The Arab Monetary Fund releases the 12th edition of the Arab Economic Outlook Report, including updated forecasts for growth and inflation in the Arab countries for 2020 & 2021

17-08-2020

The GDP of Arab countries is likely to shrink by nearly 4.0 percent in 2020

The economies of Arab oil exporters are expected to contract by 4.7 percent, while the more diversified Arab economies are expected to shrink by 2 percent in 2020

All Arab economies except Egypt, which is expected to grow by 2 percent this year, are expected to contract

Inflation in Arab countries is expected to upsurge to 8.8 percent in 2020 and to decline to 6.3 percent in 2021

The COVID-19 stimulus packages reached USD 231.6 billion and the recovery faces challenges, most notably the narrow policy space available to support the medium-term recovery, in addition to the urgent needs to ensure the efficient allocation of resources between economic sectors to keep pace with the dynamic structural transformation imposed by Pandemic

The global economy is witnessing its worst economic crisis since the Great Depression of the 1930s, due to the outbreak of the COVID-19 pandemic which causes sharp and unprecedented decline in economic activities in advanced, developing, and emerging-market economies alike. Above and beyond, the outbreak of the pandemic is negatively affecting consumers' and producers’ levels of confidence, production and productivity, domestic demand, trade, and international capital flows, bringing them all down to their lowest level ever for a long time.  Accordingly, the global economy is expected to shrink by 5 to 8 percent, and a loss of between USD 8 to 12 trillion is expected over 2020 and 2021, based on estimates released by the international organizations.

During such unprecedented crisis, international institutions, and the G-20 countries have implemented large-scale stimulus packages to prevent the global economy from going into a deep and prolonged recession. Across countries, governments stimulated demand through expansionary monetary and fiscal policies that have been adopted within the framework of stimulus packages reached around USD 14 trillion. In this context, stimulus packages have sought to pave the way for economic recovery, given its significant contribution towards easing the negative impacts of the pandemic on the household, and business sectors alike. This was helped by the reopening of many economies and the gradual removal of restrictions on activities in several front-line sectors. However, pandemic-related concerns continue to overshadow the global economy and weaken the expected recovery trajectories, particularly as the world is likely to experience a second or third wave of economic stagnation.

Additionally, the global economy stays captive to several growth obstacles, most notably, ongoing trade tensions, disruptions in global supply chains, slow progress in human development, and historically low productivity. Overcoming these challenges requires strong policy efforts, and international collaboration to support economic recovery, facilitate the transformation to further move towards sustainable, and inclusive, economic growth.

The COVID-19 is expected to have a negative impact on Arab economies, especially sectors affected by full or partial lockdown, contribute about 70 percent of the Arab GDP. The SMEs sector, which contributes about 45 percent of GDP and one-third of official employment, has been severely affected by the current crisis. In addition, Arab oil exporters are more likely to bear nearly half of the burden of the oil supply cuts in 2020 and 2021 approved the OPEC+ agreement, which will have a major impact on Arab economies. It is worth mentioning that, despite ongoing efforts towards diversifying oil-exporting economies, the oil sector continues to contribute about 27 percent of the Arab economies GDP, 42 percent of total exports, and 60 percent of public revenues.

As soon as the World Health Organization (WHO) declared that the COVID-19 as a global pandemic, Arab governments took serious action followed by precautionary measures to contain the negative impact of the outbreak on Arab economies, with stimulus packages reaching nearly USD 231.6 billion to date, including a variety of measures to mitigate the social and economic impact of the virus and support economic recovery in the medium term. In this context, it should be noted that the levels of stimulus packages vary according to the fiscal space available to each country, the levels of social safety net coverage, and the ability of countries to mobilize large funds in a short time to overcome economic shocks.

Considering these developments, Arab economies are facing a multidimensional challenge that will lower levels of activity in both the oil and non-oil sectors. Consequently, Arab GDP is expected to contract by about 4.0 percent in 2020. In contrast, a gradual recovery is expected in 2021, with Arab economies registering a growth of 2.6 percent. The impact of the crisis is expected to be stronger on the Oil-exporting Arab economies, which are expected to contract by 4.7 percent in 2020, while the more diversified Arab economies are expected to witness a lower contraction of about 2.0 percent this year. At the level of Arab countries individually, all Arab economies are expected to contract in 2020 except Egypt which is expected to grow by 2 percent this year compared with expected growth of 6 percent before the pandemic.

As Arab countries move to open their economies fully or partially, there are significant challenges to economic recovery, including:

  • The narrow policy space available to support medium-term recovery due to the increasing internal and external imbalances.
  • The urgent need to ensure the effective and rapid allocation of resources between economic sectors to keep pace with the dynamic structural transformation imposed by the spread of the virus, which requires accelerating the pace of digital transformation.
  • Maintaining an expansionary fiscal policy while ensuring debt sustainability.
  • The need to strengthen social safety nets and adopt active labour market policies to reduce job losses, especially in the SMEs sector.
  • The anticipated tightening of financial markets and its impact on the ability of Arab economies to meet their financing requirements and the need for innovative financing patterns for the Sustainable Development Goals.
  • Safeguarding the financial stability and ensuring that ability of the banking sector to extend the required credit facilities needed to support the recovery amid the recent decline in bank profits.

On inflation levels, the overall level of prices in the Arab countries as a group during 2020 was affected by several factors such as the supply of goods and services due to the disruption of global supply chains, the increase in VAT levels in some Arab countries, as well as the unfavorable domestic developments in some Arab countries. On the other hand, inflationary pressures, resulting from the significant decline in the value of some Arab currencies, against foreign currencies will continue to impact price levels in these economies.

However, the expected recession and measures taken to maintain stability in the prices of goods and services during this period in most Arab countries due to the COVID-19 pandemic will lessen the inflationary pressures in 2020. As a result of these developments, the inflation rate in the Arab countries is expected to rise to about 8.8 percent in 2020, while inflation is expected to fall to about 6.3 percent next year.

 

The full version of the report available at this link

 

 

 

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