ESCWA casts dim light on Arab economies

Economic growth of Arab states will decline to 2 percent in 2002, as a result of the escalating situation in the Palestinian territories, the decline of oil prices, and global recessionary market trends according to a recent survey conducted by the UN Economic and Social Commission for Western Asia (ESCWA).

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By  Massoud Derhally Published  July 31, 2002

Economic growth of Arab states will decline to 2 percent in 2002, as a result of the escalating situation in the Palestinian territories, the weakening oil prices, and global recessionary market trends, according to a recent survey conducted by the United Nations Economic and Social Commission for Western Asia (ESCWA).

The survey, which was finished in May 2002 and currently is being distributed with other regional commissions of the United Nations Economic and Social Council, casts a dim light on the economic development, current unemployment trends and population growth of the 13 Middle Eastern countries.

The survey maintains, “In 2001, economic growth in the ESCWA region was relatively meagre: estimates indicate that the combined real gross domestic product (GDP) of ESCWA member countries, excluding Iraq, grew by 2.1 per cent, a substantial decline from the 4.5 per cent registered in 2000.”

The 14-page survey that comes on the heels of an unflattering UNDP Arab Human Development Report, published July 2, 2002, says the anticipated 2 percent growth is a “substantial decline given the region’s annual population growth rate of 2.4 percent.”

“Of the 13 countries in the ESCWA region, 10 countries produce oil, and we looked at production of oil last year and this year and we found that given that OPEC has cut the production of oil and it will be less in total this year than what it was last year, this will result in a decline in the growth of real gross domestic product (GDP),” Nazem Abdalla, chief of the economic issues and policies section at ESCWA in Beirut, Lebanon, told ITP.net.

Real GDP of the GCC States as a group is projected to grow by only 1 per cent in 2002, down from an estimated growth rate of 2 per cent in 2001 and the 5.1 per cent growth rate registered in 2000. Of the GCC States, Qatar is projected to have the highest real GDP growth in 2002, namely, 5.5 per cent, while Kuwait is projected to register a negative real GDP growth of 0.6 per cent.

The real GDP growth rate in each GCC State is projected to be lower in 2002 than in 2001. Given that Saudi Arabia has the largest economy in the region as a whole, its projected low real GDP growth rate of 0.5 per cent is a major factor in lowering the real GDP growth rate average for the GCC States as a group.

“We also expect that oil revenues will be coming down and this may have an adverse effect on GCC countries. Given that oil revenue is very important to the government expenditure of the GCC countries it will affect employment opportunities, economic growth, remittances back to ESCWA countries and hence affect also non-GCC countries,” Abdalla said.

According to the Economist Intelligence Unit, oil revenue constitutes 74% of the revenue of the government of Bahrain, 92% of Kuwait’s, 77% of Oman’s, 81% of Saudi Arabia’s and 76% percent of the UAE’s.

The decline of the US dollar versus the Euro, also has a bearing on the oil producing countries of the Middle East. As oil is denominated in US dollars, the value of the petrodollar that oil-producing countries are getting back is lower in terms of the Euro, thus having a lower purchasing power, and this means that imports from Europe will be more expensive. “The depreciation of the US dollar has adverse effects on the oil exporting countries particularly of the Gulf,” explains Abdalla.

While there is a cost element for countries that have pegged their currencies to the US dollar, the picture is mixed. “The depreciation of the dollar puts less pressure on the Egyptian pound, the Lebanese lira, and the Jordanian dinar.” The effect of September 11 have continued to drag growth in the region but mostly in more diversified countries like Egypt, Jordan and Lebanon, says Abdalla.

“Unemployment is bad because the population has been growing at very high rates for many years, and the Gulf which has always been a fantastic valve to take the extra labour from other ESCWA members, is closing for two reasons. One the growth they are having now is less than what they had in the late 1970’s and early 1980s and two, it is because their domestic labor force is growing at a fast rate and they are getting more educated and actually most Gulf countries have policies to replace foreign workers, expatriates including Arab workers by the indigenous labor force of nationals, and hence opportunities are getting less,” Abdalla said.

Economic growth in other countries is still small. Countries like Egypt and Jordan need 7 percent real growth per year to be able fight the already large pool of unemployed, combat its growth and reduce it, points out Abdalla. A grim task some might say given that a recent article in the Al Alam al Youm, reported that the Middle East region receives only 1 percent the total foreign direct investment (FDI) globally. Such findings do little in serving as confidence building blocks, but they certainly amplify the urgency for governments to act.

“Any growth in the region of less than 7 percent tells you that the problem of unemployment is still hanging around and no improvement has happened yet. The only bright spot, as far as demography, is that Europe in the next 10 to 15 years, will be in need to import labour, as they have almost a zero rate in population growth, and they need to have people to serve in place of those who retire, and that will call for an inflow of labor,” Abdalla added.

The survey concludes with 12 recommendations for 13 countries of the ESCWA region, including: less dependence on oil with more reliance on gas, expediting structural reform, accelerating privatisation, enhancing efficiency in the public sector, promotion of regional economic cooperation and integration, improvement of education systems, repatriation of private sector capital overseas, adoption of special monetary and fiscal measures, and promoting intraregional tourism, promotion and attraction of FDI and evaluating the advantages and disadvantages of pegging the national currencies to the US dollar.

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