Handouts pose danger to Mideast economies

IMF says global slowdown threatens fiscal woes for oil exporters and importers, terms world economy to be in a “dangerous new phase.”

By DAVID ROSENBERG / THE MEDIA LINE
October 27, 2011 09:58
Protesters fill the streets of Syria

Syrian protests screenshot 311. (photo credit: REUTERS)

 
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The International Monetary Fund (IMF) warned on Wednesday that the huge increase in handouts that the governments of the Middle East and North Africa (MENA) have made to keep a lid on Arab Spring unrest is a danger for all the economies of the region - both rich and poor.

The budget deficits of oil-importing countries are expected to widen to 7.6 percent of gross domestic product, a 50% rise over two years, the IMF said in its Regional Economic Outlook: Middle East and Central Asia. These spending increases are going mainly to subsidies on food and fuel, while governments are investing less and borrowing more, making it harder for economies to recover, it said.

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But the IMF also said the wealthy oil-exporting countries of the Gulf face a risk from the largesse they have bestowed on their populations this year. Governments have been able to cover the cost of higher subsidies, pay raises and job creation because of rising oil prices, but those may not last if the world economy slows. It warned that a decline in oil prices could push them into deficit spending.

“Oil-exporting countries have understandably increased fiscal spending to address social needs,” Masood Ahmed, director of the IMF’s Middle East and Central Asia Department, said at a conference Wednesday. “Looking forward, the widening of non-oil fiscal deficits makes many countries more vulnerable to swings in oil prices, at a time when the world economy is facing heightened risks.”    
    
For now, the outlook for oil prices is positive. Brent futures have risen by about 7% in the past four weeks to above $111 a barrel and a survey of analysts by Reuters released on Tuesday pointed to the price averaging $106.80 next year and $108.60 in 2013, thanks to strong demand from China and India.

But global economic growth is projected by the IMF to slow to 4% annually this year and next, leading to a slight reduction in world oil prices in 2012 after two years of double-digit rise. Moreover, the IMF in Wednesday’s report termed the global economy to be in a “dangerous new phase” and said downside risks to growth are increasing. 

Meanwhile, the IMF estimated that the breakeven oil price – the level that ensures that budgets are in balance at the given level of spending – has increased by more than $20 a barrel since 2008 for several petroleum-exporting countries, while the average price is only $6 a barrel higher.

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The IMF forecast that economic growth for the MENA region will slow this year to 4%. That represents a sharp divergence in economic trends in the region, with oil exporters expected to enjoy a 4.9% increase in gross domestic product while oil importers’ economies – weighed down by the turmoil of the Arab Spring – post an anemic 1.4% expansion.

The gap in economic growth across the MENA region will narrow somewhat in 2012, the IMF said, as oil exporters’ growth slims down to 3.9% and oil-importers experience a modest recovery to 2.6%. Among Gulf countries, the deceleration of GDP growth will be even more pronounced, slipping from a projected 7.2% in 2011 to 4% in 20123, the IMF said.

The biggest economic causality of the Arab Spring is Libya, whose output is expected to plummet 50% this year as months of civil war brought oil production to a standstill and trade sanctions were imposed on the rest of the economy, according to the IMF.

Syria’s GDP, which has been shaken by a months-long rebellion that shows no sign of ending, will contract 2%. GDP in Egypt and Tunisia, which ousted their leaders after brief periods of mass protests but remain weighed down by strikes, protests and political uncertainty, will show little or no growth this year. Egyptian GDP will expand 1.2% and Tunisia will post nil growth, the IMF said.

Both Libya and Tunisia marked milestones in their transition to new rule over the past week. Libyan strongman Muamar Gaddafi was captured and killed last Thursday, bringing a formal end to his 40-year rule. Meanwhile on Sunday Tunisians voted for a constituent assembly that will write a new constitution and appoint an interim government.

The Islamic Ennahda Party emerged as the biggest vote getter, worrying many foreign investors both for Tunisia’s future and as a sign of political trends to come in Egypt and elsewhere in the Middle East. But Capital Economics, a London-based advisory firm, said it remain optimistic that Tunisia is heading down the right path.

“The principles of economic policy in Islam do not conflict with a market economy. What’s more, a vibrant democracy in Tunisia could lead to a stronger regulatory and legal framework, which could reduce corruption and improve the business environment,” Capital said in a report released on Tuesday.

Nevertheless, Capital said it expected Tunisia’s GDP to contract by 0.5% in 2011, and grow by only 2.5% next year.

Ahmed of the IMF also expressed cautious optimism that the Arab Spring could pave the way for political and economic reforms that revive growth. “We should not lose sight that the ongoing historical transformation holds the promise of improved living standards and a more prosperous future for the people in the region,” he said.

The IMF urged MENA governments to devise reforms designed to improve social mobility and access to economic opportunities. That should include reforms to the labor markets, education and business regulations, but also rescinding the tax breaks and subsidies. As it is, the subsidies in place now benefit the wealthy as well as the poor and are therefore wasteful and ineffective.

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