 2011