Growth is lower but Mena develops

Growth in the Middle East and North Africa (Mena) region is underwhelming, the World Bank finds in a new report, but there is a promising underlying picture in some nations – oil importing and exporting alike
It is always challenging to describe economic developments and trends across a large region of many nations, featuring social and economic diversity, and the Middle East and North Africa (Mena) is no exception. It spans a large geography, from Morocco to Iraq and the Gulf states. The region is the subject of a new report by the World Bank.

A significant difference in terms of economic profile has always been between oil exporting nations, mostly in the Arabian Gulf region, and those that are importing. Yet the World Bank notes that growth, and projected growth, is no longer diverging significantly between the two. It projects annual growth of 2.8% for oil exporters, and 2.5% for other nations. The report notes that these figures are lower than the rest of the world, but they are reasonably healthy figures considering the higher interest rate regime and the conflict in the region.

In the Mena region some non oil-based economies, such as Morocco and Egypt, have a strengthening enterprise sector. Egypt has been affected by inflation and a depreciating currency in recent years, but has received investment from the Gulf Co-operation Council, the European Union and the IMF, which has helped stabilise the economy and create conditions for growth. There is an enterprising private sector. It is right that the GCC should help Egypt, as it helps to spread the benefits of oil wealth and generate regional growth, helping all economies.

High oil revenues are a mixed blessing. They make it easier to fund the public sector and avoid a debt crisis, but harder to create and sustain a diverse and balanced productive economy.

The World Bank is fiscally conservative in culture, and critiques the rising trend in debt-to-GDP ratios in the region. This is to be expected, but it can be the case that, in oil-exporting countries where the state is a major economic player, sometimes it is prudent for the state to borrow precisely in order to help boost and develop the private sector, creating a more balanced economy. This has to be balanced against the phenomenon of the ‘crowding out’ of private sector investment by high public sector spending, which the World Bank report refers to. Nonetheless, Gulf countries have succeeded in reducing debt levels.

High debt comes with costs and related challenges. As it rises, so do interest payments as a proportion of public expenditure. The World Bank noted that debt levels had been rising in the region even before the pandemic. Several countries have struggled to reduce the debt-to-GDP ratio, for a variety of reasons.

The hope that the debt-to-GDP ratio could be reduced by economic growth or inflation or a combination, has proved to be a ‘mirage’ for non-oil exporting countries, the World Bank concludes. In practice, episodes of higher growth or higher inflation over the past decade have coincided with faster debt accumulation. For every additional percentage point decrease in the debt-to-GDP ratio attributable to real GDP growth, almost half is offset by increasing nominal debt stocks.

Looming over the Middle East region has been the threat of escalating conflict. The Israel-Gaza conflict has had a devastating impact on Gaza, with GDP a huge 86% lower than before October 7, when the recent escalation began between Hamas and Israeli forces. There has also been conflict between Israel and Iran, and while hostilities have been curbed in the second half of April after earlier exchanges of fire there is an ever-present fear of escalation and contagion.

The report made reference to a proxy measure of uncertainty, which is the level of disagreement among economic forecasters. Dispersion of forecasts generally reached a high point in 2020, at the height of the Covid-19 pandemic, before diminishing since. In 2024 there is more dispersion of forecasts in the Mena region than the rest of the world, which is to be expected given not only the ongoing conflict but its highly unpredictable dynamics, alternating between escalation and de-escalation.

It is to be expected that World Bank economists fret about national debt levels, and the points they make are germane. There are reasons to be optimistic about the highly diverse and interesting economies of North Africa and the Middle East, especially if conflict can be contained and ultimately ended.
The author is a Qatari banker, with many years of experience in the banking sector in senior positions.