Asharq Al-awsat English Middle-east and International News and Opinion from Asharq Al-awsat Newspaper

Making 2021 a Defining Year

Making 2021 a Defining Year

Monday, 3 May, 2021 - 10:15
Jihad Azour
Director of the Middle East and Central Asia Department at the International Monetary Fund

In the wake of an unprecedented crisis comes a once-in-a-generation opportunity for countries in the Middle East and North Africa (MENA) to transform their economies and build a better future for their citizens.

The choice for policymakers is clear: Will the pandemic set the region back for years, or will countries emerge from it on a path toward a more inclusive and green future?

As the region navigates the second year of the pandemic, our latest economic outlook shows both the risks and opportunities ahead for MENA countries.

Divergent outlooks, familiar challenges

A recovery is burgeoning in the region, with real GDP growth expected at 4 percent in 2021. The outlook, however, is surrounded by exceptional uncertainties, with significant divergence across countries.

Access to the COVID-19 vaccines largely defines a country’s near-term outlook. We expect early inoculators (such as Gulf Cooperation Council countries), on average, to achieve higher growth in 2021 relative to our projections in last October, while we see late inoculators (such as fragile and conflict-affected states and low-income countries) as facing a prolonged recovery. The outlook is also more subdued in countries reliant on contact-intensive sectors, especially tourism, and those without the ability to provide significant fiscal support when COVID-19 first hit.

Meanwhile, the crisis has exacerbated long-standing vulnerabilities that could inhibit progress in the region:

• Hard times for youth and small- and medium-size companies (SMEs): Many countries have long faced challenges in creating jobs and expanding the private sector, problems that worsened with the pandemic. For instance, youth unemployment rates reached nearly 32 percent in Morocco and 55 percent in Jordan in the fourth quarter of 2020. SMEs and companies in contact-intensive sectors—the main job creators in many countries—have been battered by the crisis.

• Debt and financing needs: Deficit and debt concerns have risen, and financing needs have surged. Fiscal deficits expanded to 10.1 percent of GDP in 2020 (from 3.8 percent in 2019) as revenues declined and countries provided critical support to counter recessions. As a result, debt rose to more than 70 percent of GDP for close to half of the MENA countries in 2020. Financing needs also increased considerably and are projected to remain high during 2021-22 in MENA emerging markets, exceeding 15-20 percent of GDP for several countries. While domestic banks have been able to absorb the bulk of these needs, further exposure of the banking sector to the sovereign could crowd out private sector credit and hinder the recovery.

Consequently, the pandemic could leave deep and persistent scarring on the region’s corporate sector. While higher oil prices help cushion the impact on oil-exporting countries, real GDP for the region’s oil importers is expected to be 8 to 9 percentage points lower than precrisis projections in the medium term, potentially leading to a lost decade for many.

Making 2021 a defining year

MENA policymakers can seize the opportunity to accelerate the recovery and build forward better through careful policymaking and better regional and international cooperation.

Bringing an end to the health crisis remains the most urgent priority. Regional and international cooperation will be critical to ensure sufficient and equitable access to vaccines by all countries. Bolstering COVAX funding and sharing surplus vaccines and expertise in distribution and logistics will help in this effort.

How countries manage the recovery amid elevated debt levels and rising financing needs will also define the years ahead. In general, ongoing policy support to boost economies should be flexible, targeted, and in place until the recovery is entrenched. However, countries with no or limited policy space would need to balance economic support with the importance of ensuring debt sustainability. Fiscal adjustment anchored on a credible medium-term fiscal framework coupled with structural reforms can both reduce debt burdens and safeguard growth. At the same time, medium-term debt management strategies and further developing domestic capital markets can help mitigate financing risks.

For all countries, strong governance and enhanced transparency can improve the efficiency of public spending and spur reforms to large public sectors and state-owned enterprises. Countries can widen the reach of social safety nets by capitalizing on lessons learned from the pandemic, such as how digitization and technology enhance the provision of government assistance.

Lessons from the pandemic for a post-pandemic world

More broadly, bolstering access to technology and digitalization, together with investment in education and efforts to improve the business climate and level the playing field for companies, can lay the foundation for vibrant, growing private sectors. This will help address perhaps the greatest risk to the region’s long-term outlook: a lack of opportunities for a rapidly growing population.

To truly build economies for the future, climate change must be at the forefront of the policy agenda. The current moment provides opportunities for countries to leverage recovery programs to invest in climate-resilient infrastructure and push diversification agendas in the region’s oil exporters. These efforts, accompanied by the removal of generalized fuel subsidies and an emphasis on renewable energy sources, can facilitate the transition to a greener economy, unlocking vast employment opportunities for MENA countries. The recently announced initiative by Saudi Arabia to reduce carbon emissions is an encouraging step.

By implementing bold policy agendas this year that aim to bring the pandemic to an end while advancing the transformation of their economies, MENA countries can emerge from the crisis stronger and on a path to a more inclusive, resilient, and green future.

Other opinion articles

Editor Picks