The economies of the Middle East and North Africa (MENA) region leave a lot to be desired. Niveen Wahish checks out a report that reviews the status of those economies and offers policy recommendations Click to view caption "The performance of the MENA economies in the last two decades has been disappointing," concluded the annual report of the Economic Research Forum for the Arab countries, Iran and Turkey. Entitled Economic Trends in the MENA Region 2002, the 114-page report looks at specific areas, such as the financial sector, trade, investment, industry and population issues, offering comprehensive and comparative facts and figures about the region, in addition to policy recommendations and growth projections. MENA countries continued to grow slower than any other parts of the world in the late 1990s, the report said. Per capita income grew by only one per cent annually and unemployment rates rose to 25 per cent (if oil- rich Gulf countries were to be excluded), the second highest after Sub-Saharan Africa. The 15 to 24 years age group was the one most affected by the mounting unemployment. Six million new jobs need to be created annually in order to absorb people in this age group. The effects of 11 September on the region's economies were also addressed. Tourism revenues fell due to fear of air transportation and increasing tension in the region. Just as tourists took flight, the report forecast that FDIs -- affected by the global slowdown -- would follow suit. The report compares estimated growth in the MENA region for the next 10 years with growth in the past decade. Economies that have adopted macroeconomic reforms could expect to see growth rates of 4.6 per cent, compared to 3.8 per cent in the previous decade, while countries slow with the reform packages should expect to grow by 3.6 per cent. Oil economies are expected to grow by 2.6 per cent. More importantly, the report offers a bird's eye view of various aspects of the region's economies and presents policy recommendations. A close look at the region's financial sector concludes that banks are in need of much reform. Although foreign banks have been allowed to enter the scene, state banks still dominate most MENA economies. Nonetheless, the competition has been healthy in that it is forcing local banks to adapt and introduce new technology. The report lamented the fact that most banks have relied on lending for their income, while neglecting potential areas for growth such as retail banking. "This is a high risk strategy in the absence of strictly-enforced regulations on creditworthiness," the report said. In some countries, lending has favoured larger clients at the expense of smaller ones. The region's savings are low, negatively affecting investments. To encourage saving, the report suggested the introduction of new savings instruments and the improvement of individual incomes. The sale of state banks needs to be accelerated in a handful of the region's countries, the report stressed. But banks are not the only entities that governments need to relinquish their ownership of. The report cites that only about 10 per cent of the more than $100 billion in assets that the region's governments said they would sell have actually been sold. There has been very little reduction in the role of the state in any country. Giving the example of Egypt, the report pointed out that while privatisation aims at downsizing government bureaucracy, "high unemployment, fear of social unrest as well as promises made during the parliamentary elections have pushed the government to promise more jobs and better wages in the public sector." An accelerated privatisation pace would attract much-needed foreign direct investments into the region. In 1998, according to World Bank statistics cited by the report, almost 58 per cent of total privatisation proceeds in developing countries came from foreign investors. Despite new laws designed to encourage FDIs, the region still lags behind on FDI performance. The report cites the ranking of the region on an index that assesses credit risk based on 22 components, the International Country Risk Guide (ICRG) index. It gives a value of zero for the greatest level of risk and 100 for the lowest. According to the ICRG, the level of risk in MENA countries has gone from 70.5 in 1998 to 68.5 in December 2000. This is attributed to the volatility of oil prices and the turmoil in the region. Another index referred to by the report is that of the Economist Intelligence Unit (EIU) Business Environment Index. It measures the quality or attractiveness of the business environment in 60 countries, including six in the Middle East. MENA countries measured by the EIU lag behind most other countries in the world. Since the forecasts were made before 11 September, the report said it is expected that they will decrease by between 0.5 and 0.75 percentage points in the period 2001- 2005. Investors have fled the region, the report said, due to a lack of effective policies promoting investor-friendly conditions, such as a stable exchange rate, tight monetary policies and low budget deficits. "The crisis in Turkey in November 2000 is a warning to MENA countries to adopt sound exchange rate policies and put their financial systems in order," the report said. The report warned that fixing the exchange rate may shield the economy from currency crises, but it is likely to distort it too, while at the same time encouraging black markets and corruption, forcing the government to ration currency and leading people to squirrel their money abroad. Countries of the region need to also focus on improving their budget deficits. In 1999, the budget deficit in Arab countries was in the neighbourhood of $31 billion, representing almost 5.7 per cent of their combined GDP. Problems that are common to the region's economies have affected budget spending, such as off-budget spending by the military, as well as food and energy subsidies. The inability of institutions in MENA countries to alter their budgets during the course of the year and the fact that officials in the region are seldom held accountable and that budget performance is rarely scrutinised also compounds the problem. The report also finds that government expenditure in the region's countries is biased to some social groups, while the funds for this expenditure is drawn from the pool of fiscal resources that should be used by others. According to the report, fiscal discipline can be achieved by using four different institutional mechanisms. First, budget management must be decentralised; then total deficit and spending targets should be set before considering budget details; third, spending should be limited by law and finally, budget-making authorities should agree that the budget can only be altered in a given year provided compensation is made in another. The region is also weighed down by its debts. Although its external debt has dropped from $216 billion in 1995, to $203 billion in 2000, it remains sizeable and its servicing continues to be a burden. The tendency in developing countries to focus on long-term projects can aggravate the debt servicing burden because they are forced to meet short-term repayment obligations by incurring new debt as they wait for their projects to produce a return in the distant future. MENA countries need to work hard on increasing their exports. With the exception of Turkey, Tunisia and Jordan, half the exports of MENA countries are concentrated in a few commodities -- agricultural or raw materials and minerals. This dependence on a few exports makes them more vulnerable to price fluctuations, the report said. On the other hand, the report also points out that most countries have moved away from primary products towards manufactured products. Turkey and Tunisia's primary products account for less than 15 per cent of exports. Morocco, Egypt and UAE reduced their share of primary products to 30-35 per cent of exports. To achieve export competitiveness and diversification, the report suggests that MENA countries work on improving their FDI attraction, lifting their trade barriers and activating their regional trade agreements. In the meantime, governments should continue to invest in education and upgrading the skills of their labour.