“One and a half years after the onset of the Arab Awakening, the Arab Countries in Transition (ACTs) are now in the midst of an economic downturn, and their macroeconomic vulnerabilities have heightened,” said the Middle East and Central Asia Regional Economic Outlook issued this month by the International Monetary Fund (IMF). Arab Countries in Transition (ACTs) refers to Egypt, Morocco, Tunisia, Jordan, Yemen and Libya. The economic downturns witnessed by the Arab countries concerned are normal when compared to how other countries in similar conditions fared, according to the report. In fact, the report compares what is happening in ACTs to 11 countries that have undergone what it calls intense political instability, together with severe social unrest. These 11 countries are Albania (1997-98), Argentina (2001-03), Cote d'Ivoire (2000-01), Honduras (2009-10), Korea (1980-81), Madagascar (2002), Myanmar (1988-90), Paraguay (1999-03), Philippines (1983-87), South Africa (1990-94), and Togo (1991-93). “Many of the economic trends that have characterised earlier episodes of [political instability] are becoming evident in the ACTs,” the report said. It showed that in these countries political instability was accompanied with a large decline in output and investment. “Actual growth rates dipped below trend for all [11] countries during the year of the event and during the subsequent two years,” the report said. The report put growth in most ACTs at two per cent in 2012. For 2013 “a recovery to about 3.25 per cent growth is foreseen, a rate far below what is required to address chronic and growing unemployment.” Additionally in the 11 countries with episodes of political instability unemployment rates rose by about 1-1.5 percentage points on average during the first two years after the start of the political instability, and took between four to five years to recover. In ACTs, the report showed, unemployment rates have continued to increase from already high levels. “Estimates prepared in 2010 indicate that 18 million new jobs are needed over this decade to absorb the unemployed and new labour force entrants in Egypt, Jordan, Lebanon, Morocco, Syria and Tunisia alone.” It said that creating the needed jobs in the private sector would require a larger and permanent increase of about two per cent in long-term trend growth rates. Public and private investment is another area that saw a drastic decline in the 11 countries by about 20 per cent on average during the event year, and remained low in the following years. In ACTs, public investment was reduced in some countries, adversely affecting current and prospective growth. In 2012, governments have had limited fiscal space to provide further stimulus. Additionally, in countries where governments are transitional, considerable uncertainty regarding authorities' medium-term policy agenda is deterring private investment. “Fiscal balances in the 11 countries also deteriorated sharply during the event year and continued to widen for two years as a result of both lower revenue and higher spending.” Only after four years did they return to pre-crisis levels but after having had an adverse impact on government debt. The report showed that fiscal balances across ACTs deteriorated by a cumulative 2.25 per cent of GDP over the past two years. “And average public debt stands at more than 70 per cent of GDP, fiscal vulnerabilities are high and any significant fiscal slippages, slower than projected growth or high interest rates could put debt on an unsustainable path.” As for the external current account deficits, the report showed that the experience of the 11 countries shows that “crisis-induced difficulties in accessing external finance”, augmented by the fact that most of these countries had large current account deficits to start with, led to a decline in international reserves. But according to the report, reserves do recover slowly to pre-crisis levels again after four years. In the meantime, the report recommended that there be greater focus on governance and economic reforms to reduce the likelihood of the recurrence of political instability. “Implementing growth-enhancing policies, reforming dysfunctional institutions and addressing urgent needs can help reduce the risk of conflict recurrence.” It also said that governance and economic reforms were important to improve output. However, the report stressed that “future developments in the ACTs will largely depend on policy action.” It pointed out that “the fiscal consolidation that is currently planned in the ACTs is larger than in historical episodes of [political instability], and external adjustment more gradual.” Nonetheless, it said that “real GDP is forecast to return to its long-term trend level over a four to five year period, as in previous cases of [political instability], but more gradually, having initially declined in the ACTs by less than earlier episodes of [political instability].”
