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(photo credit: AVI KATZ)
The five countries hit hardest by turmoil of the Arab spring will show a combined drop in economic output of about 2.3 percent this year as they struggle with unrest and its after effects, according to figures based on a forecast by the Institute for International Finance (IIF).
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Egypt’s $218 billion economy will be responsible for most of the decline, with output dropping 2.5% this year after inflation. The smaller economies of Syria and Yemen will experience sharper contractions, with Syrian gross domestic product slumping by 3% and Yemen’s by 4%. Tunisian GDP will decline 1.5%. Only Bahrain will show any positive growth this year, with GDP expanding 2.9%, the IIF forecast. But that will be the slowest pace of growth for the island state since the 1990s, the IIF report released late Tuesday noted.
Moreover, with the Middle East still suffering political instability, the chances are good that economic pain will be more severe than now predicted, said George Abed, director of the Washington-based IIF’s Middle East department.
“The oil-importers face considerable downside risks to growth,” Abed
said in a statement. “Not only is the political reform process unlikely
to be smooth and could drag on beyond 2011, further delaying investment
decisions and slowing any economic recovery, but investigations into
political corruption are adding to business uncertainties.”
The five countries are facing different challenges. In Tunisia and
Egypt, long-time leaders have been replaced by transitional governments
committed to bringing democracy and stabilizing their economies. Syria
and Yemen are gripped by violence as their leaders have sought to quell
opposition protests. In Bahrain, the government, helped by Saudi troops,
has restored quiet but at the cost of deterring business.
All five, however, face a similar dilemma of assuaging popular demands
for improved living standards at a time when their resources are
constrained by slowing economies, accelerating inflation and
double-digit unemployment. Governments have risked exacerbating the
problem by offering short-term solutions, such as increased subsidies
for food and other necessities, raising salaries and creating make-work
The IIF estimated that consumer prices across the Arab world will climb
5.7% this year, but among the economies hardest hit by unrest, prices
will rise much more sharply. In Egypt, inflation may reach 11.5%, in
Yemen 15% and Syria 8%.
“In this very difficult environment, and amid major pressures to
institute far-reaching political reforms, it is absolutely critical that
the transition authorities in Egypt and Tunisia place a high priority
on structural economic reform,” Abed said.
The outlook for the five countries improves in 2012, with growth
reaching 3.8%, according to figures based on IIF estimates. Tunisia’s
$44 billion economy will lead the recovery, posting a 5.2% increase in
GDP. Egypt and Bahrain will both expand by 4.2%. Syria and Yemen will
show more modest turnarounds, growing 2% and 3%, respectively.
Nevertheless, the IIF warned that the kind of structural reforms that
will bring sustainable growth will require “fundamental political and
economic reforms and will take time.” It expressed concern that
transitional governments, focusing on political and constitutional
issues, will ignore economic reforms.
Global financial institutions may serve as a lever for reform as
countries like Egypt and Tunisia seek support to tide them over the
difficult period, the IIF said.
The International Monetary Fund (IMF) head said earlier this month the
fund would likely make available $35 billion in loans to Middle East
countries where popular uprisings have occurred. Although no country has
formally approached it, Egypt has indicated it needs up to $12 billion
to meet a funding gap, Masood Ahmed, the IMF's director for Middle East
and Central Asia, told Reuters.
The IIF said Egypt’s sagging economy was at risk for a “second wave of
social upheaval” because the public has high expectations about the
future after President Husni Mubarak was forced to step down in February
in the face of massive protests. Political reform could run into 2011
while arrest and investigations of Mubarak-era businesspeople may
discourage investors, it said.
In contrast to the economies of turmoil-ridden countries, most of the
Middle East’s oil-exporting countries are likely to see significant
growth this year, including Iraq, which grew by just 0.9% in 2010 but is
now likely to grow by 11% in 2011 and by 11.5% next year.
With regard to Dubai, the IIF said Dubai World has successfully
restructured its debt, but worries persist about the country’s debt
overhang. Other Government Related Entities (GREs) are also undergoing
debt restructuring, including Dubai Holding. Dubai has regained market
access, but the cost of borrowing remains high, reflecting the rollover
needs of the total of $31 billion falling due in 2011 and 2012, and the
continuing challenges related to the depressed property sector.