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Second level
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IMF Regional Economic Outlook – The Levant
Third level
Dr.
Fabio
Fourth
level Scacciavillani
Director of Macroeconomics and Statistics DIFC Authority
Fifth
level
25th
May
2010
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11
A Rosier Picture
• Not long ago, this region was
typically associated with unrest,
civil strife and outbursts of
violence
• In the economic area little was
changing, as the countries were
trapped in a cycle of suffocating
government
red
tape,
bureaucracy,
low
growth,
poverty
and
chronic
dependence on foreign aid
• Awareness that the situation
would not be sustainable and
the emulation of other emerging
markets led to a change of
attitude in policy making
The Common Thread
The long wave of reforms


Liberalization of key sectors

Opening to foreign capital

Scrapping of subsidies

Financial sector reforms

Security stabilization, notably in Lebanon

Resilience to the global crisis despite weaker exports

Fiscal woes

Credit and FDI plunge

Future challenges

Further structural reforms

Regional Integration

Institutional Capital
Impact from the global crisis
•
Contagion came through 3 channels:
•
Credit markets => credit crunch
•
Commodity prices
•
Trade disruption
•
None of these factors was powerful
enough to derail the long term effects
of reforms although the flight to
quality after Lehman hit EM bonds
(Lebanon was the exception)
•
Lebanon and Syria barely felt any
impact, the former mostly through
external trade, the latter benefited
from the end of the political stalemate
•
Egypt and Jordan (the worst hit)
through tourism, FDIs, remittances
and donors’ grants
Misty outlook: Reforms Cycle - Deepening and Widening
• Productivity needs to be boosted while benefits from
reforms need to be distributed evenly
• Upgrading Hard Infrastructure
 Transport
 Electricity
 Sanitation
• Improving Soft Infrastructure
 Health
 Education
 Social Security
Fiscal Policy: Quantity and Quality
•
Fiscal prudence (except in Lebanon) in the past years left some room for
maneuver in the face of the crisis, but this room is shrinking
•
In the Levant fiscal positions have been hit by the crisis
•
•
Lower transfers form donors
•
Lower tax revenues
•
Lower FDI
Structural shortcomings and the quality of expenditures
•
Between 2005 and 2009 Jordan doubled its defense expenditures, 50% increase
in pension outlays and civil servant wages; 50% increase in infrastructure
•
Analogous story in Syria for pensions and wages (but defense budget subdued)
•
Over the same period, Egypt almost doubled wages and salaries, purchases of
goods and interest payments
•
In Lebanon serious questions on the sustainability of the current fiscal burden
might arise given that interest payments are almost half of expenditures
Spreading the wave
• One way to spread the benefits of growth is to
swollen the ranks of government employees
• Waste
• Thicker red tape or worse if salaries are meager
• Crowding out in labor market
• A better way would be to improve productivity and
attract investments => from current to capital outlays
Capacity and Resources Constraints
Institutional Capital

The paradigm of capital and labor is outdated: Capital does not flow to
economies with lower stock where its productivity would be higher (Lucas’
Paradox)

Physical capital is attracted by higher return/risk ratio

Risk is measured as a combination of economic risk and political risk
i.
protection of property rights,
ii.
enforcement of contracts,
iii.
independence of the judiciary,
iv.
protection against partial or total expropriation,
v.
clarity in the regulations which materially affect the return
vi.
labor market rigidity, regulatory clarity,
vii.
unambiguous decision making process,
viii.
last but not least, corruption among officials
Stalled reforms can have dire effects
Data weakness
• In Lebanon data on GDP components for 2006 and 2007 were
released in early 2009. GDP for 2009 is still not available
• Public finance data in the region are generally opaque and not
complying with international best practices
• What can be done?
• Leaving blank the tables in the Statistical Appendix as a signal
that data are not reliable
• Refusal to conclude the Art. IV consultation
• Assigning a rating to statistical data quality (e.g. AAA, A+, BB-)
• Restricting access to IMF and World Bank financing
Thank You!