Al-Ahram Weekly Online   26 Dec. 2002 - 1 Jan. 2003
Issue No. 618
Economy
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World Bank forecasts slow growth

A recently issued World Bank report is pessimistic about the global economy with growth in the Middle East contingent on the avoidance of war. Mona El-Fiqi reviews the report

"Global Economic Prospects and the Developing Countries 2003", a World Bank report, stresses that uncertainties in global financial markets have sapped the momentum of the modest recovery that began in 2001.

The economic slowdown anticipated in the report during the coming 12 to 18 months will impede poverty reduction in developing countries.

To increase growth rates in developing countries in the current uncertain environment, the report outlines steps that should be undertaken by wealthy and developing countries alike.

According to the report, the need to remove trade and investment barriers that hurt poor people in developing countries is becoming urgent.

After slow growth in 2001 and 2002, global GDP is now expected to rise by 2.5 per cent in 2003, higher than the previous two years but still well below the 3.8 per cent expansion recorded in 2000 and significantly below potential long-term growth rates.

Moreover, the report warns that the global rebound might quickly lose momentum and there is a significant risk that the world could slip back into recession. "The recovery has been much more hesitant and uneven than we had expected," said Nicholas Stern, World Bank chief economist and senior vice-president for development economics.

However, the Middle East and North Africa (MENA), according to the report, also faces an economic slowdown, with short term growth prospects contingent upon whether military action is taken in the region.

Despite a continuation of high oil prices, growth in the MENA region declined to 2.5 per cent, down from 3.2 per cent in 2001, as the events of 11 September continue to reverberate throughout the region.

However, for oil exporting countries, growth remained just above 2 per cent. The larger increase in growth anticipated from both high oil prices and increased public expenditures were offset by a slowdown in production and exports, a result of tightened Organisation of Petroleum Exporting Countries (OPEC) quotas introduced in 2001 to support higher oil prices.

The case is different for diversified exporters in the MENA region, who face worsening conditions in 2002, with GDP growth falling to 2.2 per cent, a decline of 2 per cent from 2001.

According to the report, there are external factors leading to this decline. For example, the deterioration in export market growth in Egypt, Morocco and Tunisia, as well as sharp declines in the tourism sector in North Africa after the events of 11 September.

However, internal factors such as unfavorable weather conditions, tightened fiscal and monetary policies and unstable exchange rates in some MENA countries have intensified the impact of the economic slowdown stemming from external shocks.

"The bleak growth prospects in the MENA region have made an already difficult social situation critical, as ever more newcomers to the labour market join the ranks of the unemployed," said Mustafa Nabil, chief economist for the Middle East and North Africa at the World Bank.

In the MENA region, the effects of military action on confidence in already fragile capital markets may lead to increased spreads and a "flight to quality", particularly in countries close to the warzone.

"The MENA region will continue to bear the high costs of conflict and political uncertainty," said Nabil. "This stifles private investment as well as reform efforts with negative consequences on long term growth," he added.

According to the report, growth prospects in MENA are clearly contingent upon whether military conflict occurs in the region. If a conflict is averted over the next year and confidence in the region is gradually restored, the region's growth is forecast to increase to 3.7 per cent by 2004.

A recovery would be expected for both oil- exporting countries and diversified exporters. Growth is expected to average 3.6 per cent for the oil-exporting countries, while growth in diversified exports would be expected to increase to 2.7 per cent in 2003 and 3.6 per cent in 2004.

The report goes on to describe that even if relatively strong growth performance is managed in the MENA region in the short term, growth in the long term is expected to average just over 3.2 per cent, as countries in the region continue to address several obstacles.

According to the report, MENA relies very heavily on a narrow range of external revenue sources, particularly oil remittances and tourism, and this reliance introduces the potential for vulnerability in export earnings.

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