FROM THE ECONOMIST INTELLIGENCE UNIT
Growing disarray on the streets and worsening political in-fighting are threatening to condemn the post-revolutionary Arab states to a meagre economic harvest. Although the weak global economic climate has hardly helped, new governments typically lacking both legitimacy and experience have offered short-sighted and ineffective policies. Businesses have been left operating in legal limbo; quick fiscal fixes have proven no panacea for structural unemployment and income equality; and foreign donor support has been slow to materialise, insufficient or both. So where do Egypt, Tunisia, Yemen and Libya—the four countries in the region to successfully bring down their leaders, albeit via a variety of methods—go from here?
Egypt—haemorrhaging money
Arguably the most dramatic shift in fortunes has been evident in Egypt. Not long ago, the Economist Intelligence Unit ranked Egypt among its so-called CIVETS (a group that also included Colombia, Indonesia, Vietnam, Turkey and South Africa): effectively a second tier of most promising developing states, after the BRICs. We were not the only onlooker to recognise Egypt’s promise: between 2006 and 2010 inward direct investment into the country averaged some US$10bn a year, with a host of leading (and diversified) global brands from GlaxoSmithKline to Oracle betting on a bright future for the Arab world’s most populous state.
However, since 2011 Egypt’s situation has changed dramatically for the worse, with the latest figures from the central bank highlighting the scale of the economic deterioration. In 2011 the balance of payments moved from a small surplus into a massive deficit of US$18.3bn, as portfolio investment (comprised mostly of purchases of Egyptian T-bills and equities by foreign investors) moved from a net inflow of US$10.9bn into an outflow of US$10.4bn, and foreign direct investment collapsed. With tourists also deterred by violent news footage on television, the economy has virtually ground to a halt. Real GDP growth reached an anaemic year-on-year average of 0.3% in the first half of the fiscal year (July 1st-December 31st, according to Egypt’s fiscal calendar). In comparison, the economy grew by an annual average of 7% in 2006-08, and even managed to maintain a growth rate of some 5% in the teeth of the global recession in 2009-10.
Meanwhile, any semblance of long-term economic strategy has given way to frenetic crisis management. In the first six months of 2011/12, outlays on subsidies soared by 42% and public-sector wages and benefits rose by 27%—causing the country’s already fragile fiscal finances to plunge further into the red. As a result, rates on Egyptian T-bills have risen, while, exacerbated by the deteriorating balance-of-payments position, foreign-currency reserves have plunged (from US$35bn in January 2011 to US$15bn in March this year).
Blue-sky budgets
Egypt’s lurch into economic populism has been matched elsewhere. In Tunisia, which has at least enjoyed a more stable transition than the other three countries, the government in March submitted a new 2012 budget that was 10.7% bigger than the expansionary version already in place. Among other things, the new budget pledged to freeze the price of subsidised staple foods, increase investment in the deprived interior regions, and (improbably) build 30,000 social housing units and create 100,000 jobs. The projection for revenues this year has surged by nearly 22%, based on highly dubious and optimistic assumptions of gains from enhanced tax collection, sales of confiscated assets and privatisation.
In Yemen, meanwhile, the 2012 budget seems to have almost no rooting in reality. Passed in April, the budget—the first to be drawn up by the new coalition government, following the departure of President Ali Abdullah Saleh (who had ruled over the country since the late 1970s)—plans a massive 45.6% increase in spending, including higher outlays on fuel subsidies (already the second-largest budget item). This increase is supposed to be covered in part by a jump in oil output to 300,000 barrels/day (b/d), from a mere 140,000 b/d at present. Current output levels reflect disruptions from a series of sabotage attacks, yet even before the unrest began production was 260,000 b/d and falling. The government also optimistically envisages a pick-up in non-oil revenue on the back of forecast real GDP growth of 6.7% (compared with our projection of under 5%).
Transition pains
In Libya, at least, record budget spending is largely being directed into development and reconstruction projects—unquestionably a priority after the destructive civil war last year. Moreover, the country’s fast-recovering oil production and massive foreign assets (estimated at some US$60bn) should provide the means to meet its enlarged spending commitments. Yet the country highlights another of the problems afflicting the transitional governments. There is a yawning chasm between passing a budget and actually implementing it. In Libya’s case the gap is especially wide, reflecting the fact that the country is saddled with a disorderly bureaucracy (a legacy of over 40 years of Colonel Muammar Qadhafi’s misrule), unruly regions still peppered with armed militias, and a transitional leadership so disorganised that it is considering a vote of no-confidence in a government that it itself appointed.
Political uncertainty and bureaucratic chaos are causing problems elsewhere. Yemen remains unruly, and the government’s writ is severely limited (to the benefit of al-Qaida in the Arabian Peninsula, which has expanded its footprint in the south of the country). In Egypt, meanwhile, the Supreme Council for the Armed Forces is supposed to be handing over governmental responsibilities on June 30th to a coalition led by the Muslim Brotherhood—the big winners in the parliamentary elections—once the presidential election takes place later this month. However, the powers of the president are yet to be delineated, and constant bickering over the process of drawing up a constitutional committee arguably means that insufficient time is left to complete the process before the new president is installed. With the future division of power still up in the air, the IMF is understandably uneasy about providing a vital US$3.2bn loan to the country—at a concessionary 1% rate of interest; compared with a far more onerous 15% at present paid on the country’s T-bills—especially when the two largest parties in parliament have voiced their opposition to the loan.
Of course, the region’s somewhat chaotic transitions to democracy are hardly a surprise, given the retardation of the political process under previous regimes. However, in light of the risks and sacrifices made by many ordinary people to bring down the dictators, the palpable disappointment at the lack of progress in combating social inequality and raising living standards is unsurprising. Indeed, in the cases of Egypt, Tunisia and Yemen, we calculate that GDP per head will actually be lower at the end of this year than prior to their revolutions.
A little help?
With Arab democracy presently afflicted by growing pains, and the world economy hardly helping, Yemen, Tunisia, Egypt and, to a lesser extent Libya, will clearly need more direct donor support to see them through the transition period (and to avoid being forced to impose harsh fiscal austerity, which might risk further destabilisation). Up until now, the amounts offered have been variable. On the one hand, Tunisia has done relatively well, gleaning some US$1.4bn in foreign aid and debt forgiveness in 2012 alone (although this compares with a more than US$2bn decline in its foreign reserves since the start of 2011). In contrast, Yemen’s foreign reserves are now down almost 50% from their peak in 2008. Apart from a US$93m emergency loan from the IMF, donors have been sluggish to help (the government hopes that a major international donor conference in late May will change this). Egypt’s situation is arguably even worse, with its foreign reserves down by more than half since the revolution, its currency under pressure, and confidence in its fiscal solvency weakening. Again, its own instability does not help: in March Saudi Arabia said that a grant of US$500m and a proposed purchase of Egyptian Treasury bills had been held up by the vacillations of the Egyptian government.
In any event foreign donor money will not be sufficient, if governments remain so profligate. The Arab Spring has seen a widespread backlash across the region against economic liberalisation (although this has often been confused with so-called “crony capitalism”), but all of the post-revolutionary states are either ill-equipped or—excepting Libya—can ill-afford to provide the economic respite sought by their restive populations. In reality, the economic dividend will take time to materialise, with fiscal sustainability and pro-growth policies targeted at stimulating the private sector the best way to encourage wealth-creation. Yet such a strategy will require leaders both brave and authoritative enough to explain this to their populations and implement the necessary changes. It may be many years before suitable and credible leaders emerge, and the new political organs of state mature.
The broader investment climate also remains difficult. Political turmoil has had a significant impact on corporates, tourism earnings and jobs, dramatically increasing the risk perceptions of foreign investors. Overall, corporates seem to be adopting a “wait and see” approach. This has been confirmed by evidence from the private political-risk insurance market, which is finding it very difficult to sell coverage in seemingly stable authoritarian regimes. That said, investors should return fairly quickly once stability improves given the vast opportunities in these markets, particularly in Egypt.
The Economist Intelligence Unit
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