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2. MENAP Oil Importers: Adjusting to New Global Growth Patterns1

Author(s):
International Monetary Fund. Middle East and Central Asia Dept.
Published Date:
October 2010
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At a Glance

MENAP oil importers withstood the 2008–09 global financial crisis well, having effectively used their limited room for countercyclical macroeconomic policy. As their economies have gained strength, these countries are now in a position to begin consolidating their fiscal positions. The overriding longer-term challenge remains that of creating enough jobs for a rapidly expanding population. To this end, improving the region’s competitiveness and reorienting trade toward faster-growing emerging markets are key, at a time when traditional European trading partners are growing more slowly.

Population, millions (2009)

GDP per capita, U.S. dollars (2009)
Sources: IMF, Regional Economic Outlook database; and Microsoft Map Land.Note: The country names and borders on this map do not necessarily reflect the IMF’s official position.

Recovery Gathers Momentum

The region’s economies have for the most part continued to strengthen in 2010 (Figure 2.1). In Egypt, Morocco, and Tunisia, annual nonagricultural GDP growth has increased progressively since the first quarter of 2009, reaching 5½–6 percent in the first quarter of 2010 and offsetting lower growth in agriculture. Djibouti, Mauritania, and Syria are also growing robustly, with output projected to expand by 4½–5 percent in 2010. Not all countries, however, are following the same pattern of recovery. In Pakistan, the recent flooding has had a devastating impact on the population, and projected output growth for FY2010/11 has been revised down by some 1½ percentage points from more than 4 percent (Box 2.1). At the other end of the scale, Afghanistan and Lebanon grew rapidly in 2009, notwithstanding the global recession, and are projected to continue to expand by 8–9 percent in 2010.

Figure 2.1Output Mostly Picking Up

(Real GDP growth; percent)

Sources: National authorities; IMF, World Economic Outlook database; and IMF staff estimates.

1Figures for Pakistan are on a fiscal year basis (July–June), with FY2010/11 shown as 2011.

In most countries, external receipts are again growing solidly. By mid-2010, import and export growth had broadly stabilized after registering a sharp decline and subsequent rebound in the aftermath of the global crisis. Workers’ remittances are also increasing steadily, with only Tunisia—where almost all remittances are from Europe—projected to register lower inflows in 2010 than in 2009. Current account deficits are accordingly expected to remain mostly near current levels, averaging about 3½ percent of GDP in both 2010 and 2011. Foreign direct investment has continued to decline in several countries, but is projected to recover in 2011 along with the global trend.

The region has also remained resilient to turbulence in global financial markets. The April–May 2010 financial market tremors prompted by debt problems in southern Europe did not have much of an impact on these countries. Egypt experienced some capital outflows, but sovereign debt interest rate and credit default swap (CDS) spreads in Egypt, Morocco, and Tunisia rose only marginally. CDS spreads did increase in Lebanon and Pakistan, but not much more than emerging markets overall (Figure 2.2). Moreover, aside from Egypt where markets have in part been impacted by uncertainty ahead of the upcoming elections, the region’s stock market indices fell by less than the emerging-market average in May, although markets in Jordan and Lebanon have continued to fall, while other emerging markets have rebounded (Figure 2.3).

Figure 2.2Local Debt Spreads Comparatively Steady

(Credit default swap spreads; basis points)

Sources: Bloomberg; and Markit.

Figure 2.3Equity Swings

(Stock index; April 15, 2010=100)

Source: Bloomberg.

Credit to the private sector has been picking up since late 2009, and is now increasing at an annual rate of more than 10 percent in all countries except Egypt, Jordan, Mauritania, and Pakistan. Testifying to the region’s insulation from the global financial crisis, nonperforming loans are mostly lower than they were two years ago, although in a few countries still above 10 percent of total loans. With some exceptions, most recently in Afghanistan, the region’s banks are generally on a sound footing.

Box 2.1Unprecedented Floods in Pakistan: The Social and Economic Impact

The July/August 2010 floods in Pakistan took a terrible human toll, and will have economic consequences that extend beyond the immediate destruction. The government has been quick to respond to the challenges with the help of the international community.

The massive floods that were triggered by heavy monsoon rains in north Pakistan caused rivers to burst their banks, destroying entire villages. An estimated 20 million people—more than 10 percent of the population—have been affected so far, and thousands have been killed or wounded. Almost 2 million homes have been destroyed or damaged, and roads, telecommunications, and energy infrastructure have suffered extensive damage.

The full extent of the economic damage is not yet known, but it is estimated that real GDP growth is unlikely to exceed 2¾ percent in FY2010/11, compared with a projected rate of more than 4 percent prior to the floods. In particular, agriculture—which accounts for 21 percent of GDP and 45 percent of employment—has been hit hard: an estimated 10 percent of total cropped area has been flooded, and many livestock have been lost. Manufacturing has also been affected, which will hurt exports.

The authorities’ initial response has focused on emergency relief efforts, in close cooperation with the United Nations, and on mobilizing donor support. The IMF responded swiftly with US$450 million in emergency assistance in September. Other donors have also announced support.

The damage to infrastructure will be felt beyond 2010, weighing on growth and adding to Pakistan’s fiscal challenges. The World Bank and Asian Development Bank are conducting a needs and damage assessment, which will provide the basis for a revised budget and medium-term fiscal framework.

Floods in Pakistan

Sources: Office for the Coordination of Humanitarian Affairs (August 23, 2010), underlying data; British Broadcasting Corporation (August 23, 2010), map design. Note: This map was found on the BBC website at this URL: www.bbc.co.uk/news/world-south-asia-11060686.

The authors are Udo Kock, Paul Ross, Jaroslaw Wieczorek, and Jiri Jonas.

Overall, these economies are near their long-term growth trend. Combined real GDP growth is projected at 5 percent in 2010 and 4.4 percent in 2011, close to the 2000–08 average of 4.8 percent. Indeed, the region stands out by how well activity has weathered the global recession, with only Mauritania having experienced negative growth in 2009, and most countries having already largely closed any remaining gap between actual and potential output. At the same time, however, the region’s growth trend remains well below the emerging market average.

Fiscal Consolidation Under Way

In light of stronger economic growth, the region’s governments are appropriately resuming efforts to strengthen public finances. While public debt levels in most MENAP oil-importing countries are higher than the emerging market average (Figure 2.4), improvements in fiscal positions in the years leading up to the global financial crisis gave room for stimulus that limited the fallout in 2008–09. Now, with their economies again growing solidly and revenue picking up, most oil importers are planning to resume fiscal consolidation efforts. As a result, government deficits are projected to narrow in 2011 in all countries except Afghanistan and Lebanon.

Figure 2.4Narrowing Fiscal Deficits

(Overall fiscal balance and public debt; percent of GDP)

Sources: National authorities; and IMF staff calculations.

The plans for fiscal consolidation are largely targeted at reducing expenditures. While they also include such measures as the introduction of a value-added tax (VAT) in Syria and improvements in tax administration in several other countries, consolidation focuses mainly on curtailing subsidies and other current outlays (Table 2.1). This emphasis on administrative improvements and reduction of inefficiencies should help minimize any adverse impact on aggregate demand in the near term and help bolster future growth. However, efforts to reduce subsidies notwithstanding, the recent spike in world wheat prices could offset spending reductions to the extent that governments limit the pass-through to domestic consumers.

Table 2.1Fiscal Consolidation Measures Planned for 2011(Percent of GDP)
Revenue IncreasesExpenditure ReductionsTotal Impact
VATIncome

Taxes
Other

Taxes
Revenue

Admin
WagesSubsidiesOther

Current
Captial
Egypt0.10.10.30.5
Jordan0.20.10.40.20.9
Pakistan0.50.1-0.1-0.10.70.60.22.0
Syria1.80.22.0
Tunisia0.20.1-0.10.2
Note: Based on IMF staff estimates, not necessarily reflecting the recent spike in world wheat prices.
Note: Based on IMF staff estimates, not necessarily reflecting the recent spike in world wheat prices.
  • In Egypt, the government is resuming its medium-term fiscal consolidation strategy after having provided fiscal stimulus for two years. By strengthening tax enforcement, raising sales taxes on some items, and rationalizing food and energy subsidies, the aim is to reduce the budget sector fiscal deficit by 0.5 percent of GDP in FY2010/11 (July–June) and bring it to about 3.5 percent of GDP by FY2014/15.
  • In Jordan, a combination of the elimination of VAT exemptions, a civil service hiring freeze (except for the health and education sectors), lower subsidies, and reduced spending on goods and services, should reduce the overall deficit by close to 1 percent of GDP in 2011.
  • In Mauritania, an increase in the VAT rate, administrative reforms, and a reduction in discretionary spending have helped reduce the deficit to a projected 4.5 percent of GDP in 2010. Additional savings are expected in 2011.
  • In Pakistan, prior to the floods, the authorities had aimed for substantial consolidation during the second half of 2010 and in 2011, mostly in subsidies and other current expenditure, with a total savings target of 2 percent of GDP for 2010/11. The floods, however, have created the need for substantial expenditure on rescue and relief operations and on rehabilitation and reconstruction, which will necessitate a review of the deficit target.
  • In Syria, the 2010 budget implied a moderate tightening of the fiscal stance. In 2011, the authorities plan to introduce a VAT and to continue to restrain current spending and rationalize capital outlays.
  • In Tunisia, a nominal cap on transfers and subsidies, more active debt management, lower interest payments, control on wages, and a major anticipated reform of the pension system will help reduce the deficit.

Monetary Policy Can Remain Accommodative

Outside of Egypt and Pakistan, inflation is not an immediate concern in the region (Figure 2.5, Box 2.2). Given relatively stable inflation rates, most MENAP oil-importing countries can comfortably maintain their current monetary policy stance. Indeed, after reducing interest rates in 2009 and early 2010, these countries have for the most part kept policy rates unchanged, maintaining existing spreads over rates in advanced economies. Until June, Lebanon gradually reduced its policy rate, in part to slow the pace of reserve accumulation, but has paused since then to allow for a fuller pass-through of earlier rate cuts before taking further interest rate decisions. Moving in the other direction, Pakistan raised its discount rate by 50 basis points in August and again in September to stem inflationary pressures.

Figure 2.5Inflation Holding Steady

(Consumer prices; annual percent change)

Sources: Haver Analytics; and national authorities.

Box 2.2Why Is Inflation High in Egypt and Pakistan?

Policy differences explain why inflation in Egypt and Pakistan has for the past several years been significantly higher than in other MENAP oil importers. In Pakistan, central bank—financed government borrowing creates excess liquidity that feeds into higher prices. In addition, increases in administered support prices for key commodities (wheat, in particular) have spilled over into headline inflation. In Egypt, inflation has in large part been driven by a surge in prices of several food items and the government’s streamlining of consumer subsidies—a welcome move. Absent a clear nominal anchor, these price increases have raised inflation expectations and contributed to the inflationary momentum.

Overall, inflationary pressures appear to be more pronounced in Pakistan. Indeed, while the central bank recently increased its policy rate, the flood has added to price pressures in Pakistan. In Egypt, while price increases across product categories have not been as widespread, spending pressures may arise from the upcoming parliamentary and presidential elections and feed into higher inflation.

The authors are Maria Albino-War, Udo Kock, and Kenji Moriyama.

While low interest rates will help spur growth in the region, recent real exchange rate appreciations are a dampening factor. Over the past year, countries whose currencies tend to track the U.S. dollar have seen their nominal effective exchange rates appreciate along with the greenback (Figure 2.6). Compared with other MENAP oil importers, Morocco and Tunisia’s currencies are more closely linked to the euro, but, as the bulk of their trade is with Europe, they have been less affected by exchange rate changes among major reserve currencies. For Egypt, however, where relatively high rates of inflation and nominal appreciation have coincided, the resulting real effective exchange rate appreciation points to a more difficult competitive position.

Figure 2.6Currencies Mostly Appreciating

(Percent changes, year to July 2010; increase represents appreciation)

Sources: National authorities; and IMF staff calculations.

Current Growth Too Low to Address Unemployment

Looking further ahead, the main challenge will be to raise growth to provide employment for a working age population that is growing faster than in almost all other regions and where more than half are below 25 years of age. High unemployment, averaging 11 percent in 2008, carries significant social and economic costs and remains a major policy concern (Annex 2.1). To absorb the currently unemployed and new entrants into the labor market over the next decade and assuming that the ratio of jobs created to economic growth remains constant, annual growth would need to reach 6½ percent—2 percentage points more than during the past decade. While this may be a tall order, many of the factors holding back labor demand are also dampening economic growth more broadly, and there is extensive scope to increase both the pace of growth and the responsiveness of the labor market.

During the past two decades, per capita economic growth in the region has been substantially lower than in other emerging markets (Figure 2.7). The picture differs across countries, and, in particular, Lebanon (having emerged from the 1975–90 civil war) and Tunisia have performed relatively well. But, altogether, MENAP oil importers’ 55 percent increase in real GDP per capita since 1990 has been one-third less than that of emerging and developing countries as a whole, and far below the more than 200 percent increase in emerging Asia. The region’s relatively lackluster GDP growth mirrors its weak trade performance: all MENAP oil importers have fallen below the emerging market average in terms of per capita export growth since 1990. This shortfall has been more pronounced in exports of goods than in services, but both have been falling behind.

Figure 2.7Lagging Output and Export Growth

(Average annual percent change, 1990–2009)

Source: IMF, World Economic Outlook database.

Note: Emerging Asia refers to China, Hong Kong SAR, India, Indonesia, Korea, Malaysia, the Philippines, Singapore, Taiwan Province of China, Thailand, and Vietnam.

Moreover, the region’s shortfall in income growth compared with that of other emerging markets has widened over time. During 2000–08, real GDP per capita growth rates increased throughout the region, averaging close to 3 percent a year compared with 2.3 percent during the 1990s. Over the same period, however, the corresponding growth rate for emerging markets jumped from about 3.5 percent to almost 5 percent, widening the gap vis-à-vis MENAP oil importers. In addition, whereas during the 1990s the gap in per capita income growth was mainly relative to fast-growing countries in Asia, during 2000–08 a gap has also emerged relative to that of emerging markets in all other regions, except the Western Hemisphere.

An analysis of growth determinants indicates that greater integration with international markets could provide a substantial boost to income. Indeed, evidence suggests that bringing the region’s openness to the level of Emerging Asia could increase annual per capita GDP growth by almost a full percentage point (Figure 2.8). Growth is positively related to trade openness, the ease of doing business, and education levels, and negatively related to government consumption and initial income levels. MENAP oil importers’ lower average level of income in 1990, compared with that of Emerging Asia, should thus have contributed to higher growth in the former. But, on each of the other growth drivers, MENAP oil importers score below the average for Emerging Asia.

Figure 2.8Growth Differentials Explained

(Estimated contribution to shortfall in MENAP oil importers’ average annual percentage growth of real GDP per capita compared with Emerging Asia, 1990–2008)

Sources: IMF, World Economic Outlook database; World Development Indicators; World Economic Forum; and IMF staff calculations.

Note: Openness is measured as a ratio of total imports and exports to GDP; Ease of doing business is the World Bank’s ranking; Government consumption is its ratio to GDP; Education is the secondary enrollment rate multiplied by the World Economic Forum’s score for quality of the education system; and Initial income is PPPGDP per capita in 1990.

Greater Competitiveness Key to Lifting Growth

Despite recent improvements, MENAP oil importers need to enhance their competitiveness. The region—generally characterized by burdensome regulatory systems, weak institutions, and a dominating public sector—has much to do to become competitive relative to other more dynamic economies. Persevering with sound macroeconomic policies—and, in particular, fiscal consolidation—will help support long-term growth and competitiveness, but the region will also need to redouble efforts to improve the business climate.

International rankings point to specific areas requiring improvements. While countries in the region have made substantial progress toward strengthening their business environments, according to widely cited rankings of global competitiveness and the ease of doing business, only Tunisia and Jordan come close to matching the average level for Emerging Asia. The World Economic Forum’s Global Competitiveness Report finds that the region ranks particularly poorly in labor market efficiency. And the World Bank’s Doing Business report identifies enforcing contracts, starting a business, and dealing with construction permits as the most problematic areas (Figure 2.9).

Figure 2.9Competitiveness and Doing Business Indicators

Sources: World Economic Forum, Global Competitiveness Report, 2010–11; World Bank, Ease of Doing Business Rankings, 2010.

1Economies are ranked from 1 to 139, with first place being the best. MENAP oil importers is a simple average of Egypt, Jordan, Lebanon, Mauritania, Morocco, Pakistan, Syria, and Tunisia.

2Economies are ranked from 1 to 183, with first place being the best. MENAP oil importers is a simple average of Afghanistan, Djibouti, Egypt, Jordan, Lebanon, Mauritania, Morocco, Pakistan, Syria, and Tunisia.

On the trade front, most MENAP oil importers have streamlined and lowered tariffs over the past two decades, often in the context of trade agreements with the European Union and the United States.

Egypt and Syria, in particular, have accelerated their progress in this area in recent years. Such moves have in many countries been accompanied by privatization of key industries, which, along with easier access to foreign capital and technology, has led to a pickup in exports and has contributed importantly to the improved economic outcomes of the past decade. Nevertheless, oil importers’ tariffs—averaging over 12 percent in 2009—remain high, and several countries in the region rank at the lower end among 139 countries surveyed on a measure of overall trade restrictiveness (Figure 2.10).

Figure 2.10Trade Restrictions

Source: World Economic Forum, Global Competitiveness Report, 2010/11.

The MENAP oil importers’ lagging trade performance indicates a need to adjust to changing global growth dynamics. The region’s trading patterns remain oriented mainly toward Europe, and there has been relatively little change in the product mix (Box 2.3). Over time, as global growth has shifted more toward emerging markets, continued close links to Europe have meant that the region has benefitted relatively little from the high growth of Asian and Latin American powerhouses. Indeed, the BRICs (Brazil, Russia, India, and China) are now contributing close to half of global GDP growth, but account for only about 9 percent of MENAP oil importers’ total exports.

Better economic outcomes will require new trading patterns. Exporters of raw materials—such as Mauritania (iron ore), and Morocco and Jordan (phosphates)—are already benefitting from high demand in China and India. Remarkably, China now accounts for more than 40 percent of Mauritania’s total exports, up from less than 5 percent before 2004. Aside from raw material sales, however, MENAP oil importers have often found it difficult to compete with lower-cost Asian producers, especially in traditional core areas, such as textiles and other basic manufacturing. Moreover, declining transport costs have eroded their advantage of proximity to markets in Europe. As such, they will need to find new niches and transition into more sophisticated products.

Box 2.3Trade Patterns and Determinants in MENAP Oil-Importing Countries

Trade has not been as strong an engine of growth for the MENAP oil importers as it has for other emerging and developing economies. Goods exports currently represent about 15 percent of GDP, compared with more than 25 percent of GDP for emerging and developing economies overall (Figure 1). The direction and product mix of oil importers’ exports has been relatively static, and volumes have not increased as much as in other emerging markets.

Figure 1Exports of Goods

(Percent of GDP)

Source: IMF, World Economic Outlook.

Considering their close proximity to major markets, these countries could be exporting 50 percent more than they currently are. Distance is one of the most important determinants of trade, with countries tending to export more to those nearby, in particular those with which they share a common border. The MENAP oil importers, however, trade little with their immediate neighbors and, overall, export much less than they could (Figure 2).

Figure 2Actual and Predicted Goods Exports

(Percent of GDP, 2000-08 average)

Sources: Comtrade; IMF, World Economic Outlook database; and IMF staff calculations.

Note: Predicted trade based only on geography and population.

Export patterns of MENAP oil-importing countries have responded relatively little to changing global growth dynamics. Overall, the direction of exports has remained largely unchanged over the past several decades, despite the growing importance of emerging and developing economies, which have more than doubled their share of world imports since 1990 to about 35 percent. Reflecting geographical proximity and close historical ties, the MENAP oil importing countries’ exports have mainly been oriented toward Europe, which has, on average, accounted for some 50–60 percent of their total exports since the 1970s (Figure 3). Exports to other advanced economies (mainly the United States) and to other MENAP countries (mainly the Gulf countries) each comprise about 15–20 percent of the total. Although having picked up somewhat in recent years, exports to other emerging economies still account for just 10 percent.

Figure 3MENAP Oil Importers: Goods Export Destinations

(Percent of total exports)

Source: IMF, Direction of Trade Statistics.

At the same time, progress toward transitioning into higher-value-added products has been limited. For the group as a whole, exports are mainly concentrated in intermediate and consumer goods (Figure 4). More technologically advanced and higher value-added capital goods accounted for just 6 percent of total exports in 2008. While increasing slightly since the early 1990s, the share of capital goods in total exports remains lower than the low-income-country average.

Figure 4Composition of Goods Exports

(Percent of total exports, 2008)

Source: United Nations Comtrade.

An analysis of trade determinants suggests that the region could gain more leverage from existing free trade agreements and infrastructure, as well as from trade with neighboring countries (Figure 5). The influence on trade of other factors, such as real exchange rates and country size, is in line with the rest of the world.

Figure 5Determinants of Trade

(Elasticity of exports to determining factors, 1990–2008)

Sources: Comtrade; World Development Indicators; World Trade Law. Net; and IMF staff calculations.

Note: The coefficients represent the estimated percentage change in bilateral exports from a 1 percent increase in the determining factor, except for common border and free trade agreement, where the coefficient is the percentage increase in trade from their presence.

The authors are Dominique Guillaume and Martin Banjo.

Intraregional commerce is also a promising area: intraregional exports and foreign direct investment have steadily increased, but remain relatively limited. Within the MENAP region, the oil-importing countries are endowed with abundant labor supplies, but are often short on capital. In the oil-exporting countries, the reverse is typically the case. As such, there is significant potential to expand the economic relationship between the two groups, from one based primarily on labor flows to an expansion of trade and investment. In addition, oil importers could trade much more with one another. At present, such trade accounts for just 1¾ percent of their total imports, even less than their 2½ percent share of MENAP oil exporters’ total imports.

Ultimately, fostering trade and spurring job-creating growth calls for an acceleration of reforms that better harness the regions’ assets, including its underutilized labor resources and its location at the crossroads of Europe and Asia. Enhancing trade and cooperation with other emerging markets can help lift growth but will require greater competitiveness. To this end, the region will need to address its shortcomings in education, enhance the flexibility of its labor markets, and further remove obstacles to trade.

1Prepared by Tobias Rasmussen with input from country teams.
Annex 2.1. 18 Million Jobs Needed: Raising Growth and Labor Market Responsiveness

Addressing high unemployment is a longstanding but increasingly urgent challenge for MENAP oil importers. Unemployment rates in Egypt, Jordan, Lebanon, Morocco, Syria, and Tunisia (hereafter, the MENA6) have averaged about 12 percent over the past two decades (Figure 1). Such levels of unemployment imply substantial social and economic costs. As the IMF Managing Director noted in regard to high unemployment globally, “We must not underestimate the daunting prospect we face: a lost generation, disconnected from the labor market, with a progressive loss of skills and motivation.”1

Figure 1MENA6: Demographics and Unemployment

Sources: National authorities; IMF, World Economic Outlook; staff estimates; and International Labor Organization.

High unemployment levels in the MENA6 have contributed to large outward migration, with the estimated stock of migrant workers abroad equivalent to perhaps 15 percent of the combined labor force present in the MENA6. Given greater competitive pressure from other emerging markets and reduced prospects for continued large outward migration due to sharply higher unemployment in advanced economies, the region increasingly cannot afford the status quo.

To absorb the unemployed and new entrants to the labor force, the MENA6 will need to increase employment by an estimated 18½ million full-time positions over the next decade—although even this would leave the employment to working age population ratio lower than that currently observed in any other region. If the pace of output growth and the relationship between growth and employment remain unchanged from the decade up to 2008, however, only 11 million new jobs could be created.

Reaching the job target will require a combination of permanently higher economic growth and reforms to improve the responsiveness of the labor market. The fact that unemployment has remained high for so long indicates that the problem is largely structural and will not be resolved by a cyclical increase in output. Moreover, the concentration of unemployment among the youth (Figure 2) and educated suggests that any solution will need to involve greater labor market flexibility and educational reforms. Surprisingly, unemployment in this region tends to increase with schooling, exceeding 15 percent for those with tertiary education in Egypt, Jordan, and Tunisia. In addition, the share of youth in total unemployment exceeds 40 percent in Egypt, Lebanon, Syria, and Tunisia, far more than in the rest of the world.

Figure 2Total and Youth Unemployment Rates by Region1,2

(20083)

Sources: National authorities; IMF, World Economic Outlook; staff estimates; and International Labor Organization.

1Unemployment rate for Morocco reflects data from Urban Labor Force Survey.

2Youth unemployment estimate for MENA6 excludes Jordan.

3Or most recent year for which data are available.

Why is unemployment so persistently high?

Demographic transition. Over the past decade, the labor force in the MENA6 has grown at an average annual rate of 2.7 percent, faster than in any other region of the world, save Africa. The region’s labor force growth is expected to gradually decelerate over the next decade, but will continue to outpace most other regions. The number of labor force entrants remains daunting—approximately 10 million new entrants are expected to join the labor force in the coming decade, compared with 13½ million in the previous decade. As such, demographic pressures will remain high.

Skill mismatches. The MENA6 countries have made important strides in providing education. Primary enrollment rates range from 88 percent in Lebanon and Egypt to 98 percent in Tunisia, and participation rates in tertiary education exceed 25 percent in Egypt, Jordan, Lebanon, and Tunisia. Yet, entrepreneurs regularly cite the lack of suitable skills as an important constraint to hiring (Figure 3), and unemployment rates are highest among the most educated. Taken together, this suggests that education systems in the region fail to produce graduates with needed skills.

Figure 3Firms Identifying Labor Skill Level as a Major Constraint

(Most recent; percent)

Source: World Bank, Enterprise Survey Results.

Labor market rigidities. According to the latest Global Competitiveness Report, hiring and firing regulations in most MENA6 countries are more restrictive than those in the average emerging and developing country. Moreover, data from enterprise surveys indicate that, worldwide, the percent of firms identifying labor regulation as a major constraint to their business operations is, on average, greatest in the MENA6 (Figure 4). Such rigidities limit employment creation by discouraging firms from expanding employment in response to favorable changes in the economic climate.

Figure 4Firms Identifying Labor Regulations as a Major Constraint

(Most recent; percent)

Source: World Bank, Enterprise Survey Results.

Large public sectors. In the MENA6, the public sector has been an extraordinarily important source of employment. Around the turn of this century, the public sector accounted for about one-third of total employment in Syria, 22 percent in Tunisia, and about 35 percent in Jordan and Egypt. Public-sector employment shares are even higher as a percentage of nonagricultural employment—reaching 42 percent in Jordan and 70 percent in Egypt. The dominant role of the public sector as employer throughout the MENA6 has distorted labor market outcomes and diverted resources away from a potentially more dynamic private sector. Government hiring practices have typically inflated wage expectations and placed a premium on diplomas over actual skills, influencing educational choices and contributing to skill mismatches.

High reservation wages. The comparatively greater job security, higher wages, and more generous non-wage benefits offered by the public sector have inflated wage expectations among new entrants. In fact, public sector wages are 48 percent and 36 percent higher than those offered by the private sector in Egypt and Tunisia, respectively. New entrants’ capacity to withstand long periods of unemployment—in anticipation of securing more lucrative opportunities in the public sector—is buoyed by familial support and remittances from abroad. The latter is consistent with the positive correlation observed between unemployment rates and remittances in the MENA6 countries.

What can policymakers do?

Reduce skill mismatches. Education systems will need to focus more on quality, and curriculums should be realigned with the demands of labor markets. Programs to upgrade skills of the currently unemployed would make them more employable. Private-sector involvement in the process will be critical to identifying the needed skills, and government hiring procedures can place greater emphasis on skills and competition and less on paper qualifications.

Improve the business environment. By further liberalizing external trade and opening up domestic markets, MENA6 countries could boost output growth and labor demand. Reforms aimed at creating a business climate more conducive to investment and competition are key to unlocking the region’s employment potential.

Reduce labor market rigidities. More flexible labor market regulations, along with effective social safety nets, would help enable the private sector respond effectively to market signals. Moreover, to strengthen the link between compensation and productivity, adjustments in government pay scales will be needed within a framework of overall wage restraint.

Selected Economic Indicators: MENAP Oil Importers
Average

2000–05
2006200720082009Proj.

2010
Proj.

2011
Real GDP Growth4.46.36.04.94.65.04.4
(Annual change; percent)
Afghanistan, Rep. of8.214.23.422.58.96.8
Djibouti2.44.85.15.85.04.55.4
Egypt4.06.87.17.24.75.35.5
Jordan6.07.98.57.62.33.44.2
Lebanon3.40.67.59.39.08.05.0
Mauritania3.711.41.03.7-1.14.75.1
Morocco4.47.82.75.64.94.04.3
Pakistan4.96.15.61.63.44.82.8
Syria3.55.14.35.24.05.05.5
Tunisia4.45.76.34.53.13.84.8
Consumer Price Inflation4.17.17.016.18.89.37.7
(Year average; percent)
Afghanistan, Rep. of7.28.630.5-8.3-2.93.2
Djibouti2.03.55.012.01.73.94.0
Egypt4.77.69.518.311.710.99.5
Jordan2.16.34.713.9-0.75.55.0
Lebanon0.55.64.110.81.25.03.5
Mauritania7.96.27.37.32.26.15.2
Morocco1.53.32.03.91.01.52.2
Pakistan5.07.97.620.313.613.810.2
Syria2.710.44.715.22.85.05.0
Tunisia2.74.13.44.93.54.53.5
General Government Fiscal Balance-4.7-5.1-4.9-5.7-5.4-6.3-5.1
(Percent of GDP)
Afghanistan, Rep. of-2.9-1.8-3.7-1.2-0.9-1.3
Djibouti-1.8-2.5-2.61.3-4.9-0.50.0
Egypt-6.4-9.2-7.5-7.8-7.0-8.2-7.6
Jordan-3.1-3.4-5.5-5.4-8.5-6.3-5.5
Lebanon-15.3-10.4-10.8-9.6-8.1-8.7-9.6
Mauritania1-6.635.8-1.6-6.5-5.1-4.5-4.0
Morocco2-5.2-1.80.31.5-2.1-4.5-3.6
Pakistan-2.7-3.7-4.0-7.3-5.2-6.0-3.6
Syria-2.1-1.1-4.0-2.8-5.4-4.3-3.1
Tunisia-2.6-2.9-2.8-0.7-2.6-2.8-2.6
Current Account Balance-0.4-1.6-2.4-4.7-4.4-3.5-3.6
(Percent of GDP)
Afghanistan, Rep. of-4.90.9-0.9-1.80.6-0.4
Djibouti-2.4-14.7-24.9-27.6-17.3-14.3-18.0
Egypt1.61.61.90.5-2.4-2.0-1.6
Jordan0.0-11.0-16.9-9.6-5.0-7.2-8.5
Lebanon-15.2-5.3-6.8-9.3-9.5-11.1-11.2
Mauritania-18.8-1.3-18.3-15.7-12.5-7.6-8.7
Morocco2.22.2-0.1-5.2-5.0-5.3-4.9
Pakistan1.6-3.9-4.8-8.5-5.7-2.0-3.1
Syria-1.3-1.8-2.2-3.6-4.5-3.9-3.4
Tunisia-3.0-1.8-2.4-3.8-2.8-4.4-4.1
Sources: National authorities; and IMF staff estimates and projections.

Includes oil revenue transferred to the oil fund.

Central government.

Sources: National authorities; and IMF staff estimates and projections.

Includes oil revenue transferred to the oil fund.

Central government.

The authors are Yasser Abdih and Anjali Garg.
1See IMF Managing Director’s September 13 opening remarks at the joint ILO-IMF Conference in Oslo, The Challenges of Growth, Employment, and Social Cohesion, www.imf.org/external/np/sec/pr/2010/pr10339.htm.

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