Challenges for investment, growth, and job creation in the MENA region
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Presented at the MENA-OECD Steering Group Meeting, 3 December 2013, Rabat, Morocco
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Challenges for investment, growth, and job creation in the MENA region
- 1. Challenges for Investment, Growth and Job Creation in the MENA Region: Consequences for the MENA-OECD Investment Programme 3 December 2013, Rabat Steering Group
- 2. Agenda 1. Key message 2. The 3 Main Risks for Investment in the Region 3. Translate into Core Challenges 4. Which have Implications for the Activities of the MENA-OECD Investment Programme 2
- 3. 1. MENA-OECD Investment Programme: Key message 1.1 Heightened risk perception in the MENA transition countries Crisis in Syria, domestic political tensions, increasing fiscal deficits 1.2 Stress on socio-economic outlook Economic growth in MENA transition countries is expected to remain too low (3-4% in 2013-14) Persisting high (youth) unemployment rates 1.3 Implications Risk of increased poverty, and refugee flows Immediate government action is needed as well as long-term structural reforms International community needs to scale up engagement: financially, but also structural reforms 2. In response to this pressing situation, the MENA-OECD Investment Programme focusses on structural reforms for inclusive growth and job creation through private sector development in four key areas: I. II. III. IV. Investment policy and promotion Policies for small and medium-sized enterprises (SMEs) Women in the economy Business integrity 3
- 4. Agenda 1. Key message 2. The 3 Main Risks for Investment in the Region 3. Translate into Core Challenges 4. Which have Implications for the Activities of the MENA-OECD Investment Programme 4
- 5. 2. MENA transition countries face three main risks 1. Spill-over effects from crisis in Syria and heightened security concerns 2. Domestic uncertainty and risks of political tensions halt private sector activity. November 2013: 5 million internally displaced people. Over 2.2 million Syrian refugees in neighbouring countries. Turkey 600,000 Political risk rating in MENA transition countries Egypt Jordan Libya Morocco 75 Tunisia Yemen Arab Spring begins 70 65 Lebanon 824,288 Egypt 127,876 60 Iraq 206,632 Jordan 553,311 3. Large fiscal deficits 55 50 45 2009 2010 2011 2012 2013 Energy subsidies 8.5 % of GDP or 22 percent of government revenues in MENA region. Social pressure impedes the reduction of subsidies. Source: UNFPA November 2013 Source: The PRS Group, International. Source: Masood, Ahmed: Arab Countries in Transition: Update on Developments and Outlook. 5
- 6. 2. Political instability has become a major constraint to firms in MENA Figure: Leading constraints to firms in MENA Source: World Bank, Enterprise Surveys . 6
- 7. 2. Large fiscal deficits which constrain governments Large fiscal deficits lead to increasing public debts and potentially crowd out private sector investments. After the 2011, MENA governments increased spending for wages, pensions and subsidies, partly balancing the increases with lower capital investments. Deficits are expected to decrease in 2013 and 2014 for Morocco, Jordan and Tunisia. In Egypt, deficits are estimated to rise further, increasing the current debt level to 100% of the GDP. Fiscal deficits result from inefficient tax systems, economic weakness and energy subsidies which account for 22% of government revenues and 8.5% of GDP in MENA. Several countries are looking to reduce energy subsidies or replace them with targeted cash transfers. 10 Fiscal deficits in transition countries (in % of GDP) Egypt Jordan 0 Libya Morocco -10 Tunisia Yemen -20 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: IMF World Economic Outlook (October 2013). Own calculation. Note: Y scale limited to improve overview. Libya had on average fiscal surplus of 17% in 2010 to 2010 7
- 8. 2. MENA transition countries need adequate support from external partners Gross external financing needs1 (Billions of U.S. dollars, 2012-13) 18 2013 Official external disbursements January 2011-August 2013 (Millions of U.S Dollars, estimates) 2014 16 ACT Total 14 2013 $33.9 2014 Other, $6 ,579 IMF, $863 G8, $2,82 6 $41.1 12 10 8 6 IFIs ex. IMF, $6,7 62 4 2 0 Egypt Tunisia Morocco Jordan Yemen Sources: National authorities; and IMF staff calculations Calculated as the sum of current account balance (before grants) and external Sources: National authorities; and IMF staff calculations 8 GCC, $21, 423
- 9. Agenda 1. Key message 2. The 3 Main Risks for Investment in the Region 3. Translate into Core Challenges 4. Which have Implications for the Activities of the MENA-OECD Investment Programme 9
- 10. 3. The Growth Challenge: Economic growth is expected to remain too low… GDP growth constant prices, excluding Libya 6 4 4.45 3.84 3.45 2.74 2 Egypt 0 Jordan 2010 -2 2011 -1.06 2012 2013 2014 Morocco Tunisia Yemen -4 Average -6 -8 -10 -12 -14 Source: IMF World Economic Outlook, October 2013 10
- 11. 3. …to reduce unemployment Projected economic growth is too low to reduce unemployment. Economic growth rates in selected MENA countries (per cent of GDP) 8 2001-08 6 2009 Economic growth rates in the MENA region decreased from close to 6% per year on average from 2001 to 2008 to an estimated 2.2% in 2013. 4 Estimates for 2014 predict growth rates of 3.8% for MENA - too low to substantially reduce unemployment in the long-term. -2 2010 2011 2 2012 0 2013 2014-18 100 Country disparities: Growth rates are improving in Jordan and are reaching pre- financial crisis level in Morocco. 80 60 2009 40 2010 20 2011 0 A growth rate of 6.5% in the MENA region is needed to create enough jobs, according to estimates of the World Bank 2001-08 2012 -20 -40 Libya Yemen 2013 2014-18 -60 Source: IMF World Economic Outlook Database, 2013 11
- 12. 3. The FDI Challenge: FDI inflows decreased significantly… Inward FDI flows to MENA between 2003 and 2012 (US$ Billion) 100 Beginning of global financial crisis 90 Deauville Partnership countries 89.9 2011 events 80 70 61.7 60 Rebound 50 43.8 40 30 Golf Cooperation Council total 26.4 20 16.3 10 7.9 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: UNCTAD data • FDI inflows predominate in sectors with low job creation (oil, non-tradables) • Political instability even further discouraged the FDI in labor-intensive manufacturing and services sectors 12
- 13. 3. ….re-enforce the Unemployment Challenge Unemployment rates for different regions 35 (percent, latest available data) Tunisia 30 Recent trends Youth unemployment rate MENA transition Jordan countries 25 MENA EU Europe and Central Euro area Asia Egypt Unemployment in the MENA region rose by 3.3 million between 2007 and 2013 and is expected to reach 16.8 million in 2015. 20 OECD members Lower middle income 15 Morocco Latin America & Caribbean South Asia 10 5 Source: ILO 2013. 0 0 2 4 6 8 Total unemployment rate Source: World Bank Development Indicators and national authorities. 13 10 12 14
- 14. Agenda 1. Key message 2. The 3 Main Risks for Investment in the Region 3. Translate into Core Challenges 4. Which have Implications for the Activities of the MENA-OECD Investment Programme 14
- 15. 4. Implications for the MENA-OECD Investment Programme Focusing on structural reforms to improve the business environment with the aim to foster inclusive growth. Areas of governmental actions: Reallocate public spending to infrastructure and basic services along with reducing unsustainable fiscal deficits Address inequalities by increasing the inclusion of the youth and women into the economy, fighting corruption and improving business integrity: MENA-OECD Investment Programme The international community needs to scale up its engagement! Foster private sector-led growth through investment climate improvement and support to SME development: MENA-OECD Investment Programme Deepen regional integration in in particular in trade and investment: MENA-OECD Investment Programme 15
- 16. The focus areas of the Programme were adapted to support structural reforms A. Investment Policy • Risk mitigation and investor protection: • Working Group on Investment Policies and Promotion • ISMED Support Programme • DP related activities C. Business Integrity • • • B. SME Policies • Inclusive Growth & Job Creation in turbulent times Strengthening Integrity in Business Corporate Governance Networks Responsible Business Conduct • • D. Women in the Economy • • • 16 Working Group on SME to focus on business operations in transition DP related activities SME policy index Supporting Women as Economic Actors during Periods of Transition OECD-MENA Women’s Business Forum DP related activities
- 17. Programme is supporting the G8 Deauville Partnership process under the UK Chairmanship Investment Policy SME Policy Women as Economic Actors • Identification of the Investment Climate Reform Priorities in the six Arab Countries in Transition (ACTs) • Assistance on the improvement of the investment legal and institutional frameworks • Near-term plans for SME development in the transition countries • IFI Coordination Plateform: Workshop on implementation of SME reform priorities in Morocco with IDB • Assess the legal and institutional framework to support women in the economic sphere in the TCs 17
- 18. MENA Transition Fund projects: implemented with the support of the OECD Project Implementation Support Agencies Project Objective Operationalising PublicPrivate Partnerships (PPPs) in Tunisia OECD and AfDB Assist Tunisia in establishing a new law on PPPs Establishment of Tunisia Investment Authority OECD and IFC Assist Tunisia in implementing a new investment code Invest in Youth in Tunisia OECD and IDB Assist Tunisia in strengthening employability of Youth during Tunisia’s transition to a green economy SME Development Strategy in Libya OECD / IDB Strengthening the legal and institutional framework for SMEs in Libya 18
- 19. ANNEX – Governance and Financials 19
- 20. Governance structure of the MENA-OECD Investment Programme MENA Co-chair (Morocco) H.E. Mr. Mohamed EL OUAFA Minister delegate to the Head of Government in charge of General Affairs and Governance OECD Co-chair (Sweden) H.E. Mr. Anders AHNLID Ambassador, Delegation of Sweden to the OECD Steering Group Regional partners A. Investment Theme D. Business Integrity Theme Strengthening Integrity in Business Network Corporate Governance Networks Responsible Business Conduct Network Regional Representations • Islamic Development Bank • League of Arab States • Gulf Co-operation Council • Arab Monetary Fund WG on Investment Policies & Promotion (Chairs: Jordan, Japan) DP Investment Policies Action Plans ISMED project International partners B. SME Policy Theme Regional Networks WG on SME Policy, Entrepreneurship & Human Capital Development (Chairs: Tunisia, Italy) DP SME Action Plans C. Women in the Economy Theme Women Business Forum (Chairs: Jordan, Sweden) Supporting Women as Economic Actors Network 20 Task Forces and Networks • UNDP, UNIDO & UNIFEM • European Commission • World Bank Group (MIGA & IFC) • Centre for International Private Enterprise (CIPE) • International Labour Organization • International Development Research Centre (IDRC) 20
- 21. Financials: MENA-OECD Investment Programme 2012 General Programme Fund Czech Republic Japan Sweden Spain Turkey TOTAL General Programme Fund Project related contributions United States - Iraq Project Sweden Iraq EC Egypt BCDR Siemens UK - FCO - Business Integrity Sweden - Women EC ISMED France - ISMED EC SME project Sweden - WOMEN IMF/CEF - Kuwait Transition Fund - SME Libya TOTAL Project related contributions Expected contributions Japan USAID - Competitiveness Working Group TOTAL Expected Contributions TOTAL Voluntary Contributions 10,000 100,000 1,967,080 225,000 70,000 2,372,080 1,000,000 72,750 210,000 86,930 59,816 249,930 80,000 1,759,426 0 4,131,506 21 2013 2014 2015 85,000 983,540 983,541 983,541 35,000 1,103,540 35,000 1,018,541 35,000 1,018,541 2,075,764 1,122,384 372,000 1,009,336 24,250 170,000 999,705 50,000 330,000 333,333 21,000 314,779 3,624,403 249,925 190,000 333,333 333,333 629,557 3,478,579 629,557 2,085,274 80,000 334,000 334,000 5,061,943 80,000 334,000 414,000 4,911,120 80,000 3,183,815
Editor's Notes
- Lebanon’s economy has been hit hard, and sectarian tensions have increased The number of Syrian refugees in Lebanon has exceeded [723] thousand or [18] percent of Lebanon’s population; The cost of refugees is straining Lebanon’s public finances due to rising healthcare, education, and security costs; Real GDP growth is estimated to have declined from 8 percent on average during 2009-10 to 1.5 percent in 2012, partly due to a sharp decline in tourism and related industries.Although bilateral trade accounted for only 6‒9 percent of Lebanon’s exports of goods and services prior to the conflict, transit trade and tourism from and to Lebanon through Syria were reportedly substantial and have been seriously impacted by the conflict. The number of tourists to Lebanon declined by 32 percent in 2012 compared to its 2009-10 average. Furthermore, deposit growth has moderated to about 8 percent annually in 2013 from 18 percent on average during 2009-10, while FDI inflows are estimated at about 7 percent of GDP in 2012, down from 12.7 percent on average during 2009-10.Lebanese banks have contained their direct exposure to Syria, halving these exposures and increasing provisions. The Syrian conflict has increased the sectarian divide in Lebanon and is contributing to difficulties in forming a new government.The crisis is straining Jordan’s social, economic, and fiscal conditions Jordan is hosting [520] thousand refugees, equivalent to 8 percent of Jordan’s population. The refugees have presented Jordan with additional fiscal pressure of 0.7 percent of GDP in 2012, mostly in education, health, and security outlays; Due to increased demand by refugees, rents and housing prices rose and the labor market is strained, exacerbating the already-high unemployment rate; The crisis disrupted transit trade through Syria—although Jordan’s diversified trade channels have mitigated the impact; FDI inflows declined from an average of 8 percent of GDP in 2009-10 to an estimated 4.5 percent in 2012; Tourism income recovered partially in 2012 to 11 percent of GDP, but it was still below the pre-crisis average level of 13 percent during 2009-10.Iraq’s security conditions and trade with Syria have been severely affected: With the escalation of violence in Syria, the security situation deteriorated dramatically in Iraq, leading to a steep increase in casualties; Syrian imports to Iraq fell to less than 1 percent of total imports, down from 15-20 percent pre-war; The influx of Syrian refugees to Iraq, constituting less than 1 percent of Iraq’s population at end-August 2013, is accelerating, particularly from the Kurdistan region of Syria, posing challenges to the already strained public services.
- The possibilities of many governments to increase public services with the objective to improve living standards are restrained by large fiscal deficits (see Figure 6). Deficits have been increasing to unsustainable levels due to rising public expenditures for wages, pensions and the costs of imported and heavily subsidized fuel commodities and - in a few countries - increased interest expenditures. Along with increasing public expenditures, decreasing public revenues added to the fiscal deficit. Lower revenues are related to the economic weakness and an unfavourable tax system . The rising fiscal deficits and overall debt ratio raised concerns about fiscal sustainability in many transition countries. The following lower sovereign credit ratings further reduced the access to the international capital market and much required external exchanges. As a result of the inability to access external funds, governments rely more on the domestic capital market, with negative impacts on the private sector. The additional sovereign bonds increases banks’ sovereign risks and in face of low saving rates might crowd in several countries might crowd out private sector borrowings. World Bank (2013) Middle East and North Africa - Investing in Turbulent Times
- Inclusive growth is an multi-dimensional approach that seeks to ensure that the benefits of economic growth is shared more evenly across the society - among different income groups, regions and economic sectors - ultimately improving living standards and outcomes that matter for people’s quality of life. Growth rates in the MENA region were and are too low to reduce unemployment and further decreased from close to 6 per cent in 2010 to 2.2 per cent in 2013 (see Figure 3). Growth has been adversely affected by the political and social instability, a lack of institutional capacities and a challenging global environment, especially the economic crisis in Europe, the main export market for many North African countries. Growth in Gulf Cooperation Council (GCC) countries is expected to slow to 4.2 per cent but remain the strongest in the region, whereas economic growth in oil importing countries will slightly increase to 2.9 per cent. Growth rates in Egypt decreased from 2.2 per cent in 2012 to 1.8 per cent in 2013 owing largely to an increasing political instability. Libya is the only transition country, experiencing a negative growth of -2.0 per cent in 2013. Whereas, Morocco achieved with 5.1 per cent a growth rate similar to the average level of the decade preceding 2010. The main driver of growth has been an increase in agricultural production, a strong performing tourism sector and relatively stable economic and political conditions.World Bank (2013) Middle East and North Africa - Investing in Turbulent TimesOil-importing countries: Egypt, Tunisia, Djibouti, Jordan, Lebanon, Morocco, West Bank & GazaTransition countries under the Deauville Partnership are: Egypt, Libya, Jordan, Morocco, Tunisia and Yemen. Growth vs. job strategy
- Unemployment remains high in many MENA countries, with the exception of the GCC countries. In Egypt and Tunisia, unemployment increased in 2011 by 2.7 and 5.3 percentage points respectively.MENA has a 27.9% youth unemployment rate, which is the highest in the world; in 2012the global average was 12.6%. 2The female labour force participation rate is the lowest in the world at 25%, compared to 60% for OECD countries. Outlook: Expansion of the labour force will add to the pressure to create jobs. According to World Bank estimates, the MENA region needs to create at least 50 – 75 million jobs over the next decade, which would require economic growth of 6.5% in resource-poor countries.1