With the advent of 2022, countries around the world are facing difficult decisions after the economic devastation wrought by the COVID-19 pandemic since its emergence in early 2020. Governments have no choice but to mobilize every resource at their disposal to continue fighting the virus while devising new strategies to stimulate their economies and adopting stimulus packages.
Countries across the Middle East and North Africa region are in the same quandary, plagued by the spread of the COVID-19 and reeling from compromised economies. According to the World Bank, the estimated direct cost of the pandemic across the Arab world reached a staggering $200 billion, and both the World Bank and the International Monetary Fund had to reassess their earlier GDP estimates for these states, irrespective of whether they are oil producers or oil importers.
“Overall, the estimated cumulative cost of the pandemic in terms of Gross Domestic Product (GDP) losses in the region by the end of this year will amount to almost $200 billion. These costs are calculated by comparing where the region’s GDP would have been if the pandemic had not hit,” the World Bank said in a report published in late 2021.
It added that the region’s GDP contracted by 3.8% in 2020 and was expected to grow by 2.8% in 2021.
The World Bank’s updated report, titled “Overconfident: How Economic and Health Fault Lines Left the Middle East and North Africa Ill-Prepared to face Covid19,” focused on how health systems in the MENA region suffered greatly during the pandemic.
The report further argued that the region’s public health systems were ill-prepared to absorb the shock of the pandemic, noting that authorities had previously painted an overly optimistic picture in self-assessments of their health systems’ preparedness.
“The pandemic’s crippling impact on economic activity in the region is a painful reminder that economic development and public health are inextricably linked. It is also a sad reality check that MENA’s health systems, which were considered relatively developed, cracked at the seams under the crisis,” said Ferid Belhaj, World Bank Vice President for the MENA region.
As things stand now, the ability of Arab states, which dominate most of the MENA’s map, to achieve their desired GDP growth in 2022 hinges on their respective governments’ success in facing a new wave of the virus while ensuring economic growth remains on track.
Two prominent economists interviewed by Economy Middle East Magazine believe that Arab countries, whether producers or importers of oil, will achieve a GDP growth in 2022 provided that their governments adopt measures to stimulate all economic sectors.
“Oil exporters in the region faced a double whammy with an initial period of falling oil prices and the direct negative impact from the pandemic,” said Nasser Saidi, a leading economist and the founder and president of Nasser Saidi & Associates. “The pandemic resulted in fiscal, monetary and macro stimulus: As oil prices remained low, countries with sufficient fiscal buffers [mainly the GCC, and Egypt to a lesser extent] were able to extend funds to vulnerable segments of the population and affected sectors.”
Saidi added that several countries had to tap into the international markets to get support. “The main challenges [in 2021] continued to be the pace of recovery and unemployment levels, poverty and inequality levels, while headline and food inflation are creeping up,” he said.
Countries that rely on tourism are witnessing a slower recovery than others and unemployment is higher compared to pre-pandemic levels, with some groups, namely women and youth who have jobs in the informal sectors, having suffered a great deal more. In addition, as global food prices continue to rise, inflation has hit oil importing nations much harder.
On the other hand, although oil exporters have benefited from the uptick in oil prices and the OPEC+ stance on a gradual increase in production levels, Saidi said some states such as Kuwait and Oman need to carry out extensive fiscal reforms in the near term for fiscal sustainability.
He pointed out that even among oil-producing countries, those that were able to roll out vaccinations more rapidly were better able to manage recoveries.
“Non-oil sectors are now supporting economic recovery in the GCC: PMIs are on an expansionary path with high consumer and business sentiment. Given the increase in oil prices, both the fiscal and current account balances improved this year. However, for some GCC countries, government debt as a share of GDP has increased and will continue to remain higher compared to the pre-pandemic era,” Saidi added.
Furthermore, a steady stream of reforms geared to attract expats and foreign firms have been beneficial for Saudi Arabia and the UAE.
Despite the fact that some oil importing nations rely heavily on tourism, especially international tourists, some have seen better growth over in the recent period as compared to others. Egypt, for example, has been implementing reforms and the IMF program over the past few years, which have helped it mitigate the impact of the pandemic.
In addition, labor market reforms such as removing barriers to labor mobility, reducing and removing payroll taxation will also be pivotal for near-term recovery and inclusive growth.
“Remittances have been a boon for many labor-exporting nations – 2021 has seen a rise in remittance levels to countries in the MENA region [with Lebanon and Jordan benefiting],” Saidi said.
For his part, Dr. Marwan Barakat, Group Chief Economist and Head of Research at Bank Audi, said the COVID-19 pandemic’s repercussions coupled with the exacerbation of domestic crises resulted in a major setback in economic conditions in the MENA region’s oil-importing countries.
“Although stringent work closures are starting to be relaxed in many countries, the measures have caused substantial economic slowdowns and continue to have a widespread impact,” Barakat said, noting that the COVID-19 pandemic has disproportionately affected the welfare of poor households, amplifying existing inequalities.
He added that it was within this environment that a 0.6% real GDP contraction is estimated by the IMF for MENA oil importers in 2020, further exacerbating existing structural weaknesses.
Barakat said that MENA’s oil-importing countries had already been suffering from long-term structural challenges including low GDP growth, low employment (especially among the youth and women), poor foreign direct investment inflows, a weak investment climate, poor participation in global value chains, and rising levels of debt.
“These pre-existing conditions, which are reflective of the fragile conditions in many countries in the region, have amplified the negative effects of COVID-19,” Barakat said.
The World Bank’s forecast for the region’s GDP per capita is a mere 1.1% growth in 2021 following a decline of 5.4% in 2020. By the end of 2021, the region’s GDP per capita will still remain below the 2019 growth level of 4.3%, while 13 out of 16 countries in the region will have lower standards of living in 2021 than their pre-COVID levels.
For individual countries, the GDP per capita growth rate in 2021 varies, ranging from -9.8% in Lebanon, which is in a deep recession, to 4% in Morocco. Recovery will also depend on a rapid and equitable rollout of vaccines particularly as new variants of the virus emerge.
Outlook for 2022
According to Saidi, the GCC economies, supported by the rise in oil production and hydrocarbon prices, will continue to see growth between 4% and 4.5% in 2022. Meanwhile, although growth in the non-oil sector will ease, it will still remain significant. Still, much depends on how they adjust to the new Omicron variant and its impact on international tourism.
But it is unlikely, economists say, that there will be any massive lockdowns as was the case in early 2020, but an increase in stringency is expected to keep the number of cases in check.
“I expect that the liberalization and reform measures carried out by the UAE and Saudi Arabia [the two biggest economies of the Arab world], along with mega-projects in Saudi Arabia and Qatar will lead to higher non-oil growth rates with positive spillover effects on the labor-exporting, non-oil countries through higher trade, FDI and capital investment,” Saidi said.
As for the outlook for oil importing states, Saidi expects disparate recovery rates will continue into 2022, especially given large gaps in the pace of vaccinations and the impact of the new variant, with growth ranging between 3.5% and 4.5%.
Aerial view oil and gas tank with oil refinery background at night
“With higher inflation amid fiscal and current account balances still in the red, these states need to have in place supportive policies for poor and vulnerable segments of the population,” Saidi said, referring to strengthened social protection and cash transfers for the extremely poor. He added that the countries would also have to adopt policies supporting the sectors that were directly affected by pandemic restrictions such as tourism and hospitality.
“Large external financing needs will make these countries more vulnerable to tightened financial conditions resulting from monetary tightening in the US and Europe,” Saidi cautioned.
For his part, Barakat expects a relatively better outlook in light of the widespread vaccination campaigns across the region and the opening up of their economies with the easing of restrictions.
“A favorable global backdrop, including continued economic recoveries across the region’s key trading partners, supports external demand and remittances. It is within this context that the IMF forecasts real GDP growth for MENA oil importers at 3.0% in 2021, going up further to reach 4.3% in 2022,” Barakat said. The subdued recovery is expected to solidify in 2022 as the vaccine rollouts progress.
“Meanwhile, new challenges are emerging with rising inflation due to pandemic-related supply shortages and higher commodity prices. Hence, headwinds to the outlook and uncertainty about how quickly the pandemic can be overcome still represent downside risks for the region’s oil importers at large,” Barakat said.
“The last two years have shown that pandemic control is essential not only to save lives but also to accelerate economic recovery, which is now tenuous and uneven across MENA,” said Roberta Gatti, World Bank Chief Economist for the MENA region.
Saidi, meanwhile, gave important recommendations for Arab oil-exporting and oil-importing countries alike. “First and foremost, policy support initiated during the pandemic needs to be withdrawn gradually. Countries like Bahrain and Oman [with higher levels of government debt] are anticipating an increase in non-oil revenues from 2022 [given VAT],” he said.
Saidi emphasized that it was important to continue with labor market reforms, including granting long-term residency visas, attracting a skilled workforce, promoting gender equality measures as well as fiscal consolidation efforts, and reforming distorting and inefficient subsidies. Added to these are the introduction of structural reforms for increased regional and international economic integration, new trade and investment agreements with China and Asian trading blocs for greater economic diversification, attracting FDIs and participation in global value chains.