 |
Need for economic liberalisation
The president, Abdelaziz Bouteflika, continues to strengthen his position vis-a-vis the military elite (le pouvoir), gradually consolidating civilian governance in his own hands. However, Mr Bouteflika’s autocratic tendencies will remain a major hindrance to the development of democratic institutions, especially if he secures the passing of an amendment to the constitution, which is thought probable in late 2007 or in early 2008, that would allow him to stand for a third term. The government will proceed with some economic liberalisation, and will continue to solicit foreign investment in sectors such as infrastructure, telecommunications, power and water. These projects will contribute to economic development, although the hydrocarbons sector will remain the main engine of growth.
Economic overview
Favorable hydrocarbon prices on international markets further strengthened Algeria’s external position. The current account surplus is projected to increase to 24½ percent of GDP from almost 21 percent in 2005. Gross external reserves reached $US70 billion at end-September 2006 (2 years of import cover).
Real GDP growth temporarily declined to about 3 percent in 2006, largely because of a drop in hydrocarbon output for technical reasons. Nonhydrocarbon GDP (NHGDP) growth would continue at 4½ percent, underpinned by sustained activity in the construction sector, resulting from the significant fiscal impulse, and agriculture. Inflation remained low through mid 2006 but is picking up, reflecting a rebound in food prices.
Buoyant hydrocarbon revenues have enabled a strong increase in public spending. Monetary policy remained prudent, in line with the objective of containing inflation. The Bank of Algeria continued to absorb most of the excess liquidity of the banking system through deposit auctions in 2006 and the expansion of credit to the economy slowed.
Some progress was made in structural reforms. The privatization of one public bank and the modernization of the payments system are underway.
The governance of the remaining public banks is being strengthened and supervision has become more active, mainly through on-site inspections. However, nonperforming loans of public banks remained high. The corporate profit tax rate was reduced from 30 percent to 25 percent, and the taxation of small enterprises was streamlined by introducing a single presumptive tax. Privatization of public enterprises is proceeding and an anticorruption law was adopted in
January 2006.
|
 |
 |
| |
|
|
Aiming
for Progress
Growth performance strengthened in 2006, but was accompanied by accelerated inflation. Despite structural bottlenecks and weak competitiveness, real GDP growth reached 4.8 percent, driven by fiscal expansion and large private investment in the port, construction and services sectors. However, consumer price inflation rose to 3.6 percent in 2006, its highest peak since 2003, reflecting mainly higher prices of food, housing, water, and electricity.
Economic Trends
Broad money growth continued its trend deceleration of the past few years, in an environment of favorable economic conditions and more attractive financial conditions.
Credit to the private sector increased notably compared to previous years, benefiting primarily sectors related to foreign direct investment. With a still low and little diversified export base, the surge in foreign financed related imports led to a sharp deterioration of the trade and current account balances.
However, large capital and financial inflows resulted in a substantial increase in gross official reserves, the equivalent of about three months of imports.
Fiscal policy was expansionary in 2006.While the external debt profile is manageable, the stock of public debt is projected to increase substantially over the period 2006-11.
Progress in implementing structural reforms has been slow. A civil service reform initiated in early 2006 is still unfolding. There have been various initiatives in the energy sector, but an integrated strategy to reduce electricity production costs in the short and medium term has not been formulated.
These measures are crucial to enhance growth prospects, improve competitiveness of the economy, and reduce poverty and unemployment.
|
 |
|
|
Acceleration for growth
Over the last two years, Egypt has accelerated reforms aimed at tackling impediments to higher growth and employment creation. Implementation of a broad range of reforms aimed at modernizing government and boosting private sector activity, and a favorable external environment, have contributed to macroeconomic stability.
Economic Growth
Growth accelerated to 5.7 percent in the first half of 2005/06. While the external sector remains an important engine of growth, the expansion has become more broad-based, with construction and services now increasing at a healthy rate. Employment is rising, but continued high unemployment points to the need to further boost private investment and growth.
Inflation fell sharply during 2005, and real interest rates turned positive for the first time in years. Headline CPI inflation declined from 17 percent (y/y) to 4 percent (y/y) over the 15 months through end-April 2006. The Central Bank of Egypt (CBE) introduced a corridor for the overnight interbank rate in May 2005 that has reduced the volatility of short-term rates. With inflation declining, the CBE started easing monetary policy in mid-2005. Money aggregates expanded rapidly in 2005, but have decelerated in 2006. Lower policy rates have not been fully passed through to bank lending rates, and growth of credit to the private sector remains weak.
The interbank foreign exchange market launched in late-2004 is functioning well, with banks free to buy and sell foreign exchange at market determined rates. In a context of ample dollar liquidity from large balance of payments surpluses, the CBE has been buying large amounts of foreign exchange, in part to strengthen international reserves. As a result, the Egyptian pound-U.S. dollar exchange rate has been virtually unchanged since early 2005, while the growth in the net foreign assets of the banking system was the main source of money creation in 2005.
The balance of payments and external positions remain comfortable. International reserves have increased from US$15 billion to US$22.5 billion (7½ months of imports) over the 15 months through end-March 2006. With non-oil imports growing rapidly, and non-oil exports stagnating, the current account surplus has started to narrow. However, the country’s net foreign asset position, both at the central bank and in the banking system, is being bolstered by capital inflows, mostly nondebt creating. The external debt-to-GDP ratio, currently at 30 percent of GDP, is projected to decline in the coming years, reflecting prudent external borrowing.
On the revenue side, the government reduced and streamlined corporate and individual income taxes, moved to self-assessment procedures, and established a large taxpayer center. While expected to lose revenue in the short run, the reforms have reportedly triggered greater tax compliance and filing.
The consolidated general government deficit is projected at 8.3 percent of GDP in 2005/06, down from 9.1 percent of GDP in 2004/05. The fiscal position in 2005/06 has benefited from exceptional revenues arising from a payment of tax arrears by EGPC and the sale of 20 percent of Egypt Telecom. Net public debt is projected to rise by about 1.6 percentage points in 2005/06 to 69.8 percent of GDP by June 2006. The authorities are in the process of preparing a package of measures aimed at reducing the deficit in the following years by at least 1 percent of GDP per year, including streamlining of subsidies, introduction of a full fledged VAT, and reduction in the growth of the wage bill.
Significant progress in the structural reform program of the government has taken Egypt further along the road to a market economy. The privatization program is gaining momentum. Regulatory and supervisory standards in the capital markets, insurance industry, and the banking sector are being strengthened. The restructuring of state-owned banks is progressing, including the sale of joint venture banks, and restructuring and settlement of nonperforming loans.
|
 |
|
| |
|
|
Need for stability
The government in Baghdad is likely to fail to make any significant impact on the sectarian conflict being waged by Iraqi militias and Sunni insurgents. The coalition military presence is increasingly irrelevant, as the struggle on the ground holds centre stage. Furthermore, the forthcoming referendum in oil-rich Kirkuk could presage an increase in violence in the city, and possibly an eventual setting up of a de facto Kurdish state.
In “Arab Iraq” local conflicts for political and territorial advantage are likely, as opposed to larger-scale secessionist moves. The attachment to the national political process is partial and largely self-serving on the part of distinct sectarian and factional interests.
Although the survival of the political process should help to minimise the risk of the complete collapse of the country, it is unlikely to serve as the vehicle for meaningful compromise, as a more substantive struggle is being waged at the local level by militias often allied to government parties.
Economy overview
Oil production growth will be constrained by security problems and persistent underinvestment, but modest increases in output will occur.
Additionally, government spending on development will be constrained by security costs and corruption, and the non-oil sector will continue to be blighted by the lack of security and the slow pace of reconstruction and fund disbursement.
The release of new IMF estimates indicate that Iraq recorded a large fiscal surplus in 2006, as security problems in the country prevented the government from disbursing most of the capital budget.
With recurrent spending growth set to persist, it is likely for the government to run a small deficit in 2007, which will widen to the equivalent of 7.6% of GDP in 2008. Iraq’s current-account forecast is expected to move into a deficit of US$1.3bn, or 2.4% of GDP, in 2008 as the import bill rises and export earnings dip slightly.
|
 |
|
| |
|
|
POSITIVE TRENDS
The Jordanian economy has performed remarkably well in recent years, due mainly to far-reaching macroeconomic and structural reforms. Despite negative shocks (including high oil prices and regional uncertainties), growth has been robust, inflation has remained low, public debt has continued to fall, and reserves have reached an all-time high.
Economic Growth
Economic performance remained strong in 2006. Growth is estimated at 6 percent for the year, reflecting buoyant domestic demand (private consumption and investment), in part financed by large private capital inflows. Average inflation was 6.3 percent, stemming mainly from fuel and imported food price increases, with core inflation (excluding food and energy) well contained.
The current account deficit narrowed in 2006—albeit to a still-high 16 percent of GDP—as a result of a broad-based slowdown in import growth and continued strong performance of exports and remittances. This deficit was financed by record levels of long-term private capital inflows reflecting foreign investments in banking, mining, telecommunications, and real estate.
The fiscal situation also improved in 2006. Stronger revenue performance (income tax and general sales tax receipts), larger-than-expected grants (especially from Saudi Arabia), and the authorities’ decision to raise domestic fuel prices (lowering substantially oil subsidies) more than offset higher primary spending on transfers, security outlays, and wage bonuses.
Meanwhile, monetary policy supported well the peg of the Jordanian dinar (JD) to the U.S. dollar. The spread on 3-month JD-denominated CDs issued by the Central Bank of Jordan (CBJ) over the U.S. dollar 3-month Treasury bill rate has been kept to a 1½-2 percentage point range during the past year.
The dollarization ratio has been stable, at about 27 percent of deposits, reflecting continued confidence in the dinar.
Broad money increased in line with nominal economic activity, with strong private sector credit growth (24 percent year-on-year) broadly offset by reductions in credit to government (privatization receipts) and a large increase in banks’ capital.
|
 |
|
| |
|
|
STATE OF UNCERTAINITY
Lebanon has a free enterprise economy, which is based on services (banks and insurance), tourism, light industries and agriculture. Lebanon has been a popular destination for tourism and business, specifically within the Arab World. The services and real estate sector has been the major receiver of Arab Foreign Direct Investment, which has shown an increasing trend in the past years up till the Israeli attack in July 2006. During 2004 and 2005, Lebanon was the third largest recipient of Arab FDI.
Recent Political and Economic Developments
The war that has erupted in July 2006 has imposed major implications on the Lebanese economy and its expected future performance. According to the International Monetary Fund (IMF) and the Central Bank, Lebanon’s GDP fell to zero percent or less while inflation reached 7 percent in 2006. Damages to infrastructure exceeded USD 3.5 billion as per the Council for Development and Reconstruction (CDR), the construction arm of the government. The Israeli attack has impacted most of Lebanon’s economic sectors, particularly tourism and agriculture, which will eventually show high levels of unemployment.
The impact of the war on the financial sector has been limited, showing once again the sector’s flexibility to shocks. Total assets of banks exceeded USD 72 billion in 2006 and combined profits jumped to USD 665 million in the same year. In addition, the high level of international reserves and the additional monetary support offered by Saudi Arabia and Kuwait to the Central Bank in the form of USD 1 billion and USD 500 million deposits respectively guaranteed the stability of the exchange rate.
Arab Foreign Direct Investment (FDI) into Lebanon, which has portrayed an increasing trend from USD 1,050 million in 2004 to USD 1,780 million in 2005, was expected to decrease in the second half of 2006 following the Israeli attack and recent political turmoil.
According to the Higher Customs Council, the trade balance has witnessed a year-on-year widening due to a growth in imports by 38.2 percent and a lower growth in exports by 30.3 percent.
The twelve months prior to the war showed a remarkable improvement in public finance. However, the aforementioned performance was reversed as a direct result of high revenue losses and large expenditure requirements.
Outlook
The outlook for 2007 is not fully discouraging, since the reconstruction process is expected to motivate consumption and investment levels for the year. However, if the political uncertainty persists and if the reconstruction and support funds do not occur, real GDP growth will be restrained.
The latest projections of the EIU show that the budget deficit will be around 15 percent of GDP in 2006, and will relatively stay constant in 2007, and fall to 11 percent in 2008. It is expected that real GDP growth will get to 4 percent in 2007 and fairly to 2.7 percent in 2008, provided the political situation alleviates.
Prices on goods and services will stay high, growing by an average of 5 percent in 2006, and expects it to stay constant in 2007. The EIU expects inflation to drop to 3 percent in 2008.
|
 |
|
| |
|
|
Progressive reforms
Libya is a hydrocarbon rich country, but has one of the least diversified economies in the Maghreb region and among the oil producing countries. It has a long legacy of central economic management and excessive reliance on the public sector, and started its transition to a market economy in 2002, after 10 years of international economic sanctions. Since then, Libya has made efforts to liberalize its economy and foreign trade, achieving increasing economic growth while maintaining macroeconomic stability.
Economic Growth
In 2006, economic conditions continued to be satisfactory. Real GDP grew about 5½ percent, reflecting an increase of 4½ percent in the value added of the hydrocarbon sector, and a buoyant non-oil economy (6 percent) boosted by increased government spending and the liberalization of the trade, service, and tourism sectors. However, preliminary end-year data indicate that annual Consumer Price Index (CPI) inflation accelerated in the last quarter reaching 7.2 percent (year on year) in December.
Based on preliminary data, the consolidated government operations registered a record overall cash surplus of about 39 percent of GDP, owing to a substantial increase (of 25 percent) in hydrocarbon revenues. Non-oil revenue performance grew even faster at 33 percent, partly owing to the reform of tax and customs administration currently underway. Government spending grew about 12 percent, owing to: (i) a marked increase in the wage bill, reflecting new hiring in the regions, and increases in wages for some categories of civil servants; and (ii) an improved execution of the development budget. Development spending increased to about 17 percent of GDP, concentrated on infrastructure and construction (42 percent), social sectors (32 percent), and hydrocarbons (19 percent).
Monetary developments were characterized by a strong (albeit lower than in 2005) broad money growth (about 20 percent), reflecting mainly the impact of the nominal increase in the non-oil fiscal deficit on money supply and a sustained increase in credit to public enterprises (of over 20 percent). Bank credit to the private sector grew about 7 percent, the highest growth rate since 2000.
On the external side, the current account surplus is estimated to have reached about 48½ percent of GDP, reflecting the growth of hydrocarbon exports resulting from higher export prices and volumes. Import growth was robust (18 percent) reflecting rising domestic demand, including increased government spending. Gross international reserves reached the equivalent of 29 months of 2007 imports of goods and services, and the Real Effective Exchange Rate (REER) based on the official CPI remained stable.
In 2006, structural reform continued with the implementation of a wide range of measures covering fiscal management and taxation, banking and payments systems, trade, and the business environment.
In the fiscal area, the authorities established the Libya Investment Authority to centralize hydrocarbon revenue management. Also, progress was made on strengthening revenue administration with the establishment of a large taxpayers office and the development of plans to streamline the tax and customs departments, strengthen controls, and upgrade office buildings and equipment.
In the monetary and banking area, the authorities developed a plan to restructure the public commercial banks, merged 21 regional banks, and accelerated efforts to strengthen banking supervision and modernize the payment system.
Efforts to liberalize trade and improve the business environment continued. In particular, the authorities: (i) halved the consumption tax on imported goods produced locally; (ii) abolished all remaining state import monopolies except those on petroleum products and weaponry; (iii) reduced the list of import bans for religious, health, and ecological reasons to 10 products; (iv) opened 51 offices across the country to expedite approval of business permits; (v) lowered the floor on Foreign Direct Investment (FDI) in the non-oil sector from US$50 million to US$1.5 million; and (vi) established a negative list for non-oil FDI limited to retail trade, wholesale trade, and importation. Also, the authorities issued a decree requiring that all FDI in the non-oil sector be undertaken through joint ventures with a minimum Libyan participation of 35 percent.
|
 |
|
| |
|
|
Getting strong
Inflation returned to single-digit levels in the last quarter of 2005 and Mauritania’s external position—which has also benefited from improving terms of trade since 2005—started to strengthen.
Economic Growth
In February 2006, Mauritania became an exporter of crude oil from an offshore field, with daily production averaging 54,000 barrels over the past three months. The oil investment-related activity helped maintain real growth in 2005 above 5 percent and, with the arrival of oil production, real growth is expected in the next few years. Non-oil real GDP growth (projected at 6½ percent) will be supported by new mining activity (copper and gold) and a substantial increase in public investment. Mauritania’s improved external position would allow for a build-up of international reserves.
The authorities have launched initiatives covering the first half of 2006, to maintain the disinflation and fiscal consolidation momentum and implement key reforms in the areas of data transparency, oil revenue management, and public expenditure management.
Mauritania has implemented all the remedial actions requested to qualify for the Multilateral Debt Relief Initiative (MDRI), including the resolution of the data issues, six months of satisfactory macroeconomic performance, and implementation of the remedial actions in budget formulation, execution, and reporting.
Mauritania’s debt relief from the IMF, the World Bank’s International Development Association, and the African Development Fund of the African Development Bank, would amount to about US$400 million in net present value (NPV) terms, representing about 36.5 percent of the estimated NPV of public external debt at end-2006.
The authorities have decided to take advantage of the strong fiscal and external outlook for 2006 to further consolidate public finances and liberalize the foreign exchange system.
The expected oil revenue and the maintenance of fiscal discipline are estimated to result in an overall fiscal surplus of some 10 percent of non-oil GDP, to be largely channeled toward the reduction of domestic government debt and payment arrears.
|
 |
|
| |
|
|
Favorable outlook
Macroeconomic conditions continue to strengthen and the outlook is favorable, with increased private sector confidence in the Moroccan economy. A bumper crop and continued strong activity in services and construction are ushering in a recovery, following a slowdown in growth in 2005 caused by unfavorable weather conditions.
The external current account is expected to record its sixth consecutive surplus. Strong tourism receipts, workers’ remittances and the recovery of textile exports is likely to offset the upsurge in the energy bill. External reserves, at more than US$18 billion, continue to exceed the total stock of public external debt.
Economic Growth
The fiscal position is improving but the ratio of public debt to GDP, though declining, remains high. Despite a buoyant revenue performance, the fiscal deficit is likely to be close to the 2006 budget target of 4.1 percent of GDP (down from 5.9 percent in 2005) because of continued expenditure pressures stemming mainly from oil and food subsidies (1.6 percent and 0.8 percent of GDP in 2005, respectively).
The authorities have started to implement their medium-term fiscal consolidation strategy, which aims at reducing the fiscal deficit to 3 percent of GDP and bring the public-debt-to-GDP ratio below 60 percent. Following the three increases that have taken place since 2005, the authorities plan on continuing to gradually align domestic prices of petroleum products with international prices.
Monetary policy has adequately managed the excess liquidity conditions, and the central bank continues to strengthen the operational framework for monetary policy and its transparency.
Banking sector conditions have improved following significant write-offs of nonperforming loans and the near completion of the restructuring of two state-owned banks. The authorities have also taken steps to improve the availability, accuracy and transparency of financial information in order to strengthen financial intermediation.
Morocco has made considerable progress in trade liberalization; next steps include tackling remaining obstacles to trade and increasing trade in services..
|
 |
|
| |
|
|
On stable grounds
Sudan’s economy has been growing at a fast pace and macroeconomic conditions have been stable. Real GDP grew at an estimated rate of 8 percent in 2005, owing mainly to a recovery in agriculture and robust activity in construction and services. After rapid growth in 2003 and 2004, oil sector output remained virtually unchanged in 2005, while average inflation was 8.5 percent.
Economic Growth
The external current account worsened in 2005 but the balance of payments was supported by strong capital inflows. Oil export revenues rose because of higher oil prices, but imports rose drastically and non-oil exports slowed (owing to transportation bottlenecks, high domestic demand, and to some extent, real exchange rate appreciation). A continuation in the strong trend in capital inflows—primarily foreign direct investment in non-oil sectors—allowed for a buildup of international reserves..
The central government fiscal balance turned to a deficit after three years of surpluses. Oil revenue continued to rise in 2005, but it could not keep pace with the increase in government spending, driven by higher transfers to subnational governments (including transfers to the South) and a large subsidy on domestic fuels. The subsidy is a significant drain on public resources without any direct benefit to the poor in Sudan.
Money demand was bolstered by strong economic growth and further monetization, while the fiscal expansion, higher oil exports, and strong capital inflows contributed to an appreciation of the dinar.
The authorities took steps to improve the tariff structure and increase flexibility in the foreign exchange market. Sudan maintains a managed floating exchange rate regime.
There was progress on structural reforms in the fiscal and financial sectors, but more remains to be done. A medium taxpayer unit was set up to boost non-oil revenue. The adoption of Automated System of Customs Data system should improve efficiency at customs ports.
Regarding financial reforms, the central bank introduced competitive auctions of government securities, privatized a large bank, and began to implement the financial reforms envisaged in the peace agreement with the South. Notwithstanding the progress made, more remains to be done to modernize the tax and the financial system, strengthen expenditure management at all levels of government, and improve fiscal and oil sector transparency..
|
 |
|
| |
|
|
Heading towards recovery
The economy proved quite resilient in the face of the unsettling political developments. Economic activity picked up steam buoyed by private investment and supported by the oil boom in the Gulf region. However, growth was accompanied by a rise in inflation, reflecting, in part, an expansionary monetary policy.
The non-oil budget balance improved significantly by about 2½ percent of GDP, offsetting some of the pronounced fall in oil revenues. However, this improvement was mainly due to transfers from public enterprises. Similarly, the non-oil current account balance improved, contributing to maintaining external balance despite the sharp fall in net oil exports. Public and external debts remain moderate, and official foreign reserves cover close to 2 years of imports.
Economic Growth
The recovery seems poised to continue despite the still volatile regional environment. The non-oil GDP growth momentum is expected to be sustained by robust investment expansion and good export performance, reflecting greater access to regional Arab markets and the benefits from the concerted policy to promote tourism. This, together with the windfall from higher oil prices and an increase in Foreign Direct Investment, will maintain a comfortable balance of payments.
Together with a modest increase in oil revenues, this fiscal tightening should narrow the overall budget deficit to 3¼ percent of GDP and limit the inflationary and crowding out impact of its domestic financing. With the recent measures to tighten credit policy, these developments should help in reining in inflation, if supported by an appropriately restrained wage policy.
Over the medium term Syria faces daunting economic challenges. The decline of oil reserves poses a threat to fiscal and external sustainability, and the associated fall in oil revenues will make it harder to preserve, much less expand living standards.
A bulge in labor market entrants will strain an already precarious unemployment situation and increase pressure to protect redundant labor in an overstaffed public sector. These challenges are further compounded by political uncertainties and a volatile regional environment.
In this context, the surge in international oil prices has provided a short-term windfall but will aggravate the medium-term outlook when Syria becomes a net oil importer around the year 2010 based on current oil price projections.
|
 |
|
| |
|
|
STEADY PROGRESS
Over the past decade, market-oriented reforms and prudent macroeconomic policies have contributed to placing Tunisia’s economic performance among the best in the region. The authorities have managed the exchange rate flexibly in a context of restricted external capital flows. Outward orientation has been a key component of Tunisia’s development strategy, notably through an Association Agreement with the EU, signed in 1995. Gradual structural reforms combined with a flexible exchange rate policy since 2000 have supported competitiveness and export growth.
ECONOMIC GROWTH
The Tunisian economy continues to show strength and the outlook is favorable. Real GDP growth remained relatively strong in 2006 and the external current account deficit narrowed significantly, notwithstanding unfavorable agricultural conditions, the expiration of the Agreement on Textiles and Clothing, and continued tepid demand in Europe. Growth is expected to accelerate, as agricultural production recovers and the service and industry sectors remain strong. While increased financial inflows present a challenge for monetary policy, the current macroeconomic stance remains appropriate and inflation subdued.
Banking sector indicators improved in 2006. The share of non-performing loans (NPLs) in total loans declined significantly and provisioning increased somewhat. While not of systemic proportions, banking sector vulnerabilities increase the cost of capital and hinder macroeconomic reform.
Over the medium term, the authorities are aiming to achieve the standard of living of emerging market OECD countries and transform Tunisia’s economic structure to absorb the rapidly increasing supply of skilled labor. This will require: (i) strengthening the financial sector by accelerating the resolution of the high NPLs; (ii) advancing macroeconomic policy reforms; (iii) improving the investment climate; and (iv) increasing labor market flexibility.
|
 |
|
| |
|
|
CHALLENGING TIMES
The president, Ali Abdullah Saleh, and his ruling General People’s Congress are expected to retain a strong grip. However, the Zaydi Shia rebellion in the north of the country will provide a stern test for the armed forces, and occasional outbreaks of militant Islamist and tribal violence will further stretch their capabilities. Nevertheless, despite it feeding both militant and popular resentment, the government will continue its co-operation with the US in its “war on terror”, in part out of an awareness of the diplomatic and financial rewards such assistance can bring.
The government is likely to make only patchy progress in implementing further economic reform measures, although the recent cabinet reshuffle should provide some renewed impetus.
Economic overview
Real GDP growth will remain slow, held back by falling oil exports as oil reserves dwindle. Inflation should ease in 2007-08, as international commodity prices and food prices stabilise. Yemen represents the single largest development challenge in the Middle East; it is a country of deep rooted tradition endowed with limited resources notably scarce water, limited arable land and declining oil reserves; a country that has experienced dramatic internal and external shocks in the last two decades; the only IDA country in a rich region; and a young country with nearly 50 percent of its population below 15 years and population expected to double in the next 20 years. Despite these constraints, Yemen developed a multi-party democratic system and a relatively free press ahead of other countries in the region.
Poverty reduction remains Yemen’s most compelling challenge. According to the 1998 Household Survey, 42 percent of the population lived below the poverty line with the percent in rural areas being slightly higher (at 45 percent). While the oil sector dominates Yemen’s economy (27 per cent of GDP and 90 percent of merchandise exports), it generates few jobs. Generating non-oil growth and addressing unemployment is therefore key to reducing poverty as a high percentage of working age Yemenis are unemployed and this population keeps growing each year.
There is a need to address cross-cutting constraints to private sector development (Yemen ranks only 90th out of 155 countries in the overall ease of doing business) as well as address specific constraints in particular sectors: agriculture, fisheries, natural gas, urban manufacturing and services and the financial sector. Further, to make a significant impact on income generation (and social service delivery), better infrastructure (roads, power, land and Information Communications and Technology) are also needed.
There are also fiscal challenges. Fiscal revenues are heavily dependent on oil (which contributes about three-quarters of revenues) and since fuel is being sold domestically below the international prices, subsidies are costing 10 percent of GDP. In addition to the ongoing challenges of managing the budget’s heavy dependency on oil, an additional challenge would arise as projections indicate that the oil production will decline and barring discovery of major new oil reserves, Yemen could become a net oil importer by 2011.
|
 |
|
| |
|
|
TOUGH TIMES AHEAD
After having experienced a modest recovery in 2003-05, the Palestenian economy suffered another decline in 2006, as a result of the domestic and international political difficulties. Although hard data are scarce, real GDP is estimated to have fallen within a range of 5 to 10 percent in 2006, less than initially had been feared, but still leaving average real per capita GDP at almost 40 percent below its 1999 level.
Stronger than expected official and private inflows have helped prevent a much sharper decline in incomes and consumption in 2006, thus cushioning the overall contraction. But with a larger decline in investment, from an already low level, this also signals a further hollowing out of the Palestinian economy and an increase in its dependency on foreign aid.
Economy outlook
World Bank and IMF estimates suggest that real GDP declined by 8 percent. It is clear though, that the much larger than expected official and private inflows, including humanitarian assistances and private remittances have helped to avoid a major decline in available incomes and thus in spending.
The stronger than expected inflows also largely explain why the more dramatic economic decline in early 2006 did not materialize. As a result of the inflows, private consumption and imports are estimated to have fallen only modestly in real terms.
Government consumption, on the other hand, is estimated to have fallen considerably in real terms, reflecting the days worked and the fiscal difficulties that forced a compression of expenditures.
Exports and investment are also believed to have fallen sharply, reflecting the intensified restrictions, weakening security conditions and growing uncertainty, as well as the shift in external assistance away from development aid toward humanitarian assistance. Inflation remained low in 2006 at 3.6 percent and unchanged from 2005.
|
 |
|
| |
|
|
|
|
|
DIRECTORY
OF ARAB BANKS & FINANCIAL INSTITUTIONS |
|
