Arab Monetary Fund releases the September edition of the Arab Economic Outlook Report including updated forecasts for growth and inflation in Arab countries in 2019 and 2020

11-09-2019

The weakness of the global economy will impact the external demand

Arab economies are expected to grow by 2.5 percent in 2019 and 3.0 percent in 2020

Diversification efforts and economic reform programs will support the economic performance of the Arab countries during the forecasting period

Digital transformation, reinforcing human capital and reducing unemployment are the top future priorities

 

In line with its continuous efforts to support the decision-making process in Arab countries, the Arab Monetary Fund (AMF) has released the September edition of the Arab Economic Outlook Report containing updated forecasts of economic growth and inflation rates for Arab countries in 2019 and 2020.

The report indicated that international organizations have reduced their forecasts of the global economic growth in 2019, which reflects the weakness of the global economy and international trade resulted from the escalating trade war between the United States of America and China. The increasing pace of trade protectionism between the largest two global economies has risen uncertainties and weakened consumers and investors’ confidence, hence impacting negatively on industrial, investment, and trade activities. On the contrary, the global economy is expected to recover in 2020 provided that satisfactory agreements on the outstanding trade disputes have been concluded and the global trade powers return to the multilateral trading system under the WTO umbrella.

The global economy still facing many risks, including the economic impact of the heightened trade war, the mounting levels of global debts, and their adverse consequences on households and companies’ balance sheets. In addition to the slowdown of the Chinese economy, the probability of a no-deal Brexit, and doubts about the ability of global economies to reach the 2030 Sustainable Development Goals.

Amid these developments, the growth rate of the Arab economies is forecasted at 2.5 percent in 2019 compared with 2.1 percent in 2018 reflecting lower growth forecasts for both Arab oil exporters and importers due to the sluggish external demand and its adverse impact on oil and non-oil exports. However, growth is forecasted to increase to around 3.0 percent by 2020 due to several supportive factors, including the relative recovery of the global economy, the continuation of the positive impact of diversification efforts, economic reform programs, and structural reforms implemented in many countries to foster economic growth.

On inflation expectation, the Arab Economic Outlook report indicated that many external and internal factors would influence the inflation rates in Arab countries during the forecasting period. At the domestic level, inflation rates are anticipated to be impacted by the fiscal reforms implemented in many Arab countries and measures adopted to mitigate their impact on consumers. At the external levels, the most important factors are the changes in oil and basic commodities prices as well as exchange rate movements. In light of the above-mentioned developments, the inflation rate in Arab countries is expected to decline to around 6.7 percent in 2019 and 6.5 percent in 2020.

The report referred to the reforms adopted by Arab countries over the past years to restore macroeconomic stability; increase economic growth; create more jobs, increase economic diversification, and ensure fiscal sustainability. Within this context, the report highlighted the main future priorities as follows:

Increasing economic diversification

The Arab countries have adopted several initiatives in the past five decades to diversify their production and exporting structures which successfully lowered the contribution of oil and extracting sector to around 20 to 40 percent to the total GDP. Nevertheless, more efforts are required to foster economic diversification and stimulate the contribution of other sectors. Particularly, the manufacturing sector which contributes no more than 11 percent of the total GDP in Arab countries compared to 22 percent in developing and emerging countries and 16 percent globally.

Shifting to the knowledge economy

Amid the global transformations resulted from the Fourth Industrial Revolution (4IR), the Arab economies should focus on intensifying policies aiming at shifting towards the knowledge economy, where the contribution of Arab countries is still limited. The shift to the knowledge economy provides significant opportunities to promote economic growth and create more jobs for the qualified young labor force in Arab countries. Digital transformations could support the productivity and competitiveness of the traditional sectors such as agriculture, industry, and services. On the other hand, the newly emerging sectors such as Artificial Intelligence, Internet of Things (IoT), Big Data, Fintech, and other Fourth Industrial Revolution associated technologies could help foster the regional growth rates significantly.

Reinforcing Human Capital

Discrepancies in human capital levels are largely responsible for explaining the differences in the level of economic growth. Arab countries are facing many challenges, as shown in the human capital index newly released by the World Bank. These challenges reflect the urgent need of Arab countries to reinforcing human capital, through improving education and health services, supporting training and scientific research, as well as promoting excellence environment.

Lowering unemployment rates

The challenge of reducing unemployment remains at the top of the economic challenges facing the Arab countries. The high level of unemployment rates which estimated at 10 percent according to the World Bank is double the world average.  Unemployment in Arab countries is concentrated among youth, females, educated people, and new entrants to the labor market. Reducing unemployment requires a set of policies aimed at transforming the structures of Arab economies, increasing labor market dynamics, strengthening the role of the private sector, and deepening regional and global integration.

Focusing on microeconomic reforms to increase productivity and competitiveness

During the past decades, the economic reforms focused mainly on macroeconomic reforms while less attention was given to those related to microeconomic aspects. Arab countries need to pay more attention to microeconomic reforms, which include all policies aimed at reducing economic distortions and achieving efficient use of economic resources, through reforming labor or product market to increase productivity and competitiveness level.

Strengthening policy space to ensure the resilience of Arab economies

The strong impact of the global economic performance on the Arab economies is evidenced in the high correlation coefficient between the growth rates of Arab economies and the world economy during the past two decades which reached (0.84). Strengthening policy space is needed to increase the resilience of Arab economies against external shocks. The required measures include ensuring fiscal discipline and financial sustainability, increasing the flexibility of exchange rate regimes and targeting inflation in some Arab countries, and strengthening levels of international reserves which has declined in some countries recently.

Supporting regional integration efforts

Arab countries have taken the necessary steps towards regional economic integration since the launch of the Greater Arab Free Trade Area (GAFTA). Within this area, tariff and non-tariff barriers have been eliminated to reach the Arab Customs Union, which will be followed by negotiations to reach the Arab Common Market as the ultimate goal of the regional economic integration. Recently, Arab countries have been keen to integrate trade in services in the intra-trade liberalization negotiations, recognizing the strategic importance of trade in services in light of the sector contribution of 48 percent of GDP and 54 percent of employment levels.

These efforts culminated in the signing of the “Arab Agreement on the Liberalization of Trade in Services” as an independent agreement from the Greater Arab Free Trade Area, which is expected to enter into force during the second half of 2019. The adoption of this agreement would increase intra-regional trade to levels similar to other international economic blocs and boost growth and employment opportunities. Supporting regional economic integration also requires parallel efforts to stimulate investments and capital flows among Arab countries.

 

The full report is available at:

Arab Economic Outlook Report

 

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