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Emerging Markets

Middle East recovery ‘not yet settled’

A broad consensus is emerging that while the Middle East has survived the global crisis far better than other regions, there are big challenges remaining, especially in containing unemployment and poverty.

The IMF’s World Economic Outlook projects that regional growth will fall from 5.4% in 2008 to 2% in 2009, before rebounding to 4.2% in 2010. Similar forecasts are expected to be used in the Fund’s Middle East Regional Economic Outlook, to be launched on Sunday in Dubai.

Shamshad Akhtar, the World Bank vice-president for the Middle East and North Africa (MENA), has been particularly active in Istanbul in highlighting the region’s relatively high unemployment. The bank projects joblessness to rise in 2009/10 by 25% in the Middle East and 13% in North Africa, despite growth second only to Asia.

“The message, globally, is that, yes, there are signs of recovery, but it [the situation] hasn’t settled deeply,” Akhtar told Emerging Markets. “We [in MENA] already had 20 million people unemployed, and we have new entrants to the labour force [due to high population growth], so we have a problem”.

Akhtar warned that a disproportionate number of people, especially in Egypt and Morocco, were hovering just above the $2-a-day income threshold for poverty, meaning that the region could ill afford complacency over the knock-on effects of rising joblessness.

This was the major factor behind the bank’s increased lending in MENA from $1.8 billion in 2008/09 to more than $3 billion in 2009/10, she said.

“Demand is steep,” she said. “Three billion dollars is lower than existing demand for development-policy lending. Our clients tell us they need [to finance] reforms – and not just at macro level. Countries want to strengthen their financial structures, they want more micro-finance. They want affordable mortgages and pension reform. They want to restructure social safety nets.”

The World Bank’s 2009: Economic Developments and Prospects, which it launched last week in Istanbul, drew attention to the “opportunity” presented to governments by the economic crisis to “ease infrastructure bottlenecks and restructure ineffective – yet expensive – subsidies programmes”.

Mohsin Khan, the IMF’s former Middle East chief, told Emerging Markets in a telephone interview that governments had much still to analyse in their management of the economic crisis.

He said the “clearer” changes over the past year in the Middle East had been in monetary rather than fiscal policy.

The region’s monetary reaction to the crisis was “unprecedented”, explained Khan, Senior Fellow at the Peterson Institute for International Economics in Washington. “Back in 2007, there was a lot of worry about the inflation rate. There was talk of reining in monetary expansion, the revaluation of exchange rates ... that has changed.

“They are mirroring what the advanced countries have done – lowering interest rates, which are now very low.”

Fiscal policy had been less innovative, he added. “The [fiscal] stimulus was already in the works when the problems arose. There were big infrastructural projects in the Gulf: the economic cities, the Dubai metro - and they weren’t scaled back. The stimulus was in the works anyway.”

Khan added that while inflation was “picking up” in some countries – he cited Egypt, where a rise to 16.2% in 2009 from 11.7% in 2008 is projected by the IMF – it would not become a big problem in the near future.

“A large part of the inflationary pressure was structural – commodity prices and house prices, and not to do with monetary policy,” he said. A more pressing issue, he added, was corporate over-borrowing in the Gulf.

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