Arab Monetary Fund (AMF) Releases April Edition of “Arab Economic Outlook Report”
The Arab Monetary Fund (AMF)
Releases April Edition of “Arab Economic Outlook Report” Including Forecasts of Macroeconomic Performance for Arab Countries in 2019 and 2020
Arab economies are expected to grow by 3.1 percent in 2019 and 3.4 percent in 2020
The positive impact of fiscal reforms is expected to reduce the consolidated budget deficit of the Arab economies to 5.5 percent of GDP in 2019
The current account surplus of the Arab Countries is expected to stabilize at around 1.6 percent of GDP in 2019 and 2020
High unemployment level requires urgent labor market and education systems reforms based on forward-looking visions
In line with its continuous efforts to support policymakers in the Arab region, the Arab Monetary Fund (AMF) releases April edition of the “Arab Economic Outlook” report which includes projections for the macroeconomic performance of the Arab countries in 2019 and 2020.
The report indicated that the global economy and international trade are expected to slow down over 2019 and 2020 reflecting the adverse impact of trade tensions, policy uncertainties, and rising debt levels on trade, investment, and manufacturing activities particularly during the first half of 2019. The report confirmed the need for high-level global policy coordination to overcome the outstanding risks, avoid a sharp slowdown of the global economy, and reach a more comprehensive, flexible, and responsive global multilateral system. The high-level global policy coordination is also required to enhance the capacity of advanced and developing countries to achieve the Sustainable Development Goals particularly alleviating poverty, mitigating climate change, and ensuring the sustainability of consumption and production systems.
In the International oil markets, world oil demand growth is expected to slow down in 2019 and 2020 due to the anticipated weak performance of the global economy and international trade. On the other side, oil supply is expected to keep rising, especially from non-OPEC such as the United States of America. Hence, supply is expected to exceed demand levels at least within the outlook horizon. Accordingly, OPEC and Non-OPEC major oil producers have decided at the end of the last year to undertake a production adjustment of 1.2 million barrel/day for six months effective from January 2019.
The Arab Economic Outlook Report indicated that the growth rate of the Arab countries as a group is forecasted to reach around 3.1 percent in 2019 and 3.4 in 2020. Arab oil-exporting economies will keep growing by about 2.8 percent and 3.1 percent in 2019 and 2020, respectively amid uneven growth performance among subgroups. GCC growth rate is expected to increase to 2.7 percent in 2019 and 3.0 percent by 2020 reflecting the rebound in the non-oil sector supported by several factors, including the positive impact of long-term strategies adopted to further increase economic diversification, the continuation of reforms aiming at improving business environments, and the favourable monetary and fiscal stances. On the contrary, the oil sector is expected to achieve relatively low growth rates as a result of the anticipated slowdown in demand for oil and the adjustment of oil production under OPEC agreement over the first half of 2019. However, several new projects which aim at increasing production and refining capacity will partially enhance the performance of the oil and gas sector during the forecast horizon.
The Macroeconomic performance of other Arab oil exporting countries is expected to recover due to the anticipated improvement in the domestic conditions, reconstruction efforts, and more importantly, the partial recovery of oil production capacity. Hence, the growth rate of the other Arab oil-exporting countries is expected to increase to 3.1 and 3.8 percent in 2019 and 2020, respectively. Oil-importing economies are more likely to keep growing, reflecting the ongoing economic reform programs aiming at achieving inclusive and high levels of economic growth to create more job opportunities and enhance productivity and competitiveness. As a result, high growth in oil importing countries is expected to remain at 4.1 percent and 4.3 percent respectively in 2019 and 2020.
The report stressed the need of Arab countries to create more job opportunities in light of the high unemployment rate which is almost double the global average. The unemployment rates are very high among youth and especially females. The youth unemployment rate increased to reach 26 percent according to the World Bank, which is also as twice as the global average, while female youth unemployment is at the highest global level of 40 percent compared to 15 percent for the world average. The possible implications of the Fourth Industrial Revolution and its associated transformative technologies will add to the future challenges facing the Arab countries in this regard. Consequently, overcoming the unemployment challenge requires a radical change in the structure of the Arab economies towards transformation to knowledge economies, adopting institutional reforms to increase the flexibility of the labor markets, and improving the education systems. Furthermore, establishing education observatories is very important to explore the needs of the labor markets and oriented the education systems to fulfill the future labor market requirements, while further integration into the global economy is needed to increase the mobility of trade, labor, and capital flows, hence creating more job opportunities.
Concerning Inflation Forecasts, the inflation rate is expected to reach 9.3 percent and 8.1 percent in 2019 and 2020 respectively. Across Arab oil exporting countries, inflation is expected to fall to 6.1 percent and 5.9 percent in 2019 and 2020 respectively. At the sub-group level, the inflation rate in the GCC countries is expected to decline to reach about 1.3 and 1.6 percent in 2019 and 2020, respectively. In other Arab oil exporting countries, inflation rate is forecasted to increase to reach around 6.3 percent in 2019 and 6.5 percent by 2020. Whereas, inflation in Arab oil importers is expected to fall to about 11.8 percent in 2019, while it is likely to decrease to 9.9 percent in 2020.
Monetary conditions in Arab countries will be affected in 2019 and 2020 by monetary policy stance in the United States of America and the European Union, where monetary policy normalization is expected to be reflected on financial conditions in Arab countries that adopt fixed exchange rate regimes. This, in turn, will affect the cost of domestic and external borrowing and will impact capital flows. In Arab countries with more flexible exchange rates regimes, improved monetary conditions will remain linked to further improvement in the external demand, which will support net foreign assets and reduce pressures in the foreign exchange markets.
Implemented monetary policy reforms will continue to focus on increasing the efficiency of the operational frameworks through introducing new monetary policy tools, enhancing the liquidity management process, and improving the efficiency of the foreign exchange market. Generally, Arab central banks interventions focus also on reinforcing the soundness and efficiency of the banking sector and ensuring financial stability. Moreover, Arab central banks and monetary authorities are eager to take advantage of using modern financial technologies (Fintech) to upsurge the efficiency of financial services and support financial inclusion. Many Arab Central banks have recently established regulatory Sandboxes to ensure the existence of a supportive ecosystem for fintech companies. In addition, Arab Central Banks are testing the possibility of using blockchain technology to issue digital currencies, provide some financial services to unbanked segments, develop electronic platforms for “Know Your Customer (KYC)” solutions, and promote the role of Crowdfunding in financing SMEs.
In terms of Fiscal Policy, the consolidated fiscal budget deficit to GDP in Arab countries as a group is anticipated to reach around 5.5 percent of GDP in 2019 reflecting the positive impact of continued fiscal reforms. Fiscal reform programs adopted in Arab countries within the forecast period will continue to focus on enhancing and diversifying sources of public revenues, rationalizing government expenditures, and undertaking medium-term measures aiming at containing the budget deficit and ensuring debt sustainability. Accordingly, a number of Arab countries are expected to restore fiscal balance by 2023.
On the public revenues side, Arab oil exporters, especially GCC are adopting measures to diversify their public revenues through stimulating non-oil revenues by introducing new taxes and reviewing fees charged for public services. Arab oil importers, on the other hand, have also made significant progress in tax reform through improving tax administration, combating tax evasion and introducing electronic billing for tax collection. On the public expenditures side, Arab countries are implementing policies aimed at rationalizing public spending by rearranging spending priorities, restructuring ministries, and governmental entities, reforming subsidy systems, as well as strengthening the social safety nets and targeting eligible groups through cash transfers. The reforms also aim at allocating more resources to capital spending through encouraging Private-Public Partnerships in the implementation of infrastructure projects and the provision of government services.
As for the External Sector, the surplus in the current account balance is expected to reach around 1.6 percent of GDP in 2019 and 2020. At the level of Arab oil exporting countries, the anticipated changes in oil prices, levels of production, and the improvement in non-hydrocarbon exports are expected to result in a limited reduction in the current account surplus in 2019 with possible recovery in 2020. On the other hand, current account deficit of the Arab oil importing countries is expected to decrease over the forecast period, benefiting from the improvement in the competitiveness of export for some countries, following the adoption of more flexible exchange rate regimes, and the anticipated increase in remittances and tourism receipts. The current account deficit for this group of countries is expected to decrease by 6.8 percent in 2019, to reach about USD 34.3 billion, representing around 5.6 percent of the GDP. In 2020, the current account deficit is expected to reach USD 33.6 billion, equivalent to about 5 percent of GDP. The Full Report