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Surviving but not yet secure
Published in Al-Ahram Weekly on 08 - 07 - 2010

The world economy is recovering, but challenging issues remain to be addressed, Sherine Nasr reports
There is no doubt that international economic recovery is proceeding, but progress is not uniform. The recently launched International Monetary Fund (IMF) Regional Economic Outlook has revealed that while growth prospects for advanced economies are subdued, emerging economies are growing at a much faster rate.
"Whatever growth we will encounter, it will not make up for the ground we've lost during the financial crisis," commented Saade Chami, director of the Middle East Technical Assistance Centre (METAC) during a roundtable discussion organised by the Egyptian Centre for Economic Studies (ECES) last Sunday.
Although global financial markets are recovering faster than expected, bank credits remain low, and while credit growth is reaccelerating in many emerging and developing economies, financial conditions remain more fraught than before the crisis. According to the IMF report, expected growth rates in advanced countries will range between 2.3 to 2.5 per cent during 2010/11 while emerging economies are expected to grow by 6.1 to 6.5 per cent during the same period.
"Major global challenges include the need to reform financial systems, devise credible exit strategies, combat unemployment and manage capital inflows," said Chami.
On the regional level, the IMF report divided the Middle East, North Africa, Afghanistan and Pakistan (MENAP) into oil exporting and oil importing countries. Oil exporters -- including Algeria, Bahrain, Iran, Iraq, Kuwait and Saudi Arabia among others -- had to deal with two major challenges in 2009: a sharp decline in oil prices (estimated at 36 per cent compared to 2008) and the tightening of financing conditions. Nevertheless, they continue to recover, driven by rising oil demand and supportive policies.
Many of these countries have undertaken large spending schemes directed towards infrastructure projects. "Saudi Arabia implemented the largest stimulus package relative to GDP among G20 countries in 2009," underlined the report, adding that total central government expenditure increased by more than 10 percentage points of GDP from 2007 to 2009.
Meanwhile, a rebound in capital inflows was concentrated in new bond issuances, which reached a record level of $28 billion for the year, "about half of which was by sovereigns. On the other hand, bank loans remained subdued."
The improving external environment helped many of the countries concerned to rebuild their stock of international reserves: Saudi Arabia to $27 billion, Algeria to $14 billion and Libya to $11 billion. What is clouding the horizon, however, is the sharp decline in bank deposits and continued uncertainty about oil prices. "Banks are suffering from decreasing deposits, and because profitability has been affected banks have become more careful on to whom they lend," commented Chami.
The IMF report underlines that while many MENAP oil exporters will expand their fiscal spending in 2010, fiscal balances are projected to improve and non-oil sectors will continue to be buoyed by accommodative macro policy.
In MENAP oil importers, including Egypt, Jordan, Lebanon, Morocco and Tunisia, among others, the main obstacle to growth is believed to be persistent weakness in EU demand and fierce competition from other emerging markets in Asia. "Governments are facing huge debts and will need to cut back on fiscal expansion. High inflation rates in some countries constitute a constraint on people's budgets," said Chami.
According to the report, the MENAP oil importers are projecting a good image: foreign direct investment (FDI) to MENAP countries did not collapse, trade is recovering after a sharp decline, the financial markets have rebounded, and stocks are up though --Tunisia aside -- still well below earlier highs. "Nevertheless, bank credit has fallen sharply in several countries, including Egypt, Jordan and Pakistan, which account for 70 per cent of this group's GDP," said Chami who added that the region's competitors are rebounding faster and stronger.
The economic financial crisis negatively affected the Egyptian economy on various fronts. Growth slowed to 4.7 per cent in 2008/09 compared to 7.2 per cent the previous year, while real GDP per capita growth slowed to 2.3 per cent compared to five per cent in 2007/08.
According to Magda Kandil, executive director and director of research at ECES, the decrease in the country's total exports was driven mainly by the decrease in exports to the US and EU that constitute 65 per cent of the country's export market. "On a sectoral basis, major reductions in exports were registered in iron and steel [58 per cent], fuels and oils [40 per cent], cotton [28 per cent], aluminium [28 per cent] and cement [18 per cent]," said Kandil.
Kandil's review of Egypt's economic profile revealed that international reserves decreased to a total of $31.3 billion in 2008/09 from $34.6 billion the previous year, reflecting a sharp reduction in net FDI flows. The government increased the share of public investment from 7.9 per cent to 9.8 per cent of GDP, while the private investment share of GDP dropped from 14.4 to 9.2 per cent in 2008/09.
The overall budget deficit, the review underlined, remained at 6.8-6.9 per cent of GDP. "Nonetheless, the primary deficit widened by 0.6 per cent of GDP, reflecting higher non-interest expenditures that surpassed the increase in revenues," said Kandil, adding that an increase in subsidies and social benefits was directed by the government to mitigate the effect of the crisis on the poor.
Major sectors experienced slower growth, which negatively affected their contribution to GDP. Among these are the Suez Canal, tourism, financial intermediaries, manufacturing, construction and electricity.
"Overall unemployment increased to 9.4 per cent during last year, reflecting slower growth in some sectors with high employment shares, particularly, manufacturing, construction and trade." said Kandil.
"The budget deficit continues to be one of the main vulnerabilities of the Egyptian system. The high unemployment rate can be a primary source of social unrest," said Chami.
The magic formula prescribed by the IMF to Egypt as well as the other MENAP oil importing countries is to rethink the educational systems, create more jobs, enhance the business environment, strengthen revenues, scale back subsidies and address non-performing loans.

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