the economy of the middle east and - elibrary.imf.org€¦ · the economy of the middle east and...

The Economy of the Middle East andNorth Africa in 1997

Mohamed A. El-Erian and Susan Fennell

Middle Eastern Department

International Monetary Fund

©International Monetary Fund. Not for Redistribution

© International Monetary FundNovember 1997

Cover Design: IMF Graphics Section

Cataloging-in-Publication Data

El-Erian, Mohamed A., 1958-The Economy of the Middle East and North Africa in 1997 /

Mohamed A. El-Erian and Susan Fennell. —[Washington, D.C.] :Middle Eastern Dept., International Monetary Fund, 1997.

p. cm.

ISBN 1-55775-711-9

1. Middle East—Economic conditions—1979. 2. Middle East—Economic policy. 3. Africa, North—Economic conditions. 4. AfricNorth—Economic policy. I. Fennell, Susan. II. InternationalMonetary Fund. Middle Eastern Dept.

HC415.15.E43 1997

Price: $15.00

Address orders to:

International Monetary Fund, Publication Services700 19th Street N.W., Washington D.C. 20431, U.S.A.

Telephone: (202) 623-7430Telefax: (202) 623-7201

E-mail: [email protected]: http://www.imf.org


http://www.imf.org

Acknowledgments

The authors are grateful for valuable comments from colleagues in the MiddleEastern and European I Departments. They are grateful for the contributions on countryexamples provided by Patricia Alonso-Gamo, Amer Bisat, Eric Clifton, Annalisa Fedelino,Thomas Helbling, Alexei Kireyev, Shahpassand Sheybani, and Sherwyn Williams. Specialthanks are due to Rahul Dhumale for his contributions on investment and growth issues andto Peter Kunzel for his exceptional research assistance. Thomas Enger prepared the Annexon oil and natural gas in the GCC. Martha Bonilla, of the External Relations Department,edited the publication. Joan Wise and Anne Yee were very helpful in the final preparation ofthe manuscript. The views expressed in this study are the sole responsibility of the authorsand do not necessarily reflect the views of the Executive Directors of the IMF or othermembers of the IMF staff.

- i i i -


This page intentionally left blank


Contents

Page

Acknowledgments iii

Executive Summary 1

I. Introduction 2II. Recent Developments in the Macroeconomy 3

III. The Intensification of Structural Reforms 10IV. The Next Step Forward 23V. Conclusion 25

AnnexesI. MENA at a Glance 27

II. Economic Developments in the GCC Economies 28III. GCC Oil and Natural Gas 32

References 37

Recent IMF Publications on the Middle East andNorth Africa Region (1994-97) 38

- v -


This page intentionally left blank


Executive Summary

• After a decade of stagnating economic performance, the economic picture in theMiddle East and North Africa (MENA) region improved considerably in 1996 and hasremained favorable in 1997. Economic growth is estimated to be about 4 percent, andper capita income to have increased for the second consecutive year in 1997. Financialbalances have also improved for the region as a whole, with a further reduction in thefiscal deficit and continued improvement in the external position.

• This performance reflects, in part, favorable external factors (the sharp increase ininternational oil prices in 1996 and favorable weather conditions for the Maghrebeconomies), but most important, particularly in 1997, the effect of appropriatedomestic economic policies—including government efforts to tighten fiscal andmonetary policies.

• Progress is also being made in overcoming the structural impediments in manycountries. Steps have been taken to redefine the role of government; enhance financialintermediation; address inefficiencies in the labor market and introduce trainingschemes; deregulate domestic markets and production structures; liberalize highlyprotective external trade regimes; and strengthen institutions. However, M E N A ' simplementation of structural reforms, while accelerating, continues to lag that in manyemerging markets. Further efforts are needed to increase investment and savingrates so as to place the economies on a higher growth path, address the difficultemployment challenge and, for some countries, deal with disappointing socialindicators.

• In moving forward, M E N A countries face a number of challenges. Most of all, theymust move rapidly to restructure their economies in order to participate in the evolvingglobalization and reap the rewards, while minimizing the risks. With a less favorableoutlook in this external environment, the onus of adjustment falls squarely on theM E N A countries themselves.

• Those M E N A countries that are more advanced in macroeconomic stabilization andstructural reform will need to widen and deepen those reforms, and embark upon asecond generation of reforms aimed at advancing the transformation of the role of thestate in the economy and increasing economic transparency. They face the additionalchallenge of "managing their growing success" in the increasingly complex globaleconomy. For those countries that have not yet begun to reap the rewards of reform,determined action is needed in the short term to set a sound foundation for growth andavoid being marginalized in the rapidly globalizing world economy.

- 1 -


- 2 -

I. Introduction

The economy of the Middle East and North Africa (MENA) has continued tostrengthen in 1997, notwithstanding particularly difficult situations in certain individualeconomies.1 Annual economic growth has been in the 4 percent range, resulting in a secondconsecutive year of much needed positive per capita income growth. Financial conditionshave continued to improve as reflected in lower inflation, higher foreign exchange reserves,and a more manageable debt burden.

These short-term improvements in the macroeconomic indicators of the region areto be welcomed. They are a further illustration of the region's potential to put behind ityears of foregone economic welfare gains, erosions in living standards, and unduemarginalization in the rapidly globalizing world economy.

As important are the underlying changes in the structures of the economies. Thesechanges will determine the sustainability of the region's economic improvements; theextent of beneficial linkages with the international economy; and, most fundamentally,its ability to generate employment for its growing population and to raise living standards.

The purpose of this paper is to document the recent developments in the MENAeconomy and the challenges that lie ahead. It complements the analyses that have beenpresented in a number of recent publications on the region by the International MonetaryFund (see listing at the back of this study).

The paper is organized as follows. Section II details recent macroeconomicdevelopments, while Section III reviews the accompanying structural changes. Against thisbackground, Section IV discusses the challenges for the period ahead as MENA economiesseek to sustain higher economic growth and benefit to a greater extent from developmentsin the global economy. The discussion in this paper is supported by a number of boxes thatprovide greater details on both the experience of certain countries and key policy issuesfacing the region. Developments in the six member countries of the GCC2 and in the oilmarket are discussed in Annex II and Annex III, respectively.

1For the purpose of analysis in this paper, MENA is defined to cover the economies of members of theArab League, the Islamic Republic of Iran, and Israel (see Annex I).

2Members of the GCC (formally known as the Cooperation Council for the Arab States of the Gulf) areBahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.


- 3 -

II. Recent Developments in the Macroeconomy

A. Overview

As recognized by governments throughout the region, sustaining a high rate ofgrowth is the primary economic challenge facing the MENA economies. This is needed toenhance national prosperity, reduce unemployment in non-oil economies of the region, andgenerate jobs for the growing number of young people joining the labor force.

International experience, as well as a well-established body of literature, confirmsthat macroeconomic stability enhances economies' ability to sustain a high growth rate.Accordingly, this section discusses the extent to which the MENA economies haveprogressed in establishing macroeconomic stability. In the following section, another criticalingredient of the growth dynamics—the evolving structures of the economies and theirrelations with the international economic system—is discussed.

Available data for the MENA region as a whole indicate that, after over a decade ofdeteriorating or, at best, stagnant macroeconomic performance, the economic pictureimproved considerably in 1996, and remained favorable in 1997 (Table 1). This is mostvisible in the developments detailed below relating to the traditional set of macroeconomicoutcomes (economic growth, inflation, and balance of payments), as well as theintermediate macroeconomic policy targets (such as the budgetary position, the externalcurrent account, and domestic credit developments).

The improvement in 1996 reflected the favorable impact of both domestic andexternal factors. Domestic factors included positive market reactions to government's effortsto tighten fiscal and monetary policies and, to a lesser extent—given the less advanced stageof reforms—their efforts to widen and deepen structural reforms. These factors were greatlyaccentuated by favorable external factors in the form of the sharp increase in international oilprices and favorable weather conditions for the Maghreb economies after a period ofprolonged drought. Appropriately, given the volatile nature of the region's externalconditions, countries, especially the oil-producing ones, used the more favorable externalenvironment to consolidate their financial position rather than to increase spending.

In comparison to 1996, MENA's economic improvements in 1997 have beenprimarily the result of domestic policies. The economic and financial conditions of theregion are responding favorably to several countries' success in further strengtheningmacroeconomic fundamentals and gaining greater credibility with respect to theirwillingness and ability to move away from the legacy of years of inward-oriented, publicsector-led development strategies, particularly in the non-oil economies.

These changes have been recognized domestically, regionally, and internationally. Inmost, though not all, economies they have been compensating for the less favorable externalfactors, be it the lower international oil prices (by 5 percent up to September) or theunfavorable weather conditions. There have also been setbacks to the Arab-Israeli peaceprocess.


- 4 -

Table 1. MENA: Basic Economic Indicators, 1976-97 1/

1976-80 1981-85 1986-90 2/ 1991-95 2/ 1996

(Percent a year)

Real GDP GrowthMENA

Oil exporters 3/Others

G C C

Real Per Capita GDP GrowthMENA


G C C

InflationMENA


GCCC

3.02.14.56.8

-0.9-2.61.8

-0.8

14.913.217.611.7

Central Government Fiscal BalanceMENA


G C C

Current Account BalanceMENA


G C C

Overall BalanceMENA 4/

Oi l exporters 3/Others 4/

G C Cc

External DebtMENA 4/

Oi l exporters 3/Others 4/

G C C

Debt ServiceMENA 4/

Oil exporters 3/Others 4/

G C C

-3.13.8

-15.214.4

8.112.6-6.020.6

-0.8-0.8-0.40.6

18.510.550.4

5.9

3.82.6

14.90.7

3.73.04.8

-1.0

0.1-1.22.1

-5.4

15.68.6

27.71.3

-8.0-2.9

-16.1-0.7

1.43.7

-6.37.2

0.30.5

-0.21.4

21.49.9

66.07.3

2.51.73.64.5

-0.6-2.21.4

-1.1

15.010.122.0

1.1

(In perce

-8.8-7.5

-10.6-12.0

-1.6-1.1-2.60.2

0.91.7

-1.13.3

30.213.372.9

8.4

3.73.83.62.7

-0.4-1.51.0

-1.5

17.617.817.52.6

nt of GDP)

-6.1-5.9-6.4

-10.8

-3.8-3.8-3.4-6.2

-0.61.2

-5.92.6

35.117.782.69.2

4.84.35-53.7

2.41.93.01.3

12.412.512.3

1.4

-2.9-1.9-4.3-2.4

0.74.0

-4.74.4

-2.9-3.3-1.7-4.1

30.914.872.46.9

(In percent of exports of goods and services )

7.94.8

29.60.6

14.19.3

34.01.4

15.010.732.22.8

11.37.9

23.64.2

3.9

3.93.82.5

1.41.41 5

-0.6

9.68.2

11.50.9

-1.8-0.8-3.2-0.2

0.53.2

-4.04.3

-2.1

-2.4-1.7-3.3

28.5

12.869.1

7.1

9.36.6

19.02.3

Source: IMF, World Economic Outlook.1/ PPP weighted averages.2/ Excluding Kuwait in 1990 and 1991.3/ Oi l exporters include Algeria, Bahrain, the Islamic Republic of Iran, Kuwait, Libya, Oman,

Qatar, Saudi Arabia, and the United Arab Emirates.4/ Excludes Israel.

1997


- 5 -

In the rapidly globalizing world economy, countries' attractiveness for investment isjudged not only against their own historical record and prospects, but also vis-a-visdevelopments in other countries. In this regard, MENA's macroeconomic conditionscompare favorably relative to those in emerging markets (Chart 1). In most countries withgrowing international financial linkages, relatively sound economic fundamentals provide animportant cushion against the disruptive impact on the real economy of sudden reversals incapital flows, such as experienced in Mexico (1995) and Thailand (1997). However,MENA's implementation of structural reforms, while accelerating, continues to lag that inmany other emerging markets. As a result, the region's investment and saving rates remainswell below those in the average developing country, let alone those in developingeconomies having recorded high rates of economic growth (Chart 2).

Unfortunately, not all economies have been participating in the generalizedimprovements in the region. The Palestinian economy, in particular, has been sufferinganother year of major disruptions caused by frequent border closures and, until October,Israel's withholding of tax revenues accruing to the Palestinian Authority. These twofactors have contributed to worrisome unemployment rates, disrupted public investment,and undermined private investment. Some other economies, such as Lebanon, continue toface challenging financial conditions as they manage the complex task of massivereconstruction and macroeconomic stabilization (Box 1).

B. Macroeconomic Outcomes in 1996-97

Growth in the MENA region picked up to 4.8 percent in 1996, and is projected atabout 4percent in 1997. In line with this favorable development, real GDP per capita hasalso increased for the group as a whole, reversing the declining trend of the previous threeyears. As a result, the region's real per capita income level is back to its level of 1990.Performance in this respect has been particularly noteworthy among the non-oil exporters,where real per capita GDP is estimated to have grown by about 3 percent in 1996 and afurther 1.5 percent in 1997.

Egypt, the Islamic Republic of Iran, and Sudan are among the countries registeringincreasing real economic growth rates. Growth in Jordan remained relatively high at above5 percent, albeit below the annual average of 6 percent recorded in the 1990s.

Not all economies registered increasingly buoyant economic growth rates. InLebanon, for example, the growth rate has been below recent trends reflecting theslowdown in construction and the impact of the April 1996 bombings. Syria alsoexperienced lower growth, as did Morocco owing to the less favorable weather conditionsin 1997 and after a year of sharp recovery in GDP. Developments in the Palestinianeconomy were more worrisome, with output estimated to have remained stagnant or tohave contracted for the second consecutive year. Indeed, the pickup in confidence and signsof sustained growth observed earlier have been undermined by recent disruptions to theregional peace process—a process accentuated by border closures and the interruption ofrevenue transfers. Growth in Israel slowed in 1996-97 owing to the winding down of theeffects of the large wave of immigration during 1990-91, the deteriorating securitysituation, and high domestic interest rates.


- 6 -

Chart 1. Macroeconomic Conditions are Relatively Sound...

Real GDP Growth 1/

(Annual changes, in percent)

Inflation(Annual changes, in percent)

Central Government Fiscal Balance

(In percent of GDP)External Current Account

(In percent of GDP)

Source: IMF, World Economic Outlook.

1/ Excludes Kuwait in 1990-93.©International Monetary Fund. Not for Redistribution

- 7 -

Chart 2. But Investment and Savings Rates are Still too Low...

Gross Fixed Capital Formation(In percent of GDP)

Gross National Savings(In percent of GDP)

Source: IMF, World Economic Outloo1/ Excludes Djibouti, Lebanon, and Sudan.2/ Excludes Lebanon.


- 8 -

Box 1. Lebanon's Reconstruction Program

Since the end of the civil war, Lebanon has embarked on an ambitious program of reconstructionand economic stabilization. The reconstruction effort was initiated in 1992 with the NationalEmergency and Reconstruction Program (NERP). In 1994, this was integrated into the much moreambitious and widely known Horizon 2000 program, which has become the envelope for allgovernment financed and/or sponsored reconstruction efforts:

1. The Vision. The Horizon 2000 program outlines the government's investment plans for the1995-2007 period. It goes beyond the initial emergency works under NERP and targets primarilythe rehabilitation and expansion of the infrastructure capital stock so as to lay thefoundations for future economic growth. In the preparation of the program, the governmenttargeted an annual average real GDP growth rate of 8 percent so as to double per capita GDP by2007. Taking into account that a sufficient stock infrastructure capital is an essential part of anenabling environment for private sector growth, a frontloaded path for government capitalexpenditure was a key element of the plan, allowing the public sector to be the catalyst for a generalrecovery in the economy. Later, growth was envisaged to be driven mainly by private sectoractivities and investment, allowing the government to reduce its budget deficits and its debt.

2. The Achievements 1993-96. The acceleration in government capital expenditure coupled withthe nominal stabilization efforts was associated with high rates of economic growth, with theaverage annual growth rate during 1993-96 amounting to 7.4 percent. Moreover, the target ofPhase I of the Horizon 2000 program, the rehabilitation of basic infrastructure, has largely beenachieved. Major benefits are already tangible, including the 24-hour electricity provision for mostusers, better functioning telecommunication systems, rehabilitated road networks in Beirut and itsnorthern and southern suburbs, and some 1,200 renovated public schools.

3. The Future. The Horizon 2000 Program has always had the character of an indicativeframework, allowing the government to adjust to actual needs and macroeconomic constraints.Given recent macroeconomic and public finance developments, the government is adapting its plansaccordingly:

• Focus on social infrastructure. During Phase II, the authorities are now shifting theirattention from basic infrastructure to social infrastructure projects to achieve a well-balanceddistribution of the reconstruction benefits across sectors, regions, and groups, and to ensure anenvironmentally sustainable growth. During Phase II, public capital expenditure will target projectsin the education, health, water supply, wastewater, and solid waste sectors. Estimates of Phase IIprojects vary, but investments in the order of US$5 billion over the period 1998-2002 are foreseen.

• Greater private sector participation. Given the budgetary constraints and its intention topromote the roles of the private sector and foreign direct investment in the economy, thegovernment has started to increase private sector participation in the reconstruction, includingthrough B.O.T. (Build-operate-transfer) and O.T. (operate-transfer) projects.

• More foreign financing. The government also hopes to increase the share of long-termconcessional foreign financing, which has been lower than envisaged so far, thereby reducing thebudgetary interest burden resulting from the relatively high domestic interest rates. In December1996, during the "Friends of Lebanon" meeting, the international community pledged grants andconcessional loans in the order of US$3.2 billion to support the reconstruction efforts for1997-2001.


— 9

Earlier progress in reducing inflation has been consolidated. The region's averageinflation rate, as measured by changes in consumer price indices, declined to 12.4 percent in1996, and to an estimated 9.6 percent in 1997. This represents a significant reduction fromthe levels registered in the early 1990s (of 15-18 percent). It reflects the pursuit, in manycountries, of greater fiscal restraint and prudent monetary policies. The rate of inflation was6 percent or below for more than one-half of the countries, and for countries with aboveaverage rates, such as the Islamic Republic of Iran, Sudan, and the Republic of Yemen, therate of inflation was on a sharply declining trend. Inflation in Israel, after showing a risingtrend early in 1996, was brought back down by a sharp tightening of monetary conditions inmid-1996 and is likely to fall below 10 percent in 1997. The lower inflation in the regionhas not only imparted a certain degree of financial stability, but is also helping with effortsto protect the poorest segments of the population.

MENA's outstanding external public debt, while still high in some countries, hasbeen on a declining trend while foreign exchange reserves continue to increase. The ratioof external debt to GDP has been reduced from over 35 percent in the early 1990s to 31percent in 1996, and an estimated 29 percent in 1997. This ratio has declined from 100percent to 70 percent in the non-oil exporters, while for the oil exporters, it increasedinitially from 14 percent in 1991 to 22 percent in 1994, before declining to 13 percent in1997. Likewise, MENA's debt burden, as measured by the ratio of total debt service tototal exports of goods and nonfactor services, has declined to 11 percent in 1996 from over16 percent just two years previously. A further decline is projected for 1997.

The recent decline in the external debt indicators reflects both the pursuit of moreprudent fiscal policies, with a consequent reduction in the need for external financing ofthose deficits, as well as, in some country cases, exceptional debt relief from officialcreditors. For the GCC countries, the improvement in debt indicators reflects the repaymentof foreign loans contracted to pay for outlays related to the 1991 regional crisis.

In view of these favorable developments, it is not surprising that we have alsowitnessed a continuing decline in market risk premia and related borrowing costs.Moreover, a number of countries have obtained in 1997 relatively favorable ratings frominternational credit rating agencies, including at the investment grade level.

C. Intermediate Policy Targets

As expected, these improvements in macroeconomic indicators have reflectedstrengthening intermediate policy variables.

MENA's sustained improvement in the fiscal balances has been particularlyimpressive. The overall government deficit for the region declined from close to 9 percentof GDP in 1986-90 to less than 3 percent of GDP in 1996, and an estimated 1.8 percent ofGDP in 1997. The reduction has been most pronounced in the oil-producing countries,where the fiscal balance is projected to be only slightly in deficit (of 1 percent of GDP) in1997. Clearly, the sharp increase in oil prices in 1996 and consequent impact on oilrevenues explains in part the dramatic fiscal improvement. In virtually all cases, the gainsfrom the oil price increases were not used to relax spending constraints but were directed


- 1

toward reducing public indebtedness and/or increasing official reserves. In fact, in manycountries undertaking fiscal reforms, consolidation efforts have been intensified in the pasttwo years.

The improved budgetary position has facilitated the implementation of prudentmonetary policy while alleviating constraints on the provision of noninflationary credit toproductive private sector activities. The expansion in liquidity associated with the heavyfinancing requirements of the budget, particularly in the non-oil exporting economies—growth in broad money averaged about 22 percent in the early 1990s for this group—hadfueled inflationary pressures. However, with the adoption of fiscal restraint and animprovement in budgetary positions, broad money growth for these countries has beenreduced to 16.5 percent in the past two years, permitting a reduction in inflation and animprovement in external positions. Within the overall credit expansion, there has been achange in composition, allowing resources to be redirected in support of private sectordevelopment.

The external current account position has strengthened. The region as a wholerecorded a small current account surplus of 0.7 percent of GDP in 1996, with the sameprojected for 1997. The non-oil exporting countries registered a deficit of 4.7 percent ofGDP in 1996, reflecting primarily higher import costs associated with the rise in oil pricesand higher cereal prices. The oil exporters benefited from oil export price increases, whichtogether with relatively stable net service receipts, resulted in a current account surplus of4 percent of GDP in 1996, with a somewhat smaller surplus projected for 1997.

In sum, the favorable reversal of past economic trends in the region reflects thestrengthening of reforms by a number of countries. Some MENA countries that initiatedmacroeconomic stabilization programs in the early 1990s, or even earlier—for example,Israel, Morocco, Tunisia, Egypt, and Jordan—have been reaping rewards for a relativelysustained period and are now moving more vigorously to implement structural reforms(Box 2). Others, which have recently embarked on comprehensive macroeconomicstabilization programs—for example, the Islamic Republic of Iran and the Republic ofYemen—have already begun to show favorable results. Still others have yet to embark onfull-fledged economic reform programs and have thus not shared sufficiently in theeconomic turnaround experienced by many countries in region.

III. The Intensification of Structural Reforms

A. Addressing Structural Impediments

Full development of the economic potential of the region has in the past beenconstrained by macroeconomic instability and serious structural impediments.3 With several

3Israel differs in economic circumstances from most countries in the region. It is considered among theadvanced economies in the sense that its economic structure is most akin to that of the industrial countries (adistinguishing feature of its industrial sector is the preponderance of high-tech industries). Furthermore, itseconomy is highly integrated in the world economy.


- 1 1 -

Box 2. Egypt: From Stabilization to Structural Reform

Egypt has made commendable progress in achieving macroeconomic stability since the early 1990s.Key indicators for 1996/97 demonstrate continued progress:

• Inflation moderated to 6.2 percent (from 21 percent in 1990/91).• A prudent fiscal policy resulted in a deficit of 0.8 percent of GDP (from 18 percent in

1990/91).• Tight monetary conditions were maintained.• The external position strengthened, with surpluses on both current and capital

accounts, and an overall balance of payments surplus US$1.3 billion. Reserves stand atmore than US$20 billion—equivalent to 16 months of imports.

Building on the success of stabilization measures, the authorities have begun to turn theirattention to the structural reform effort.

Privatization. The program was initiated in 1996, and has recently been intensified. Majoritydivestitures of government shares have been completed for 42 companies, including in theindustrial, agricultural, construction, retail, and tourism sectors. More than one-fourth of the state-owned enterprise sector is now in private hands.

Tax and civil service reform. GST coverage has been extended and the income tax systemreformed, so as to reduce distortions, encourage compliance, simplify administration, and widen thetax base. Civil service reform encompassing measures to streamline and reduce manpower is inprogress.

Financial sector reform. The government has recently divested majority public holdings in joint-venture insurance companies and banks and has announced plans to divest ownership in a majorpublic bank. Prudential regulation and bank supervision have been strengthened, and instrumentsfor active use of indirect monetary policy are being developed.

Trade liberalization and exchange system. Tariff rates and import surcharges have been reduced;import bans have been eliminated and replaced with tariffs; and steps have been taken to enhancethe operations of the foreign exchange market. The capital account is free of restrictions.

Deregulation. The regulatory framework is being simplified to encourage private sectorinvestment, and steps are under way to liberalize the rental property market. Energy pricedistortions are being removed.

As a consequence of recent actions.....

Buoyed by strong macroeconomic performance and structural reform, confidence has risen, asdemonstrated by the following developments:

• Real GDP growth increased to 5 percent.• Egypt's access to international capital markets has increased and the terms, improved.• Private sector investment has risen.• Portfolio and foreign direct investment has increased.• Stock market activity has surged.

Investors are now looking to the further intensification of the structural reform program.


- 1

countries having achieved significant improvements in their macroeconomic positions,emphasis is now firmly being placed on eliminating structural impediments that haveundermined investment and factor productivity gains. These impediments have alsodistorted the region's interlinkages with the rapidly globalizing world economy whilelimiting the beneficial spillover effects domestically of the economic and financialimprovements.

While it is difficult to quantify the extent of structural rigidities in MENA, a reviewof three basic features of the region provide an important, albeit far from comprehensiveindication, of the structural constraints that have inhibited economic growth andemployment creation. These features are now being addressed as governments in the regionestablish the conditions for sustained economic growth.

• First, the region's investment performance has been disappointing. Looking at threeindicators of investment activity—domestic (private and public) investment, foreigndirect investment, and portfolio investment (Box 3)—it can be seen that the MENAregion has been insufficiently attractive in both absolute terms and relative to otherregions.4 While political and other risk factors have had an impact, the main factor isan insufficiently strong domestic economic "enabling environment," includingstructural impediments to a high return/low risk outcome for domestic, regional, andinternational investors.

• Second, the government's dominant role in the economy has tended to undermineproductive private sector activities rather than support them.5 In some cases, it hasalso encouraged the emergence of a rather insular private sector that is morecomfortable living on rents and off the largess of the government rather than followthe example of the successful Asian economies in competing internationally for themore prosperous world markets.

• Third, the region's institutional and human development strategies have lagged,weakening a fundamental pillar of a successful development strategy. Publicinstitutions in several countries in the region suffered gradual erosion, while theprivate sector progressed slowly in establishing an internationally competitivecorporate culture and structure. Spending on social sectors, while relatively high forthe region as a whole, has been shown to have had relatively low productivity.6 As aresult, the contribution of one of the region's key attributes—its human resourcebase—has been well below potential.

Many countries of the region have now turned their attention to structural reform andeconomic liberalization in an effort to create an environment that is conducive toinvestment, while ensuring that policies needed to maintain financial balance remainin place.

4See Bisat, El-Erian, and Helbling (1997); and El-Erian and Sheybani (1997).5See Eken, Helbling, and Mazarei (1997); and World Bank (1995).6This is discussed in Shafik (1994) and Serageldin (1996).


- 1

Box 3. Investment as the Spur for Growth—How Has MENA Fared?

Growth performance in the 1980s through the mid-1990s has been disappointing inMENA, especially in comparison with the high rates achieved in other regions of the world.Given the importance of investment to growth, a review of MENA's investment performancemight help to explain the underlying causes of weak growth in the region. (For more detailedanalysis, see Bisat, El-Erian, El-Gamal, and Mongelli, 1996; and Bisat, El-Erian, and Helbling,1997.)

Past investment performance in MENA has been weak....

• The MENA region has suffered from an unimpressive investment performance sincethe early 1980s, particularly when compared with the high investment rates of the1970s in MENA and the high rates characteristic of the fast growing Asian countries.The slowdown in investment coincided with the fall in oil prices of the 1980s, whichdramatically reduced government revenues available to support the large capitalinvestment programs that had been pursued by governments in oil producing states.Non-oil exporting countries experienced an even greater decline in investment, asthey found it necessary to curb expansive public investment programs in view ofdeteriorating macroeconomic balances.

• The flow of foreign direct investment (FDI) into the MENA region has also beensluggish at best. Since the 1980s, FDI has averaged between 0.5 percent and 0.7percent of GDP, most of which was directed to the energy sector. In Asia, FDIaveraged more than 1 percent of GDP a year over this period. Portfolio investmenthas also traditionally been low in most countries of the region.

But there are recent signs of an improvement....

• A recent pickup in investment in both oil and non-oil MENA countries reflectsgrowing private sector confidence. Capital inflows to the region have increased, mostnotably in Egypt and Jordan. A number of countries have seen renewed access tointernational capital markets (Egypt, Jordan, Lebanon, Morocco, and Tunisia). Manyhave experienced a surge in portfolio investment as evidenced by stock market activity(Egypt and certain GCC countries). Some MENA countries have received investmentgrade ratings by international ratings agencies.

• Also noteworthy is the dramatic shift from public to private sector investment in theregion, especially in the Maghreb countries. Traditionally, public sector investment hasovershadowed private sector investment activity in MENA, in contrast to the patternobserved in developing countries as a group and in the high growth Asian economies(see chart). While this characteristic reflects in part the dominance of investment bythe state in oil-related activities in MENA, it also represents, more generally, thelegacy of the policies pursued in the 1970s, which placed the state at the center ofmost productive activity. Since 1991, there has been a gradual reversal of this pattern,with private investment increasing and public investment declining, reflecting theliberalization of policies, including privatization and deregulation, which has boostedprivate sector investment.


- 14 -

Box 3. (Concluded)

Foreign Direct Investment, 1980 - 95

(In percent of GDP)

Private and Public Investment, 1980 - 96(In percent of GDP)

Private and Public Investment in the MENA Region, 1980 - 96(In percent of GDP)


- 1

As detailed in recent IMF publications on the region (see listing at the back of thisstudy), at the forefront of the structural policy agenda, to varying degrees across the region,are reforms aimed at:

• enhancing financial intermediation;

• addressing inefficiencies in the labor market and training schemes;

• deregulating domestic markets and production structures;

• liberalizing highly protective external trade regimes;

• strengthening institutions; and

• improving the availability and coverage of data to permit more timely analysisand policy responses, as well as better functioning markets.

The objective of this combination of policies is to develop more flexible economiesthat are guided by market forces and that can quickly respond to structural changes in thedomestic and world economies. At the same time, the role of the State is being redefined tobe more supportive of productive private sector activities.

While much remains to be done (as described in Section IV), there are signs thatprogress has been made in these areas and that the momentum for reform is accelerating inseveral countries in the region. Indeed, after being essentially marginalized from the processof globalization of financial markets, the region is now finding a more enthusiastic receptionon the part of international capital markets: the flow of foreign capital to the region isincreasing, sovereigns and corporates are finding a healthy appetite abroad for their debtand equity issues, and international credit ratings agencies have awarded relatively strongratings to several countries and companies in the region. We are also witnessing increasedinterest on the part of foreign direct investment.

The following subsections discuss some of the more important ongoing structuralchanges.

a. Redefining the role of the government

A key element of structural reform among MENA countries has been to facilitate amore efficient allocation of resources and to reduce and redefine the role of governmentconsistent with the requirements of a modern and dynamic economy. As part of this effort,privatization programs are underway in many MENA countries, although the pace andscope of these programs varies considerably, with Egypt, Kuwait, and Morocco making themost progress (Box 4 outlines Kuwait's privatization program). Privatization efforts arespreading to most countries in the region. Most recently:

• Jordan has expanded significantly the range of its privatization effort;

• the Islamic Republic of Iran has resumed the divestiture of government shares inindustrial enterprises through sales on the Tehran Stock Exchange; and

• Israel intensified its privatization program. In July, the government signed anagreement to sell 12.5 percent of the electric company's stock as part of a plan


- 1

Box 4. Kuwait's Privatization Program

Origin

- Large government equity participation originated in the form of state support foreconomic development projects in the private sector, and subsequently, the acquisition ofequity held by the private sector in the aftermath of the financial market crisis of the early1980s.

- In 1994, the government adopted a comprehensive privatization program thatencompasses the sale of government equity shares in existing companies (with the exceptionof the core oil activities), as well as the transfer of management of public utilities, ports, andhealth services to the private sector.

Objectives

- Broaden the scope of private sector activity and thereby increase the overallefficiency of the economy.

- Strengthen the ties to the domestic economy by enhancing local investmentopportunities.

- Deepen the stock market.

- Create employment opportunities for Kuwaiti citizens.

- Contribute to the strengthening of public finances.

Divestiture of government shares

- At the outset of the privatization program, the Kuwait Investment Authority's (KIA)holdings of both listed and unlisted shares in some 50 companies were valued at KD 850million, and represented between 5 percent and 99 percent of total equity, depending on thecompany. Since mid-1994, the KIA has sold equity shares in 22 companies, for a total of KD760 million. The remaining holdings, now valued at some KD 1 billion, are expected to besold over the next two years.

- The pace of the divestiture is largely driven by the absorptive capacity of the market.Privatization methods have included public subscription of shares, open auctions, as well as acombination of the two. Most of the public offers have been largely oversubscribed.

Next step: Privatization of public services and utilities

- Privatization of public utilities, including telecommunications, and water andelectricity—currently administered by government ministries—is awaiting the adoption of aPrivatization Bill before the National Assembly.

- In addition to issues related to the method and scope of privatization, the law coversthe regulatory and pricing regime of the utilities concerned in view of their monopolisticnature. Issues of competition are also being addressed in the preparation of the privatization ofthe public transportation company and Kuwait Airlines. Moreover, plans are under way for theprivatization of some 30 retail gas stations.


- 1

to reduce the state's share from 76 percent to 51 percent and, in earlySeptember, 43 percent of a major bank was sold.

A number of countries are joining the privatization effort. Algeria has published a listof firms selected for privatization over the coming few years. The Republic of Yemen hasalso initiated its program, which is expected to proceed once initial difficulties related to thebidding process are resolved.

MENA's privatizations have had a number of direct and indirect beneficial effects.In terms of direct impact, and while information is not yet comprehensive in view of thelimited set of observations, initial indications are that several of the privatized firmsare being more productive, have enhanced their capital, and have not pursued massivelayoff programs. The indirect effects have included an important impetus to thedevelopment of domestic stock markets, attraction of foreign capital to related activitiesand, very importantly, a signal to the private sector as to the government's reformseriousness.

Facilitating greater reliance on market mechanisms has also encompassed price andmarketing reform, allowing the private sector into activities previously reserved only forthe public sector, and upgrading the regulatory structure. In this regard, several MENAcountries have taken further steps to remove price distortions (including Egypt, the IslamicRepublic of Iran, Morocco, Sudan, and the Republic of Yemen).

Algeria has taken far-reaching measures to liberalize price-setting mechanisms,including most recently, eliminating generalized food subsidies (Box 5). Jordan hasundertaken an important overhaul of the subsidy system to reduce waste and mistargetingwhile ensuring government support for private sector importation, storage, and distributionof certain food items. The Republic of Yemen is currently developing a system for moreefficiently targeting food subsidies. Public enterprises in the Syrian Arab Republic are nowpermitted greater price flexibility and the private sector may set its prices freely (withofficial monitoring)—a step toward full market determination of prices. Many countrieshave eliminated the concessional and preferential credit allocations in favor of moremarket-oriented approaches to promoting development of priority sectors.

At the same time, recognizing the enormous financing needs for infrastructuredevelopments, several MENA countries have opened up sectors recently reservedexclusively for the public sector. This includes power generation, airports, and roads.

Such measures have, in turn, helped to strengthen the structure of the budget byreducing budgetary transfers to privatized enterprises, limiting the expansion of spending onwages and salaries, and cutting outlays on transfers and subsidies. Some countries have alsotaken measures on the revenue side to broaden the revenue base so as to reduce dependenceon volatile revenue sources and better prepare themselves for reductions in external tariffs,including in the context of the Association Agreements with the European Union. Forexample, Egypt, Jordan, and Morocco have expanded the scope of their general sales tax,while Djibouti has extended the corporate tax to all enterprises and established aprogressive tax on properties.


- 1

Box 5. Algeria: Letting the Markets Set Prices

The Algerian reform package launched in April 1994 is aimed at establishing amarket-based outward-oriented economy. Thus, a cornerstone of the package was thenecessary realignment of relative prices and subsequent price liberalization. This strategy waspursued through the following key measures:

• Pursuit of an active exchange rate policy. At the onset of the program, a 50 percentexchange rate devaluation corrected for the overvaluation of the dinar. A gradual shift in theexchange rate regime from a peg to a managed float allowed for greater flexibility in the eventof adverse shocks. In addition, an interbank foreign exchange market was introduced atend-1995. Overall, between 1993 and 1996, the real effective exchange ratexiepreciated byabout 30 percent as a result of nominal depreciation combined with tight demand managementand incomes policies.

• Liberalization of interest rates. Notwithstanding a partial liberalization in the early1990s, interest rates were still negative in real terms in 1994. The deregulation of interestrates, together with the deceleration in inflation brought about by tight demand managementpolicies, has led to the emergence of positive real interest rates since 1996.

• Liberalization of prices. At the beginning of 1994, Algeria had a generalized systemof subsidies, which cost the budget more than 5 percent of GDP while giving rise to shortagesand black markets. In 1994, prices of inputs for agriculture and housing construction werefreed, and controls on retail prices and profit margins were lifted for most goods and services,except for a limited number of products including a few essential food staples, energyproducts and public transportation fares, which remained subsidized. The generalizedsubsidies on these goods were eliminated over the following two years. This was doneprogressively so as to mitigate the social impact and repercussions on the general price level.The remaining consumer subsidy on gas and electricity tariffs (less than 1 percent of GDP in1996) is to be phased out by end-1997.

• Reform of social safety net. To cushion the impact of the exchange rate depreciationand the elimination of generalized subsidies on the most vulnerable groups of society, theauthorities reformed the social safety net. They replaced cash transfers that were both poorlytargeted and costly to the budget by a decentralized public works program and an increase inthe transfers received by pensioners and the disabled.

• Trade liberalization. The realignment in relative prices was accompanied by a majorliberalization of the external trade and payments system, to provide appropriate marketincentives to the productive sector. In 1994, the authorities dismantled the cumbersomesystem of exchange controls, giving importers free access to foreign exchange for all but ashort list of imports. This negative list was eliminated at the end of 1994. In addition, theauthorities lowered the maximum custom duty rate from 60 percent in 1994 to 45 percent asof January 1, 1997, and consolidated its tariffs into five rates. Algeria accepted Article VIIIobligations in September 1997, and the Algerian dinar will be fully convertible for currentaccount transactions by end-1997.


- 1

b. Development of the private sector

As a complement to reducing the role of the state, most MENA countries are takingsteps to encourage the development of the private sector through deregulation, openingtheir economies to greater foreign participation, adopting transparent civil andcommercial procedures, and harmonizing tax provisions.

Until now, a number of MENA countries have been characterized by a complexbureaucratic network of regulations that have inhibited investment. Indeed, the bureaucracyof the region had assumed almost legendary proportions in the perceptions of certaininvestors. While the policy agenda remains large, it is encouraging that some countries haverecently introduced legislation aimed at simplifying investment procedures and streamliningbusiness applications (the guichet unique in Mauritania, the one-stop shop for licensing ofnew investment projects in Lebanon, and the Unified Investment Law in Egypt). Moroccohas recently adopted a new commerce code and corporate law, increasing the transparencyof the legislative framework governing foreign and domestic private investment. Similarsteps have been taken by Jordan.

Labor market concerns are rightly at the forefront of the policy agenda for mostMENA countries. This is also the case for the members of the GCC, which, while having nomajor unemployment problems at this time, face the prospects of a rapidly increasing laborforce.7 The labor situation is rendered more complex by the interaction of the fiscalretrenchment and civil service reform being undertaken by countries where the governmenthas essentially played the role of employer of first and last resort.

Measures outlined above aimed at expanding private sector activity have as a centralobjective the absorption of the increasing number of nationals seeking work. In support ofthat goal, some countries have taken action to strengthen training and education programs,so as to provide the population with the skills needed by the emerging private sector. Atthe same time, however, while development plans of certain MENA countries set outclear goals for reducing structural rigidities in the labor market, concrete steps remain tobe taken in most cases. The difficulties that Europe is having in this regard serve as animportant reminder as to the complexity of the policy challenge and the need to movedecisively.

c. Reforming the financial and external sectors

Financial sector reform in progress in many MENA countries is helping to enhancethe integrity of financial systems, promote financial intermediation, and improve the invest-ment climate. Its importance cannot be overstressed. The financial sector acts as the nervecenter of the economies and problems there often spread to other sectors. Moreover, thehistory of banking problems in a very large number of industrial and developing countriesillustrate the importance of maintaining progress, especially during the "boom times" whenthe seeds of future problems are often sown.

7See El-Erian and Sassanpour (1997) and Sassanpour and others (1997).


- 2

Some countries of the region have taken, or are considering, steps to open thebanking sector and local stock markets to greater foreign participation. Prompted by pastdifficulties in the banking sector and, in certain countries, concern about moral hazard,prudential regulation and bank supervision have been strengthened in many countries. Inaddition, with the recent explosion in the activities of local stock markets, the authorities ofthe countries concerned are taking actions to ensure stronger market infrastructure,particularly with respect to payments and settlement, custodian services, and informationdisclosure. Israel has been undertaking an extensive program of financial liberalization for anumber of years.8

As the financial markets in the region have tended to be rather thin until recently, thebanking authorities in some countries have taken steps to deepen the financial sectorthrough the introduction of new instruments (the Islamic Republic of Iran, Jordan, andLebanon), reform of the stock market (including, for example, by privatizing themanagement—Morocco and Tunisia), and development of a secondary market (Egypt andJordan). (Boxes 6 and 7 outline recent progress in Jordan and Tunisia.)

MENA economies, particularly the non-oil ones, have among the most protectiveexternal trade regimes in the world.9 Recognizing the benefits of globalization, and the needto compete in an increasingly integrated world environment, a growing number of MENAcountries have committed regionally and internationally to opening their markets throughexchange and trade liberalization. Such commitments have been made in the context ofWorld Trade Organization (WTO) membership, Association Agreements with the EuropeanUnion, reinvigoration of the Arab free-trade initiative, and unilateral actions.

Some countries have already undertaken concrete steps to ensure greater marketaccess to foreign goods and services. For example, Egypt has recently implemented twofurther rounds of tariff-cuts that are expected to enhance competition, as well as improvethe welfare of consumers. Jordan has also reformed the tariff system, and reduced importrestrictions significantly. Looking forward, both countries, as well as Lebanon and theSyrian Arab Republic, will face the challenges being confronted by Israel, Morocco, andTunisia as they implement the free-trade component of Association Agreements with theEuropean Union.

d. Strengthening institutions and enhancing information dissemination

Institution building is an important part of structural reform programs of manycountries. Efficient and transparent institutional structures, whether those carrying out keygovernment functions and policies, or those providing the judicial and legislative frameworkfor commercial activity, are key to creating an enabling environment for investment andpromoting a vibrant private sector. The challenge is a particularly acute one for the low-income economies of the region and those emerging from years of disruptions oroccupation.

8See Clifton (1994).9See Alonso-Gamo, Fennell, and Sakr (1997).


- 2

Box 6. Jordan: Recent Financial Sector Reforms

The Central Bank of Jordan (CBJ) has implemented a number of important measuresover the last year to deepen and liberalize the financial system.

• Reserve requirements. To allow more flexibility in holdings of requiredreserves, regulations on reserve requirements were changed in November 1996. Banks arenow permitted to maintain a daily minimum balance of 80 percent of their reserverequirements with the CBJ during a one-month maintenance period and may hold theremaining 20 percent on a period-average basis during the maintenance period. Moreover, toeliminate discrimination against intermediation in the Jordan dinar (JD), the reserverequirement on foreign currency deposits was lowered from 35 percent (remunerated) to14 percent (nonremunerated). Regulations on reserve requirements on dinar and JD depositsare thus identical.

• Resident and nonresident accounts. To facilitate banking operations, thedistinction between these accounts was abolished for several types of operations in November1996. These include identical treatment of resident and nonresident foreign currency deposits(FCDs) with respect to current payments, elimination of the ceiling on residents' FCDs,permission to banks to manage investments in foreign currencies for both residents andnonresidents, and the application of identical regulations governing margin foreign exchangetransactions to residents and nonresidents.

• Swap operations. To enhance the efficiency of the foreign exchange markets,swap operations in foreign exchange are now permitted as of November 1996, allowing bankclients to sell foreign exchange at the spot rate and repurchase it at a forward rate for anyperiod of time.

• Auctions of CBJ Certificates of Deposit (CDs). Starting last April, the authoritieshave modified the auction procedure for CDS, allowing more flexibility in interest rates whilealso lengthening the maturities of CDS offered (to include 12 months in addition to 3 and 6months maturities).

• Liberalization of the capital account. The CBJ liberalized all transactions inforeign exchange last June. Restrictions on foreign investment have been relaxed and the rulesand regulations relating to the Amman Financial market have been improved, contributing toincreased investor interest in Jordan.

In addition to these measures, the authorities are also undertaking reforms in the areasof money market development, banking supervision and regulation, payment system reform,and the introduction of deposit insurance.

Djibouti and Mauritania are taking steps through civil service reform and byenhancing policymaking capacity, with support from the international community. Nowhereis the importance of institution building more clear than in the Palestinian economy, whichhas had to establish the major institutions required to administer and implement economicpolicy. Here, the authorities, together with the international community, are putting in placesound budget procedures and tax administration, as well as set in place the basic functions


- 2

Box 7. Tunisia: Recent Financial Sector Reforms

Shift to indirect instruments of monetary policy

• General controls on interest rates were abolished in 1994. Preferential interest rates under amandatory lending scheme, whereby banks had to lend at least 10 percent of total deposits to certain prioritysectors (agriculture, export activities, and small- and medium-sized enterprises) were abolished in November1996.

Public sector's preferential access to savings reduced

• Since 1989, the system of mandatory holding of treasury bills by banks (legally abolished in 1994)has been replaced by auctions. In 1991, the treasury ceased the issuance of low-interest bearing developmentbonds (bons d'equipements). The introduction of longer term treasury instruments (bons du tresornegociables) since 1993, sold via public offerings to banks and tradable on the stock market, has contributedto the development of nonbank long-term financing.

Banking supervision strengthened and competition increased

• Since 1991, prudential supervision by the Central Bank of Tunisia (BCT) has been strengthened, andcommercial banks have been moving toward meeting tighter central bank rules on provisioning and aminimum capital-to-risk-weighted-assets ratio of 5 percent, which is considered broadly equivalent to the 8percent Cooke ratio. The BCT has agreed with individual banks on action plans to phase in full compliancewith the new prudential standards by the end of 1997.

• Through a partial restructuring of the government-owned agricultural bank (BNA) in 1996, BCTremoved a substantial portion of problem loans from the banking system. The average return on assets hasbeen steadily increasing from 0.6 percent in 1993 to 0.9 percent in 1996. The average return on equitydeclined during 1992-94 reflecting major recapitalization operations, in particular by public banks in 1992and 1994, which tended to increase the share of private ownership. In particular, the government effectivelyprivatized Banque de Sud, the country's sixth largest bank in October 1997, reducing its stake from 42percent to 30 percent by not participating in a recent share issue.

• To foster competition, an amendment to the banking law in 1994 and subsequent legislation loweredthe barriers between the commercial and development banks, while permitting the establishment of newfinancial institutions (investment banks) that provide financial services such as project finance, equityparticipation, and portfolio investment. The requirement to open at least one rural branch for every four newbranches a commercial bank opens was abolished in late 1996.

Securities market reform

• Based on reforms of the legal and regulatory framework of the stock market in 1989 and 1994,banking and brokerage functions were separated, and management of the Tunis bourse was transferred to thebrokers' association. In 1996, an independent supervisory commission (Conseil du marche financier) was setup to ensure transparency of transactions in the stock market and to enforce disclosure and prudentialrequirements of publicly traded firms. In addition, the Tunis stock market acquired an electronic quotationsystem.

Financial deepening

• Various measures of the depth of financial markets confirm the progress made to date. The ratio ofM4 (broad money including the bons cessibles) to GDP, an indicator of financial deepening, has approachedin recent years levels prevalent in France. Stock market capitalization and turnover have increased sharplysince 1993, albeit from a low level. Real interest rates have been positive since the mid-1980s, and havebroadly converged during the 1990s toward the level of comparable rates in France.


- 2

required of government, including the conduct of monetary policy. In its massive efforts toreconstruct and rehabilitate after the war, Lebanon is strengthening its institutionalframework; most recently in the fiscal area through important steps to strengthen taxadministration and computerization.

Countries in the region are also starting to recognize the importance of timelycompilation and public dissemination of comprehensive information on all sectors of theeconomy. As recent experience in other regions has demonstrated, dissemination of data is acrucial element in maintaining the confidence of private investors and in ensuring the soundmanagement of the economy. In this light, and given the relatively limited regional traditionof economic data dissemination, many countries of the region have initiated action tostrengthen data collection and enhance information systems. Some countries have alreadybegun to disseminate economic data via the Internet (e.g., Israel, Jordan, Kuwait, andLebanon).

e. Protecting the poor from the adverse effects of reform

The implementation of macroeconomic and structural reforms inevitably have anadverse impact on certain segments of the population, at least in the short term. At times, itis the poorest segments of the population that are least able to protect themselves.Accordingly, effective social safety nets are an integral component of successful economicdevelopment efforts.

To protect the poorest segments of the population that are adversely affected byadjustment, some MENA countries are implementing social safety nets and other socialprograms, often with the assistance of the World Bank and other creditors and donors. It isrecognized that such programs should be appropriately targeted and should, to the extentpossible, have limited distortionary effects on economic efficiency and incentives.

With these objectives in mind, the Republic of Yemen has established a socialwelfare fund, introduced an employment generating scheme for unskilled workers, and setup a vocational training program. Jordan is implementing a social productivity package,incorporating a community development fund, a job training and placement service for theunemployed, and a credit facility to encourage the establishment of small enterprises. ASocial Fund has been in operation in Egypt for some time with similar objectives. Socialissues have come to the forefront in Lebanon, and Phase II of the reconstruction programemphasizes building up the social infrastructure.

IV. The Next Step Forward

Despite the improvements in economic prospects in many MENA countries outlinedabove, much remains to be done in terms of consolidating progress achieved and extendingthe benefits of macroeconomic stabilization and reform more deeply and widely.

The extent of the challenge facing countries in the region should not be under-estimated: there are hurdles that must be overcome and opportunities to be seized.


- 2

• First, many countries in the region are attempting to overcome years ofeconomic underperformance, with entrenched vested interests and deep-rootedstructural weaknesses.

• Second, the external environment, while relatively favorable to many MENAcountries in the past two years, cannot and should not be relied upon to generatethe windfall gains recently experienced by some countries.

• Third, the world economy is evolving structurally at an accelerating pace,generating large rewards for reforming economies. As a result, MENA countriesface a stark choice: they must either move rapidly to restructure their economiesso as to participate in the evolving globalization and reap the rewards such aprocess offers, or maintain the status quo and risk missing out on the potential togenerate the wealth-enhancing effects that will bring greater affluence to theirpeople.

• Finally, recent setbacks to the establishment of a comprehensive, just, anddurable peace continue to undermine potentially positive region-wide economicactivities.

As a result of these factors, the onus of comprehensive adjustment and reform fallssquarely on the MENA countries themselves. They must create the conditions forsustainable growth if they are to be able to meet the needs of their rapidly-growingpopulations.

Given the different starting points of individual MENA economies—in terms of bothpolicies and initial income and wealth conditions—there is no single set of recommendationsthat fit all countries in the region. However, for presentational purposes—and at the risk ofsome overgeneralization—it is possible to think of MENA countries as being classified intotwo groups.

In the first group, we find countries that have advanced in macroeconomicstabilization and structural reforms, and that are being increasingly recognized by domestic,regional, and international investors. These countries must maintain their policy efforts,especially in deepening and widening structural reforms which, in international comparisonterms, are still lagging. This is critical if they are to succeed in raising savings andinvestment rates, improve total factor productivity and, thereby, sustain a high rate ofeconomic growth. This will require, in addition to intensifying the reform efforts outlinedabove, the move to a second generation of reforms that would further advance thetransformation of the role of the state in the economy and increase the transparency ofgovernment economic operations.

These countries also face the challenge of "managing their growing success" in anincreasingly rewarding but complex world economy. This year's financial and economicturbulence in Southeast Asia serves as an important reminder of the complexity and stakesof the challenge. The rapid and sizable capital flows that are an important feature (andbenefit) of globalization also present countries with a need to maintain a consistentlyvigilant approach to policymaking. While capital inflows reinforce and reward goodpolicies, policy slippages can generate rapid and destabilizing capital outflows, creating


- 2

unsustainable exchange rate pressures and exposing weaknesses in the financial system.Countries can also be subject to contagion effects—the transmission to the domesticeconomy of shocks occurring elsewhere in the international economy.

There are important lessons to be drawn from other countries' experience withgreater integration into the international financial system: there is no room for complacency,even—or perhaps especially—when economic conditions are good. MENA countries willneed to manage carefully the risks that accompany the enormous advantages associatedwith globalization. Diligence in monitoring risks is crucial. In this regard, efforts to increasetransparency in financial and government operations and to disseminate to the public timelyand comprehensive data on all aspects of the economy will be key to ensuring successfulmonitoring by both the private and public sectors and to facilitating rapid policy response bythe authorities concerned.

Outlined above are the challenges facing those countries that have alreadyprogressed down the road of economic reform. For the second group of countries, thosethat have yet to embark decisively on this journey, the path is even clearer. Determinedaction is needed in the short term if they are to set a sound foundation for growth and avoidbeing marginalized in the rapidly globalizing economy. For some countries, the immediatechallenge is to reverse unfavorable macroeconomic and debt dynamics. For others, there is aneed to tackle longstanding weaknesses in the structural aspects of their economies, startingwith the exchange and payments system, the financial sector, and the regulatory structures.10

While the initial adjustment is likely to be difficult, the payoff will be large in termsof providing for the basic needs of, and ensuring employment opportunities for, the rapidlygrowing populations in these countries. Indeed, these countries should draw encouragementfrom the experience of other economies in MENA. The speed with which the latter havebenefited from improvements in investor sentiment—domestic, regional, andinternational—provides an important demonstration effect as to what is both possible anddesirable.

V. Conclusion

Recent economic performance for the region as a whole has been favorable,reflecting not only positive developments in certain aspects of the external environment but,more importantly and increasingly, the pursuit of appropriate domestic policies in manycountries. As a result, growth has picked up, inflation has moderated further, and thefinancial balances—domestic and external—have improved.

Of course, performance has varied across countries in the region. Thoseimplementing sustained, far-reaching reforms have generally fared commensurately better.Others, including those facing particularly difficult noneconomic factors, continue to lagwith large immediate and medium-term costs for their population.

10The main areas of reforms are analyzed in IMF (1996).


- 2

Looking to the future, countries in the region will not be able to, and should not,rely on a favorable external environment to spur growth and achieve their broader socialand economic objectives: oil price developments over the medium term are unlikely to be asfavorable as they have been in the past two years; a comprehensive, just, and durable peacesettlement remains elusive; and many countries will continue to be adversely affected by thevagaries of weather. On the other hand, there are many aspects of the global environmentthat offer promise for the region, particularly globalization and its impact on increasingtrade opportunities, enhancing capital flows, and accelerating the transfer of technology andmanagerial knowhow.

It is clear that MENA countries themselves must take the measures necessary tobenefit from the possibilities presented by the evolving global economy. Only by intensifyingeconomic stabilization and market opening reforms will they be in a position to reap thepotential benefits of globalization. They will also need to keep in mind that the advantagesaccompanying greater integration in the global economy bring added risks, for example,sudden reversals of capital flows, and certain limitations on various policy instruments.These are risks that are not only worth taking, but can also be minimized through steadfasteconomic policy management.

For those countries that have successfully established sound macroeconomic funda-mentals, the next steps will involve creating an environment that will encourage higherdomestic savings, and larger and more productive investment, which in turn will promotesustainable growth over the longer term. For the remaining countries, success in meetingthe needs of the population will only be attained if action is taken now to address thefinancial imbalances and reduce the structural impediments to high and sustained growth.


- 2

ANNEXI i

MENA at a Glance

Coverage. The MENA region is defined to encompass the economies of the Arab League(Algeria, Bahrain, Djibouti, Egypt, Iraq, Jordan, Kuwait, Lebanon, Libya, Mauritania, Morocco,Oman, Palestine, Qatar, Saudi Arabia, Somalia, Sudan, the Syrian Arab Republic, Tunisia, the UnitedArab Emirates, and the Republic of Yemen), as well as the Islamic Republic of Iran and Israel.11 Theregion possesses abundant natural resources and, on average, enjoys a reasonable standard of living.However, individual countries exhibit a broad diversity of characteristics. They vary substantially innatural resources, economic and geographical size, population, and standards of living.

Size. The MENA region covers an area of more than 15 million square kilometers andcontains more than 300 million people, roughly 6 percent of the world's population. The population ofindividual countries varies considerably—the smallest among them have a population of about half amillion (Bahrain, Djibouti, and Qatar) and the largest have populations of some 60 million (Egypt andthe Islamic Republic of Iran). The nominal GDP of the region amounted to some US$720 billion in1996, roughly 2.5 percent of world GDP and about 14 percent of developing countries' GDP.

Population growth. Many MENA countries are experiencing rapid population growth andhave a high proportion of young dependents among their population. The average increase inpopulation in recent years has been about 3 percent, although a group of countries (Kuwait, Libya,Oman, Qatar, Saudi Arabia, and the United Arab Emirates) have registered a higher rate of growth of3.5 percent. Bahrain, Egypt, Lebanon, Morocco, and Tunisia have recorded relatively low rates ofpopulation growth (of about 2 percent) compared with the average for developing countries as a group.

Per capita income. The region includes some of the poorest countries in the world, with percapita incomes about US$200 (Somalia and Sudan), as well as countries among the high-incomegroup, with per capita incomes ranging between US$14,000 and US$18,000 (Israel, Kuwait, Qatar,and the United Arab Emirates).

Regional subgroupings. Many subgroupings have been used in the literature. The mostcommon include:

• Oil economies. Ten MENA countries are classified as oil-exporting countries. They areAlgeria, Bahrain, the Islamic Republic of Iran, Iraq, Kuwait, Libya, Oman, Qatar, SaudiArabia, and the United Arab Emirates. Although other countries (such as Egypt, the SyrianArab Republic, Tunisia, and the Republic of Yemen) also export oil, the role of this sector intheir economies is relatively limited.

• Cooperation Council for the Arab States of the Gulf(GCC). Member countries of the GCCare Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

• The Arab Maghreb Union. The member countries are Algeria, Libya, Mauritania, Morocco,and Tunisia.

• Mashreq. This group consists of Egypt, Israel, Jordan, Lebanon, the Syrian Arab Republic,and the West Bank and Gaza Strip.

11In view of the limited availability of data for Iraq, the aggregate figures presented in this publicationgenerally do not include information on this country.


- 2

ANNEX II

Economic Developments in the GCC Economies

As in MENA as a whole, recent economic performance in the GCC has been favorable,reflecting not only the sharp increase in oil prices in 1996, but also the pursuit of fiscal restraint andother reforms. In many respects, the policy issues facing the countries of the GCC are similar to thosefacing the region as a whole, although the particular nature of the GCC economies—most notably theiroil wealth, which accounts for more favorable initial conditions but greater vulnerability tointernational oil prices; and the segmented structure of their labor markets—present the authorities ofthese countries with particular nuances (Box 8). This is reflected in the medium-term plans that havebeen adopted, or are being discussed in these countries.

Macroeconomic performance has been favorable

Real GDP grew by 3.7 percent in 1996 and is expected to slow somewhat in 1997 to2.4 percent (Chart 3). Taking into account terms of trade effects, real per capita income grew sharplyin these two years as compared to the early 1990s. Inflation has been low in the GCC, averaging lessthan 1.5 percent in the past two years, reflecting prudent policies and the de facto peg of the GCCcurrencies to the U.S. dollar in an open economic system.

The most impressive element of economic performance among the GCC countries has beenthe dramatic improvement in the fiscal balances. Many countries were faced with substantiallyweaker budgetary situations following the regional crisis of 1990-91. The large expendituresassociated with that crisis, together with the slowdown in economic activity in the rest of the world anda decline in oil prices, led to a deterioration in their budgetary positions, with an average fiscal deficitfor the group (excluding Kuwait) of 15 percent of GDP in 1991. The drawdown in foreign assets alsoweakened the "built-in stabilization" role played by the region's investment income.

Recognizing the need to restore the favorable fiscal positions characteristic of the GCC in the1970s and early 1980s, these countries have in recent years strengthened the fiscal adjustment effortinitiated in the late 1980s, with the objective in most cases of achieving a balanced budget by 2000.Despite high oil prices and the consequent increase in oil-related budgetary revenues, this fiscal effort,particularly expenditure restraint, was maintained in 1996. As a result, the fiscal position improvedsubstantially—to a deficit of 2.3 percent of GDP in 1996. Given the continuation of fiscalconsolidation in 1997, the fiscal situation is expected to improve further, with a balanced fiscalposition projected for the year as a whole.

The higher oil prices in 1996 were also reflected in a strong improvement in the externalcurrent account balance of the GCC, which registered a turnaround after five years of deficits, to asurplus of 4.4 percent of GDP in 1996, with only a slightly lower surplus expected in 1997. Theexternal debt of the GCC countries has demonstrated a sharply declining trend in recent years, as aconsequence of tighter fiscal policies, together with the repayment of borrowing incurred in theaftermath of the regional crisis.

Structural reforms are progressing

On the structural front, the GCC economies are not encumbered with structural rigidities to thesame extent as other MENA countries. For example, they have more open exchange and trade regimes,and their financial systems are generally more developed. Nevertheless, and as recognized bygovernments, there is benefit in pursuing further structural reforms in the areas of labor markets and


- 2 9 -

Box 8. Selected Economic Characteristics of the GCC Countries

Heavy dependence on petroleum

• The hydrocarbon sector dominates the GCC economies. These countries account for53 percent of the world's proven petroleum reserves and 24 percent of world production.They also hold 14 percent of world's proven natural gas reserves.

• This sector contributes about 35 percent of GDP in these countries.

• Oil and gas exports account for more than 60 percent of total exports, ranging from37 percent in Bahrain to 90 percent in Oman.

• Oil and gas revenues represent on average 70 percent of total government revenues.Thus, the GCC countries' revenue base and overall fiscal position are highly vulnerableto developments in the international oil markets.

Relatively high per capita income

• The average per capita income of the GCC of US$10,718 is more than double the worldaverage. Nevertheless, within the GCC, per capita income varies considerably, fromUS$5,345 in Oman, to US$18,068 in Kuwait.

Liberal exchange and trade regime

• The GCC countries have pursued exchange systems based on de facto pegs to the USdollar. Monetary policy has been aimed at maintaining stability of the exchange rate as anominal anchor for the economy. Consequently, inflation has been low and relativelystable, a policy that has served to enhance private sector confidence.

• These countries are characterized by relatively open exchange and trade regimes, withvirtually no capital controls, full currency convertibility, and fairly liberal trade policies.

Limited economic diversification

Given the heavy dependence on the oil sector in GCC economies, a primary challenge facing thesecountries has been the diversification of the economic base beyond the petrochemical sector.Policies to promote diversification have included, to varying degrees, development of downstreampetrochemical activities, establishment of free trade areas, liberalization of foreign participationlaws, establishment of investment promotion agencies, pursuit of privatization programs.

A segmented labor market

Most GCC countries have segmented labor markets, with heavy reliance on expatriate workers hiredon fixed-term contracts (representing from 40 percent to more than 80 percent of the labor force indifferent GCC countries). The vast majority of GCC nationals are employed in the public sector,which generally pays higher salaries and offers more benefits than the private sector. The nationallabor force is growing rapidly (given the high population growth rates in the region—3.5 percent ayear) presenting difficult challenges for the GCC governments in terms of job creation.


- 3 0 -Chart 3. Macroeconomic Conditions in GCC Countries are Relatively Sound...

Real GDP Growth 1/(Annual changes, in percent)

Inflation

(Annual changes, in percent)

Central Government Fiscal Balance

(In percent of GDP)External Current Account

(In percent of GDP)

Source: IMF, World Economic Outlook.

17 Excludes Kuwait in 1990-93.


- 3 1 -

the fiscal sector. However, in other respects, their structural problems are similar to those of thebroader MENA group, particularly with regards to labor market rigidities, vulnerable structuralelements in the budget, and limited competition in certain sectors. The authorities recognize thechallenges in these areas, and are implementing reforms.

Despite the fiscal measures taken by GCC countries, the dependence on oil-related revenuesremains high, with non-oil sources contributing little to the total revenue effort. The structure ofspending is also an issue. Spending on government wages and salaries represents a large proportion oftotal spending.

Some countries have begun to take preliminary steps to broaden the revenue base. SaudiArabia has increased fees and charges and reduced subsidies, and Qatar has increased certain non-oiltaxes, and fees for health care and education. More marked progress has been made in the GCC as awhole in restraining current spending, in part through better expenditure management and controls,although capital spending has borne the brunt of adjustment in some countries.

Privatization is on the policy agenda for all of the GCC countries, although comprehensiveaction plans remain to be established in most of them. Noteworthy has been Kuwait's privatizationprogram, which has thus far involved divestiture of government shares totaling KD 760 million (someUS$2.5 billion), representing between 5 percent and 99 percent of total equity in individualenterprises. The divestiture program in the United Arab Emirates has gained momentum, and privateparticipation in new joint ventures has been successful, with projects in shipbuilding, insurance,banking, and some utility sectors.

The GCC countries are also moving toward allowing greater foreign participation as theyendeavor to diversify their productive base, particularly into downstream petrochemical activities.Several large state infrastructure and heavy industrial projects in Saudi Arabia and Oman involveprivate financing, as do the Equate petrochemical complex in Kuwait and the gas facility projects inQatar and Oman.

Financial sector enhancement has encompassed measures to diversify and deepen the market,including through the development of new products. All GCC countries have taken steps, to varyingdegrees, to strengthen banking supervision and regulation, and the bourses in some of the GCCcountries are beginning to permit trading by non-nationals. GCC countries that are seeking to furtheropen their financial sectors include Kuwait, Qatar, and the United Arab Emirates as well as Oman,where the government has drafted a law to increase opportunities for foreigners to participate intrading on the Muscat securities market, and Saudi Arabia, which has witnessed the launch of a mutualfund open to nonresidents.

Creating employment opportunities for their growing populations is a key policy objective ina number of GCC countries. Thus far, the focus of policy measures has been on promoting privatesector development through various measures, and enhancing education and training programs, withthe objective of providing new entrants to the labor market with the skills required for private sectorjobs.


- 3 2 -

ANNEX III

GCC Oil and Natural Gas12

GCC economies are heavily dependent on oil production

The countries of the GCC are endowed with abundant reserves of hydrocarbons, particularlycrude oil. Proven crude oil reserves in the GCC region (estimates of which have increased since themid-1970s) amount to 464.5 billion barrels, or about 46 percent of global proven reserves in 1995.However, there are wide disparities in petroleum endowments among the GCC countries. Saudi Arabiahas the dominant share, more than double the combined share of the next two largestproducers—Kuwait and the United Arab Emirates. Oman and Qatar have markedly smaller shares,while Bahrain is a very small producer. In 1995, the average reserve to production ratio in the GCCcountries was about 75 years, ranging from more than 120 years in Kuwait and the United ArabEmirates to 15 years in Oman (Table 2).

These countries account for about 21 percent of the world's oil production and about33 percent of global crude oil exports (Tables 3 and 4). Although exports of liquid natural gas(LNG)—derived from natural gas production—from the GCC region have been small in the past, theyare set to increase significantly when several export projects are completed in the medium term.

Not surprisingly, crude oil production dominates economic activity in the GCC countries.Oil contributes about 35 percent of GDP, 60 percent of export earnings, and 70 percent of revenues onaverage. In the last decade, petroleum exports have been supplemented by exports of petrochemicalsand, more recently, exports of LNG in some countries.

Given the heavy dependence of GCC countries on oil production, GCC economies arevulnerable to developments in the international oil market. Since 1970, crude oil spot prices havebeen volatile, although the volatility has declined considerably in recent years compared with earlierperiods (Chart 4).13 These fluctuations have added an important element of uncertainty topolicymaking among the GCC.

Recognizing their vulnerability to developments in the international oil market and the adverseimpact of volatile oil prices on economic growth, the GCC countries initiated efforts in the 1980s todiversify their productive base so as to reduce dependence of the domestic economy on oil exports.Typically, crude oil producers sought to increase the value added of the petroleum sector by developingthe production of petrochemicals from their abundant supplies of natural gas, propane, butane, andethane. By 1996, a fairly broad range of petrochemicals were being produced, including basicfertilizers, industrial alcohols, fuel oxidizing agents, synthetic fibers, and plastics. More recently,diversification has also included the development of energy intensive production of metals, includingaluminum and iron.

The government plays a predominant role in the petroleum sector of GCC economies. Therole of upstream foreign investment has been limited in the major oil producing countries, owing torestrictions governing foreign participation. Typically, foreign participation has been confined to jointventures in refining and petrochemical production. However, the smaller GCC oil producers haveencouraged greater upstream foreign participation using production sharing arrangements inexploration and oil field development. These arrangements have been successful in increasing crude oilproduction capacity.

12This section has been prepared by Thomas Enger.13The standard deviation of real oil prices, a measure of volatility, declined from 14.8 in 1970-85 to 1.9

in 1986-96.


- 3 3 -

Table 2. GCC Proven Crude Oil Reserves(In billions of barrels unless otherwise noted)

QatarKuwait2

OmanSaudi Arabia2

United Arab Emirates

Total GCC Proven Reserves

Memo Items:Global Proven Reserves

GCC share (percent)OPEC Proven Reserves

GCC share (percent)

1975

5.971.2

5.9151.832.2

267.0

666.740.0

463.144.1

1985

3.392.54.0

171.533.0

304.3

708.942.9

535.847.2

1990

3.097.04.2

260.198.0

462.3

1,005.646.0

771.450.6

1995

3.796.55.0

261.298.1

464.5

1,017.045.7

785.150.2

(Years)1995

R/P Ratio1

21129

1588

121

75

Source: OPEC; and British Petroleum.1The Reserve/Production ratio.2Includes Neutral Zone.

Table 3. Crude Oil Production, 1989-97(In millions of barrels a day unless otherwise noted)

QatarKuwait1

OmanSaudi Arabia1

United Arab Emirates

Total GCC

Memo Items:Neutral Zone Output2

Global Crude Supply3

GCC share (percent)OPEC Crude Supply

GCC share (percent)Crude Oil Price

(In billions ofU.S. dollars)4

1989

0.381.470.645.071.91

9.46

0.3766.06

14.323.80

39.7

17.84

1990

0.401.720.686.412.12

11.33

0.3066.92

16.923.0049.3

22.97

1991

0.391.120.718.232.42

12.86

0.1366.79

19.323.30

55.2

19.33

1992

0.400.310.758.402.29

12.15

0.3667.09

18.124.4049.8

19.03

1993

0.421.060.798.142.17

12.58

0.3667.45

18.724.70

50.9

16.82

1994

0.411.890.828.102.22

13.43

0.3968.56

19.625.00

53.7

15.89

1995

0.452.141.878.162.20

14.81

0.4369.94

21.225.10

59.0

17.17

1996

0.492.051.928.162.23

14.85

0.4872.0020.6

25.8057.6

20.42

Proj.1997

0.592.091.978.272.20

15.12

0.54

19.38

Sources: IEA; and IMF staff estimates.1Includes Neutral Zone Share.2Shared equally by Kuwait and Saudi Arabia.3Includes processing gains and OPEC Ngls.4Simole average of WTI, Brent, and Dubai.


— 3 4 —

Table 4. Exports of Crude Oil(In thousands of barrels a day unless otherwise noted)

QatarKuwaitOmanSaudi ArabiaUnited Arab Emirates

Total GCC

Memo Items:Global Exports

GCC share (percent)OPEC Exports

GCC share (percent)

1989

320850591

3,3361,650

6,747

25,81726.1

14,88045.3

1990

348645628

4,5001,895

8,016

27,09929.6

16,06049.9

1991

33685

6436,5262,195

9,785

27,80135.2

16,96057.7

1992

362696689

6,5822,060

10,389

28,99535.8

17,41059.7

1993

3411,440

7326,2931,970

10,775

30,17635.7

17,90060.2

1994

3231,264

7436,2341,955

10,517

31,27733.6

18,02058.4

1995

3331,186

7806,2911,925

10,515

32,06532.8

18,07058.2

Sources: OPEC; IEA; and IMF staff estimates.

Factors affecting petroleum production

All GCC countries, except Oman and Bahrain, are members of OPEC and therefore haveassigned quota allocations for crude oil production or oil supplied to the market. The current quotaallocations are: Kuwait-2.0 mbd; Qatar-0.378 mbd; Saudi Arabia-8.0 mbd; and the United ArabEmirates-2.161 mbd.

The evolution of the overall OPEC production depends, to a large extent, on developments inthe global demand for oil and non-OPEC production. Considering the expected evolution of theselatter factors, together with the magnitude of their proven reserves, several GCC countries are makingefforts to increase crude oil production capacity over the medium term, with the objective of increasingcrude oil production capacity by about 2.0 mbd by 2002. The GCC countries thus plan to invest in therange of $4 billion to $6 billion in oil field development in the medium term.14 The trend in thedevelopment of crude oil production capacity has been to develop fields that have light, sweet crudesthat typically sell for a premium in Asia. In addition, GCC countries have been increasing theproduction of condensates with the development of new oil and gas fields.15

Current situation with regard to natural gas production

Total proven natural gas reserves (LNG) for the region quadrupled between 1975 and 1995,from 5,100 billion cubic meters (bcm) to 20,100 bcm. Proven associated and nonassociated natural gasreserves vary widely among the GCC countries (Table 5). Consequently, natural gas production hasincreased over this period, from 48 billion cubic meters (bcm) to 97 bcm (Table 6).

14This conservative estimate does not include (1) investments in planned expansions where the costs areunknown as yet; and (2) investments needed to maintain the output of existing fields, which could be largebecause they involve natural gas and water injection.

15Commonly referred to Ngls and are by-products of both crude oil and natural gas production. Theyinclude natural gasoline, naphtha, benzene, and pentane.


Chart4. Nominal and Real Crude Oil Prices, 1970-96 1/(In U.S. dollars per barrel)

Sources: IMF, International Financial Statistics; British Petroleum Co.; and IEA.11970-87 Arab Light; 1988-96 Dubai.2In 1990 prices.


- 3 6 -

Table 5. Proven Gas Reserves and Production in 1995(In billions of cubic meters unless otherwise noted)

BahrainKuwaitOmanQatarSaudi ArabiaUnited Arab Emirates

GCC Total

World TotalGCC Share (percent)

ProvenReserves1

1471,494

2837,0705,3415,831

20,166

150,24113.4

Production

1.96.04.8

13.640.330.1

96.8

2,207.04.4

(Years)R/P Ratio2

77250

58520132194

208

Source: Cedigaz.Estimated at 1/1/1996.2The Reserve/Production ratio.

Table 6. GCC Total Natural Gas Production(In billions of cubic meters unless otherwise noted)

1985 1990 1995

BahrainKuwaitOmanQatarSaudi ArabiaUnited Arab Emirates

GCC Total

World OutputGCC Share (percent)

4.54.21.85.5

18.813.2

48.0

1,670.12.9

5.84.22.66.3

30.520.1

69.5

1,988.83.5

1.96.04.8

13.640.330.1

96.7

2,119.64.6

Sources: BP; and Cedigaz.

Reflecting changing government strategies, the development of natural gas reserves hasbecome a priority in recent years for several reasons. First, economic growth and population growth inthe GCC countries indicate increased demand for gas to generate electricity for both business andresidential use. Second, urban and agricultural development have increased the demand for water,which requires electrical power for desalination. Third, governments have recognized the importantcontribution to domestic budgetary revenues from exports of LNG and associated condensates, as wellas from the domestic sale of natural gas for feedstock. Fourth, natural gas feedstock is the basis for thefurther development of the petrochemical business in the region—an important element ofgovernments' economic diversification strategy.


- 3 7 -

References

Alonso-Gamo, Patricia, Annalisa Fedelino, and Sebastian Paris Horvitz, 1997, "Globalization andGrowth Prospects in Arab Countries," IMF Working Paper No. 97/125 (Washington:International Monetary Fund).

Alonso-Gamo, Patricia, Susan Fennell, and Khaled Sakr, 1997, "Adjusting to the New Realities:MENA, the Uruguay Round, and the European's Mediterranean Initiative," IMF WorkingPaper No. 97/5 (Washington: International Monetary Fund).

Clifton, Eric, 1994, "Financial Liberalization in Israel," IMF Paper on Policy Analysis and Assessment94/14 (Washington: International Monetary Fund).

Bisat, Amer, Mohamed A. El-Erian, and Thomas Helbling, 1997, "Restoring the Boom: Growth,Investment, and Savings in the Arab World," IMF Working Paper No. 97/85 (Washington:International Monetary Fund).

Eken, Sena, Thomas Helbling, and Adnan Mazarei, 1997, "Fiscal Policy and Growth in the MiddleEast and North Africa Region," IMF Working Paper No. 97/101 (Washington: InternationalMonetary Fund).

El-Erian, Mohamed A., and Cyrus Sassanpour, 1997, "GCC's Macroeconomic Policies," in The GCCin the Twenty-First Century, ed. by Julia Devlin (Washington: Georgetown University).

El-Erian, Mohamed A., and Sheybani, S., 1997, "Private Capital Flows in the Development of theArab Countries," paper presented at The Cairo Papers' Sixth Annual Symposium: The MiddleEast and Development in a Changing World, January.

International Monetary Fund, 1996, "Building on Progress: Reform and Growth in the Middle Eastand North Africa" (Washington).

International Monetary Fund, 1997, World Economic Outlook, Spring and Fall (Washington).

Sassanpour, Cyrus, Ghazi Joharji, Alexei Kireyev, and Martin Petri, 1997, "Labor Market Challengesand Policies in the Gulf Cooperation Council Countries," in Financial Systems and LaborMarkets in the Gulf Cooperation Council Countries (Washington: International MonetaryFund).

Serageldin, Ismail, 1996, paper presented to the Arab Regional Conference on Populations, Cairo.

Shafik, Nemat, 1994, "Big Spending, Small Returns: The Paradox of Human Resource Developmentin the Middle East" (Washington: World Bank).

World Bank, 1995, "Claiming the Future: Choosing Prosperity in the Middle East and North Africa"(Washington: World Bank).


- 3 8 -

Recent IMF Publications on the Middle East andNorth Africa Region (1994-97)

Books and Seminar VolumesFinancial Policies and Capital Markets in Arab Countries, edited by Said El-Naggar, 1994.

The Uruguay Round and the Arab Countries, edited by Said El-Naggar, 1996.

Currency Convertibility in the Middle East and North Africa, edited by Manuel Guitian and Saleh M.Nsouli, 1996.

The Social Impact of Economic Reform on Arab Countries, edited by Taher Kanaan, 1997.

Occasional PapersNo. 117. Resilience and Growth Through Sustained Adjustment: The Moroccan Experience, by

Saleh M. Nsouli, Sena Eken, Klaus Enders, Van-Can Thai, Jorg Decressin, and Filippo Cartiglia,1995.

No. 120. Economic Dislocation and Recovery in Lebanon, by Sena Eken, Paul Cashin, S. Nuri Erbas,Jose Martelino, and Adnan Mazarei, 1995.

No. 136. Jordan: Strategy for Adjustment and Growth, edited by Edouard Maciejewski and AhsanMansur, 1996.

No. 150. Kuwait: From Reconstruction to Accumulation for Future Generations, by Nigel Chalk,Mohamed A. El-Erian, Susan Fennell, Alexei P. Kireyev, and John Wilson, 1997.

Forthcoming. Macroeconomic Stabilization and Systemic Transformation: The AlgerianExperience, by Karim Nashashibi, Patricia Alonso-Gamo, Alain Feler, Stefania Bazzoni, NicoleLaframboise, and Sebastian Paris-Horvitz.

PamphletsGrowth and Stability in the Middle East and North Africa, by Mohamed A. El-Erian, Sena Eken,

Susan Fennell, and Jean-Pierre Chauffour, 1996.

Policy Challenges in the Gulf Cooperation Council Countries, prepared by staff of the MiddleEastern Department, 1996.

Building on Progress: Reform and Growth in the Middle East and North Africa, prepared by staff ofthe Middle Eastern Department, 1996.

Recent Economic Developments, Prospects, and Progress in Institution Building in the West Bankand Gaza Strip, prepared by staff of the Middle Eastern Department, 1997.

A Global Integration Strategy for Mediterranean Countries: Open Trade and Market Reforms, byOleh Havrylyshyn, 1997.

Financial Systems and Labor Markets in the Gulf Cooperation Council (GCC) Countries MiddleEastern Department, 1997.

Working PapersNo. 94/55. "The Arab Maghreb Union," by Mohamed Finaish and Eric Bell.

No. 94/103. "Emerging Equity Markets in the Middle Eastern Countries," by Mohamed A. El-Erianand Manmohan S. Kumar (also published in IMF Staff Papers, Vol. 42, June 1995).


- 3 9 -

No. 94/129. "Dollarization in Lebanon," by Johannes Mueller.

No. 95/69. "The Parallel Market for Foreign Exchange in an Oil Exporting Economy: The Case ofIran, 1978-1990," by Adnan Mazarei.

No. 95/97. "Imports Under a Foreign Exchange Constraint: The Case of the Islamic Republic of Iran,"by Adnan Mazarei.

No. 96/7. "Effects of the Uruguay Round on Egypt and Morocco," by Clinton R. Shiells, ArvindSubramanian, and Peter Uimonen.

No. 96/30. "Is MENA a Region? The Scope for Regional Integration," by Mohamed A. El-Erian andStanley Fischer.

No. 96/124. "Investment and Growth in the Middle East and North Africa," by Amer Bisat, MohamedA. El-Erian, Mahmoud El-Gamal, and Francesco Mongelli.

No. 96/136. "Mobilization of Saving in Developing Countries: The case of the Islamic Republic ofIran," by Mohamed A. El-Erian and Manmohan S. Kumar.

No. 97/5 "Adjusting to the New Realities: MENA, Uruguay Round, and the European Union'sMediterranean Initiative," by Patricia Alonso-Gamo, Susan Fennell, and Khaled Sakr.

No. 97/8. "External Stability Under Alternative Nominal Exchange Rate Anchors: An Application tothe GCC Countries," by Zubair Iqbal and S. Nuri Erbas.

No. 97/47. "Intra-Industry Trade of Arab Countries: An Indicator of Potential Competitiveness," byOleh Havrylyshin and Peter Kunzel.

No. 97/22. "Broad Money Demand and Monetary Policy in Tunisia," by Volker Treichel.

No. 97/81. "Financial Sector Reforms in Algeria, Morocco, and TunisiaCA Preliminary Assessment,"by Abdelali Jbili, Klaus Enders, and Volker Treichel.

No. 97/85. "Restoring the Boom: Growth, Investment, and Savings in the Arab World," by AmerBisat, Mohamed A. El-Erian, and Thomas Helbling.

No. 97/105. "The Egyptian Stabilization Experience: An Analytical Retrospective," by ArvindSubramanian.

No. 97/101. "Fiscal Policy and Growth in the Middle East and North Africa Region," by Sena Eken,Thomas Helbling, and Adnan Mazarei.

No. 97/125. "Globalization and Growth Prospects in Arab Countries," by Patricia Alonso-Gamo,Annalisa Fedelino, and Sebastian Paris-Horvitz.

Papers on Policy Analysis and AssessmentNo. 94/14. "Financial Liberalization in Israel," by Eric Clifton.

Forthcoming"Financial Sector Reform in the Countries of the Middle East and North Africa," by Nigel Chalk,

Abdelali Jbili, Volker Treichel, and John Wilson.

"What Ought to be the Role of the State in the Financial Sector? A Conceptual Frameworkfor Analysis and an Application to the case of Morocco," by Paul Chabrier and Oussama Kanaan.

Other"GCC's Macroeconomic Policies," by Mohamed El-Erian and Cyrus Sassanpour, in Julia Devlin (ed.),

The GCC in the Twenty-First Century (Washington: Georgetown University, 1997).


- 4 0 -

"Financial Sector Reform in Morocco and Tunisia," by Abdelali Jbili, Klaus Enders, and VolkerTreichel, Finance and Development, September, 1997.

"Globalization and the Arab Economies: From Marginalization to Integration," by Mohamed A. El-Erian, Working Paper No. 14., Egyptian Center for Economic Studies, July 1997.

"The Middle East's Investment Challenge," by Mohamed A. El-Erian, Middle East Policy, 1996.

"Middle East Economies' External Environment: What Lies Ahead?" by Mohamed A. El-Erian, 1996.Middle East Policy, Vol. IV, No. 3, pp. 1337-146.

"Attracting Foreign Direct Investment to Arab Countries: Getting the Basics Right," by Mohamed A.El-Erian and Mahmoud A. El-Gamal (1997). Paper presented to the Inter-Arab InvestmentGuarantee Corporation's conference on foreign direct investment, held in Tunisia in March 1997.Forthcoming as an Economic Research Forum Working Paper.

"The Arab Experience of Linking to International Financial Markets," by Mohamed A. El-Erian,March 1997; Arab Banker.

"Economic Reforms, Growth, Employment, and the Social Sectors in the Arab Economies," byMohamed A. El-Erian and Patricia Alonso-Gamo, January 1997, in The Social Effects ofEconomic Adjustment on Arab Countries, edited by T. Kanaan.

"Private capital flows in the Development of the Arab countries," by Mohamed A. El-Erian andShahpasand Sheybani. Paper presented in "The Cairo Papers' Sixth Annual Symposium: TheMiddle East and Development in a Changing World."

"Financial Reform in the Middle-Income Arab Countries: Lessons from the Experiences of OtherDeveloping Countries," by Amer Bisat, July 1996.

"Economic performance and Government Interventions in the Arab World," by Rakia Moalla-Fetini,and John Waterburry.

"Implications of the Uruguay Round for the Arab Countries: A General Analysis," by P. Chabrier,Mohamed A. El-Erian, and R. Moalla-Fetini, April 1996: in The Uruguay Round and the ArabCountries, edited by S. El-Naggar.

"The Association Agreement Between Tunisia and the European Union," by Abdelali Jbili and KlausEnders. Finance andDevelopment, 1996, pp. 18-20.

"The European Union's New Mediterranean Strategy," by Saleh Nsouli, Amer Bisat, and OussamaKanaan, Finance and Development, 1996, pp. 14-18.

"The Paradox of Successful Adjustment Policies," by Mohamed A. El-Erian, April 1996: ArabBanker.

"The European Union's New Mediterranean Strategy: A Review of Readiness Indicators of SelectedMediterranean Countries," by Saleh Nsouli, Amer Bisat, and Oussama Kanaan, IMF, November1995.

"Strengthening the Financial Sector in the Arab Economies," by Mohamed A. El-Erian, August 1995:Arab Banker.

"Multiple Exchange Rate Regimes: Lessons from the Experience of Arab Countries," by Mohamed A.El-Erian in Finance and Development, reproduced by Middle East Executive Reports, Al AlamAl Youm and Business Recorder.

"Middle East Financial Markets: Potential for Development and Internationalization," by Mohamed A.El-Erian, June 1994: Middle East Executive Reports.


the economy of the middle east and - elibrary.imf.org€¦ · the economy of the middle east and...

Documents