Arab Monetary Fund (AMF) releases September edition of “Arab Economic Outlook Report” including updated forecasts for growth and inflation in Arab countries in 2017 and 2018

26-09-2017

Arab Monetary Fund (AMF)

releases September edition of “Arab Economic Outlook Report” including updated forecasts for growth and inflation in Arab countries

 in 2017 and 2018

 

Arab economies are expected to grow by 1.9 percent in 2017 and 2.9 percent in 2018

In line with its continuous efforts to support decision-making process in Arab countries, the Arab Monetary Fund (AMF) has released September edition of "Arab Economic Outlook Report" containing updated forecasts of economic growth and inflation rates for Arab countries in 2017 and 2018.

The report indicated that the global economy has shown signs of mild recovery in the first half of 2017, which reinforces world growth expectations in 2017 and 2018. This recovery includes both developed and developing countries. In advanced economies, the improvement in investments and exports has supported the economic activity. In the meantime, the macroeconomic performance of the developing countries and emerging economies has recovered due to several factors. These factors include the relative increase in commodities prices, the rising external demand, and the gradual fading of the impact of fiscal tightening measures which were adopted in the last couple of years to achieve fiscal consolidation.

Despite the expectations of improved global economic activity, this rebound is still fragile, weak, and unsustainable as a result of the decline in productivity gains and the increasing income disparity levels in many countries.  Also, a considerable amount of risks surrounds this recovery in the medium term. These risks include high uncertainty levels about economic policies in developed countries and a growing trend towards protectionist policies and nationalism. Additional risks lie in the declining potential output levels besides the possible fluctuations in the global financial markets in case of a fast and unexpected path of monetary policy normalization in the United States of America. Accordingly, the priorities for economic policies include adopting measures to strengthening the aggregate demand, enhancing productivity gains through overcoming the structural imbalances in labor, goods, and services markets as well as containing public debt within sustainable levels.

In international oil markets, it has become clear that restoring the balance between supply and demand levels needs a relatively longer time than expected at the beginning of the year and faces more challenges although major oil-producing countries agreed to cut production by 1.2 million barrels per day starting from January 2017 to March 2018. The increase in oil supply mainly shale oil, especially from the United States of America is expected to affect oil prices gains in 2017 and 2018 and may keep oil stocks above their historical five-year average for an extended period. Therefore, the outlook for the global oil prices included in the baseline scenario of this edition of the Arab Economic Outlook Report (AEO) has been lowered to level ranges between 50 and 52 dollars per barrel this year and 52 to 54 dollars per barrel next year.

The report pointed out that the macroeconomic performance of the Arab economies in 2017 and 2018 will be affected by global economic developments, especially trends in the oil markets. Growth will also be affected by the impact of economic reform programs being implemented in some Arab countries to contain economic imbalances. Moreover, internal developments in some Arab countries and their spill-over effects will also affect growth prospects in the region.

In oil-exporting countries, it is expected that the real growth rate will decline in most of these countries during 2017 in light of OPEC agreement to reduce oil production by 1.2 million barrels per day for the period from January 2017 to March 2018, especially that oil reduction from these countries accounts for about 90 percent of the reduction planned under this agreement. On the other hand, the non-oil sectors in these countries will continue to be affected by the fiscal adjustment measures adopted to reduce the public budget deficit which increased to about 10.5 percent of their GDP in 2016.

Nevertheless, it is worth noting that non-oil activities in some Arab oil-exporting countries particularly the more diversified economies within GCC countries have been showing signs of recovery and coping with the new economic reality. Some of these sectors have achieved moderate growth rates exceeding 3 percent last year despite challenging economic conditions. Policy priorities for this group of countries include strengthening the economic diversification efforts, the continuation of fiscal consolidation policies, as well as increasing the contribution of the private sector in economic activities in some of these countries other than GCC countries.

As for Arab oil-importing countries, some measures included in the economic reform programs undertaken in a number of these countries have been influencing the purchasing power of many segments of the society and lowering the aggregate demand. However, other measures will reflect positively on the economic growth especially those aiming at increasing exchange rate flexibility as it will support exports and investments level.

On the other hand, some countries within this group will continue to benefit from the relatively lower oil prices which reduce pressures on the public budget and avail some financial resources that could be used to support capital and social spending. Also, economic activities in a number of these countries will benefit from the increasing external demand as a result of the gradual recovery of the global economy and international trade. The rising unemployment rate, the growing public debt, and the limited fiscal space in these countries are still to be the major economic challenges facing most of the Arab oil-importing countries and affect the ability of these countries to foster economic growth in the medium and longer-term.

As a result of the above-mentioned factors and based on the key assumptions of the report, the expected real growth rate of the Arab countries has been lowered by 0.3 percentage point compared to growth level expected in March edition. Arab economies are forecasted to grow by 1.9 percent in 2017. Growth is expected to rebound to 2.9 percent in 2018, assuming the return of oil production quantities to their previous levels during the period extends from January 2017 till March 2018, the fulfilling of the positive impact of economic reform programs, and a relative improvement in the situation in the Arab countries affected by internal developments.

At the sub-group level, the Arab oil-exporting countries are forecasted to grow by 1.3 percent in 2017 compared with 2.4 in 2016, while the growth rate is expected to improve to 2.5 percent in 2018 in light of the awaited improvement in oil production and prices.

The growth rate of the GCC countries is anticipated to reach 1.1 percent this year compared with 1.9 percent last year. In 2018, growth will be reinforced by the increase in oil production quantities and the gradual decline of the impact of fiscal tightening measures which is expected to support the real growth to levels around 2.3 percent.

Other Arab-oil exporting countries are anticipated to achieve growth level around 2.2 percent this year, supported by the increase in oil production recorded in some countries of this group. Further rebound of economic activities is expected in 2018 in light of the expectations of higher oil prices and a relative improvement in the domestic conditions, which is expected to increase the growth rate of this group to around 4.5 percent.

Arab oil-importing countries are forecasted to achieve a higher pace of economic growth reaches 3.7 percent this year against 2.7 percent last year. Many factors will help raise the gross domestic product in these countries. Among which the recovery of the global economy, the positive impact of the economic reforms, and the increasing production level of the agricultural sector due to improved weather conditions. Likewise, growth is anticipated to reach 4 percent in 2018 due to the expected increase in both domestic and external demand levels.

As for Inflation Forecasts, the AMF report indicated that inflation rate witnessed an increase in most Arab countries during the first months of 2017, as the majority of these countries have fully or partially liberalized the prices of fuel products. In addition to the impact of bottlenecks in the supply side of goods and services due to the internal developments in some Arab countries. Moreover, the increase in the price levels in some Arab countries is due to the cancellation of customs tariff exemptions and the increase in taxes and fees imposed on many goods and services. It is also noteworthy that the decline in foreign exchange receipts generated pressures on the exchange rate of domestic currencies and led to an increase in the inflationary pressure levels in some Arab countries. On the contrary, the fiscal consolidation policies and tight monetary policies have contributed to ease the inflationary pressures in some Arab countries.

As a result of the aforementioned developments, the inflation rate in the Arab countries as a group is expected to reach about 15.0 percent in 2017, and to reach 10.3 percent in 2018. It should be noted that the rise in the inflation rate of the Arab countries as a group during 2017 and 2018 is mainly due to the high inflation rates recorded in both Egypt and Sudan. Accordingly, the inflation rate in the Arab countries as a group excluding Egypt and Sudan will be about 5.2 percent in 2017 and around 5.8 percent in 2018.

With regard to the Arab oil-exporting countries, the inflation rate in this group of countries is expected to register in 2017 the same level recorded in the previous year, to reach about 6.6 percent. In terms of inflation expectations for 2018, it is anticipated that the inflation rate in the Arab oil-exporting countries will reach 7.6 percent.

In the GCC countries, the first months of 2017 witnessed rising prices for some items in the CPI basket. This was due to the relative increase in international oil prices as most of the countries in this group adopted the automatic adjustment price mechanism. In addition, some countries in this group applied another phase of the energy subsidy reform. The decline in domestic liquidity levels, in some countries of this group, helped to ease inflationary pressures. In light of these developments, it is anticipated that the inflation rate in this group of countries will reach 2.3 percent during 2017, and about 2.9 percent in 2018.

Concerning other Arab oil-exporting countries, the inflation rate in some countries of this group rose in the first months of 2017. This came due to bottlenecks in the supply side of goods and services as a result of internal developments in some countries of this group. On the contrary, the adopted fiscal consolidation policies in this group have helped to ease the inflationary pressures in these countries. Moreover, the increase in oil exports and their impact on the flows of foreign exchange resources enabled some countries to adopt measures to abandon some quantitative restrictions on imports of goods and services. Therefore, it is expected that the inflation rate in this group of countries will record about 7.7 percent in 2017, while it is forecasted to reach 9.2 percent in 2018.

Regarding the Arab oil-importing countries, most of these countries recorded an increase in the price levels for some items in the CPI basket during the first months of 2017. This is due to the relative increase in world oil prices, the rise in the prices of petroleum products and electricity. Moreover, some Arab countries, in this group, abandoned tax exemptions, or increased taxes and fees imposed on many goods and services, which led to more inflationary pressures. The price level in some countries of this group was also affected by the pressures exerted on the exchange rates of some local currencies due to the decline in foreign exchange resources. To limit the impact of these inflationary pressures, some countries have adopted a tight monetary policy.

In the light of the above developments, the inflation rate in this group of countries is expected to reach about 23.0 percent in 2017 and about 13.2 percent in 2018. This mainly due to the high inflation rates in Egypt and Sudan. Consequently, the inflation rate in this group of countries excluding Egypt and Sudan expected to reach about 2.5 percent during 2017 and 2018.

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