Arab spring economies likely to shrink this year

Five countries with severest unrest - Egypt, Syria, Yemen, Bahrain and Tunisia - to see GDP drop 2.3 percent, IIF figures show.

arab spring_521 (do not publish again) (photo credit: AVI KATZ)
arab spring_521 (do not publish again)
(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).
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.
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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 In Tunisia and Egypt, long-time leaders have been replaced by transitional governments committed to bringing democracy and stabilizing their economies.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 programs.
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.