With a worsening global environment, the MENA region is expected to be faced with several challenges including a global slowdown and the tightening of global financial conditions. Oil exporters are currently benefiting from high energy prices, while middle income economies are feeling the constraints of financial instability. Low income countries are struggling with high commodity prices and the lingering effects of COVID, including limited progress with vaccinations. Although MENA experienced a growth in GDP in 2022, IMF predicts that worsening global conditions will weigh on the region in 2023 with growth projected to slow to 3.6%. Inflation has continued to increase and will remain in double digits through 2023 for the third consecutive year.
Despite challenging conditions, global economic activity has proved to be resilient thus far and is anticipated to continue with a “multi speed recovery”. Restoring price stability, tackling food insecurity, mitigating the cost-of-living crisis, and protecting the vulnerable are noted as the most pressing policy priorities for the region. (IMF Regional Outlook)
Growth in MENA is projected to decelerate to 3.5 percent in 2023 and to 2.7 percent in 2024. The regional slowdown is mainly on account of a fading boom in net oil exporters where growth is expected to slow to 3.3 and 2.3 percent in 2023 and 2024, respectively, from 6.1 percent in 2022. While the estimated rebound in 2022 in Saudi Arabia was well above last June’s forecast, projections for growth for 2023 and 2024 have been revised down, to 3.7 percent and 2.3 percent, respectively. The downward revision to growth prospects reflects expected deceleration in major trading partners, new oil production cuts, and lagged effects of tightening domestic monetary policy. Growth in Iraq is forecast to slow to 4.0 percent in 2023 and 2.9 percent in 2024, below its pre-pandemic pace. Water and electricity shortages, as well as political instability and violence, are likely to impede a stronger expansion. The Syrian Arab Republic is forecast to contract further in 2023. Its economy is facing multiple shocks, including climate impacts, ongoing violence, policy uncertainty, cholera outbreaks, and fuel shortages.
As a result of the conflict, incomes have halved between 2010 and 2020, and households are facing unprecedented levels of poverty and food insecurity. In the region’s net oil importers, growth is projected to be steady over 2023-24, at slightly above 4 percent a year. Growth in the Arab Republic of Egypt, while continuing to benefit from earlier reforms, is expected to slow to 4.5 percent in FY2022/23 (July 2022- June 2023), as high inflation erodes real wages, weighing on domestic consumption. Weakening growth of external demand is also likely to limit activity in the manufacturing and tourism sectors. Fiscal and monetary policy tightening to rein in high inflation and a large current account deficit are expected to further restrain growth. In Morocco, growth is projected to pick up to 3.5 percent in 2023—below previous projections—and to 3.7 percent in 2024 as its agriculture sector recovers gradually from last year’s drought. Government spending is expected to partially offset weakness in private consumption stemming from high inflation. Risks: Risks to growth remain to the downside. Spillovers from further weakness in key trading partners, tighter global financial conditions, increasing climate-related risks, rising social tensions, and political instability highlight the possibility of further economic contractions and increasing poverty. A further deterioration in global and domestic financial or economic conditions could see economies with large macroeconomic imbalances fall into crisis.
Insufficient Growth Capital
Promoting SME resiliency and growth is well recognized contributor to both GDP and to political stability – and many country policies, including those in the MENA region, have been developed to promote economic activity in this sector. Yet, access to finance continues to be one of the greatest challenges for the region where nearly 63 percent of the SMEs do not have access to commercial capital. The total financing gap for SMEs in MENA is estimated at $210 to $240 billion (of which the formal sector gap is estimated at $160-180 billion). A recent World Bank/Union of Arab Banks survey of over 130 MENA banks shows that only 8 percent of lending goes to SMEs across MENA (and even less in GCC countries at 2 percent).
Not surprisingly, banking in the region is characterized by conservative lending practices, where credit risk is minimized through the imposition of high collateral requirements. Lack of sufficient collateral is the number one reported (by borrowers) obstacle to receive bank commercial funding. From the commercial lenders’ perspective, advancing relatively small amounts to widely distributed and undercollateralized borrowers is simply too costly a venture to pursue.
Addressing the long-term structural impediments to regional job creation is a massive challenge charged by political, social and economic considerations that limit the influential effectiveness any single course of action. Nevertheless, parsing the problem into smaller bits is an important step, particularly when demonstrable evidence is at hand to support unique interventions.
As it relates to overall employment in the region, the significance of the SME sector (also known as Small & Medium Enterprises) cannot be overstated. SMEs account for a very high share of private sector employment in MENA, particularly in countries with large informal sectors where they represent about 80% percent of all business (estimated at 19-23 million) contributing 40% of all jobs. In the typical non-GCC MENA country, SME businesses (including in the informal sector) are more likely to employ as much as 67 percent of total labor.
Women are almost three times more likely to be unemployed than men, despite the fact that more young women than men in the Arab world are graduating from universities.
Private-sector development is a critical part of the solution. Entrepreneurship, access to finance, increasing IT connectivity, and reducing regulatory burdens for small businesses can help fill the jobs gap.
At an estimated 25%, the youth unemployment rate in the MENA region is almost five times higher than the joblessness rate for older adults. In North Africa, youth unemployment is higher than the Arab average: 30% for both sexes and 45% for young women.
In the MENA region, youth unemployment rates have exceeded 25% since 1991. By the early 2000s, for every job that was created, four jobseekers entered the labor market. High labor force growth, skill mismatches, large public sectors, and high reservation wages have been key factors behind the large and persistent level of youth unemployment. (IMF)