39408 MIDDLE EAST AND NORTH AFRICA REGION 2006 Economic FINANCIAL Developments MARKETS IN A and Prospects NEW AGE OF OIL © 2006 The International Bank for Reconstruction and Development / The World Bank 1818 H Street, NW Washington, DC 20433 Telephone 202-473-1000 Internet www.worldbank.org E-mail feedback@worldbank.org All rights reserved. This volume is a product of the Chief Economist's Office of the Middle East and North Africa Region of the World Bank. The findings, interpretations, and conclusions expressed herein are those of the author(s) and do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The World Bank encourages dissemination of its work and will normally grant permission promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA, telephone 978-750-8400, fax 978-750-4470, www.copyright.com. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, World Bank, 1818 H Street NW, Washington, DC 20433, USA, fax 202-522-2422, e-mail pubrights@worldbank.org. Cover photo: Khaled Desouki, Getty Images. A FREE PUBLICATION Table of Contents FOREWORD ix ACKNOWLEDGMENTS xi ABBREVIATIONS AND ACRONYMS xiii OVERVIEW xv CHAPTER 1: RECENT ECONOMIC OUTCOMES AND SHORT-TERM DEVELOPMENT PROSPECTS IN MENA 1.1 Introduction 1 1.2 Recent Economic Developments 2 1.2.1 Regional growth outcomes buoyant 2 1.2.2 Regional unemployment declines 6 1.2.3 Per capita growth less robust 7 1.2.4 Oil market developments shape regional outcomes 8 1.2.5 Reliance on oil subsidies becomes a fiscal challenge 11 1.2.6 Diverging relationship between oil prices and growth among nonoil economies 11 1.2.7 Strengthening correlation between oil price developments and growth in resource-rich economies 15 1.3 External Sector 15 1.3.1 Export growth robust throughout the region 15 1.3.2 Resource-poor economies face several new external challenges 18 1.3.3 Current account positions diverge 20 1.3.4 Capital flows reflect increasing desire among resource-rich economies to diversify 25 1.4 Fiscal Developments 26 1.4.1 Strong upturn in fiscal balances among oil producers 26 1.4.2 Deteriorating fiscal balances among resource-poor countries 26 1.4.3 The special case of oil subsidies in MENA 28 Contents iii 1.5 Near-Term Prospects 31 1.5.1 External environment for growth 31 1.5.2 Risks 35 CHAPTER 2: FINANCIAL SECTORS IN A NEW AGE OF OIL 2.1 Introduction 37 2.2 Recent Upturn in Financial Activity in MENA 38 2.2.1 Windfall liquidity drives strong credit growth 38 2.2.2 Enhanced bank profitability in the Gulf 41 2.2.3 Exposure to economic shocks heightened 45 2.2.4 Rising equity markets, with recent corrections 47 2.3 Disconnect between Financial Sectors and the Real Private Economy in MENA 50 2.3.1 Macroeconomic indicators demonstrate a relatively deep financial sector across MENA 51 2.3.2 Financial sector has limited links to real private economy 52 2.4 Factors Inhibiting the Growth-Finance Nexus in MENA 55 2.4.1 Public sector ownership of banking in MENA 55 2.4.2 Regulatory frameworks and limited private monitoring 60 2.4.3 Limited bank access 61 2.4.4 Underdeveloped capital markets 62 2.4.5 Poor-quality governance can undermine financial intermediation 66 2.4.6 A business climate not conducive for lending 66 2.4.7 Improving the impact of financial sectors on growth in MENA 68 CHAPTER 3: STRUCTURAL REFORM PROGRESS FOR LONG-TERM GROWTH 3.1 Introduction 69 3.2 Measuring Structural Reform 70 3.3 Outward Orientation in MENA 71 3.3.1 Developments in trade reform 71 3.3.2 Quantifying progress with trade reform 73 3.4 Business Climate 77 3.4.1 Developments in business and regulatory reform 77 3.4.2 Quantifying progress with business and regulatory reform 78 3.5 Governance 81 3.5.1 Developments in governance reform 82 3.5.2 Quantifying progress with governance reform 83 APPENDIX A: STATISTICAL TABLES 87 APPENDIX B: STRUCTURAL REFORM INDICATORS FOR 2006 101 B1 Trade Openness 101 B2 Business Environment 104 B3 Governance and Public Sector Reforms 107 BIBLIOGRAPHY 111 iv Economic Developments and Prospects BOXES Box 1.1 Recent economic developments in Iraq 5 Box 1.2 Petrochemicals: building value into oil and natural gas production 20 Box 1.3 The Tunisian experience with the MFA removal 21 Box 1.4 Debt reduction among MENA's oil producers 27 Box 1.5 The experience with oil price adjustments in some MENA economies 29 Box 1.6 Building greater oil production capacity in MENA 34 Box 2.1 A broad categorization of financial market development in MENA 40 Box 2.2 Housing finance in MENA 42 Box 2.3 "The World" comes to Dubai: real estate in the Gulf 46 Box 2.4 GCC capital markets' integration through competitiveness 59 Box 3.1 Morocco's Emergence program 82 Appendix Box Principal component analysis 109 FIGURES Figure 1.1 Economic growth in MENA, 2000­2005 3 Figure 1.2 Official unemployment rates, 2000 and 2005 5 Figure 1.3 MENA's GDP per worker/unemployment reduction relationship 2000-2005, relative to world 7 Figure 1.4 Oil prices, 1970­2005 9 Figure 1.5 Crude oil production among select MENA producers 9 Figure 1.6 Oil revenue growth among MENA oil producers, 2002­2005 10 Figure 1.7 Oil trade balance among select resource-poor economies 11 Figure 1.8 Diesel and gasoline prices in MENA, 2005 12 Figure 1.9 Correlation between real oil prices and economic growth among MENA's resource-poor economies 13 Figure 1.10 Sources of oil-related wealth in Egypt, 1970­2005 14 Figure 1.11 Oil-related wealth and costs in Jordan, 2000­2005 14 Figure 1.12 Correlation between real oil prices and economic growth among MENA's resource-rich economies 15 Figure 1.13 Economic growth among select MENA oil producers, 1970­2005 16 Figure 1.14 Composition of MENA exports of goods and services, 1998­2005 17 Figure 1.15 Growth of service exports among RPLA, 1991­2005 17 Figure 1.16 Nonoil export growth among select MENA oil exporters 18 Figure 1.17 Real effective exchange rate, 1998­2004 19 Figure 1.18 Merchandise exports in MFA countries, 2001­2005 21 Figure 1.19 Merchandise import growth among RPLA economies, 2001­2005 23 Figure 1.20 Current account balance, early 2000s versus 2005 23 Figure 1.21 FDI inflows as a share of GDP, 2000­2005 25 Figure 1.22 Fiscal balances in MENA 26 Figure 2.1 Bank deposits in MENA, 1998­2005 39 Figure 2.2 Private sector credit to GDP, 2002­2005 41 Contents v Figure 2.3 Return on average assets in MENA 44 Figure 2.4 Net interest margins, 2005 45 Figure 2.5 Market capitalization in MENA, 2002 and 2005 48 Figure 2.6 Market capitalization to GDP in MENA, 2005 versus 2002 48 Figure 2.7 MENA equity markets, 2002­2006 49 Figure 2.8 M2 to GDP in MENA 51 Figure 2.9 Bank assets to GDP in MENA 52 Figure 2.10 Sources of finance for investment 53 Figure 2.11 Collateral requirements in MENA 54 Figure 2.12 Lending to assets in MENA 54 Figure 2.13 State ownership of bank assets 56 Figure 2.14 Credit to the public sector as a percentage of total bank credit 57 Figure 2.15 Nonperforming loans 58 Figure 2.16 Official bank supervisory powers in MENA 60 Figure 2.17 Restrictions on bank activities 61 Figure 2.18 Financial access in MENA 62 Figure 2.19 Premiums per capita in MENA 63 Figure 2.20 Bond issuance in MENA 66 TABLES Overview Table 1 Global developments and MENA GDP growth xvii Overview Table 2 Structural reform progress in MENA, 2000­2005 xix Table 1.1 MENA growth performance, 1995­2005 4 Table 1.2 GDP growth per capita in an international perspective, 1995­2005 8 Table 1.3 External reserves, in months of imports 24 Table 1.4 Poverty impact of oil price rise: most severely affected countries 30 Table 1.5 The external environment, 2004­2008 32 Table 1.6 GDP growth for the MENA region 33 Table 2.1 Market ratios of MENA stock markets, 2003­2005 50 Table 2.2 MENA equity market representation in global indexes 65 Table 3.1 Trade protection in MENA, 2000 72 Table 3.2 Structural reform progress: trade reform 74 Table 3.3 Current trade policy in MENA 76 Table 3.4 Structural reform progress: business and regulatory reform 77 Table 3.5 Current business and regulatory environment in MENA 80 Table 3.6 Structural reform progress: governance reform 84 APPENDIX TABLES Table A1 Gross domestic product and prices: real GDP growth, 1995­2005 85 Table A2 Gross domestic product and prices: GDP, 1995­2005 86 Table A3 Gross domestic product and prices: real GDP per capita growth, 1995­2005 87 vi Economic Developments and Prospects Table A4 Gross domestic product and prices: consumer prices, 1995­2005 88 Table A5 Government finance: total expenditures, 1995­2005 89 Table A6 Government finance: current expenditures, 1995­2005 90 Table A7 Government finance: total revenues, 1995­2005 91 Table A8 Government finance: overall fiscal balance, 1995­2005 92 Table A9 External sector: exports of goods and services, 1995­2005 93 Table A10 External sector: merchandise exports, 1995­2005 94 Table A11 External sector: imports of goods and services, 1995­2005 95 Table A12 External sector: current account balance, 1995­2005 96 Table A13 External sector: external reserves, 1995­2005 97 Table A14 External sector: external reserves, 1995­2005 98 Table A15 External sector: real effective exchange rate index, 1995­2005 99 Table B1 Abbreviated trade policy index, 2000 and 2005, and trade reform progress 102 Table B2 Enhanced trade policy index, 2005 103 Table B3 Abbreviated business climate index, 2003 and 2005, and business reform progress 106 Table B4 Enhanced business climate index, 2005 107 Table B5 Governance indexes, 2000 and 2005, and governance reform progress 109 Contents vii Foreword MENA ECONOMIC DEVELOPMENTS AND PROSPECTS 2006 2005 was a year of major developments in the Mid- region's financial systems and to understand how dle East and North Africa (MENA) region. A few they contribute to growth, promote efficiency, and events made international headlines during 2005: enhance productivity: through corporate gover- oil prices hitting record levels, the continuing tur- nance, through savings mobilization, and through moil in Iraq, building tensions regarding the nu- their ability to protect against systemic shocks. clear policy of the Islamic Republic of Iran, the af- This is the second volume in a new series of an- termath of political upheaval in Lebanon, and the nual reports on the MENA region. Its aim is to shed uncertain political situation and aid implications in light on recent key economic developments in the the West Bank and Gaza. But many of the develop- region and the forces underlying the region's eco- ments that have not made headlines--the deterio- nomic outcomes. It analyzes the region's medium- rating impact of high oil prices on nonoil producers term growth prospects, given global forecasts, and in the region, increasing moves by oil producers to (building on last year's issue) the report continues channel windfalls into longer-term assets, and to chart the region's progress in implementing progress with structural reforms--have been just as comprehensive structural reforms for longer-term important in determining the direction of the growth. Also, in this second issue, the important economies in the MENA region. topic of MENA's financial markets is highlighted to With oil prices continuing their soaring advances, understand how financial systems are poised to the efficiency with which the region channels its oil- meet some of the region's development objectives. related resources into the real economy will depend As always, it is hoped that the report deepens the critically upon the region's financial sectors. It is thus understanding of the region's development particularly opportune to examine the state of the progress, prospects, and challenges. Foreword ix Acknowledgments This report was the work of the Office of the Chief The team also benefited greatly from the consulta- Economist of the Middle East and North Africa Re- tions and suggestions of Bertin Martens, Ander gion (MENA), with contributions from the World Hakan, Jose Leandro, Arno Baecker, Maria-Immac- Bank's Financial Sector Evaluation and Operations ulada Montero-Luque, and Enrico Gisolo from the Groups (FSEFS and OPD) and its Development European Union's Directorate General for Eco- Prospects Group (DECPG). The core team respon- nomic and Financial Affairs. sible for the preparation of the report comprised The team would like to thank Patrick Honahan, Jennifer Keller (Task Team Leader) and Paul Dyer of Sanjay Kathuria, and John Page, the report's peer the MENA Chief Economist's Office, Caspar reviewers, whose careful review and guidance have Romer of FSEFS, Stijn Claessens of OPD, Wafik substantially improved this report. The team would Grais of FSEFS, and Elliot Riordan of DECPG. The also like to acknowledge the support of Aart Kraay, report was prepared under the guidance of Lili Mottaghi-Foroozan, Ali Al-Abdulrazzaq, An- Mustapha Nabli (Chief Economist, MENA). ton Dobronogov, Thirumalai Srinivasan, Julia Dev- Essential contributions to the report were pro- lin, Manuela Chiapparino, Dina El-Naggar, Leena vided by Mariem Malouche, Claudia Nassif, Carlos Chaukulkar, and Henriette Mampuya. Important Silva-Jauregui, Paloma Anos Casero, Ganesh Se- administrative assistance was provided by Isabelle shan, Ingrid Ivins, Sahar Nasr, Dahlia El-Hawary, Chaal-Dabi. The World Bank's Office of the Pub- Sergei Shatalov, and Tadashi Endo, and painstaking lisher managed editorial and print production, in- research assistance was provided by Melisa Carter. cluding book design. Acknowledgments xi Abbreviations and Acronyms ATM Automated teller machine bl Barrel bn Billion bpd Barrels per day CAR Capital adequacy ratio DECPG Development Prospects Group (World Bank) EU European Union FDI Foreign direct investment FSDI Financial Sector Development Indicators (a World Bank database) FTA Free trade agreement GCC Cooperation Council for the Arab States of the Gulf (formerly named and still commonly called the "Gulf Cooperation Council") GDP Gross domestic product ICA Investment Climate Assessment (a World Bank report) IFS International Financial Statistics (an International Monetary Fund database) IMF International Monetary Fund IPO Initial public offering LIBOR London interbank offered rate LMIC Low- and middle-income economies LPG Liquified petroleum gas MEDP MENA Economic Developments and Prospects (a World Bank report) MENA Middle East and North Africa MFA Multifiber Agreement MFN Most favored nation mn Million MUV Manufacturers' unit value NPL Nonperforming loan NTB Nontariff barrier OECD Organisation for Economic Co-operation and Development OPEC Organization of the Petroleum Exporting Countries Abbreviations and Acronyms xiii QIZ Qualifying industrial zone RPLA Resource-poor, labor-abundant RRLA Resource-rich, labor-abundant RRLI Resource-rich, labor-importing TRAINS Trade Analysis and Information System UAE The United Arab Emirates UN United Nations UNCTAD United Nations Conference on Trade and Development UNWTO World Tourism Organization WITS World Integrated Trade Solution (software) WTI West Texas Intermediate WTO World Trade Organization All dollar amounts are U.S. dollars unless otherwise indicated. xiv Economic Developments and Prospects Overview For the third year in a row, the Middle East and over, with rising energy use, MENA's resource- North Africa region1 (MENA) enjoyed a spectacu- poor countries are increasingly experiencing the lar year of growth, buoyed by record-high growth negative consequences of higher oil prices on the rates among the region's oil exporters. As oil prices external and fiscal fronts, in the form of higher oil continued their upward climb, the MENA region import bills and energy subsidies. grew by an average of 6.0 percent over 2005, up Growth patterns among oil producers,3 on the from 5.6 percent over 2004, and compared with av- other hand, have been increasingly harmonized, re- erage growth of only 3.7 percent over the late flecting a trend toward common development 1990s. On an annual basis, MENA's average eco- strategies. Compared with previous oil booms, the nomic growth over the past three years, at 6.2 per- region's oil producers are increasingly demonstrat- cent a year, has been the highest three-year growth ing impressive fiscal restraint. They are building up period for the region since the late 1970s. liquidity through external reserves, oil stabilization MENA's regional growth upturn has not been funds, and paying down debt. They are also pursu- universally shared, however, and resource-poor ing common strategies for diversification of the oil economies2 are increasingly feeling the adverse im- wealth into foreign assets, as a way to transform the pact of higher oil prices. In earlier periods, MENA's finite oil wealth into longer-term revenue streams. nonoil economies also benefited from rising oil They have worked almost in unison to develop trade prices through a range of transmission mechanisms ties and to encourage greater foreign participation in from the oil producers, including labor remittances their economies. With increased prudence, the and aid. Many transmission channels remain and volatile growth outcomes among oil producers that have thrived during the current oil boom, including characterized the 1970s and 1980s have been in- intraregional tourism and portfolio equity flows, creasingly supplanted by a common growth effect. but the overall magnitude of these channels is sig- Although oil prices dominate the region's external nificantly diminished relative to prior booms. More- landscape, MENA has experienced other important The Middle East and North Africa region comprises Algeria, Bahrain, Djibouti, the Arab Republic of Egypt, the Islamic Republic 1 of Iran, Iraq, Jordan, Kuwait, Lebanon, Libya, Morocco, Oman, Qatar, Saudi Arabia, Syria, Tunisia, the United Arab Emirates, the West Bank and Gaza, and the Republic of Yemen. Resource-poor economies include Djibouti, Egypt, Jordan, Lebanon, Morocco, Tunisia, and the West Bank and Gaza. 2 Dominant oil producers in the region include Algeria, Bahrain, the Islamic Republic of Iran, Iraq, Kuwait, Libya, Oman, Qatar, Saudi 3 Arabia, Syria, the United Arab Emirates, and the Republic of Yemen. Overview xv developments on the trade front. Resource-poor recipients, but a financial market upswing has also economies have dealt with the expiration of the Mul- reached some of the region's resource-poor coun- tifiber Agreement in 2005, which had allowed privi- tries through increased cross-border investment, re- leged access to European markets for the Arab Re- mittance flows, and tourism. public of Egypt, Morocco, and Tunisia in textile and Many of the recent regional financial sector de- clothing products. Textile exports in Tunisia and velopments are positive. Strong credit growth and Morocco have been hard hit, while Egypt has man- declining nonperforming loans have improved bank aged to maintain textile exports to date, in part by profitability and asset quality. Rising equity capital cushioning the impact with a December 2004 agree- has increased the breadth and depth of investment ment on qualifying industrial zones between Egypt, opportunities to investors. In addition, many coun- Israel, and the United States. tries in the region have utilized their strengthened On the fiscal front, the sharp rise in oil prices has positions to address long-needed financial sector re- spotlighted the MENA region's heavy subsidiza- forms, including public sector bank restructuring tion of oil prices within the domestic market. While and privatization, licensing private financial entities, oil-importing economies are particularly affected, improving bank supervision, and upgrading pru- the reliance on energy subsidies pervades the re- dential regulations. gion, with large fiscal implications. Several resource- However, several of the recent financial sector poor countries have implemented short-term ad- developments have increased exposure of some justments to oil prices, but the concerns of potential MENA economies to negative shocks. Banks have poverty impacts have held back more ambitious re- rapidly expanded financing for equity markets. Al- forms. Among oil exporters, windfall revenues have though the recent stock market gains have been delayed the perceived urgency for reform. built in part on impressive corporate profitability, Over the medium term, general conditions for stocks have also been increasingly speculative. Bank maintaining a solid pace for growth appear promis- exposure to equity markets, through both lending ing. Global oil prices are now anticipated to hold and substantial income from brokerage fees, leaves above $50 per barrel through 2008, which will pro- bank income and asset quality vulnerable because of vide for a moderating, yet still substantial, flow of recent market corrections. Banks have also in- oil revenues to MENA exporters. Should prudent creased exposure to the booming real estate sector, budgetary policies prevail, prospects for the oil- which may be vulnerable to contagion effects from dominant economies are upbeat, with growth eas- the recent equity market weaknesses and may also ing from 6.7 percent in 2005 to 5.0 percent by face slowdown with growing oversupply. 2008. For the diversified economies, the anticipat- However, a more troubling aspect about ed recovery in European demand will be a key ex- MENA's financial markets is the seeming disconnect ternal factor for growth during 2006­2008, as will between the financial sector and the real private the easing of oil prices, which should allow some of economy, despite the appearance of a relatively deep the costs of subsidies to be recaptured; also, growth financial sector by macroeconomic indicators. Al- among resource-poor economies is viewed to pick though regional banks have abundant liquidity, out- up above 5.5 percent. Overall, on a base set of as- side of the Gulf, few private businesses have access to sumptions, including continued moderate progress bank finance. Even in countries with relatively high in domestic reforms, the MENA region's growth is rates of lending to the private sector, credit remains viewed to ease modestly in 2006 to 5.6 percent and concentrated among a select minority, and invest- to establish a 5.2 percent pace over 2007­2008, re- ment climate surveys suggest an average of more flecting an acceleration for the diversified than 75 percent of private business investment in economies, contrasted with some slowing for oil ex- MENA is financed internally through retained earn- porters. ings. As a result, few of the assets accumulating to The oil shock MENA is experiencing has had im- the region are channeled toward productive invest- portant financial spillovers. Over the past few years, ment. Moreover, key elements of a well-functioning the region has seen an upsurge in financial activity financial sector that could help boost sustainable and as abundant liquidity has fed a rapid rise in credit efficient growth, including bond and equity markets growth, surging stock markets, and a booming real and contractual savings instruments, remain largely estate sector. Oil economies have been the primary undeveloped outside of the Gulf. xvi Economic Developments and Prospects Overview Table 1: Global developments and MENA GDP growth Growth, or as otherwise specified 2004 2005 2006 2007 2008 World tradea 12.0 9.0 8.5 7.0 7.0 High-income imports 8.9 6.6 6.7 6.2 6.2 Euro Area 6.3 4.3 5.8 5.3 5.4 United States 10.7 6.2 5.0 3.8 3.8 Oil prices ($/bl)b 37.7 53.4 59.0 56.0 53.0 Nonoil commodity pricesc 17.3 13.4 5.4 ­3.1 ­5.9 MUV indexd 6.9 0.0 2.4 2.6 0.8 US dollar LIBORe (%) 1.7 3.6 5.2 5.3 5.2 World GDPf 3.8 3.3 3.3 3.2 3.2 High-income countries 3.2 2.8 2.9 2.7 2.8 Euro Area 1.9 1.4 2.1 1.7 1.9 Developing countries 6.9 6.3 6.0 5.7 5.6 MENAg 5.6 6.0 5.6 5.2 5.2 Resource-poor 4.8 4.0 5.4 5.4 5.7 Resource-rich 5.9 6.7 5.5 5.2 5.0 Resource-rich, labor-abundant 4.7 5.5 5.3 5.1 4.8 Resource-rich, labor-importing 6.5 7.2 5.8 5.3 5.0 Source: World Bank 2006c. Goods and services (2000 US$). a World Bank average oil price = equal weights of Brent, West Texas Intermediate (WTI), and Dubai crude oil prices. b World Bank index of nonoil commodity prices in nominal US$ terms. c Index of manufacturers' unit value, G-5 countries (France, Germany, Japan, the United Kingdom, and the United States). d London Interbank Offered Rate. e Real GDP in 2000 US$. f MENA geographic region comprising resource-poor, labor-abundant countries (Djibouti, Egypt, Jordan, Lebanon, Morocco, and Tunisia); resource-rich, labor-abundant g countries (Algeria, the Islamic Republic of Iran, Iraq, the Syrian Arab Republic, and the Republic of Yemen); and resource-rich, labor-importing countries (Bahrain, Kuwait, Libya, Oman, Qatar, Saudi Arabia, and the United Arab Emirates). A few critical facts lie at the heart of the structur- The region's recent strong liquidity creates a al disconnect between the relatively plentiful finan- window for the governments of the MENA region cial resources found across MENA and the scarcity to either accelerate or postpone the complicated of external financing for businesses. Public sector process of reform, both within the financial sector ownership has significantly impacted the direction of and in the economy in general. With the large wind- credit in MENA, as well as the operating efficiency fall revenues accruing to oil producers since 2002, a and the ability of the banking sector to conduct ro- natural question emerges as to what impact oil is bust risk analysis. Bank regulatory frameworks, with having on the reform process. To date, the large limited market forms of oversight and discipline, budget surpluses appear to have delayed the imper- have led to adverse credit allocation. Access to bank- ative for reform of the oil subsidy system in re- ing facilities remains comparatively limited across source-rich economies. Oil producers have also ex- the region and in many cases is restricted to public hibited weaker reform progress over the past several sector banking networks, concentrating credit pro- years than have the region's resource-poor vision upon a relatively privileged minority. Un- economies along two major structural reform derdeveloped contractual savings and capital mar- fronts: improving the business climate and liberaliz- kets remove a source of competition for banks and ing trade. an alternate avenue for firm finance. Governance However, the more subdued progress made by structures undermine formal financial relation- oil exporters in these areas of reform in large part ships across much of MENA. In addition, com- reflects lack of improvements among the economies mercial-finance relationships are further under- of the GCC (Cooperation Council for the Arab mined by a wealth of problems in MENA's States of the Gulf, formerly named and still com- business climate. monly called the Gulf Cooperation Council), which Overview xvii have traditionally maintained more open and busi- world across all areas of reform. In both trade re- ness-friendly trade and investment policies. More form and business and regulatory reform, the re- important, as a group, the oil economies have source-poor economies have made (on average) demonstrated long-awaited progress in governance, stronger progress over the past five years than have an area in which the group demonstrates a signifi- all other regions of the world. Largely in connec- cant deficit relative to the rest of the world. Specifi- tion with recent bilateral and multilateral trade cally, notable progress has taken place over the past agreements and led by deep tariff reductions under- five years in enhancing public sector accountability taken in Egypt, resource-poor economies ranked mechanisms, which augers well for continuing re- (on average) in the 71st percentile with regard to form success. Although oil economies continue to tariff reform over the past five years. With regard to rank in the bottom 20th percentile relative to the reform of the business climate, the steps taken by rest of the world with regard to measures of public resource-poor economies placed them (on average) sector accountability (including political and civil in the top 63rd percentile. Nonetheless, much liberties, freedom of information, and so forth4), stronger progress can take place, particularly with over the past five years, oil economies have made regard to trade liberalization. The resource-poor greater progress in improving public sector ac- economies as a group continue to maintain some of countability than have all other regions of the the highest tariffs in the world, ranking in the bot- world, ranking (on average) in the 65th percentile tom 25th percentile worldwide with regard to low worldwide with regard to improving public ac- tariff protection. countability. In the area of governance, resource-poor Worldwide, successful reform efforts have de- economies have also demonstrated significant pended critically upon the support and participa- progress. In the area of improving public sector ac- tion of those in society whom reforms will impact. countability, resource-poor countries ranked (on The governance improvements in MENA, with re- average) in the 62nd percentile with regard to re- gard to enhancing the accountability of govern- form progress, second only to the gains made by ments and granting greater voice in development to the MENA region's resource-rich economies. In MENA's people, are important not only to take improving the quality of public sector administra- into account the needs and values of those who are tion, the group ranked in the 82nd percentile with affected by reforms but also to ensure that in the regard to reform--the strongest progress world- transition to a new development model, the eco- wide, led by strong achievements in Egypt, Moroc- nomic outcomes are socially acceptable among co, and Tunisia. those who have benefited from the old systems. The Along with across-the-board policy reform, MENA region continues to have the greatest gap MENA economies continue to look to selective in- with the rest of the world with regard to account- dustrial policies designed to enhance specific sector able and inclusive governance structures, ranking competitiveness and growth to complement more (on average) in the bottom quintile worldwide. It is broad-based structural reform. Although the views thus an important development that both resource- on industrial policy are changing and a variety of rich and resource-poor economies in MENA are economic justifications can be made for their use, making a start at these vital changes. MENA's own unsuccessful history with industrial With diminishing positive links to the oil policies (and the difficulty in transitioning out of economies (and increasing negative impacts from them) should serve as a cautious reminder that the higher oil prices), the resource-poor economies in most effective policies for promoting growth rely the MENA region have maintained a solid pace of on strategies to create a neutral and internationally reform, generally exceeding other regions of the competitive business environment. See appendix B for a description and the methodology behind 4 governance indexes. xviii Economic Developments and Prospects Overview Table 2: Structural reform progress in MENA, 2000­2005 Governance: quality Governance: Trade Business of public public sector policy climate administration accountability Current Reform Current Reform Current Reform Current Reform Country/region status progress status progress status progress status progress Algeria 44 71 13 38 38 91 29 91 Bahrain .. 62 .. .. 77 26 23 91 Djibouti .. 51 .. .. .. .. .. .. Egypt, Arab Rep. of 43 100 11 36 43 92 25 84 Iran, Islamic Rep. of 22 74 57 44 16 19 21 4 Iraq .. .. 66 .. .. .. .. .. Jordan 47 86 58 89 66 67 34 60 Kuwait 53 65 59 7 58 24 31 65 Lebanon 61 80 37 31 .. .. .. .. Libya .. 27 .. .. 11 64 0 42 Morocco 38 52 61 54 73 83 33 81 Oman 71 11 78 15 61 75 16 81 Qatar .. .. .. .. 60 89 13 74 Saudi Arabia 39 77 80 26 57 77 5 69 Syrian Arab Rep. 18 43 30 5 15 67 7 74 Tunisia 51 57 83 93 74 87 22 22 United Arab Emirates .. .. 43 14 59 6 17 41 Yemen, Rep. of 62 82 35 57 28 71 20 89 MENA 46 63 51 42 49 63 20 64 Resource-poor 48 71 50 63 64 82 28 62 Resource-rich 44 57 51 23 44 55 17 65 Resource-rich, labor abundant 36 67 40 36 24 62 19 64 Resource-rich, labor importing 54 48 65 15 55 52 15 66 East Asia and Pacific 56 37 61 47 43 45 41 48 Europe and Central Asia 51 69 48 64 47 46 52 51 Latin America and the Caribbean 57 50 40 51 46 50 57 43 High-income OECD 70 64 84 50 89 47 91 49 South Asia 41 48 48 41 48 53 39 31 Sub-Saharan Africa 34 27 27 43 34 53 37 55 World 50 50 50 50 50 50 50 50 Source: World Bank Staff estimates from country data. Note: For each index, current status reflects a country's current (2005) placement in a worldwide ordering of countries based on a variety of relevant indicators, expressed as a cumulative frequency distribution, with 100 reflecting the country with the "best" policies (worldwide) and 0 representing the country with the "worst" policies (worldwide). Reform progress reflects the improvement in a country's rank between 2000 and 2005 (2003 and 2005 for business and regulatory reform) in a worldwide ordering of countries based on the changes in a variety of relevant indicators, expressed as a cumulative frequency distribution, with 100 reflecting the country with the greatest improvement in rank (worldwide) and 0 reflecting the country with the greatest deterioration in rank (worldwide). Overview xix 1 Recent Economic Outcomes and Short-Term Development Prospects in MENA 1.1 Introduction icantly diminished relative to prior booms. More- over, the positive benefits from these transmission The Middle East and North Africa region5 (MENA) channels have been increasingly overshadowed by enjoyed another exceptionally strong year of eco- the detrimental external and fiscal consequences of nomic expansion, buoyed by the record-high higher oil import bills and surging oil subsidies. growth rates among the region's oil exporters. As Economic growth patterns among oil producers oil prices continued their upward climb, the MENA have been increasingly harmonized, reflecting a region grew by an average of 6.0 percent over 2005, trend toward common development strategies. up from 5.6 percent over 2004, and compared with Compared with actions during previous oil booms, average growth of only 3.7 percent over the late the region's oil producers are increasingly demon- 1990s. On an annual basis, MENA's average eco- strating impressive fiscal restraint. They are building nomic growth over the past three years, at 6.2 per- up liquidity through external reserves, oil stabiliza- cent a year, has been the highest three-year growth tion funds, and paying down debt. They are also period for the region since the late 1970s. pursuing common strategies for diversification of MENA's regional growth upturn has not been the oil wealth into foreign assets as a way to trans- universally shared, however, and resource-poor form the finite oil wealth into longer-term revenue economies are increasingly feeling the adverse im- streams. With this increased prudence, the volatile pact of higher oil prices. In earlier periods, MENA's growth outcomes among oil producers that charac- nonoil economies also benefited from rising oil terized the 1970s and 1980s have been increasing- prices through a range of transmission mechanisms ly supplanted by a common growth effect. from the oil producers, including aid and labor re- Although oil prices dominate the region's exter- mittances. Many transmission channels remain and nal landscape, MENA has experienced other impor- have thrived during the current oil boom (including tant developments on the trade front. Resource- intraregional tourism and portfolio equity flows), poor economies6 have dealt with the expiration of but the overall magnitude of these channels is signif- the Multifiber Agreement (MFA) in 2005, which The Middle East and North Africa region comprises resource-poor, labor-abundant economies (Djibouti, the Arab Republic of 5 Egypt, Jordan, Lebanon, Morocco, and Tunisia); resource-rich, labor-abundant economies (Algeria, the Islamic Republic of Iran, Iraq, Syria, and the Republic of Yemen); and resource-rich, labor-importing economies (Bahrain, Kuwait, Libya, Qatar, Oman, Sau- di Arabia, and the United Arab Emirates). See previous note for description of MENA country groupings. 6 Recent Economic Outcomes and Short-Term Development Prospects in MENA 1 had allowed privileged access to European markets 1.2 Recent Economic Developments for the Arab Republic of Egypt, Morocco, and Tunisia in textile and clothing products. Textile ex- 1.2.1 Regional growth outcomes buoyant ports in Morocco and Tunisia have been hard hit, while Egypt has managed to maintain textile ex- The Middle East and North Africa region experi- ports to date, in part by cushioning the impact with enced another stellar year of economic growth, as a December 2004 agreement on qualifying indus- oil prices continued their upward climb over 2005. trial zones (QIZs) between Egypt, Israel, and the Growth in the region averaged 6.0 percent over United States. 2005 (figure 1.1). Over the past three years, gross On the fiscal front, the sharp rise in oil prices has domestic product (GDP) in the region7 has grown spotlighted the MENA region's heavy subsidiza- by an average of 6.2 percent a year, the highest tion of oil prices within the domestic market. Al- three-year average growth rate for the region in though oil-importing economies are particularly af- nearly three decades. fected, the reliance on energy subsidies pervades Above all, MENA's recent growth upturn re- the region, with large implications for fiscal posi- flects the spectacular events in the oil market, where tions. Several resource-poor countries in the region continuing tight supply and volatility in response to have implemented short-term adjustments to oil external conditions have resulted in surging oil prices, although the concerns of potential poverty prices over the past three years. Combined with impacts have held back more ambitious reforms. production increases, rising oil prices have fueled Among oil producers, windfall revenues have de- extraordinary economic growth among oil produc- layed the perceived urgency for reform. ers,8 which together grew 6.7 percent over 2005 Over the medium term, two major elements are and accounted for 84 percent of regional growth likely to shape the outlook for the broader MENA last year.9 Most impressive has been the economic region: Developments in critical nonoil export mar- expansion among the region's resource-rich, labor- kets for MENA will carry substantial influence on importing (RRLI) economies, which grew by more the outlook for the region's diversified economies, than 7 percent during the year (table 1.1). Most of largely within the resource-poor, labor-abundant the group has benefited from OPEC10 production group. At the same time, the dynamics of the oil increases, including Saudi Arabia, which expanded market are anticipated to change as global demand by 6.5 percent (more than a percentage point gain and supply conditions evolve over the next years. over growth in 2004, and behind 2003, the highest General conditions for maintaining a solid pace rate of economic growth experienced by the econo- for growth over the next years appear promising. my in 15 years). Other OPEC producers, including Global oil prices are now anticipated to hold above Kuwait, Libya, Qatar, and the United Arab Emi- $50 per barrel through 2008, which will provide rates (UAE), all realized economic growth rates in for a moderating, yet still substantial, flow of oil excess of 8 percent last year, driven by across-the- revenues to MENA exporters. Should prudent board increases in the components of domestic de- budgetary policies prevail, prospects for the oil- mand (private and government consumption, as dominant economies are upbeat, with growth eas- well as investment). ing from 6.7 percent in 2005 to 5.0 percent by MENA's resource-rich, labor-abundant (RRLA) 2008. For the diversified economies, the anticipat- economies (excluding Iraq) also reaped the benefits ed recovery in European demand will be a key ex- of higher oil prices, supported by expansionary fis- ternal factor for growth during 2006­2008, as will the easing of oil prices, which should allow some of Not including Iraq. 7 Includes resource-rich, labor-importing economies (Bahrain, 8 the costs of subsidies to be recaptured. On a base Kuwait, Libya, Oman, Qatar, Saudi Arabia, and the United set of assumptions, including continued moderate Arab Emirates) and resource-rich, labor-abundant economies progress in domestic reforms, the MENA region's (Algeria, the Islamic Republic of Iran, Syria, and the Republic growth is viewed to ease modestly in 2006 to 5.5 of Yemen), but does not include Iraq. As a comparison, the oil producers accounted for less than 70 9 percent and to establish a 5.2 percent pace during percent of growth during the late 1990s. 2007­2008. Overall growth reflects a pickup for OPEC members include Algeria, Indonesia, the Islamic Re- 10 the diversified economies above 5.5 percent, con- public of Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Ara- trasted with a slowing for oil exporters toward the bia, the United Arab Emirates, and República Bolivariana de 5.0 percent mark. Venezuela. 2 Economic Developments and Prospects Figure 1.1: Economic growth in MENA, 2000­2005 10 8 (%) 6 growth 4 annual 2 0 MENA RPLA RRLA RRLI 2001 2002 2003 2004 2005 Source: World Bank staff estimates. Notes: RPLA = resource-poor, labor-abundant; RRLA = resource-rich, labor-abundant; RRLI = resource-rich, labor-importing. cal policy (particularly in the Islamic Republic of country in five years), as well as to a drop in growth Iran and the Republic of Yemen). The Islamic Re- in Tunisia. Diminished investor confidence and public of Iran's economy grew by 5.9 percent last shaken security following the February 2005 assassi- year, more than a percentage point gain over last nation of former prime minister Hariri, meanwhile, year, while Algeria saw economic growth above 5 resulted in Lebanon's economic growth collapsing percent for the third year in a row. Although high- to 1.0 percent over 2005, down from more than 6.0 er oil prices have only partially offset the effects of percent growth the previous year. Elsewhere, re- the substantial drop in oil exports (stemming from source-poor countries fared better, including Egypt, both production declines and loss of oil reexports where the economic revival has been driven by both from Iraq), the Syrian Arab Republic also managed manufacturing exports and strong growth of servic- stronger growth over 2005 because of sizable ex- es, including tourism and Suez Canal receipts. Jor- pansion of nonoil exports to Iraq. Overall, resource- dan has also posted strong growth, reflecting the poor, labor-abundant (RPLA) economies recorded rapid expansion of private spending and investment robust growth over 2005 of 5.5 percent (up from financed by surging capital inflows. 4.7 percent last year), driven by strong growth in Following a strong economic rebound recorded government spending and improvements in the re- in 2004, growth in Iraq averaged a sluggish 2.6 per- source balance. cent over 2005, with the country unable to capital- But the boon to oil producers did not fully trans- ize on soaring oil prices. The sabotage of oilfield in- late to resource-poor economies in the region. stallations has thwarted Iraq's ability to increase oil Growth among resource-poor economies averaged export revenues, and continuing attacks on power 4.0 percent over the year (down from 4.8 percent in and transportation facilities have seriously detracted 2004), chiefly reflecting the sharp growth contrac- from developing the nonoil sector of the economy, tions in Morocco and Lebanon and slower growth worth about 33 percent of GDP. The continued in Tunisia. Stagnating European demand and a se- lack of security, with regard to both sectarian vio- vere drought contributed to a reduction in Moroc- lence and insurgent activity, has stalled Iraqi recon- co's economic growth of almost two-thirds from struction and remains the fundamental threat to a 2004 (and the lowest annual growth rate for the sustained economic recovery (see box 1.1). Recent Economic Outcomes and Short-Term Development Prospects in MENA 3 Table 1.1: MENA growth performance, 1995­2005 Average Average Country/country grouping 1995­1999 2000­2002 2003 2004 2005 MENA region (excl. Iraq)a 3.7 3.3 6.9 5.6 6.0 MENA region (incl. Iraq)a .. 3.0 5.6 6.3 6.0 Resource-poor, labor-abundanta 4.7 3.7 4.1 4.8 4.0 Djibouti ­0.5 2.3 3.2 3.0 3.2 Egypt, Arab Republic of 5.6 3.3 3.1 4.2 4.9 Jordan 3.2 5.5 4.1 7.7 7.2 Lebanon 1.9 3.5 4.9 6.3 1.0 Morocco 3.6 4.7 5.5 4.2 1.5 Tunisia 5.6 3.5 5.6 5.8 5.0 West Bank and Gaza .. ­12.5 6.2 6.2 6.3 Resource-rich, labor-abundant (excl. Iraq) 3.4 4.5 6.1 4.7 5.5 RRLA economies (incl. Iraq) .. 3.1 1.2 7.2 5.3 Algeria 3.2 3.3 6.8 5.2 5.5 Iran, Islamic Republic of 3.5 5.3 6.7 4.8 5.9 Iraq .. ­7.2 ­41.4 46.5 2.6 Syrian Arab Republic 2.4 3.3 2.5 3.6 4.0 Yemen, Republic of 5.5 4.2 3.1 2.6 3.8 Resource-rich, labor-importing 3.3 2.5 8.6 6.5 7.2 Bahrain 4.3 4.9 7.2 5.4 6.9 Kuwait 1.9 2.9 13.4 6.2 8.5 Libya 1.6 3.3 9.1 9.3 8.5 Oman 3.4 4.6 1.4 3.1 4.1 Qatar 11.8 5.9 5.9 9.9 8.8 Saudi Arabia 2.7 0.3 7.7 5.2 6.5 United Arab Emirates 5.2 6.0 11.3 8.5 8.0 Population (millions) MENA geographic region 281.4 304.7 317.4 323.5 330.2 Resource-poor, labor-abundant 106.2 114.1 118.1 120.0 122.1 Resource-rich, labor-abundant 143.0 154.5 160.9 163.8 167.1 Resource-rich, labor-importing 32.2 36.2 38.4 39.7 40.9 Labor force (millions) MENA geographic region 94.8 107.5 114.7 118.4 122.4 Resource-poor, labor-abundant 39.4 44.1 46.7 48.0 49.4 Resource-rich, labor-abundant 44.7 50.9 54.5 56.4 58.4 Resource-rich, labor-importing 10.6 12.4 13.5 14.0 14.6 Growth of GDP per capita (%) MENA geographic regionb 1.7 1.3 4.9 3.8 4.0 Resource-poor, labor-abundant 2.8 1.9 2.3 3.0 2.2 Resource-rich, labor-abundant 1.5 2.6 4.3 3.1 3.7 Resource-rich, labor-importing 0.4 ­0.5 5.3 3.3 3.9 Growth of GDP per laborer (%) MENA geographic regionb 0.4 ­0.2 3.4 2.1 2.5 Resource-poor, labor-abundant 1.8 0.2 1.2 1.9 1.1 Resource-rich, labor-abundant ­0.1 0.6 2.3 0.9 1.7 Resource-rich, labor-importing ­0.5 ­1.5 4.3 2.2 2.9 Source: World Bank staff estimates from country data. West Bank and Gaza not included in regional or subregional totals. a Does not include Iraq. b 4 Economic Developments and Prospects Box 1.1 Recent economic developments in Iraq Economic growth in Iraq over 2005 continued to be Fiscal developments: Despite a large oil revenue hindered by an uncertain security situation and ad- windfall, Iraq's fiscal stance is subject to risk. Bud- ministrative weaknesses. High oil prices have benefited getary revenue projections depend on both continu- Iraq's fiscal stance, and have partially compensated for ing high oil prices and strong oil exports. Non-oil weak oil exports and production. Yet many Iraqis per- revenues remain negligible. On the spending side, ceive little improvement in living standards due to in- Iraq's public subsidies remain a significant budget- security, few well-paid jobs outside the public sector, ary burden (equivalent to over half of GDP), with rising inflation, and a continued lack of basic services. the costliest and most deleterious subsidy for fuel Terrorism and crime claim hundreds of victims daily; (equivalent to about a quarter of Iraq's GDP in and sectarian strife continues unabated. Iraq's per capi- 2005). The Iraqi government has begun to gradual- ta income is estimated at US$1,200--a significant rise ly increase fuel prices (price hikes took place in De- from the low of 2003, but still less than a third of the cember 2005), but even after these increases, official 1980 level. Iraq's medium term outlook depends on fuel prices are three to five times below border and the restoration of security, successful political transi- black market prices, and fuel smuggling out of Iraq tion, recovery in the oil sector, strong world oil prices, is widespread. Spending pressures are significant, fu- and strong fiscal discipline. eled by high inflation. Spending on public sector salaries is high at 14 percent of GDP. The number of Macroeconomic performance: Real economic public sector employees has doubled in the past two growth was lackluster over 2005, averaging 2.6 per- years, and they now account for a third of the total cent, and growth is anticipated to improve only mod- labor force. estly over 2006. Inflation remains high, averaging 50 percent (as of May), fueled by high security costs, sup- Poverty developments: Poverty is widespread in ply bottlenecks, lack of storage facilities, and rapidly Iraq, with an estimated 10 percent of families living rising public spending. Despite building healthy levels in absolute poverty and a further 10-12 percent at of foreign exchange reserves, dollarization is high, and high risk of sliding into this category. Although capital flight continues to be widespread. poverty data is weak, social indicators suggest that Iraq may be further away from the Millennium De- Oil sector developments: Crude oil accounts for two- velopment Goals (MDGs) than it was 25 years ago. thirds of GDP, and generates over 98 percent of ex- The Public Distribution System (PDS), which dis- ports and over 96 percent of government's own rev- tributed food rations to all citizens of Iraq, is in- enues, but the country was unable to capitalize fully creasingly unreliable, while other formal safety nets from high oil prices over 2005. The Northern pipeline reach only 15 percent of households. In December is paralyzed by attacks, while in the South dilapidated 2005, the government launched a new social safety infrastructure is a major bottleneck for oil exports. Out- net, targeting one million poor families in Iraq. This put declines are exacerbated by executive staff turnover initiative has been very successful, with the govern- and administrative bottlenecks at the Ministry of Oil. ment receiving close to 450,000 applications. This On the positive side, oil production and exports have safety net mitigates the impact of fuel price rises on been on a rising trend since a deep trough in end-2005. the poor, and will gradually replace the PDS. Recent Economic Outcomes and Short-Term Development Prospects in MENA 5 1.2.2 Regional unemployment declines Algeria. According to the National Statistics Office, unemployment was estimated to have declined MENA economies have had some of the highest lev- from 29.8 percent of the labor force in 2000 to els of unemployment in the world. In 2000, unem- 15.0 percent in 2005, by almost any comparison, a ployment in the region was conservatively estimated titanic reduction in unemployment in just a few at around 15 percent of the labor force, but in a few short years. However, based on the economic countries, including Algeria, Morocco, and Dji- growth and job creation relationships observed bouti, more than 20 percent of workers were with- worldwide, the sustainability of the region's recent out jobs, with disproportionate impact on the re- job creation is questionable. Every country in gion's stock of younger, better educated workers.11 MENA (aside from Jordan) has exhibited declines Although unemployment remains critically high in unemployment greater than what would be ex- in a few countries, including Iraq, Djibouti, and the pected given their average annual rates of growth of West Bank and Gaza, the recent growth upturn in GDP per laborer (which, in a sense, determine the MENA has been accompanied by significant de- envelope of improved labor market outcomes). clines in unemployment. Outside of Iraq, unem- To better understand the importance of the ployment, by official statistics, is estimated to have growth of GDP per laborer in improving labor mar- declined from 15 percent of the labor force in 2000 ket outcomes, it is useful to refer to the simple ac- to about 12.2 percent of the labor force currently counting framework below. Creating employment (figure 1.2).12 for those who want to work is equivalent to increas- A large part of this decline stems from the major ing the ratio of employed persons to the total labor reduction in unemployment that has taken place in force (c). Increasing productivity (the basis for wage growth, at least over the long term) is equivalent to In Egypt, for example, while those with a secondary education 11 increasing output per employed person (b). The make up only slightly more than 40 percent of the labor force, they account for 80 percent of the unemployed. In Algeria, sum of these two objectives results in growth in out- while those with a secondary education account for only 20 put per laborer (a). The higher is real output per la- percent of the labor force, they comprise almost 40 percent of borer growth, in turn, the greater is the scope for the unemployed. the economy to either reduce unemployment or in- Including Iraq, current unemployment is estimated to average 12 13 percent of the labor force. crease productivity (and wages), or both. In short, Figure 1.2: Official unemployment rates, 2000 and 2005 35 30 25 force 20 labor 15 of % 10 5 0 Egypt, Arab Morocco Tunisia Jordan West Bank Algeria Iran, Islamic Iraq Syrian Yemen, Rep. of and Gaza Rep. of Arab Rep. Rep. of 2000 2005 Source: World Bank staff estimates. Note: 2005 data reflects most recent data available. 6 Economic Developments and Prospects output per laborer growth provides a snapshot of In Algeria, a large number of jobs have been created the labor market outcomes that will arise.13 Strong under the first Economic Recovery Program, but growth per laborer will allow for both unemploy- jobs were primarily temporary jobs in the construc- ment reductions and wage increases. tion and agriculture sectors. Thus, although the re- duction in unemployment in the region is welcome news, it is less clear whether it reflects sustainable job output growthemployment + growthemployment output Growth labor force = growth that will remain for the longer term. labor force (a) (b) (c) 1.2.3 Per capita growth less robust Although MENA economies have experienced strong economic growth with the oil boom, MENA's recent economic expansion has been un- MENA's recent unemployment reductions have dermined by continuing rapid population growth, been substantially greater than other countries particularly among the resource-rich, labor-import- worldwide (figure 1.3). In the last five years, every ing economies, where 2005's growth rate of 7.2 country in MENA but Jordan has experienced de- percent amounted to only 3.9 percent on a per capi- clines in the unemployment rate greater than would ta basis. Overall, MENA's per capita growth over have been expected, given their growth of output per the past two years (averaging 3.9 percent a year), laborer. This is particularly the case in Algeria, Mo- while a marked improvement over the 1990s, re- rocco, Saudi Arabia, and Iran. MENA's high rate of mains off the pace of developing countries as a unemployment reduction is all the more suspicious group (overall, and excluding China and India), for countries in which the oil sector dominates, given and well behind the growth in other middle-income the low employment creation capacity in the sector. regional subgroupings (table 1.2). Nabli and Keller 2006. 13 Figure 1.3: MENA's GDP per worker/unemployment reduction relationship 2000-2005, relative to world 3.0 Algeria 2.5 rate 2.0 1.5 1.0 Morocco unemployment Iran, Islamic Rep. of in Saudi Arabia 0.5 Tunisia Syrian Arab Rep. 0 reduction ­10 ­8 ­6 ­4 ­2 0 2 Lebanon4 6 8 10 ­0.5 Jordan annual ­1.0 Egypt, Arab Rep. of ­1.5 average ­2.0 average annual growth of GDP per worker Source: World Bank staff estimates. Note: Trend line (based on worldwide observations): Average annual reduction in unemployment rate = 0.26 + (0.11 × average annual growth of GDP per worker). Adj. R2 = 0.21. Recent Economic Outcomes and Short-Term Development Prospects in MENA 7 Table 1.2: GDP growth per capita in an international perspective, 1995­2005 Averages Estimate Growth of GDP per capita 1995­1999 2003 2004 2005 MENA geographic region (excl. Iraq) 1.7 4.9 3.8 4.0 MENA geographic region (incl. Iraq) .. 3.4 4.3 3.8 Resource-poor, labor-abundant 2.8 2.3 3.0 2.2 Resource-rich, labor-abundant (excl. Iraq) 1.5 4.3 3.1 3.7 RRLA economies (incl. Iraq) .. ­0.8 5.3 3.2 Resource-rich, labor-importing 0.4 5.3 3.3 3.9 Developing countries 2.1 4.2 5.5 4.7 Excluding transition economies 2.5 3.9 5.4 4.7 Excluding China and India 0.8 2.6 4.6 3.4 Low-income countries 3.5 5.3 4.7 4.8 Latin America and the Caribbean 2.5 ­0.1 2.8 1.5 South Asia 4.1 6.2 5.1 5.4 Excluding India 1.9 3.3 4.1 4.8 Sub-Saharan Africa 1.8 2.1 3.3 3.0 Middle-income countries 2.3 4.3 5.9 4.9 East Asia and Pacific 5.9 7.8 7.9 7.4 Excluding China 1.3 4.3 4.9 3.0 Europe and Central Asia 1.5 5.9 7.0 5.2 Latin America and the Caribbean 0.9 0.6 4.1 3.1 South Asia 3.6 4.8 4.2 3.5 High-income countries 2.0 1.3 2.6 1.9 World 1.6 1.4 2.7 2.0 Source: World Bank staff estimates. Does not include Libya. a 1.2.4 Oil market developments shape regional Strong gains for region's resource-rich economies outcomes As the demand for oil has expanded, additional sup- For the third straight year, crude oil prices rose ply has been accommodated primarily through sharply over 2005, from an average of $38 a barrel OPEC producers, to the benefit of several MENA over 2004 to more than $53 over 2005, an increase economies (figure 1.5). Over the past three years, of more than 40 percent year-on-year (figure 1.4).14 Saudi Arabia has increased output from an average Oil price developments over the past three years re- of 7.4 million (mn) to 9.2mn barrels per day (an in- flect a continuing tight market, with exceptionally crease significantly higher than the total increase of large demand growth (particularly emanating from OPEC production quotas).15 Strong production China), especially for refined products, driving drives also took place in Kuwait (with crude pro- prices upward. Over 2005, oil markets also experi- duction up 33 percent in the past three years), enced significant volatility in response to external Qatar (up 24 percent), and the UAE (up 23 per- 16 conditions: the year saw prices spike in August fol- cent). Non-OPEC oil producers in the region, on lowing Hurricane Katrina, subsequently weaken the other hand, have generally not been able to cap- with a mild U.S. winter, and spike again following a italize on higher oil prices with increased produc- natural gas dispute between the Russian Federation tion, partly reflecting depleting reserves and in part and Ukraine. because of a shortage of refinery capacity. In fact, in International Energy Agency (IEA). 15 Average of West Texas Intermediate (WTI), Brent, and Dubai 14 crude oil prices per barrel. Bahrain, Oman, Syria, and the Republic of Yemen. 16 8 Economic Developments and Prospects Figure 1.4: Oil prices, 1970­2005 80 60 barrel 40 per $ 20 0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 year Nominal 2000 US$ (GDP deflator) Source: World Bank staff estimates Note: Oil price = average of West Texas Intermediate, Brent, and Dubai crudes. Figure 1.5: Crude oil production among select MENA producers 25 20 day per 15 barrels of 10 millions 5 0 2002 2003 2004 2005 year Saudi Arabia Iran, Islamic Rep. of United Arab Emirates Kuwait Iraq Oman Syrian Arab Rep. Yemen, Rep. of Bahrain Source: World Bank staff estimates. Recent Economic Outcomes and Short-Term Development Prospects in MENA 9 Bahrain, Syria, and the Republic of Yemen, oil pro- oil-importing economies in the region, with Jor- duction in 2005 was 10­15 percent lower than pro- dan, Lebanon, and Morocco posting the largest in- duction over 2002. creases. In Lebanon, oil and oil derivative import With climbing oil prices and increased produc- volumes grew by 9 percent over 2005, and since tion, oil producers have seen substantial increases in 1999 by more than 25 percent a year (in compari- the dollar value of oil exports, and consequently in son, manufactured imports have only grown by an oil export revenues accruing to governments. Gov- average of 4 percent a year). The impact has been ernment revenues from oil have more than doubled most severe in Jordan, which was relying heavily on in the past three years, from $154 billion in 2002 to cheap oil from Iraq in the context of the oil-for- $365 billion in 2005,17 and with an accumulated food program.18 With oil imports growing signifi- gain in revenues of $350 billion since 2002. Saudi cantly more rapidly than GDP, the oil-trade-deficit- Arabia has particularly benefited, realizing a tripling to-GDP ratio jumped from only 2 percent in 2000 in government revenues from oil in the past three to almost 19 percent by 2005 (figure 1.7). years (figure 1.6). Higher import bills for resource-poor economies But higher oil prices and increased consumption After the first Gulf war, Jordan imported most of its fuel prod- 18 have meant sharply rising oil import bills for the net ucts from Iraq under the food-for-oil program: around half of the imports took place in the form of a grant (3 percent of GDP in 2002), while the other half was sold at preferential be- low-market prices negotiated each year between the respective governments. The government then sold the oil at preferential Not including Syria or Libya. 17 prices to the Jordan Petroleum Refinery Company. Figure 1.6: Oil revenue growth among MENA oil producers, 2002­2005 400 350 300 250 billions 200 US$ 150 100 50 0 2002 2003 2004 2005 year Saudi Arabia United Arab Emirates Iran, Islamic Rep. of Kuwait Algeria Iraq Libya Othera Source: World Bank staff estimates. Other oil producers include Bahrain, Oman, Qatar, and the Republic of Yemen. a 10 Economic Developments and Prospects Figure 1.7: Oil trade balance among select resource-poor economies 0 ­4 GDP) of (% ­8 balance ­12 trade ­16 oil ­20 1999 2000 2001 2002 2003 2004 2005 year Jordan Lebanon Morocco Tunisia Source: UNCTAD. Note: Oil trade balance represents exports minus imports of petroleum, refined petroleum, and natural gas products as a percentage of GDP. 1.2.5 Reliance on oil subsidies becomes a dization is far greater in oil-producing economies. fiscal challenge For the most part, resource-rich economies have The sharp rise in oil prices has also brought to the been able to more than offset the negative impacts spotlight the MENA region's heavy subsidization on the budget with strongly rising revenue streams. of oil prices within the domestic market, a policy of- At the same time, these rising budget surpluses have ficially designed to protect poor households (figure provided limited incentive for reforming the energy 1.8). Although the resource-poor economies are subsidy systems. As a result, over the past several particularly affected, the reliance on oil subsidies years, little if any progress has occurred in reducing pervades the region, with large implications on fis- these subsidies among the region's oil producers cal positions. (discussed further in section 1.4.3). Among oil importers, Jordan has been particu- larly impacted by these subsidies, because of not 1.2.6 Diverging relationship between oil only rapidly rising oil prices but also the recent loss prices and growth among nonoil of the oil and gas arrangements with Iraq. At the economies end of 2004, oil subsidies represented 3.1 percent of GDP, and 11.3 percent of total current expendi- An important feature of the current growth envi- tures. A year later, they amounted to 5.8 percent of ronment in MENA is the substantially weaker over- GDP and 19 percent of current expenditures, this all ties between oil price movements and growth despite the first round of reduction in oil subsidies outcomes among the region's resource-poor in September 2005 (without this reduction, oil sub- economies. Twenty to thirty years ago, the eco- sidies would have grown to an estimated 7.2 per- nomic growth outcomes in MENA's resource-poor cent of GDP over 2005). In Lebanon, surging economies were deeply linked to oil price move- Treasury transfers to the public electricity company ments because the resource-poor economies in the to cover these higher oil costs have resulted in gov- region received strong benefits from oil windfalls ernment consumption spending increasing by more through vigorous transmission channels, especially than 8 percent a year over the past two years (com- labor remittances, official aid, and capital inflows. pared with spending reductions in the years before). Although there remain positive transmission But the problem is not limited to the oil im- channels from oil producers to the resource-poor porters, and in fact, the degree of oil price subsi- economies and these channels have experienced a Recent Economic Outcomes and Short-Term Development Prospects in MENA 11 Figure 1.8: Diesel and gasoline prices in MENA, 2005 Diesel prices 120 100 80 60 cents/liter 40 20 0 of of of Iraq Rep. LibyaRep. Arabia Rep. Qatar GazaAfrica Turkey Arab IndonesiaBahrainJordanKuwait OmanRep.EmiratesAlgeriaLebanonMexicoTunisia and Romania Poland Morocco Saudi South Islamic Yemen, ArabArab Bank Syrian Iran, Egypt, United West Super gasoline prices 160 140 120 100 80 cents/liter 60 40 20 0 of of of Iraq LibyaRep. Rep. Rep. AlgeriaRep. QatarKuwaitArabia Oman Africa Bahrain GazaPoland Turkey Indonesia Emirates MalaysiaTunisia Arab MexicoJordanMoroccoLebanon Romania and Arab Saudi South Islamic Yemen, Arab Bank Syrian Iran, Egypt, United West Source: GRZ. boost under the current oil boom (particularly oil imports and oil import subsidies) have increased through rising portfolio equity inflows, foreign di- for nonoil economies. As a result, the correlation be- rect investment (FDI), and intraregional tourism), tween economic growth and oil price movements has the relative size of combined transmission mecha- steadily declined among most of the resource-poor nisms from oil producers to resource-poor economies in the region (figure 1.9), and for the economies in the region has declined substantially group has moved from an average of 0.5 over the over time. In addition, with rising energy use among 1970s and 1980s to almost zero over the past decade. resource-poor economies (relative to the past oil Egypt is most indicative of a changing growth en- booms), the costs of higher oil prices (with regard to vironment. Over the late 1960s and 1970s, Egypt's 12 Economic Developments and Prospects Figure 1.9: Correlation between real oil prices and economic growth among MENA's resource-poor economies 1.0 0.8 0.6 coefficient periods) 0.4 8-year 0.2 correlation (rolling 0 average ­0.2 Egypt, Arab Jordan Morocco Tunisia Lebanon Djibouti Resource- ­0.4 Rep. of poor 1968­1980 1980­1992 1992­2005 Source: World Bank staff estimates. Notes: Average correlation coefficient reflects average of rolling eight-year period correlation coefficients between economic growth and oil price movements. Because the relationship between an oil price movement and a growth impact may have a time lag, each eight-year growth/oil price correlation reflects the best-fitting relationship (highest correlation) between oil price changes and growth, allowing for econom- ic growth to lag up to two years. Regional averages weighted by GDP. economic growth moved almost in lockstep with which reached more than 19 percent of GDP in real oil price fluctuations (with a correlation of near- 1975, accounts for less than 2 percent of GDP to- ly 80 percent between real oil prices and growth), day. And at the same time, with rising energy con- cemented through Egypt's own foreign exchange sumption and a leveling off of production, Egypt's earnings from oil and oil-related revenues, as well as net oil exports have declined as a share of GDP from through the various transmission channels from the more than 20 percent in 1980 to about 3 percent region's major oil producers (such as labor remit- currently (figure 1.10). tances, economic assistance, direct investment, and Even resource-poor economies that maintain intraregional tourism). Over the past three decades, strong ties with the oil-exporting economies are be- however, many of these transmission channels have ginning to carry new costs with higher oil prices. weakened. Although at the peak of the 1980s oil Although regional oil wealth has spurred greater boom, more than 20 percent of the Egyptian labor FDI and capital flows into Jordan, for example, and force was employed abroad (primarily in the Gulf), has resulted in higher tourist receipts, rising oil today only 7 percent of Egyptian laborers work in prices have also become increasingly taxing on both other Arab states,19 as Gulf countries have increas- the fiscal and external fronts (figure 1.11). In the ingly replaced expatriate Arab with (less costly) previous oil boom era, with significantly lower en- South Asian laborers. Labor remittances as a per- ergy consumption, rising oil prices could be more centage of GDP in Egypt have fallen from a high of easily accommodated. At the height of the 1980s almost 14 percent in 1979 to little more than 3 per- oil boom, for example, oil imports in Jordan repre- cent today. FDI inflows reached a peak of almost 7 sented less than 10 percent of GDP, and oil subsi- percent of GDP in 1979, but averaged less than 1 dies absorbed about 3 percent of GDP.21 That is lit- percent of GDP by 2003 (but recently have climbed tle more than half of its relative costs today (oil to more than 4 percent in 2005).20 Official aid, imports representing 19 percent of GDP and oil subsidies 6 percent of GDP). 19 Said 2004. 20 Staff estimates from UNCTAD (FDI) and country (GDP) data. 21 Staff calculations from World Bank (1983). Recent Economic Outcomes and Short-Term Development Prospects in MENA 13 Figure 1.10: Sources of oil-related wealth in Egypt, 1970­2005 25 20 15 GDP of % 10 5 0 1970 1975 1980 1985 1990 1995 2000 2005 year Worker remittances Net portfolio equity FDI inflows Official aid Net oil exports Source: World Bank staff estimates. Figure 1.11: Oil-related wealth and costs in Jordan, 2000­2005 40 30 20 GDP of 10 % 0 2001 2002 2003 2004 2005 ­10 year Oil wealth channels Portfolio equity Worker remittances Aid Inward FDI Oil costs Oil imports Oil subsidies Source: World Bank staff estimates. 14 Economic Developments and Prospects Added to weakened transmission channels and diverging approaches and successes in utilizing higher costs, an additional element weakening the windfall oil surpluses. Over the past decade, howev- connection between oil price movements and growth er, growth patterns among regional oil producers among resource-poor economies has been the have moved progressively more in sync with oil group's increasing progress with structural reform. price developments (and with each other), in part Beginning in the 1980s and 1990s, many of the re- reflecting the pursuit of increasingly common de- source-poor economies adopted programs of macro- velopment strategies (figure 1.12). economic stabilization and structural reform designed Unlike in past oil booms, MENA's oil exporters to- to restore macroeconomic balances and promote pri- day are demonstrating significantly more fiscal restraint, vate sector­led development. Although the pace has building substantial external reserves, and pursuing varied, these reforms have resulted in more diversified common strategies for diversification of the oil wealth economies than under the prior oil booms, with into foreign assets. With this increased prudence, the stronger nonoil export sectors to support growth. Be- volatile growth outcomes among oil producers that tween 1988 and 2005, for example, nonoil exports as characterized the 1970s and 1980s have been increas- a share of GDP more than doubled in Jordan, Mo- ingly supplanted by a common growth effect. This is rocco, and Tunisia. As outward orientation has particularly evident when looking at the larger oil strengthened, the dependence of resource-poor economies, which exhibited startling dissimilarity in economies on oil price developments has weakened. growth outcomes in earlier periods (figure 1.13). 1.2.7 Strengthening correlation between oil 1.3 External Sector price developments and growth in resource-rich economies 1.3.1 Export growth robust throughout the An equally important growth trend in the region region has been the greater harmony among oil producers with regard to their growth outcomes. In the past, Riding the wave of higher oil export values, MENA economic growth patterns among the major oil has achieved exceptional export growth since 2002, producers of the region varied widely, a reflection of primarily among oil exporters, but broad-based Figure 1.12: Correlation between real oil prices and economic growth among MENA's resource-rich economies 1.0 0.8 0.6 coefficient periods) 0.4 8-year 0.2 correlation 0 (rolling ­0.2 average ­0.4 Saudi United Kuwait Oman Bahrain Qatar Algeria Iran, Syrian Libya Resource- Arabia Arab Islamic Arab rich Emirates Rep. of Rep. 1968­1980 1980­1992 1992­2005 Source: World Bank staff estimates. Notes: Average correlation coefficient reflects average of rolling eight-year period correlation coefficients between economic growth and oil price movements. Because the relationship between an oil price movement and a growth impact may have a time lag, each eight-year growth/oil price correlation reflects the best-fitting relationship (highest correlation) between oil price changes and growth, allowing for econom- ic growth to lag up to two years. Regional averages weighted by GDP. Recent Economic Outcomes and Short-Term Development Prospects in MENA 15 Figure 1.13: Economic growth among select MENA oil producers, 1970­2005 35 (%) 10 growth annual ­15 average ­40 1970 1975 1980 1985 1990 1995 2000 2005 year Saudi Arabia Kuwait Qatar Iran, Islamic Rep. of Algeria Source: World Bank staff estimates. throughout the region. With oil exporters seeing a an upswing in exports of services, primarily reflect- more than doubling of oil exports because of terms ing strong gains in tourism. International tourist re- of trade movements (from about $186 billion in ceipts to both Morocco and Tunisia grew by 15 per- 2002 to $440 billion by 2005),22 MENA economies cent a year over the past two years,24 resulting in have experienced a doubling or tripling of the aver- exceptional service export growth. Even in Jordan, age annual rate of growth of exports of goods and although tourism has been hit by regional political services over the past three years. disturbances, service exports have expanded by an Not surprisingly, oil dominates the region's ex- average of 14 percent a year (up from negative port landscape. More than three-quarters of the re- growth of 3 percent a year), on the strength of larg- cent growth in exports of goods and services has er remittances and strong advances in transport and come from oil exports among the region's domi- communication services destined for Iraq. Al- nant oil producers (figure 1.14). With the increase though Lebanon realized strong growth in tourism in the price of oil and production increases in sever- up to 2004, in 2005, in the face of the difficult se- al MENA countries, oil has grown to account for curity situation, tourism receipts--which account more than two-thirds of regional exports by 2005, for about 5 percent of GDP--are estimated to have up from only about half in 1998.23 declined by some 11 percent, and overall service ex- But export growth has also been strong among ports declined by 2.4 percent from 2004. the region's resource-poor economies, supported in part by strong growth in service exports (figure Oil producers have realized strong growth in energy- 1.15). Egypt's service exports increased by an aver- dependent exports age of 20 percent a year between 2002 and 2005 (compared with growth averaging about 4 percent Regional oil producers have benefited not only a year between 1998 and 2002), the result of surg- from exceptional oil export growth but also from ing Suez Canal receipts and strong growth in strong nonoil export growth, which between 2002 tourism. Other RPLA economies also experienced and 2004 averaged more than 16 percent a year. A strong impetus has been energy-dependent indus- tries such as petrochemicals, which--as oil prices In current US$. 22 Exports of goods and services, current US$. 23 24UNWTO 2006. 16 Economic Developments and Prospects Figure 1.14: Composition of MENA exports of goods and services, 1998­2005 700 600 500 billions 400 US$ Non-oil 300 current 200 Oil 100 0 1998 1999 2000 2001 2002 2003 2004 2005 year Resource-poor Resource-rich Sources: World Bank staff estimates from UNCTAD data. Figure 1.15: Growth of service exports among RPLA, 1991­2005 16 4.5 14 4.0 billions) 3.5 (US$ 12 3.0 billions) 10 Morocco 2.5 (US$ 8 and 2.0 of, 6 economies Rep. 1.5 4 Arab 1.0 other 2 0.5 Egypt, 0 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 year Egypt, Arab Rep. of Morocco Tunisia Lebanon Jordan Djibouti Source: World Bank staff estimates. Recent Economic Outcomes and Short-Term Development Prospects in MENA 17 have risen--have become increasingly expensive for lized. Thus, the "Dutch disease," where the non-oil traditional centers of production to manufacture export sector gets crowded out by the oil and non- (see box 1.2). With a widening cost advantage in traded goods sectors, which characterized the oil the industry, many countries have bolstered their booms of the 1970s, has not yet materialized with petrochemical production facilities. As a result, over the current increase in oil prices and oil wealth. the past two years, 90 percent or more of the nonoil export growth in Kuwait, Qatar, and Saudi Arabia 1.3.2 Resource-poor economies face several has come from petrochemicals (figure 1.16). new external challenges Nonoil export competitiveness has also benefit- ed from a limited appreciation of the real effective Resource-poor economies, on the other hand, have exchange rate, despite the large export receipts ac- seen a few unfavorable changes to the external land- cumulating to oil producers (figure 1.17). All of the scape over the past few years. On the export side, the GCC countries' currencies operate a fixed exchange expiration of the World Trade Organization (WTO) rate regime pegged to the U.S. dollar, which has Multifiber Agreement (MFA) on textile and cloth- depreciated modestly against other major curren- ing in January 2005 has impacted merchandise ex- cies over the past few years. As a result, the real ef- ports among several RPLA economies. The MFA fective exchange rate index among GCC countries had allowed privileged access to European markets depreciated by an average of 7 percent a year be- for a few MENA economies (mostly from the re- tween 2002 and 2004. And although the Islamic source-poor economies--Egypt, Morocco, and Republic of Iran's currency appreciated substantial- Tunisia--but also from the United Arab Emirates) ly before its landmark exchange rate reform in 2002 in textile and clothing products. To date, Egypt has (whereby the exchange rate was unified and a man- not experienced a major downturn in total textile aged float system was adopted), it has since stabi- exports, as evidenced by its woven apparel exports Figure 1.16: Nonoil export growth among select MENA oil exporters (Proportion of total nonoil export growth, 2002­2004) 100 75 50 25 percent 0 ­25 ­50 Algeria Saudi United Arab Iran, Islamic Qatar Kuwait Arabia Emirates Rep. of Agriculture/food including edible oil Crude resources Chemicals Manufacturing Machinery Miscellaneous items Source: World Bank staff estimates from UNCTAD data. 18 Economic Developments and Prospects Figure 1.17: Real effective exchange rate, 1998­2004 140 120 100) = (2000 index 100 80 1998 1999 2000 2001 2002 2003 2004 year Saudi Arabia United Arab Emirates Kuwait Qatar Algeria Iran, Islamic Rep. of Source: World Bank staff estimates. increasing in value by 6 percent over 2005.25 In part, year), however, Tunisian textile exports managed to the effects of the MFA expiration have been cush- remain a growing sector in 2005, albeit at a sluggish ioned by the December 2004 agreement on qualify- 1.5 percent pace. The impact on Morocco, howev- ing industrial zones (QIZs) between Egypt, Israel, er, has been sharper. Over the first six months of and the United States, providing tariff-free access 2005, Morocco's clothing exports, representing 34 for Egypt's apparel exports to the United States.26 percent of merchandise exports, declined by some The Egyptian textile and apparel companies repre- 13 percent from 2004 values, and of the export loss- sent 77 percent of the 471 companies listed under es, more than 90 percent were in the textile export the QIZ protocol.27 categories that were liberalized with the MFA re- But other countries have already started to feel moval. Partly as a result, both Morocco and Tunisia the pinch. Tunisian textile exports to Europe de- have experienced sharp downturns in merchandise clined by 6 percent in 2005, and textile production export growth rates from 2004 (figure 1.18). in the country declined by an equivalent amount But far more challenging to the external land- over the first six months of 2005 (see box 1.3). The scape among resource-poor economies has been the weakening export market has affected jobs in the impact of surging oil import bills. Since 2002, mer- sector, which are down 9 percent from employment chandise imports among the RPLA economies have values in 2004. Thanks to a strong pickup in textile increased by about 18 percent a year in dollar terms exports to the United States (42 percent year-on- (figure 1.19), and from about 26 percent of GDP in 2002 to about 35 percent by 2005 (that com- pares with the resource-rich economies, in which as a share of GDP, merchandise imports have re- www.egytex.com (2006). 25 mained virtually unchanged since 2002, averaging A similar agreement on QIZs between Israel, Jordan, and the 26 between 24 and 25 percent). Primarily because of United States buoyed textile exports dramatically, supporting the sector's 120 percent growth between 1999 and 2003, rel- oil import bills, all of the RPLA economies, without ative to 13 percent growth of overall exports. exception, have seen a large upturn in the ratio of www.egytex.com (2006). 27 merchandise imports to GDP since 2002. Recent Economic Outcomes and Short-Term Development Prospects in MENA 19 Box 1.2 Petrochemicals: building value into oil and natural gas production The global economic downturn that began over the about 9 percent of MENA ethylene production; how- late 1990s and the slow subsequent recovery have lim- ever, the country is building major new facilities in ited demand for petrochemicals, and the recent strong Bandar Imam and Assalouyeh that are expected to be price increases for oil and natural gas, the primary feed- some of the largest petrochemical complexes in the stock for petrochemicals, have severely limited prof- world. By 2006, the country is expected to produce itability, particularly in traditional centers of production nearly 20 percent of the region's ethylene. in Europe, Japan, and the United States. In response, Saudi Arabia's petrochemical company SABIC has there has been a shift in production from these tradi- initiated construction on several petrochemical plants tional centers to locations in faster-growing, lower-cost that will produce ethylene, ethylene glycol, polyethyl- developing regions. The focus has shifted largely to the ene, and polypropylene products by 2008. The firm Gulf region of MENA, where hydrocarbons are pro- has also joined several international firms in expand- duced in excess of domestic demand and where costs ing or building four additional facilities that will pro- associated with primary materials are extremely low. duce styrene and olefins, which will also come on line The countries of the GCC and the Islamic Repub- in 2008. lic of Iran have taken strong steps to bolster their Other GCC countries are investing heavily in petro- petrochemical production capabilities in recent years chemical enterprises. Kuwait is expanding its petro- to take advantage of this shift in production and to chemicals production with several new facilities that build additional value into their oil and gas produc- will be on line by 2007. Qatar is finishing a methanol tion. These countries now account for nearly 10 per- plant this year and will add two ethylene crackers pro- cent of global production in basic petrochemicals such ducing 2.7 million tons a year by 2011. UAE has as ethylene. By 2010, these countries are expected to added another ethylene cracker that will be running in provide nearly 50 percent of the world's annual new 2009. Oman has announced plans for a petrochemi- ethylene capacity and account for nearly 20 percent of cals complex, including two methanol plants, that will total global capacity. Exports of liquid chemicals from produce 2 million tons by 2008. the GCC and the Islamic Republic of Iran were 16.6 The petrochemicals industry has grown by 4 per- million tons in 2004 and reached 18.4 million tons in cent per year over the past two years. As MENA pro- 2005. This amount is expected to rise to 32 million duction facilities come on line, experts expect a drop tons by 2007 and nearly 48 million tons in 2008, as in profitability as the industry responds to an initial planned petrochemical facilities come on stream. oversupply of petrochemicals. However, in the longer term, the MENA region is poised to benefit greatly Petrochemical investment projects in the from a strengthened position in the petrochemicals GCC and the Islamic Republic of Iran industry as demand from China and India catches up The Islamic Republic of Iran currently maintains with supply and as growth in the industry rebounds. 1.3.3 Current account positions diverge 2005). Oil exporters, on the other hand, have built up sizable current account surpluses, from an average With conflicting external developments, the MENA of only about 6 percent of GDP in 2002 to almost region's current account positions have likewise di- 23 percent of GDP by 2005. In the past year alone, verged strongly between the resource-poor and re- the current account surplus has risen from about 15 source-rich economies (figure 1.20). With rising oil percent to 22.7 percent of GDP. import bills, resource-poor economies have seen widening current account deficits, which have be- Oil producers have substantially improved their come most evident in Jordan (where the current ac- external positions count moved from a surplus of about 5.6 percent of GDP to a deficit of almost 18 percent of GDP by Oil producers have also significantly increased their 20 Economic Developments and Prospects Figure 1.18: Merchandise exports in MFA countries, 2001­2005 (Current US$) 40 35 30 25 (%) 20 growth 15 10 annual 5 0 ­5 ­10 Egypt, Arab Rep. of Morocco Tunisia United Arab Emirates 2001 2002 2003 2004 2005 Source: World Bank staff estimates. Box 1.3 The Tunisian experience with the MFA removal Production/employment: The textiles and clothing the effective completion of the MFA removal, the (T/C) industry is the largest contributor to the Tunisian Tunisian textile sector faced stiffer competition. The economy, providing almost one-third of the manufac- local textile industry remained fragmented and largely turing value added and about 5.7 percent of total GDP. operating on a subcontractor basis. The threading and The T/C sector constitutes one of the pillars of the weaving firms were hardest hit. A slump in investment Tunisian economy, employing approximately 204,460 paralleled the trend in production. During the first people (or 46 percent of total industrial employment, quarter of 2005, 74 foreign firms/affiliates in the T/C with the largest female participation). The industry is industry closed their units in Tunisia (out of a total of also dominated by small and medium enterprises (with 115 foreign firm closures). They were mostly small 10 to 100 employees). Only 25 firms have more than units (less than 100 employees) and subcontractors, 500 employees. Since 1976, Tunisian products enjoyed heavily dependent on European donneurs d'ordre. duty-free access to European markets. The loss of momentum has been particularly per- The T/C industry has been an export locomotive, ceptible in the industry's traditional export markets, generating some 50 percent of Tunisia's goods and notably the EU, whereas textile exports to the United services exports, with a high degree of geographic con- States increased during the first half of 2005. Com- centration. The majority (98 percent of value) of pared with the first three quarters of 2004, Tunisia's Tunisian T/C exports were destined for the European exports to the EU in 2005 decreased by almost 6 per- Union (EU), mostly to three countries (France, Ger- cent (see table on next page). At the same time, many, and Italy), and represented 45 percent of the to- Tunisia's exports to the United States during the first tal exports of the nation's manufacturing industries. six months of 2005 increased by 42 percent relative to Recent developments: Over the first six months of the same period in 2004. 2005, the T/C industry production registered a loss of (Continues on the following page.) 4.9 percent relative to the same period in 2004. With Recent Economic Outcomes and Short-Term Development Prospects in MENA 21 Box 1.3 The Tunisian experience with the MFA removal (continued) EU Imports of Textiles and Clothing January­September 2004 January­September 2005 Imports Share of EU's Imports Share of EU's (EUR billion) total imports (%) (EUR billion) total imports (%) Change in value (%) World 52.6 100.0 54.5 100.0 +3.7 China 11.3 21.6 16.4 30.1 +44.8 Tunisia 2.2 4.1 2.0 3.7 ­5.6 The expiration of the MFA in January 2005 and the nation tariffs are still very high, at 26 percent (see consequent stiffer competition will compel Tunisia to figure below), which is above many competitors' tar- surpass its simple role as a subcontractor by proposing a iffs, the world average, and those of the least-devel- more complete offer to clients. Certain Tunisian suppliers oped and medium-income MENA countries. Tariffs find themselves at the head of true platforms composed are high for apparel and also for the industry's main of satellite subcontractors. The head of the network cen- inputs, such as fabrics and fibers. Only access to tralizes the entire scope of services (grading, cutting, cheap inputs from competitive textile producers grouping, packaging, dispatching) in such a manner as to would enable the Tunisian T/C industry to be com- present to the principal only a single representative. Such petitive on the world market. As far as the European a development of services should permit Tunisia to move market is concerned, Tunisia should accelerate the from the mass production of basics, which is the strong- process toward adoption of the Pan-European rules hold of Asian production enjoying a competitive advan- of origin. tage that Tunisia simply cannot rival. On the other hand, Reduced labor costs could also help improve T/C the development and promotion of national brands is dif- competitiveness. In 2004, the T/C labor cost in ficult because of the financial weakness of the clothing Tunisia was about $2 an hour, lower than that of Mo- sector and the small size of the domestic market. rocco (at about $2.50), but higher than those of its Important competitiveness gains can derive from competitors: Bulgaria ($1.30 an hour), Egypt ($0.90 access to cheaper inputs. The industry most-favored- an hour), and China (about $0.50 an hour). MFN tariff rates on textiles and clothing for selected countries, 2004 Tunisia Bangladesh Romania Developing MENA World Turkey 0 5 10 15 20 25 30 tariff rate (%) Source: WITS. Note: Turkey data for 2003. 22 Economic Developments and Prospects Figure 1.19: Merchandise import growth among RPLA economies, 2001­2005 25 20 15 billions US$ 10 5 0 Egypt, Arab Rep. of Jordan Lebanon Morocco Tunisia 2001 2002 2003 2004 2005 Source: World Bank staff estimates. Figure 1.20: Current account balance, early 2000s versus 2005 Resource-rich Resource-rich labor-importing labor-abundant 50 Resource-poor 40 30 20 GDP of 10 % 0 ­10 ­20 ­30 of of of Rep. Rep. Tunisia Jordan Oman Qatar Libya Morocco Lebanon DjiboutiAlgeria Rep. Rep. Bahrain Kuwait Arab Arabia Emirates Arab Saudi Islamic Syrian Yemen, Arab Egypt, Iran, United 2000­2002 2005 Source: World Bank staff estimates. Recent Economic Outcomes and Short-Term Development Prospects in MENA 23 external reserves, providing a substantial buffer for Islamic Republic of Iran, for example, the fund was the external accounts and partially insulating them established in 2000 as part of the country's Third from the exchange rate appreciation that marked Five-Year Plan (Third Plan), conceived to absorb all earlier oil booms (table 1.3). In the past three years, foreign exchange earnings above the reference price external reserves among the oil exporters have risen (which between March 2000 and March 2005 has from about $140 billion to more than $300 billion averaged between $12 a barrel and $19 a barrel). in 2005 (and from 12 percent of goods imports to However, the unexpectedly robust rise in oil prices almost 15 percent). (averaging more than $35 over the period) resulted Oil stabilization funds have also been utilized for in both increases in the regular "oil share" of the reserve building. Established to collect surplus hy- budget and repeated withdrawals from the fund. As drocarbons receipts, the funds are designed to lower a result, while some $74 billion should have been the impact of volatile oil prices on government accumulated in the fund between March 2000 and spending and on the economy. Oil producers in the 2005 according to the original guidelines, instead region have set exceedingly conservative assumptions the total deposits have amounted to a mere $29 bil- for the average price of oil for the purposes of their lion.28 Despite these drawdowns, the buildup in budgets (in 2005, for example, both Algeria and both oil stabilization fund assets and foreign re- Qatar budgets called for an average price of oil over serves have provided oil producers in the region sig- the year of only $19; Saudi Arabia's budgetary esti- nificant cushions against future oil price slides and mate was $25). As a result, with real oil prices sub- sudden reversals in capital flows. stantially higher than budgeted assumptions, signifi- cant revenues have accumulated within the funds. Not all of these surplus revenues have actually gone into the stabilization funds, however. In the Amuzegar 2005. 28 Table 1.3: External reserves, in months of imports Country 2000 2001 2002 2003 2004 2005 MENA Total 11.4 12.0 11.7 12.7 13.2 13.7 Resource-poor 8.7 9.0 10.5 12.3 10.6 10.0 Djibouti 3.9 4.3 4.5 5.1 4.1 4.2 Egypt, Arab Rep. of 10.2 10.4 11.6 12.0 9.7 10.0 Jordan 10.1 8.9 11.0 12.7 9.0 7.1 Lebanon 16.9 12.2 15.5 23.5 18.0 18.7 Morocco 5.8 10.4 12.0 13.3 13.0 11.8 Tunisia 2.7 2.7 3.1 3.4 4.1 3.7 Resource-rich 12.5 13.2 12.1 12.9 14.0 14.8 Resource-rich, labor-abundant 11.7 14.5 15.1 15.8 15.9 18.5 Algeria 15.8 23.2 23.3 29.9 29.1 33.8 Iran, Islamic Rep. of 9.7 11.2 11.7 10.2 10.8 14.6 Syrian Arab Republic 8.9 9.1 9.9 11.1 8.1 5.4 Yemen, Republic of 12.9 15.5 15.8 15.0 15.9 14.2 Resource-rich, labor-importing 12.7 12.6 10.8 11.6 13.1 13.1 Bahrain 4.3 5.0 3.8 3.5 3.3 2.4 Kuwait 13.4 17.0 13.8 9.3 8.3 8.4 Libya 38.3 35.3 24.3 31.5 33.7 43.8 Oman 6.4 5.5 6.8 7.1 5.4 4.6 Qatar 3.4 3.4 3.9 6.4 8.4 8.9 Saudi Arabia 20.7 20.4 17.1 21.1 25.5 21.2 United Arab Emirates 5.4 5.1 4.9 4.0 4.1 4.5 Source: World Bank staff estimates from country sources. 24 Economic Developments and Prospects 1.3.4 Capital flows reflect increasing desire share prices rose 70 percent across the region, and among resource-rich economies to 2004 showed more spectacular returns--Saudi Ara- diversify bia 80 percent, UAE 95 percent. But such oppor- tunities are limited, and capital is now flowing into The rising liquidity accruing to oil producers has neighboring states, principally into industrial proj- brought forth a strong move toward overseas in- ects in Egypt, Jordan, and Syria (for example, ce- vestment, particularly among Gulf economies, as ment, oil refineries). Inroads are also being made in part of an overall drive to diversify oil-dependent the tourism infrastructure, as well as the financial economies and transform finite oil reserves into sector and real estate (discussed in chapter 2). longer-term revenue streams. A sizable portion of Though figures are largely anecdotal, direct and the oil windfall has returned to U.S. dollar hold- portfolio investment on the order of $5 billion to ings following a shift away from such assets fol- $10 billion appears to have been committed over lowing the events of September 11, 2001, but the the past year. Bank for International Settlements finds that In addition to diversifying their assets geograph- MENA's financial outflows in the present boom ically, many of the oil-producing economies of the have become more geographically dispersed and GCC have substantially increased their exposure to allocated across more asset classes,29 thus diversi- foreign investment into their own economies. A fying their portfolios with the objective of spread- strong drive is underway among GCC countries to ing risk. capture greater foreign investment, and almost all Some of these large surplus funds have been re- of the economies have passed legislation to open up cycled through the region to direct investment key sectors to foreign ownership, to encourage projects in industry, finance, and commerce, partic- greater FDI (see chapter 3). Partly as a result, a few ularly in both Egypt and the Mashreq.30 GCC coun- of the GCC countries, including Bahrain, Qatar, tries in particular are looking to build investment and Saudi Arabia have seen large increases over the with large-scale flows, having been drawn at first past three years in inward FDI (figure 1.21). into GCC equity and real estate. During 2003, BIS 2005. 29 MENA Mashreq countries include Iraq, Jordan, Lebanon, Syr- 30 ia, and West Bank and Gaza. Figure 1.21: FDI inflows as a share of GDP, 2000­2005 10 9 8 7 6 GDP 5 of 4 % 3 2 1 0 ­1 of of of Rep. Rep.MoroccoTunisiaLebanonJordan Qatar Libya Algeria Rep. Rep. OmanBahrain Arabia Arab EmiratesKuwait Arab IslamicSyrian Yemen, Saudi Arab Egypt, Iran, United 2000­2002 2005 Source: World Bank staff estimates from UNCTAD, 2005. Note: 2005 or closest year available. Recent Economic Outcomes and Short-Term Development Prospects in MENA 25 1.4 Fiscal Developments tion among oil producers). Although there is evi- dence of higher spending on the horizon, including 1.4.1 Strong upturn in fiscal balances among a strong expansion of infrastructure spending, the oil producers resource-rich, labor-importing economies have to date maintained unprecedented fiscal discretion. Record revenues from oil exports have swelled state Spending advances have been more robust coffers for the region's oil producers, who collec- among the resource-rich, labor-abundant countries, tively have seen total revenues more than double with a tripling in the rate of growth of government over the past three years, from $202 billion in 2002 spending in Algeria (a result of strong increases in to $433 billion in 2005.31 Over the past year alone, the wage bill, but also reflecting significant pay- revenues as a percentage of GDP among oil produc- ments toward external debt reduction) and a surge ers rose from 40.5 percent to more than 45 percent. in the Islamic Republic of Iran's public spending, In general, the phenomenal growth in govern- particularly in the run-up to presidential elections. ment revenues has been met with fiscal restraint. With rapid revenue advances and only moderate Total expenditures as a percentage of GDP among spending increases, fiscal positions have improved resource-rich economies are below pre-oil-boom sharply for MENA oil producers, who posted a fis- levels, although in current dollar terms they have cal surplus of 16 percent of GDP over 2005, up increased by about 12 percent a year between 2002 from 10 percent in 2004, and only 2 percent of and 2005 (slightly higher than over the period GDP in 2002 (figure 1.22). 2000­2002, when expenditure growth averaged 7.9 percent per year). Resource-rich, labor-import- 1.4.2 Deteriorating fiscal balances among ing economies in particular have shown fiscal pru- resource-poor countries dence with this oil boom: expenditure growth has averaged only 10 percent a year, despite extraordi- But results have been sharply divided along resource nary spending outlays in Saudi Arabia to pay down allocation lines, with resource-poor economies re- public domestic debt (see box 1.4 on debt reduc- maining in fiscal deficit and with acute deteriora- tions in the fiscal deficits in Egypt, Jordan, and Mo- rocco. A strong rise in public sector wages in Egypt, Does not include Iraq. 31 along with rising costs of energy subsidies through- Figure 1.22 Fiscal balances in MENA 40 30 20 10 GDP of % 0 ­10 ­20 of of of Rep. Rep. MoroccoTunisia Jordan Arabia Qatar Oman Libya Lebanon Algeria Rep. Rep. Kuwait Bahrain Arab Emirates Arab Saudi Islamic Syrian Yemen, Arab Egypt, Iran, United 2003 2004 2005 Source: World Bank staff estimates. 26 Economic Developments and Prospects out the region, resulted in total expenditures in- most 5 percent of GDP in 2005 (figure 1.22). creasing by almost 13 percent over 2005 for RPLA In the West Bank and Gaza, the fiscal worries are economies as a group. Although Egypt actually cut perhaps most challenging, given recent uncertainty current expenditures by almost 7 percent over about (primarily Western) donor aid payments, on 2004, current expenditures in 2005 rose by about which the Palestinian Authority strongly depends. 21 percent, reflecting a 50 percent increase in sub- Over 2005, the Palestinian Authority's budget sidies (primarily fuel) and a 27 percent increase in deficit reached about $800 million, of which some consumption expenditures (primarily wages and $340 million was financed by donors in the form of salaries, which rose 20 percent on the year). With direct budget support. With strong increases in revenue growth only modest, fiscal deficits among both the public sector wage bill and social transfers, resource-poor economies have increased from the Palestinian Authority's fiscal situation is increas- slightly more than 3 percent of GDP in 2004 to al- ingly unstable. Box 1.4 Debt reduction among MENA's oil producers Many of the oil producers have reacted to the windfall by 2005, and by November 2005, Algeria's debt to the revenues with remarkable prudence, evidenced not only International Monetary Fund (IMF) was fully repaid. through relatively small spending advances, large sur- Although countries in the GCC carry some exter- pluses, and the buildup of foreign assets but also through nal debt, the majority of debt is domestic, and a few a drawdown of external and government debt obliga- countries have utilized the oil wealth to substantially tions. On the external debt front, the most significant draw down domestic debt obligations. Most notably, debt reduction has come from Algeria, where sizable Saudi Arabia has initiated a massive debt repayment surpluses in the balance of payments have allowed Alge- process, and in the span of just three years, it has re- ria to initiate a process of early payoff of external debt. As duced the stock of domestic debt from 97 percent of a result, the external debt-to-GDP ratio has declined GDP to just 41 percent by 2005. Debt reductions from 41 percent of GDP in 2001 to 16 percent of GDP have also occurred in Kuwait and Oman. Stocks of external and domestic debt among MENA oil exporters Debt as a proportion of GDP Country (debt indicator) 2001 2002 2003 2004 2005 Algeria (external debt) 41 41 35 26 16 Iran, Islamic Republic of (external debt) 7 6 7 8 9 Syrian Arab Republic (external debt) 110 106 101 90 .. Yemen, Republic of (external debt) 53 51 48 42 33 Bahrain (govt. debt) 30 32 37 34 31 Kuwait (external debt) 32 32 27 23 17 Oman (govt. debt) 25 19 18 13 11 Qatar (govt. debt) 16 38 44 44 51 Saudi Arabia (govt. debt) 94 97 82 65 41 UAE (external debt) 27 27 24 .. .. Source: World Bank staff estimates. Thus, unlike in the past oil booms, many of the re- debt obligations represents one of the several constructive gion's oil economies seem to be viewing the recent oil actions undertaken by many oil economies to strengthen wealth as a window of opportunity. Drawing down their fiscal positions and enhance private sector confidence. Recent Economic Outcomes and Short-Term Development Prospects in MENA 27 1.4.3 The special case of oil subsidies in the availability of subsidized gasoline (the draft bill MENA stipulated that car owners be provided with "smart cards," fixing the subsidized gasoline allowance and Energy subsidies represent a special--and signifi- forcing drivers to pay full price when they exceed cant--expenditure item in many of the economies in the ration). But parliament has backed off from im- MENA, and with the recent rise in oil prices, the im- plementing the scheme--a modest step in the right pact on the budget has been particularly evident. En- direction--until 2007 at the earliest. Energy subsi- ergy subsidy rates vary in the region. Estimates of en- dies will continue throughout 2006 according to ergy subsidies as a percentage of GDP in a few MENA the revised bill, which froze any adjustments to do- countries demonstrate diverging burdens for the re- mestic prices of oil products, gasoline, electricity, gion, ranging from 5.8 percent of GDP in Jordan to water, and postal services for the budget period. In some 15.7 percent in the Islamic Republic of Iran, the Saudi Arabia, meanwhile, the heavily subsidized do- highest in the region (outside of Iraq). Other recent mestic prices of gasoline and diesel have actually estimates include 6.5 percent in the Republic of been lowered in early 2006 by nearly 30 percent, in Yemen, 8.1 percent in Egypt, and 12 percent in Syria. an effort to soften the impact of the country's re- Aside from the enormous fiscal drain of these cent stock market declines. And equally telling, no subsidies, with the exception of Jordan, energy sub- other resource-rich economy has attempted to en- sidies in MENA are also regressive and untargeted. act subsidy reform since the oil boom began. With energy consumption generally more modest While short-term adjustments have been limited, among the poor, energy subsidies disproportionate- a few resource-poor economies are working to put ly benefit rich rather than poor households. In into place longer-term measures. Both Morocco and Egypt, individuals in the richest quintile receive Tunisia have recently taken steps to reduce con- more than two-and-a-half times the energy subsidy sumption and dependence upon oil. The Tunisian received by the poor, the disproportion being the government adopted an Energy Control Law in Au- greatest for gasoline, for which 93 percent of the gust 2004.33 It also targets a 20 percent reduction in benefits go to the richest quintile.32 In addition, the energy consumption by government administration, artificially low prices result in energy inefficiency, ex- firms, and households; a greater use of natural gas; cessive consumption, and environmental damage. and the development of renewable energies. In that context, the Tunisian government launched in 2005 Price adjustments and other energy policies a public awareness campaign to reduce household Aware of the large fiscal impacts, authorities of a energy consumption. It is also developing its use of few economies in MENA have, with varying suc- both solar and wind energy. Likewise, the Moroccan cess, undertaken to mitigate the budget impact of government is considering the adoption of more subsidies and transfers by adjusting retail prices (see long-term energy-saving measures, including a box 1.5 for details). However, with the exception of rolling work schedule to eliminate midday traffic, as Jordan, the reforms to date have been timid, and in well as the use of renewable energies. no country in the region are oil prices currently In Egypt and Jordan, on the other hand, the issue market-determined. Part of the hesitancy to under- is being approached by price reform. In Egypt, there take ambitious price reforms is explained by con- is a general consensus to move from implicit to ex- cerns about the poverty impact, as well as the fear of plicit and from direct to indirect cash subsidies and political backlash. In both Lebanon and the Repub- to strengthen the safety nets. In Jordan, the govern- lic of Yemen, efforts to reduce or offset these oil ment voted for measures to allow a gradual reduc- subsidies were met with riots. Governments have tion of the oil subsidies on diesel, fuel oil, liquefied also worried about the inflationary impacts of rising petroleum gas (LPG), and kerosene and to liberalize oil prices to consumers. the domestic market for petroleum products over But surging budget surpluses among oil produc- three years. The first round of reductions in oil sub- ers have also seemed to contribute to a backing off from oil subsidy reform. In the Islamic Republic of Iran, the government asked parliament in October Law No. 2004-72 of August 2, 2004. The bill pertains to en- 33 to approve a new pricing formula that would ration ergy consumption and the use of renewable energies. It in- cludes incentives and other promotional measures destined to boost the use of renewable energies in the country's private World Bank 2005d. 32 and public sectors. 28 Economic Developments and Prospects Box 1.5 The experience with oil price adjustments in some MENA economies In Morocco, oil products have been subsidized since diesel in 1993 (LE 0.4 per liter for kerosene and ordi- 1995. Prices were indexed on the Rotterdam oil price nary diesel), and natural gas and fuel oil in 1997 (LE up until 2000, but increasing oil prices pushed the 0.141 per cubic meter and LE 182 per ton, respec- Moroccan government to interrupt this indexation in tively). In addition, the depreciation of the exchange September 2000, which has translated into the widen- rate by 30 percent over 2003­2004 widened the gap ing of the Caisse de la Compensation deficit. Prices between domestic and international prices of all ener- were kept unchanged until 2004, when they were in- gy products. creased by between 2.9 and 3.5 percent, depending on In the Republic of Yemen, the government has the product. Further increases were introduced in May been trying to phase out subsidies on oil derivatives and August 2005 and in January 2006. As of May for at least seven years. A first rise in gasoline of 40 2005, the energy bill was evaluated at Moroccan percent in 1998 led to riots and a death toll of 50. In dirhams (DH) 7 billion (Ministry of Finance); howev- July 2005, the government raised the price of diesel er, the recent price adjustments will reduce it to DH 5 and oil--as well as kerosene and cooking gas--signifi- billion, equivalent to a 20 percent cutback. cantly: pump prices for diesel jumped from Yemeni rial The Tunisian government has controlled for the (YRls) 17 per liter (8 U.S. cents per liter) to YRls 45 budget deficit by increasing retail oil prices several per liter, while those for oil almost doubled. These times. In 2004, prices were adjusted up by about 5 price hikes were combined this time with pro-poor percent (in February and August), but the decision supportive measures such as a sales tax cut, production was offset by a 3 percent increase of the minimum and consumption taxes cancellation, and 200,000 ad- wage to attenuate the burden on some 280,000 work- ditional individuals covered under the Social Care Sys- ers. More rises followed in February, June, and Sep- tem. However, despite safety measures, riots led to 13 tember 2005. dead, and the government withdrew part of the price The government of Jordan made its first reforms of hike: new prices were cut by 20­30 percent, and oil the oil and gas subsidies by raising the price of gasoline prices remain at around half their market rate. and fuel oil by 10.6 and 33.3 percent, respectively, on In Lebanon, the government imposed in May 2004 July 9, 2005. In September, the government an- a price cap on gasoline and increased excise taxes to off- nounced additional increases, varying from 5 percent set the rise in world oil prices. As in the Republic of for gasoline to 20­22 percent for diesel and kerosene Yemen, these price hikes resulted in riots, occurring in to Jordan dinars (JD) 0.25 for LPG cylinders. Prices the southern suburb of Beirut and claiming five lives. are likely to further increase because the Jordanian In the Islamic Republic of Iran, oil and gasoline government has embarked on long-term reform to- prices are among the cheapest in the world, but gas ward the removal of oil subsidies. subsidies have had the largest fiscal implications. Be- In Egypt, prices were adjusted upward in 2004, cause of refining limitations, some 40 percent of the when the government introduced two new types of country's gas consumption is imported at market gasoline with higher octane levels at higher prices and prices, and consumption has risen. In 2005, the gov- increased the prices of diesel to Egyptian pounds (LE) ernment introduced a proposed rationing scheme for 0.6 per liter (up by 50 percent), fuel oil to LE 300 per gasoline, in which each car owner would have a "smart ton (up by 65 percent), and natural gas to LE 0.21 per card" allowing the purchase of a certain amount of gas cubic meter (up by 49 percent). This is a major step, at the subsidized rate, after which further fuel would given that there was no change in the nominal domes- have to be purchased at market prices. The scheme tic price of any petroleum product between 1997 and was intended to be implemented in 2006, but mixed 2004. While the price of LPG froze at its 1991 level reaction by the Majlis to the bill has resulted in freez- (LE 2.5 per 12.5-kilogram cylinder), prices of gasoline ing any adjustments to domestic oil prices, gasoline, or were last adjusted in 1992 (LE 0.9 per liter for octane electricity. As a result, prices will remain unchanged 80 and LE 1.0 per liter for octane 90), kerosene and until at least 2007. Recent Economic Outcomes and Short-Term Development Prospects in MENA 29 sidies became effective in September 2005, and de- prices, even if it has not been directly passed on to spite the continual rise in oil prices, subsidies for the consumers. A recent World Bank study estimated the last four months of the year increased by only 49 impact of the recent increase in oil price on poverty percent compared with the same period in 2004--in through the growth channel,34 and three resource- contrast, subsidies up to September increased by poor economies are found to be particularly affected: 139 percent over the same period in 2004. Djibouti, Jordan, and Lebanon. In Djibouti and Jor- dan, the impact was especially large, estimated as a 4.7 The poverty impact of higher oil prices percent rise in the poverty headcount, and in Lebanon, the increase in the poverty headcount was Although energy subsides have contributed to signif- estimated at approximately 2.6 percent (table 1.4).35 icant deterioration of fiscal positions among resource- With growing recognition among MENA gov- poor countries, many governments in the region have ernments that to ensure fiscal sustainability, they been hesitant to remove them, mainly because these must reevaluate present energy subsidy systems, subsidies have buffered the poor from the direct shock of higher oil prices. But rising oil prices may have poverty impacts beyond consumer budgets (for ex- The study considered a US$10 increase with respect to the aver- 34 ample, through growth itself). To the degree that age oil price in 2003 and a rise in the long-term oil price of about $5 a barrel in real terms. The study accounted for country-spe- higher growth benefits the poorest households, there cific growth elasticities of poverty (World Bank 2005c). may still be a poverty impact from the higher oil World Bank 2005c. 35 Table 1.4: Poverty impact of oil price rise: most severely affected countries Country Total growtha (%) Poverty elasticityb Poverty impactc (%) Mauritania 4.08 ­2.12 8.65 Moldova 3.22 ­2.45 7.87 Belarus 2.13 ­3.20 6.81 Kyrgyz Republic 1.83 ­3.34 6.11 Uzbekistan 1.61 ­3.63 5.84 Armenia 2.49 ­2.22 5.53 Tajikistan 2.09 ­2.56 5.35 Guyana 3.06 ­1.73 5.28 Jordan 1.93 ­2.45 4.73 Djibouti 3.40 ­1.39 4.72 Ukraine 1.20 ­3.34 4.02 Georgia 1.63 ­2.33 3.80 Jamaica 1.63 ­2.22 3.63 São Tomé and Principe 2.50 ­1.39 3.48 Singapore 1.75 ­1.82 3.18 Estonia 1.33 ­2.33 3.10 Mongolia 1.83 ­1.64 3.01 Macedonia, FYR 0.86 ­3.48 2.98 Tonga 1.29 ­2.22 2.88 Lithuania 0.95 ­2.93 2.78 Guinea-Bissau 1.98 ­1.39 2.75 Latvia 0.93 ­2.93 2.73 Bulgaria 0.93 ­2.93 2.71 Lebanon 1.01 ­2.56 2.58 Pakistan 0.88 ­2.81 2.47 Source: Herrera et al. 2005. a. Total growth effect = sum of direct and indirect effects. b. Poverty elasticity calculated according to Ravallian 2004. c. Poverty impact = product of total growth effect multiplied by poverty elasticity. 30 Economic Developments and Prospects there has been increasing interest in understanding ter invested to create jobs while developing a well-tar- the impact on the poor from reducing energy subsi- geted and efficient social safety net system that could dies. To that end, poverty simulations undertaken in replace the transitory transfer system.37 three MENA countries attempted to approach this With the vast proportion of energy subsidies question by analyzing the impact of setting all ener- benefiting the nonpoor, removing energy subsidies gy prices to import parity. In all cases, potential im- and replacing them with programs that are better pact on the poor would be great without compensa- targeted to the poor could have a strong positive tory measures. In the Islamic Republic of Iran, such social impact. Moreover, although these subsidies a policy would be equivalent to an across-the-board emerged with the aim to protect the poor, they price increase of 308 percent on all energy products now represent an ever-growing fiscal burden, a and would result in an increase in household expen- burden that ironically may present its greatest risk diture of 33 percent for the urban poor and 47.6 to the poor with regard to preserving important percent for the rural poor. The estimated results for social expenditures. the Republic of Yemen were similar: price increases for oil products would correspond to (on average) a 104 percent increase, and the increase in expendi- 1.5 Near-Term Prospects ture would account for (on average) 14.4 percent of household budgets for the poorest households and In the wake of quite strong performance over the 7.1 percent of household budgets for the richest. past three years, two major elements are likely to Most of the expenditure increase originates from shape the outlook for the broader MENA region LPG consumption, the major energy product of over the period through 2008. First, the external poor households in the Republic of Yemen. In environment for growth will be shifting over this Egypt, another approach to simulate the poverty im- period in line with the business cycle in the OECD pact of subsidy removal took into account other rel- countries, affecting global growth and trade pat- evant effects, namely the welfare-enhancing effect of terns. Developments in critical nonoil export mar- energy reform in the production sector and the like- kets for MENA will carry substantial influence on ly quantity responses to the price increase. The study the outlook for the region's diversified economies, simulated a 50 percent reduction in overall energy largely within the resource-poor, labor-abundant subsidies without any compensation for potential group. At the same time, the dynamics of the oil losses through other social protection schemes and market are anticipated to change as global demand resulted in an estimated increase in the incidence of and supply conditions evolve over the next years. In poverty of 4.5 percentage points, with most of the this context, OPEC policy will play an important increase in poverty arising from the phasing out of role in establishing the price level that emerges and, LPG subsidies. In absolute numbers, the reduction consequently, the level of hydrocarbon revenues an- of energy subsidies by half would increase poverty in ticipated to accrue to regional oil exporters. Egypt by almost 3 million people. But the simulations above only point to the poten- 1.5.1 External environment for growth tial increase in poverty without compensatory meas- ures. With a large portion of energy subsidies current- In broad terms, the external environment for ly benefiting the nonpoor, removing oil subsidies and growth in the MENA region appears favorable directing some of these budgetary savings to the poor (table 1.5). Long dormant, economic activity in the could eliminate these negative impacts on the poor. In Euro Area is showing signs of increased vigor, with Egypt, for example, it was shown that if only half of the expectations that GDP growth and import demand savings from the subsidy reduction were used in a new, will be picking up in 2006 and 2007 to the benefit untargeted cash transfer program, the negative impact of MENA exporters of manufactured goods, espe- on the poor would be largely eliminated.36 In addition, cially textiles, clothing, and similar products. At the in the Islamic Republic of Iran, a seminal study of the same time, the balance of supply and demand forces oil subsidy scheme found that the wealth that would suggests that global oil prices will remain at fairly be freed up from the subsidy removal could be far bet- high levels through 2008, continuing to rise into World Bank 2005d. 36 World Bank 2003f. 37 Recent Economic Outcomes and Short-Term Development Prospects in MENA 31 Table 1.5: The external environment, 2004­2008 Growth, or as otherwise specified 2004 2005 2006 2007 2008 World tradea 12.0 9.0 8.5 7.0 7.0 High-income imports 8.9 6.6 6.7 6.2 6.2 Euro Area 6.3 4.3 5.8 5.3 5.4 United States 10.7 6.2 5.0 3.8 3.8 World GDPb 3.8 3.3 3.3 3.2 3.2 High-income countries 3.2 2.8 2.9 2.7 2.8 Euro Area 1.9 1.4 2.1 1.7 1.9 Developing countries 6.9 6.3 6.0 5.7 5.6 Oil prices ($/bl)c 37.7 53.4 59.0 56.0 53.0 Nonoil commodity pricesd 17.3 13.4 5.4 ­3.1 ­5.9 MUV indexe 6.9 0.0 2.4 2.6 0.8 US dollar LIBOR (%) 1.7 3.6 5.2 5.3 5.2 Source: World Bank 2006c. Note: MUV = Manufacturers' unit value. a. Goods and services (2000 US$). b. Real GDP in 2000 US$. c. World Bank average oil price = equal weights of Brent, WTI, and Dubai crude oil prices. d. World Bank index of nonoil commodity prices in nominal US$ terms. e. Index of manufacturers' unit value, G-5 countries (France, Germany, Japan, United Kingdom, and United States). 2006 (to $59 per barrel),38 before easing to $53 per For resource-poor, labor-abundant countries, barrel by 2008. This pattern of global oil price (a growth in the European Union, sluggish since base case, with substantial associated risks) would 2000, now shows signs of picking up and could of- serve to sustain oil revenue flows to MENA ex- fer stronger support for goods exports, tourism, porters at high, albeit diminishing, levels. Together and remittances over the next years. these factors point to a pickup in growth for those On a base set of assumptions--continued mod- countries more dependent upon economic condi- erate progress in domestic reforms--MENA tions in Europe and a moderate easing in activity for growth is viewed to ease modestly in 2006 to 5.6 most oil exporters in the region--both as revenues percent and to establish a 5.2 percent pace over scale back to a degree and as outlays (domestic and 2007­2008. As shown in table 1.6, overall growth import spending) gradually adjust toward new equi- reflects a pickup for the diversified economies above librium levels consistent with government policy. 5.5 percent by 2008, contrasted with a slowing for For the MENA region, the tenor of the external oil exporters toward the 5 percent mark. environment offers clear opportunities for oil ex- Oil-exporting countries porters to make use of continuing high revenue flows and for diversified economies to make the most of Among the resource-rich, labor-importing the revival in a key export market. These driving economies, the strong trend of recent growth is an- forces for growth come with challenges as well. ticipated to ease from 7.2 percent to 5.8 percent in For oil-exporting economies, clear opportunities ex- 2006 as additional gains in oil and gas production ist to place continuing high revenue streams into pro- generally come up against capacity constraints, al- ductive use in domestic spending because job growth though efforts are being made to enhance capacity will be essential to quell booming demographic pres- in the medium and long terms (see box 1.6). sures. Challenges facing policy makers include contin- Though GDP measures of output fall in line with uing cautious management of the financial windfall to this development, much accrued hydrocarbon rev- avoid domestic overheating and inflationary conse- enues remain to be expended though fiscal accounts quences and, importantly, to avoid the tendency for and capital outlays. GDP growth in Kuwait, Qatar, high revenues to cloud the need for structural change. Saudi Arabia, and the United Arab Emirates is an- ticipated to remain strong, while new oil produc- World Bank average price gives equal weighting to Brent, WTI, 38 tion capacity in Oman should help to bolster and Dubai crudes. growth there. For the group, hydrocarbon revenues 32 Economic Developments and Prospects Table 1.6: GDP growth for the MENA region Growth, or as otherwise specified 2004 2005 2006 2007 2008 MENA 5.6 6.0 5.6 5.2 5.2 Resource-poor, labor-abundant 4.8 4.0 5.4 5.4 5.7 Egypt, Arab Republic of 4.2 4.9 5.5 5.8 6.0 Jordan 7.7 7..2 6.0 6.0 6.0 Lebanon 6.3 1.0 .. .. .. Morocco 4.2 1.5 5.0 4.0 4.5 Tunisia 5.8 5.0 5.5 5.5 6.0 Resource-rich, labor-abundant 4.7 5.5 5.3 5.1 4.8 Algeria 5.2 5.5 5.7 5.4 5.0 Iran, Islamic Republic of 4.8 5.9 5.5 5.3 5.0 Syrian Arab Republic 3.6 4.0 4.0 4.0 4.0 Yemen, Republic of 2.6 3.8 3.5 3.0 3.0 Resource-rich, labor-importing 6.5 7.2 5.8 5.3 5.0 Bahrain 5.4 6.9 7.0 6.8 6.5 Kuwait 6.2 8.5 6.2 5.0 4.0 Libya 9.3 8.5 .. .. .. Oman 3.1 4.1 6.0 5.5 5.0 Qatar 9.9 8.8 8.0 7.5 7.0 Saudi Arabia 5.2 6.5 5.1 4.8 4.5 United Arab Emirates 8.5 8.0 6.5 6.0 6.0 Memo item Oil exporters 5.9 6.7 5.5 5.2 5.0 Diversified exporters 4.8 4.0 5.4 5.4 5.7 Source: World Bank staff estimates. are anticipated to remain at quite high levels despite Resource-poor, labor-abundant countries the moderation in oil price, easing from $260 bil- After suffering a slowdown in 2005 linked to poor lion in 2005 toward $225 billion by 2008. The cur- export performance across the Maghreb39 and dev- rent account surplus is seen diminishing from about astating drought in Morocco, several of the RPLA $185 billion to $80 billion as more of the windfall economies are positioned to enjoy a revival of is expended on imports, and the overall fiscal posi- growth over 2006­2008. At the same time, fuel tion is seen to drop from the current surplus of 21 prices, if maintained at their current high levels, will percent of GDP to a still-high 15 percent. continue to exert important pressure on the balance For the resource-rich, labor-abundant countries, of payments (through the import bill) and on fiscal economic activity will be driven by a combination accounts (through oil subsidies). Part of this nega- of factors. In Algeria, increased oil and gas output, tive impact may be compensated for with higher cap- in several cases through massive new facilities, will ital and tourism inflows from the Gulf, and Jordan is serve as a driving force for growth. In contrast, a well situated to garner economic spillovers from the paradigm shift is underway in the Islamic Republic continuing conflict in Iraq in the form of real estate, of Iran, in which large-scale increases in domestic administrative, and other supporting work efforts. subsidies and transfers underpin a revival of private Also, Egypt's improving track record of reforms, to- consumption spending. In Syria and the Republic gether with revival of growth in European demand of Yemen, dwindling natural resources and (in the for goods and tourism services, holds the promise of former country) increasing geopolitical tension and accelerating GDP growth over the period to 2008. lack of market opening are likely to restrain growth potential. Still, advances in GDP are respectable, easing from 5.5 percent in 2005 toward 4.8 percent MENA Maghreb members include Algeria, Morocco, and 39 by 2008. Tunisia. Recent Economic Outcomes and Short-Term Development Prospects in MENA 33 Box 1.6 Building greater oil production capacity in MENA Rising oil prices and burgeoning demand have pushed Republic of Iran's ability to import new oil production MENA oil producers toward the limits of their up- technology is limited by economic sanctions. Iraq's stream crude oil production in the past year. In August adoption of new technology is limited by the security 2005, spare capacity among the six primary oil pro- environment. Currently, these countries are depend- ducers in the Gulf (the Islamic Republic of Iran, Iraq, ing largely on the reinjection of gas and water into Kuwait, Qatar, Saudi Arabia, and the United Arab wells and (in Iraq) the reinjection of excess fuel oil. Al- Emirates) was estimated at 1.7 million barrels per day though reinjection is a standard practice in many old- (bpd), the lowest spare capacity they have maintained er wells, it can negatively affect the long-term health since 2003. The lack of spare oil capacity has largely of a well if not managed properly. been shaped by the fact that OPEC countries, particu- On the downstream side of oil production, produc- larly Saudi Arabia, have boosted production to meet ers in the Gulf are investing heavily in refining. Recent global demand. However, there are underlying con- global supply constraints are largely the result of a lack cerns about future capabilities of the region to gener- of global refining capacity, not a lack of crude oil pro- ate spare capacity because of limitations on manpower, duction upstream. Refining capacity has been particu- equipment shortages, and, more important for the larly hampered in developing nations, given the di- long term, aging oil reservoirs. verse product requirements caused by varying Supply shortages have triggered a renewed effort at environmental standards and local resistance to the exploration in the region. Kuwait most recently dis- development of new refineries. To bolster global refin- covered new oil and gas deposits that could boost the ing capacity and to help cover their own growing do- country's reserves by some 10 percent. Algeria made mestic needs, MENA oil producers are increasingly in- 13 discoveries in 2004 and at least 6 in 2005. The vesting in refineries. Together, they are planning to country plans to increase production capabilities from add more than 4 million bpd of capacity in the next a current 1.4 million bpd to 2 million bpd. UAE has decade, and many of these refineries are being built agreed to add 200,000 bpd, increasing total produc- primarily for export purposes. tion capacity to 2.7 million bpd. In an effort to devel- Saudi Arabia is planning to double its total oil-re- op greater upstream production to improve their spare fining capacity, both within the kingdom and abroad, capacity, most MENA producers are having to exploit to 6 million bpd by 2010. Proposed refineries in Sau- heavy crudes. Heavy crude oils are sold at a discount di Arabia will add capacity of 400,000 bpd within the rate because of the higher costs of refining them be- next three years. These refineries are designed specifi- fore they become end-use products. As spare capacity cally to produce high-end, cleaner fuels to meet the decreases, producers are more inclined to increase up- demands in the key export markets of Europe, Asia, stream production of heavy crudes, despite the price and the United States. The Islamic Republic of Iran discounts. Saudi Arabia currently produces 11 million plans to raise its refining capacity to 2 million bpd in bpd of heavy crudes and is planning to produce 12.5 the near term. Currently, the country produces 1.64 million bpd by 2009 by investing heavily in oil field million bpd, having increased that from 1.35 million developments. Kuwait has taken similar steps, launch- bpd in 2000 by increasing refining efficiency. The ing a pilot heavy crudes scheme in 2005. country plans to build three refineries for medium Regional oil producers are also attempting to devel- crude in coming years; however, much of this in- op new technology and extraction techniques to ex- creased capacity will be directed toward the domestic tend the life of aging reservoirs and boost production market because the Islamic Republic of Iran currently in existing wells. Oman, which has heavier crudes than imports 132,000 bpd of gasoline. Kuwait plans to its neighbors, has invested heavily in new techniques spend some $10 billion through 2011 to upgrade and (such as steam and polymer injection) that will boost increase its petroleum-refining capacity. Iraq also ex- well production. Such investment is also key for the Is- pects to bolster its refining capacity to 1 million bpd lamic Republic of Iran and Iraq; however, the Islamic by the end of 2006 to meet domestic fuel needs. Cur- 34 Economic Developments and Prospects Box 1.6 Building greater oil production capacity in MENA (continued) rent refineries in Iraq, if operating at maximum capac- national oil companies and international firms, which ity, can produce 750,000 bpd, but because of outdat- would improve production and refining capacity and ed technology, power outages, and sabotage, they are boost overall investment in the oil infrastructure of operating much below capacity. the region; however, the national oil companies in the Smaller oil producers have also taken steps to ex- region remain resistant to such suggestions, at least in pand their refining capacities this year. The Republic the area of upstream production. Saudi Arabia has of Yemen has announced the development of a private welcomed limited participation by internationals in refinery in Ras Issa that will begin construction in mid- its downstream sector, but upstream production con- 2006, a $450 million project (supported by the Inter- tinues to exclude international firms. The Kuwaiti national Finance Corporation [IFC] of the World government proposed a greater role for internation- Bank Group) that will provide an additional 60,000 al firms in upstream production several years ago, bpd. Its end products will primarily be targeted to the but the proposal remains under intense political de- domestic market. Syria has also announced that it will bate in the Kuwaiti Parliament. Of countries in the move forward on increasing production at its two cur- Gulf, only Qatar and the UAE have created signifi- rent facilities and on reconstructing a third. Syrian ef- cant roles in production for international firms. Al- forts are focused on maintaining a position in regional geria passed a law in 2005 that strips Sonatrach of its oil markets as its own upstream production slows. monopoly in oil distribution, storage, and refining, Alleviating the supply situation in MENA coun- while allowing international firms more independ- tries in the long term will arguably require greater co- ence in taking on research and exploration contracts. operation among industry producers, refiners, and as- However, it is too early to judge the true impact of sociated contractors along the production train. this legislation on the role of Sonatrach and inter- Important to this is enhancing relationships between national firms in Algeria. Following the subdued GDP outturns of 2005, ac- mary risk is to the health of the global economy and, tivity is viewed to pick up quickly toward 5.4 percent in turn, for the potential of a sharp slump in oil prices and above as the situation in Morocco normalizes in the aftermath. Finally, there is the risk of a rever- and export growth across the group enjoys a fillip. sion to difficult growth conditions in Europe, im- plying a volatile export market for the diversified economies of the region. If the removal of the 1.5.2 Risks Agreement on Textiles and Clothing results in com- A number of economic and geopolitical risks present plete domination of the textile-clothing market by tensions to the base outlook. Among these is the po- large Asian producers, growth in the Maghreb could tential for much lower oil prices in the intermediate be quite adversely affected. term should demand ease--or actually contract--in Although the external environment is a principal response to the much-heightened level of price. It determining factor of regional growth over the appears that MENA exporters have budgeted oil medium term, MENA's longer-term growth prices in a conservative fashion, and adjustment to prospects will be driven in large part by changes in weaker revenues may present fewer problems than the policy environment, which will determine the might be envisioned. More problematic is the po- climate for growth of the private sector and the tential for much higher oil prices in the intermediate prospects for job creation. Gauging the region's re- term, should one or more of the currently heated cent progress with structural reform, then, can pro- geopolitical situations in the region give way to up- vide important insight into longer-term growth ward bidding on futures prices. In this case, the pri- prospects (chapter 3). Recent Economic Outcomes and Short-Term Development Prospects in MENA 35 2 Financial Sectors in a New Age of Oil 2.1 Introduction ing bank supervision, and upgrading prudential regulations. MENA's oil shock has had important financial Many authorities have looked to invest this oil spillovers. Over the past few years, MENA has seen windfall, building upon long-held ambitions to be- an upsurge in financial activity as abundant liquidi- come regional hubs for finance, business, and ty has fed a rapid rise in credit growth, surging stock tourism, and bank credit has flowed into a series of markets, and a booming real estate sector. Oil gargantuan real estate, tourist, and commercial ven- economies have been the primary recipients, al- tures. Project finance has also boomed, with banks though a financial market upswing has also reached competing to supply long-term finance to a wave of some of the region's resource-poor countries new industrial and infrastructure initiatives, largely through increased cross-border investment, remit- in the Gulf. In the process, bank profitability has tance flows, and tourism. reached record levels. Increased liquidity has directly or indirectly fed a However, several of the recent financial sector rapid rise in bank deposits and a simultaneous de- developments have increased exposure of some mand for credit from the real economy. Lending MENA economies to negative shocks. Banks have has accordingly expanded, improving access to fi- rapidly expanded financing for equity markets. Al- nance for corporations, households, and consumers though the recent stock market gains have been alike and facilitating some of the strongest growth built in part on impressive corporate profitability, in investment and consumption that MENA has stocks have also been increasingly speculative. seen for decades. In addition, many countries in the Bank exposure to equity markets, through both region have utilized their strengthened positions to lending and substantial income from brokerage address long-needed financial sector reforms, in- fees, leaves bank income and asset quality vulnera- cluding public sector bank restructuring and priva- ble because of recent market corrections. Banks tization, licensing private financial entities, improv- have also increased exposure to the booming real Financial Sectors in a New Age of Oil 37 estate sector, which may be vulnerable to conta- ciencies that inhibit efficient and sound resource gion effects from the recent equity market weak- allocation. nesses and may also face slowdown with growing oversupply. But a more troubling aspect of MENA's finan- 2.2 Recent Upturn in Financial cial markets is the seeming disconnect between the Activity in MENA financial sector and the real private economy, de- spite the appearance of a relatively deep financial 2.2.1 Windfall liquidity drives strong credit sector by macroeconomic indicators. Although re- growth gional banks have abundant liquidity, few private 40 businesses outside the Gulf have access to bank fi- Banks dominate MENA's financial systems, and nance. Even in countries with relatively high rates over the past three years, the exceptional increases of lending to the private sector, credit remains con- in liquidity from oil and oil-related wealth in centrated among a select minority, and investment MENA have fed a rapid rise in bank deposits and a climate surveys suggest that an average of more simultaneous demand for credit from the real econ- than 75 percent of private business investment in omy. Between 2002 and 2005, deposits to the 41 MENA is financed internally through retained earn- banking sector rose in real terms by an average of 42 ings. As a result, few of the assets accruing to the re- 15 percent a year, led by strong deposit growth gion are channeled toward productive investment. among resource-rich economies (figure 2.1). Moreover, key elements of a well-functioning finan- Among resource-rich, labor-importing economies, cial sector that could help boost sustainable and ef- bank deposits increased in current dollar terms by ficient growth, including bond and equity markets $95 billion (bn) between 2002 and 2005, or more and contractual savings instruments, remain largely than $30 billion a year, more than three times the undeveloped outside the Gulf. pace established over the previous four years (about A few critical facts lie at the heart of the struc- $10bn a year). Resource-rich, labor-abundant tural disconnect between the relatively plentiful fi- economies saw even greater deposit growth in nancial resources found across MENA and the banking institutions, with deposits growing by $45 scarcity of external financing for businesses. Public billion over the past three years and with the aver- sector ownership has significantly impacted the di- age annual growth in deposits increasing almost rection of credit in MENA, as well as the operat- fourfold relative to the 1998­2002 period. But the ing efficiency and the ability of the banking sector frenetic pace was not matched by resource-poor to conduct robust risk analysis. Bank regulatory countries, despite the transmission of parts of the frameworks, with limited market forms of over- oil wealth through capital flows and remittances. sight and discipline, have led to adverse credit al- Deposits in resource-poor countries grew by some location. Access to banking facilities remains com- $33 billion over the past three years (about $11bn paratively limited across the region, and in many a year), a pace down slightly from the four-year pe- cases is restricted to public sector banking net- riod before the start of the oil boom (about $12bn works, concentrating credit provision upon a rela- a year). tively privileged minority. Underdeveloped con- Rising liquidity in the banking sector and the in- tractual savings and capital markets remove a creased demand for credit stemming from high-re- source of competition for banks and an alternate turn investment opportunities have helped trigger avenue for firm finance. Governance structures substantial loan growth to private sectors. Bank undermine formal financial relationships across credit to the private sector as a percentage of GDP much of MENA, and commercial-finance relation- has risen across most countries of the region, with ships are further undermined by a wealth of prob- the strongest loan growth occurring in the region's lems in MENA's business climate. resource-rich economies. Between 2002 and 2005, Record oil receipts and strong economic growth present an important challenge for the fi- See box 2.1 for a description of MENA's financial market de- 40 nancial systems of MENA to channel this liquidity velopment. into the real economy, boosting sustainable, effi- Deposits include time, savings, and demand deposits. Does not 41 cient, and equitable growth. To do so, the region include Libya. must address a range of underlying structural defi- Total deposit growth, deflated by CPIs. 42 38 Economic Developments and Prospects Figure 2.1: Bank deposits in MENA, 1998­2005 90 80 70 60 50 billions 40 US$ 30 20 10 0 of of of Rep. JordanMorocco Tunisia Arabia Qatar Rep. Rep. LebanonDjibouti EmiratesKuwait OmanBahrain Rep. Algeria Arab Arab Saudi Arab Islamic Syrian Yemen, Egypt, United Iran, 1998 2002 2005a Source: IMF IFS. a. 2005 or closest year available. bank claims to the private sector rose from an aver- from an average of 73 percent in 2002 to almost 86 age of 17.4 percent of GDP to 21.1 percent for re- percent by 2005. Overall, credit to MENA's private source-rich, labor-abundant economies and from sector as a share of regional GDP has risen from an 38.0 percent of GDP to 42.5 percent among re- average of 35 percent to 39 percent over the past source-rich, labor-importing economies (figure three years. 2.2). But the upturn in private sector credit has not A strong beneficiary of the credit upturn has been universal, and a large portion of the region-- been consumer lending, which in a few countries some 40 percent of its population--has not benefit- has been extended at startling rates. In Saudi Ara- 43 ed from the liquidity or credit upturn. Corre- bia, consumer lending grew by an average of 57 sponding to the slower growth in deposits, private percent a year over 2004 and 2005 (compared with sector credit growth has been more subdued among overall private sector credit growth of 39 percent) the resource-poor economies in the region, and as a and now represents more than 40 percent of all 44 share of GDP, it has fallen slightly (from 59 percent loans. In Jordan, consumer credit, including cred- to 57 percent), although a few countries, including it destined for stock markets, saw a 58 percent in- Jordan and Morocco, have also seen strong gains in crease over 2005 (relative to a 30 percent increase private sector lending. Corresponding to rising cap- in total credit to the private sector). Loans to fi- ital inflows and worker remittances, increased com- nance investments into soaring stock markets al- mercial bank deposits in Jordan have translated into most certainly contributed to part of the dynamic private sector lending as a share of GDP increasing consumer credit growth. While margin lending to stock investors is estimated to account for between 5 percent and 15 percent of total bank loans in the Measured by countries that either had an increase in the ratio 43 of private credit to GDP between 2002 and 2005 or by coun- tries whose average annual increase in bank deposits (in current terms) between 2002 and 2005 exceeded the average annual Economist Intelligence Unit (EIU), Saudi Arabia Country Re- 44 deposits over the previous four years. port (May 19, 2006). Financial Sectors in a New Age of Oil 39 Box 2.1 A broad categorization of financial market development in MENA In chapter 1, the developments within the MENA re- other hand, generally share a high level of financial gion are often discussed with regard to three broad market development relative to their income level and country groupings, corresponding to countries with to the rest of the region. Levels of governance are bet- similar resource endowments: the resource-poor, la- ter than those in transition markets and generally are bor-abundant economies (Djibouti, Egypt, Jordan, ahead of their income peer group. The degree of state Lebanon, Morocco, Tunisia, and the West Bank and and foreign ownership within the banking sector varies Gaza); the resource-rich, labor-importing economies widely, as does the concentration of banking systems. (the six countries of the GCC--Bahrain, Kuwait, In addition, the financial systems of these emerging Oman, Qatar, Saudi Arabia, and the United Arab Emi- markets provide relatively limited access to finance, rates--plus Libya); and the resource-rich, labor-abun- given their income level, and shareholder protection is dant economies (Algeria, the Islamic Republic of Iran, particularly low. Iraq, the Syrian Arab Republic, and the Republic of Finally, the resource-rich, labor-abundant Yemen). economies display a more state-led approach to finan- These categorizations are also useful in discussing cial sector development, in line with their approach to the broadly similar characteristics of countries in the general economic management. Broadly categorized region with regard to financial sector size, ownership, as lower-middle-income (the Republic of Yemen is an access, and governance. The resource-rich, labor-im- exception), their financial markets exhibit some depth, porting economies are generally high-income states, but considering their income levels, their banking sys- and these countries have (on average) large financial tems are relatively small with regard to assets and pri- markets, low levels of state ownership, and high for- vate credit relative to GDP. The banking sectors are eign penetration. Governance is broadly effective, and also highly concentrated and largely state-owned, and access to credit is in line with income levels (Libya is a the quality of financial system governance is below notable exception). that of the resource-rich, labor-importing Gulf Resource-poor, labor-abundant economies, on the economies or the resource-poor economies. GCC (Cooperation Council for the Arab States of Gas Project, accounting for almost 40 percent of the Gulf), for example, the total proportion of bank the overall corporate finance extended by the UAE 46 credit exposed to stock markets is almost certainly in 2005). Corporate credit facilities in the GCC higher, with widespread evidence that much of con- countries advanced strongly in several key sectors, sumer, and even corporate, lending also flowed into including oil and gas and finance. stocks. Mortgage lending has also been a beneficiary of In addition, MENA's credit growth has support- the increased credit, particularly in high-target real ed real estate loans and sizable increases in corpo- estate segments such as Dubai. This has been par- rate business. Corporate finance volumes in MENA tially supported by housing finance reform efforts are thought to have increased from US$11 billion throughout the region, although mortgage markets 45 in 2003 to almost US$19 billion in 2004, with remain significantly underdeveloped (box 2.2). Par- project finance among the GCC countries account- ticularly in the Gulf economies, the banking sector ing for some three quarters. Over 2005, some $19 has increased credit and relaxed financing terms to billion in project finance was extended among the the real estate sector, and loans of up to 95 percent GCC countries alone (a 34 percent increase over of principal have become available, with maturities 2004), dominated by credit activity in the UAE of 20 to 25 years. Across Bahrain, Oman, and (about $8bn over 2005, or some 6 percent of GDP, Qatar, personal loans and construction lending have with a single project, Dolphin Energy's Dolphin World Bank staff estimates from the Middle East Economic Di- 46 The Banker (August 2005). 45 gest (MEED) (March 24­30, 2006). 40 Economic Developments and Prospects Figure 2.2: Private sector credit to GDP, 2002­2005 Resource-rich, Resource-rich, labor-importing labor-abundant Resource-poor 100 80 60 percentage 40 20 0 of of of Rep. Rep. MoroccoJordan TunisiaLebanonDjibouti Qatar Libya Oman AlgeriaRep. Rep. Arabia Kuwait Bahrain Arab Emirates Arab Saudi IslamicSyrian Yemen, Arab Egypt, Iran, United 2002 2005a Sources: IMF IFS; World Bank country data. Notes: Private sector credit to GDP reflects claims on the private sector by deposit money banks as a percentage of GDP. a. 2005 or closest year available. risen to 53 percent, 44 percent, and 37 percent of mostly by Saudi Arabia and the UAE. GCC coun- total lending, respectively. In the UAE, 13 percent tries enjoyed (on average) the highest return on av- of the banking sector's loan portfolio is dedicated erage assets within MENA, at 2.4 percent. This 47 solely to real estate and construction. compares well with other upper-middle-income countries, at 1.8 percent (on average) (figure 2.3). Net interest margins have also increased, al- 2.2.2 Enhanced bank profitability in the though for most countries they remain off the lev- Gulf els in upper-middle-income economies worldwide The surge in low-cost funding from deposits, in- (figure 2.4). Strong credit growth and declining creased lending (particularly to the consumer seg- nonperforming loans over 2002 to 2005 con- ment), and declining delinquency rates has translat- tributed toward rising profitability. Lending deposit ed into soaring profitability, particularly within the spreads have widened, thanks to the increase in resource-rich, labor-importing economies. It is esti- higher-margin consumer lending and to the rise in mated that the top 100 Arab banks by size enjoyed low-cost demand deposits, and strong fee income a 36 percent increase in profits before tax to almost has also been an increasingly important factor in 48 US$12 billion in 2004. Of this total, US$9.6 bil- many Gulf countries. As with credit growth, how- lon can be accounted for by the GCC states alone, ever, resource-poor economies have largely not benefited from rising bank profitability, with sever- al countries (including Egypt and Tunisia) experi- Capital Intelligence Group (CIG). "Personal loans" may in- 47 clude lending to family businesses. encing a rise in nonperforming loans as a propor- The Banker (November 2005). 48 tion of total gross loans over the past few years. Financial Sectors in a New Age of Oil 41 Box 2.2 Housing finance in MENA With an average growth rate of 2.1 percent a year over lenders to foreclose on delinquent borrowers. For ex- the past 15 years, MENA has one of the world's most ample, in Algeria, because of the multiple layers and rapidly expanding populations. Urban areas have been sources of laws and regulations, property rights are the main recipients of this population growth. Cities' sometimes confusing and contradictory and, as a re- share of the population in the region had grown from sult, give rise to conflicting interpretations. This is the 48 percent in 1980 to close to 60 percent by 2000, case, in particular, with the transfer of ownership for and they are expected to account for nearly 70 percent newly built or condominium units. In Egypt, the of the region's populations by 2015 (this compares most serious obstacle is the property registration sys- with an expected average of 54 percent in 2015 for all tem. Today, few residential properties in Egypt are developing countries). registered in the names of their current owners and Despite the fundamental importance of housing in occupants. the economy, the stock of housing-related financial as- sets--largely mortgage loans--varies from less than 1 Reforms in the housing finance market percent of GDP to nearly 11 percent. In recent years, several MENA countries have been taking concerted actions to reform their housing fi- Main issues in the MENA mortgage nance systems and pursue more market-based and sus- market tainable alternatives through the development of for- Formal housing finance in many MENA countries has mal mortgage finance markets. historically been the prerogative of state-owned hous- At the core of such reforms are the opening of the ing finance institutions whose presence in some coun- housing finance systems to market competition, the tries has often deterred private sector lenders from of- leveling of the playing field among institutions in the fering housing finance products and has tended to primary market, and the development of mechanisms constrain the development of the real estate sector for to provide long-term funds and to manage credit risk. low- and middle-income households. Until the mid- In Algeria, until 1999, housing finance used to 1990s, in countries such as Algeria, Jordan, and Mo- be entirely channeled through Caisse Nationale rocco, mortgages were mainly channeled through one d'Epargne et de Prevoyance (CNEP), the savings public financial institution. The Islamic Republic of and housing bank. CNEP was transformed into a Iran and the Republic of Yemen continue to function public commercial bank and now provides only under this model. about half of all housing loans. Five other public Moreover, the operations of these state-owned banks share the remaining half. To provide banks housing finance institutions have often imposed signif- with long-term refinancing, the Algerian authorities icant financial burdens and contingent liabilities on established the Société de Refinancement Hypothe- government finances. For instance, in past years, inter- caire (SRH) in 1997. As of 2005, loans refinanced est rate subsidies have been a main feature of housing by SRH stood for Algerian DA 8 billion. A year lat- finance policies in many MENA countries. Although er, the Société de Garantie des Credits Immobiliers well-designed subsidies can help to tap private savings (SGCI) was established to provide banks with mort- and facilitate home ownership by lower-income gage credit risk insurance. groups, in particular, in practice they have frequently In Morocco, until 1998, the state-owned housing been poorly designed, not been well targeted to in- bank, Crédit Immobilier et Hôtelier (CIH), was the tended beneficiaries, and promoted financial market main player in bank mortgage financing, with more distortions. than 70 percent of all mortgage loans. Because of its The development of market-based housing finance financial problems, CIH had to restrict its activities. in MENA has also been constrained by weaknesses in In addition, interest rate subsidies for mortgages legal and judicial frameworks, affecting in particular provided through the state-owned housing bank the reliability of property titling and the ability of were extended to the other banks, which rapidly be- 42 Economic Developments and Prospects Box 2.2 Housing finance in MENA (continued) gan to compete in the mortgage market. Overall, scribed in the cases of Algeria and Jordan, some coun- the mortgage finance market has expanded signifi- tries have pursued the creation of secondary mortgage cantly; the outstanding mortgage amount grew from institutions to help link primary mortgage markets to 3 percent of GDP in the mid-1990s to about 7 per- capital markets. The authorities in the West Bank and cent of GDP in 2004. More recently, the Moroccan Gaza have also followed the same route. In the mid- authorities opted to create three mortgage guaran- 1990s, the government was considering how it could tee funds whose development is currently underway. best enhance the affordability of housing without hav- The objective of these funds is to facilitate access to ing to resort to subsidy programs that could impose bank financing for populations with modest or ir- heavy financial burdens on the state. The concept of regular incomes. creating a financial intermediary working between re- In Jordan, the mortgage finance market was rela- tail lenders and capital markets was deemed the best tively small a decade ago. A government-supported alternative, with affordability being enhanced through housing bank was the main provider, supplying a the lengthening of the maturities of mortgage loans modest number of loans at below-market rates--but offered at market rates. The Palestine Mortgage and at high government cost. Commercial banks were re- Housing Corporation (PMHC) was established in luctant to enter the mortgage business mainly be- 1997 as the parent company of two separate but affil- cause the housing bank still retained competitive ad- iated institutions: a liquidity facility company and a vantages from its government support. It was only mortgage insurance facility. As of 2005, PMHC had when the state housing bank withdrew from the sec- extended approximately 500 residential mortgage tor that banks started to enter the housing finance loans totaling about $25 million and was preparing for market. In addition, the Jordan Mortgage Refinance a first bond issuance to move its operations closer to fi- Company (JMRC) was established in 1996 to help nancial sustainability on a market basis. primary lenders address the liquidity risks associated Other countries such as Morocco have securitized with long-term lending. Loans refinanced since mortgage loans without creating secondary mortgage JMRC's inception have exceeded Jordanian dinars institutions. For instance, the CIH has securitized (JD) 100 million, covering more than 9,000 housing Moroccan dirhams (DH) 1.5 billion in mortgage loans. Today, more than 10 banks are competing ac- loans through a mutual fund run by a management tively in the sector, and the percentage of mortgage and depository firm, Maghreb Titrisation. loans to GDP has increased from 2 percent in 1997 Considering that the success of secondary mort- to 11 percent in 2004. Most recently, the United gage markets is dependent on many factors (starting Arab Investors Company announced that it has with a strong legal and regulatory framework, a lib- signed an agreement with the Canada Mortgage and eralized financial sector, and a well-established pri- Housing Corporation to establish the first mortgage mary market), it is not surprising that these markets insurance company in Jordan, which will allow bor- have only recently begun to emerge in the MENA rowers to finance houses with lower down payments, region. thereby increasing the number of borrowers in the For most countries in the region, the next chal- market. lenge relates to further improving the accessibility of housing finance services to lower-middle-income Emergence of secondary mortgage households. This includes offering loans with fixed markets rates for a longer period and improving the various Policy makers in MENA have recognized that the cap- subsidy schemes, as well as developing systems to ital markets can provide both an attractive and poten- better manage credit risk and mobilize savings. tially large source of long-term funding for housing and solutions to better allocate part of the risks. As de- (Continues on the following page.) Financial Sectors in a New Age of Oil 43 Box 2.2 Housing finance in MENA (continued) Depth of residential mortgage markets 70 GDP 60 of 50 40 percentage a 30 as 20 debt 10 mortgage 0 United EU-15 Canada Hong Malaysia Jordan Morocco Tunisia Iran, Algeria Saudi States Kong Islamic Arabia (China) Rep. of Source: World Bank staff estimates. Figure 2.3: Return on average assets in MENA, 2004 3.0 2.5 Upper-middle-income economy average assets 2.0 1.5 average on 1.0 return 0.5 0 of of of Rep. Rep. Jordan Tunisia Rep. Rep. Morocco Lebanon ArabiaEmirates Qatar Kuwait OmanLibya Bahrain Algeria Arab Arab Saudi Arab IslamicSyrian Yemen, Egypt, United Iran, Source: BANKSCOPE. Note: Data for Lebanon, Algeria, Islamic Rep. of Iran, and Rep. of Yemen from 2003. Data for Djibouti from 2001. 44 Economic Developments and Prospects Figure 2.4: Net interest margins, 2005 5.0 4.5 Upper-middle-income 4.0 economy average 3.5 3.0 margins 2.5 2.0 interest net 1.5 1.0 0.5 0 of of of Rep. Rep. Jordan Tunisia Arabia Libya Qatar Kuwait Oman Algeria Rep. Rep. Morocco Lebanon Emirates Bahrain Arab Arab Saudi Arab IslamicSyrian Yemen, Egypt, United Iran, Source: BANKSCOPE. Note: 2005 or closest year available. 2.2.3 Exposure to economic shocks heightened tions. Real estate oversupply may also take its toll on profitability and loan quality, should the region At the same time that bank profitability has risen experience an economic slowdown. across the Gulf economies in particular, the acceler- MENA's expansion in real estate has been partic- ation in credit to the consumer and real estate seg- ularly excessive across the Gulf. In Qatar, construc- ments has also increased the exposure of banking tion permits increased 23 percent year-on-year in systems to economic shocks. Financing for equity 50 2004, while the annual value of traded land per- initial public offerings (IPOs) has expanded rapidly mits in Bahrain rose by more than 70 percent be- in a number of countries, but substantial bank in- 51 tween 2002 and 2004. Kuwait has also enjoyed a come is also derived from brokerage fees, raising the rebound in activity, with annual building permits overall exposure to stock markets. In Saudi Arabia, 52 rising by 40 percent in 2002 and 2003. In some for example, more than 70 percent of some banks' 49 cases, this has translated into increased housing and operating income stems from brokerage fees. rental prices, and there is evidence of localized spec- Banks have also increased their exposure to the ulation emerging in some property markets, with booming real estate sector (see box 2.3), both undeveloped real estate lots trading hands on sec- through lending and more directly, as some banks 53 ondary markets. Outside the Gulf, construction have actively sought to diversify their assets through has accelerated in markets such as Jordan and the the creation and syndication of funds invested in Islamic Republic of Iran. In the former, construc- high-yield projects and property. The increasing ex- tion activity has grown because of the impact of re- posure of MENA banks to these two high-return segments makes bank portfolios increasingly open to contagion effects. The real estate segment of bank assets may be vulnerable to recent sharp equi- EIU. 50 ty corrections as investors unwind leveraged posi- BMA 2005. 51 EIU. 52 MEED (January 27, 2006) and EIU (2005): UAE Country 53 Global Association of Risk Professionals (GARP). 49 Profile. Financial Sectors in a New Age of Oil 45 Box 2.3 "The World" comes to Dubai: real estate in the Gulf MENA's capacity to absorb the wave of new real estate Tourism is recovering as Gulf airports development that has been commissioned in the past link Europe and Asia 12­18 months carries some risk for the banking sys- Hotel development and tourist infrastructure provide tem, which has substantially increased its financing to- another important driver of real estate growth. The ward this segment over recent years. region has enjoyed a marked recovery in tourist and business activity, such that occupancy and average Entire new cities are being room rates recorded record growth in 2004 and commissioned 2005. The Gulf has been at the forefront of this trend, From Saudi Arabia to Bahrain, entire cities have been with average hotel occupancy rates reaching more commissioned by national governments, and vast than 70 percent, and new hotel projects continue swaths of coastline are set to be reclaimed and reengi- apace, with most of the large developments inside and neered. King Abdullah City, currently the largest sin- outside of the Gulf incorporating one or more new gle project to be initiated, will cost US$26 billion, five-star hotels. Eighty new hotels are currently comprise 55 million square meters of greenfield land, planned across the Arabian Peninsula by 2008, and and stretch 35 kilometers along Saudi Arabia's western over the long term, government projections are for coastline. Similar developments include the $15 bil- continued and substantial growth, with 30,000 new lion Blue City in Oman, designed to accommodate 2 rooms in Dubai by 2010 and a further 50,000 in Sau- million tourists each year, along with 250,000 perma- di Arabia by 2020. nent residents; the New Town and Industrial Projects The recovery in tourism has as much to do with a in Bahrain, costing more than $2.2 billion and being structural increase in international visitors to MENA formed from reclaimed land; and Qatar's $5 billion as a cyclical recovery from recent political events. Lusail development for 200,000 inhabitants. From 1995 to 2005, international arrivals into the re- With projects valued at some $200 billion, Dubai gion increased from 14 million to more than 38 mil- stands out among the Gulf states. The emirate has four lion (a compound growth rate of more than 12 per- headline projects, including the $9.5 billion Dubai- cent), and Emirates, the UAE's national carrier, has land theme park, due for completion in 2010, as well seen passenger numbers grow from 6 million in 2001 as The World and Palm Islands developments. These to 12 million by 2005. Such strong traffic growth has two land reclamation projects, comprising literally been central to the ambition of many Gulf states to be- hundreds of islands, will increase UAE's beachfront by come strategic transportation and business hubs con- more than 160 percent and are being developed by a necting Europe and North America with the burgeon- variety of real estate consortiums for a mixture of ex- ing markets of South and East Asia, and further airport clusive residential, leisure, and commercial purposes. capacity is set to come on stream. The Dubai Interna- Topping the list comes the Burj Dubai, which, at half tional Airport expansion, costing $4 billion and pro- a mile high, will be the world's tallest building, com- jected to be completed in 2006, is expected to increase prising a hotel, luxury apartments, and the largest total annual passenger capacity from 25 million to 70 shopping mall in the world at 12 million square feet. million. In Bahrain, current plans should take passen- Whether Gulf property markets can absorb this quan- ger capacity from 10 million to 45 million passengers, tity of new and high-end development remains to be a tenfold increase from its actual flow of 4 million. To seen, and with a 1,001-meter building under consid- put these figures in perspective, Chicago's O'Hare eration in Kuwait, there is a danger of "beggar thy Airport handled 75 million passengers in 2004, plac- neighbor" competitive development. ing it as the second busiest airport in the world. Sources: UAE Property Trends; MEED 2006; EIU 2005; Deloitte and Touche LLP 2005. 46 Economic Developments and Prospects construction and the decision of many Iraqis to re- growing corporate profitability, the region's equity side there, causing annual residential construction markets rose almost fivefold between 2002 to the 54 to double over 2000­2004. The Islamic Republic end of 2005 (and some markets, including Dubai of Iran's construction sector has also seen substan- and Egypt, rose more than tenfold over the period). tial growth, with private sector investment in urban These equity market gains have provided a valuable construction rising by 170 percent between 1999 source of financing to private sector companies and 55 and 2003. an important route for state divestment of assets The increase in bank exposure has prompted in- and wider public ownership. In tandem with capital tervention on the part of some regulatory authori- gains, the markets greatly expanded with regard to ties. The Qatar Central Bank has limited bank mort- liquidity, with average daily traded volumes rising gage lending to the lower of 150 percent of from under US$1 billion per day to more than shareholder funds or 15 percent of total bank cus- US$6 billion during 2005. This has proved advan- 56 tomer deposits, while Saudi Arabia has limited the tageous for capital raising by both the private and proportion of an individual's total salary that can be public sectors, and there had been an increasing assigned for the repayment of debt. Loan to deposit number of IPOs and rights issues across a variety of ceilings were set at 87.5 percent and 80 percent in corporate sectors. Increased activity has also had ad- 57 Oman and Kuwait, respectively, in 2004, and vantageous effects with regard to widening domes- share-dealing limits have been enforced, with the tic share ownership, as well as further liberalization UAE's Central Bank imposing fines on four banks of market access to foreign investors from both 58 that had breached the 1:4 leverage ceiling on IPO within the region and outside it. financing in 2005. More than US$1 trillion was gained in market While such action is extremely timely, regulators value between 2002 and late 2005. Of this, the Gulf regionwide need to consider the wider implications countries saw the bulk of the gain in market capital- of both a growth shock and a gradual deceleration ization, at more than US$934 billion, a rise of 675 in economic activity upon the financial health of the percent (figure 2.5). In comparison, the rest of the banking system. Recent profitability improvements region gained US$112 billion in market capitaliza- in the Gulf are undoubtedly, in part, the result of tion. Resource-rich, labor-abundant economies saw one-time windfall gains, spurred both by the specu- market capitalization rise by about 138 percent. Re- lative excess on equity and real estate markets and source-poor economies also benefited, with equity by rising consumer lending. Although balance markets that were some of the strongest targets of sheets appear robust enough to withstand some petrodollar recycling. It is estimated, for example, form of adjustment, the early consideration of vul- that by the end of 2005, 30 percent of investment nerabilities would be prudent. in Egypt's stock markets emanated from the Gulf, while non-Jordanian investment made up more than 45 percent of Jordan's stock market capitaliza- 2.2.4 Rising equity markets, with recent 59 tion. Together, resource-poor economies saw corrections market capitalization rise by more than 200 percent The region's windfall liquidity has also had impor- over the past three years. tant spillovers into MENA's equity markets, which With market capitalization to GDP rising from just by any measure performed impressively between more than 26 percent in 2002 to almost 110 percent 2002 and 2005. Against a backdrop of accelerating in late 2005--and in some individual cases to almost economic growth, expanding private credit, and 300 percent--clear signs emerged of excess in some markets (figure 2.6). IPOs, in particular, showed signs of increasing speculation. The 2004 IPO of a EIU. 54 telecommunications company in Saudi Arabia attract- Private sector investment in construction projects has risen 55 from Rls 22,069 in 1999 to Rls 59,765 billion in 2003 (EIU). Qatar Central Bank, Annual Report 2004. 56 Because several Kuwaiti banks had already lent more than 100 57 See box 2.4, "GCC capital markets' regional integration 58 percent of their deposit base, exposure had to be reduced by the July 2005 deadline (The Banker [November 2005] and the through competitiveness." Oman Central Bank, Annual Report 2004). Oxford Analytica (February 8, 2006). 59 Financial Sectors in a New Age of Oil 47 Figure 2.5: Market capitalization in MENA, 2002­2005 1,200 1,000 800 million 600 US$ 400 200 0 2002 2005 year Resource-poor, labor-abundant Resource-rich, labor-abundant Resource-rich, labor-importing Source: AMF 2005. Figure 2.6: Market capitalization to GDP in MENA, 2005 versus 2002 300 250 200 GDP of % 150 100 50 0 of of total Arabia Qatar Kuwait Oman Emirates Bahrain Rep. Jordan Rep. Lebanon Tunisia Morocco MENA Saudi Arab Arab Islamic Egypt, United Iran, 2002 2005 Source: World Bank WDI. 48 Economic Developments and Prospects ed Saudi riyals (SRls) 50 billion for an issue valued at tirely on speculation. Earnings growth also acceler- only SRls 200 million, while the 2005 sale of a petro- ated at an impressive pace, and growing corporate chemical company in the UAE was more than 800 profitability has been a strong source of valuation times oversubscribed, attracting more than US$100 support for the markets. Earnings per share in Saudi billion (or more than 100 percent of the country's Arabia have been consistently strong for the recent 60 GDP), for an issue valued at US$135 million. Such years, rising 30 percent in 2002, 87 percent in 2003, 61 speculative excess around new stock offerings was an and almost 60 percent in 2004. In Qatar, the net early warning sign of "overheating" in many of income of the constituents of the Doha stock ex- MENA's equity markets, which, on certain valuation change rose by 59 percent in 2004, led by industry criteria, looked stretched relative to past history. and the insurance sector at 104 percent and 81 per- In early 2006, MENA equity markets fell sharply cent, respectively, and Kuwait's corporate sector en- in a few countries, particularly in Qatar, Saudi Ara- joyed a 74 percent rise in net income over the first 62 bia, and the United Arab Emirates. Since the start half of 2005, compared with the prior year. How- of 2006, Saudi and Qatari stock indexes have fallen ever, most markets saw valuation measures increase by more than 30 percent, while the major Dubai in- quite steeply relative to their historic multiples and dex has plummeted to half its value (figure 2.7). those of major developed markets in Germany, the This is not to say that MENA's extraordinary United Kingdom, and the United States (table 2.1). stock market gains over 2002­2005 were built en- Average EPS growth, weighted by market capitalization of the 61 Ittihad Etisalat in Saudi Arabia (Tadawul Stock Exchange, An- 60 15 largest listed companies (The Banker [August 2005]). nual Report 2004) and Aabar Petroleum in Abu Dhabi (The Qatar (Doha Stock Exchange, Annual Report 2004) and 62 Banker [September 2005]). Kuwait (GCC Market Review, August 2005). Figure 2.7: MENA equity markets, 2002­2006 1,600 1,400 1,200 100) = 1,000 (2002 800 index 600 value 400 200 0 2- 2- 2- 2- 3- 3- 3- 3- 4- 4- 4- 4- 5- 5- 5- 5- 6- 6- 6- Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jun Dubai Qatar Jordan Egypt, Arab Rep. of Saudi Arabia Source: Bloomberg. Notes: Egypt, Arab Rep. of = Egypt CSE Case 30 Index; UAE = Dubai Financial Mkt. Index; Saudi Arabia = Tadawul All Share Index; Jordan = Amman SE General Index; Qatar = DSM 20 Index. Financial Sectors in a New Age of Oil 49 Table 2.1: Market ratios of MENA stock markets, 2003­2005 Price-to-earnings ratio Price-to-book ratio Dividend yield (%) Country 2003 2005 2002 2005 2005 2005 Bahrain 31 16 1.4 2.0 3.6 3.3 Egypt, Arab Republic of 12 43 2.1 8.7 4.9 1.2 Jordan 22 39 1.9 4.4 2.4 1.2 Morocco 25 22 1.7 2.4 4.7 4.2 Oman 9 11 1.5 2.9 8.8 3.1 Saudi Arabia 29 47 3.7 9.6 1.9 1.3 UAE (Abu Dhabi) 18 34 3.2 6.7 3.1 1.0 Germany (DAX) .. 16 .. 1.8 .. 2.1 United Kingdom (FTSE 100) .. 15 .. 2.4 .. 3.9 United States (S&P 500) .. 21 .. 2.8 .. 1.8 United States (NASDAQ) .. 35 .. 2.5 .. 0.6 Sources: AMF, Bloomberg, and IFCG (for Morocco). Historic figures throughout: MENA figures as at 06/05 and 02/06 for Germany, the United Kingdom, and the United States. It is still too early to determine the full potential 2.3 Disconnect between Financial impact of these recent market corrections on the Sectors and the Real Private real economy. The banking sector is likely to expe- Economy in MENA rience some losses, and a decrease in trading activi- ty will diminish profitability. Similarly, many indi- MENA has had something of a mixed record with viduals will have suffered substantial losses, often financial sector developments since the oil boom. smaller investors who may have the least financial Increased liquidity, credit, and equity market gains capacity to absorb them. Contagion effects appear have provided an important new source of finance to be working through to other regional equity to private sector companies. Bank profitability has markets, with Gulf investors unwinding intrare- improved with the surge in low-cost funding from gional investments. These pullouts may come from deposits, increased lending, and declining delin- markets that have demonstrated relative stability quency rates. But for the most part, these positive and stand within historic valuation parameters. developments have benefited only about 60 percent There may also be some danger of contagion to of the region (by population). And the increasing other asset classes such as real estate, as investors interests of MENA banks in the booming but liquidate holdings to pay for equity-market-related volatile equity and real estate markets have height- losses. ened the exposure of MENA's dominant financial On the negative side, even after the recent mar- market segment to economic shock. ket corrections, many equity markets still appear But a more troubling aspect of MENA's finan- considerably overvalued, should earnings growth cial markets is the seeming disconnect between the ease to a more sustainable pace. On the positive financial sector and the real private economy, de- side, with oil prices still high, the region's financial spite the appearance of a relatively deep financial markets remain flush with liquidity to create share- sector by macroeconomic indicators. Although holder value and drive demand for equity invest- many of MENA's banks are flush with liquidity, ments, and there is reason to believe that confidence they play a limited role in financial intermediation in markets may be rebuilt. and economic development throughout most of the 50 Economic Developments and Prospects region. Credit remains concentrated among a select income countries (MIC average), but below the 84 minority, and few private businesses can access fi- percent of GDP in high-income countries (figure nance. As a result, little of the region's recent and 2.8). At the same time, there is wide variation across dramatic increase in assets over the past few years the region, with resource-poor countries having sig- have been accessed by the domestic economy to nificantly higher ratios of broad money to GDP channel toward productive investment. than resource-rich economies. Bank assets to GDP are also high, averaging 75 percent, and ahead of the average for middle- and 2.3.1 Macroeconomic indicators demonstrate low-income countries. Even excluding Lebanon, with a relatively deep financial sector across its extraordinarily high level of bank assets, the region MENA records an average of more than 50 percent of GDP. Several indicators would point to a relatively high Indeed, turning to the provision of credit by de- degree of financial intermediation in MENA. The posit money banks to the private sector, MENA's ratio of broad money (or M2) to GDP, which gen- ratio of private credit to GDP averages more than erally provides a useful indication of the overall de- 39 percent (figure 2.9), higher than the average for 63 gree of financial intermediation in MENA, stands middle-income countries (37.5 percent), although at more than 60 percent for the region as a whole only a fraction of the 112 percent average recorded and has remained largely constant since 1999. This among high-income nations. Most resource-poor is well ahead of the 47 percent recorded by middle- economies in MENA, and several Gulf states, in- cluding Bahrain, Kuwait, and the UAE, have ratios of 50 percent and over. And as recalled in section 3.2, private credit has increased markedly in a num- Care must be taken with M2:GDP because the ratio may de- 63 ber of countries, including Jordan and Morocco; crease as the financial system develops and individuals invest in many of the Gulf economies; and, off an extremely longer-term or less-liquid financial instruments that are not in- cluded in M2. low base, Syria and the Islamic Republic of Iran. Figure 2.8: M2 to GDP in MENA 140 Resource-poor Resource-rich, Resource-rich, labor-importing 120 labor-abundant 100 80 60 percentage 40 20 0 of of Rep. Rep. Jordan LebanonMorocco Tunisia Qatar OmanLibya Djibouti Algeria Rep. KuwaitBahrain Arab Arabia Emirates Arab Saudi IslamicSyrian Arab Egypt, Iran, United Source: World Bank FSDI. Note: Results plotted against middle-income economy average. Financial Sectors in a New Age of Oil 51 Figure 2.9: Bank assets to GDP in MENA 350 300 250 200 percentage 150 100 50 0 of of Rep. Libya Oman Qatar Algeria Rep. Rep. ArabiaBahrainKuwait -middle-middle Arab Morocco JordanTunisiaLebanon Arab Saudi Low-income High-income Islamic Lower Upper Syrian Iran, Egypt, Source: World Bank FSDI. Note: Results plotted against average for all middle-income economies. 2.3.2 Financial sector has limited links to relatively low and much economic activity is still real private economy conducted through the public sector, this may be less surprising: The survey of Algerian companies Barring a few exceptions, most countries in MENA records a mere 16 percent of investment financing enjoy a reasonably high level of financial intermedi- from banks and almost three-quarters of all financ- ation, deep bank assets, and robust onward lending 65 ing from retained profits. In Syria, the level of to the private sector. Given the strong observed bank finance is even lower, with less than 5 percent linkages between finance and development, this of working capital or investment financing being se- would suggest a supportive environment for new 66 cured from the banking sector. investment, economic growth, and employment However, low penetration of bank finance to en- generation at the firm level. terprises is also recorded in resource-poor, labor- However, World Bank Investment Climate As- abundant economies such as Egypt and Morocco, sessments (ICAs) undertaken within the region as well as the Gulf economies of Oman and Saudi provide strong evidence to the contrary. A low pro- Arabia. In Egypt and Morocco, with private credit portion of firms access finance, and many business- representing a high 48 percent and 56 percent of es report that one of the major impediments to GDP, respectively, banks and financial institutions growth is both access to, and the cost of, finance: provide a mere 20 percent or less of new investment firms from Algeria, Morocco, and Saudi Arabia all 67 finance. More than 80 percent of new investments highlight finance as a major constraint to their op- 64 by Egyptian firms were sourced from retained prof- erations. Indeed, evidence suggests that firms in its, and less than 10 percent from the banking sec- the MENA region have less recourse to bank fi- tor, while under 20 percent of all firms have some nance than in any other region of the world, with form of loan from a financial institution. A similar 75 percent of funding for investment being sourced picture emerges in Saudi Arabia, where internal from retained earnings and only 12 percent from funds account for 70­80 percent of financing for the banking sector (figure 2.10). working capital and new investment, against 10­15 The phenomenon is widespread across the re- percent from bank finance. Indeed, less than 40 per- gion. In the case of the resource-rich, labor-abun- cent of all Saudi Arabian firms report having an dant economies, where aggregate private credit is World Bank Investment Climate Assessments: 29 percent of 64 World Bank 2003h. 65 firms in Algeria (World Bank 2003h), 80 percent in Morocco World Bank 2005g. 66 (World Bank 2005f), and 40 percent in Saudi Arabia (World Bank 2006d). World Bank 2005h (Egypt), World Bank 2005f (Morocco). 67 52 Economic Developments and Prospects Figure 2.10: Sources of finance for investment (MENA versus other regions) 80 70 (%) 60 50 funding 40 overall of 30 20 proportion 10 0 Middle East East Asia Europe and Latin America OECD/ South Asia Sub-Saharan and and Central and the High-income Africa North Africa Pacific Asia Caribbean Internal finance for investment Informal finance for investment Bank finance for investment Supplier credit financing Source: World Bank Investment Climate Assessments, various years. overdraft facility, and slightly more than 20 percent lateral to be put up by the company, and the aver- 68 a loan from a bank. age level of collateral represents 151 percent of the This disconnect between a relatively deep finan- loan (figure 2.11). This places MENA toward the cial sector and the level of firm finance is particular- highest end of regional comparisons, with some ly apparent in the case of smaller companies, where countries recording average collateral requirements access to bank credit is rarer still. In the case of Al- of more than 200 percent of loan value. A similar geria, small firms source only 7 percent of working disparity in conditionality applied by the size of capital and 13 percent of investment financing from company, with smaller Syrian companies being re- the banking sector, as against 13 percent and 29 quired to pledge collateral worth 230 percent of percent, respectively, for larger firms. Furthermore, the loan as against 160 percent and 182 percent for only 23 percent of smaller companies have an over- large and medium firms, respectively. draft facility, compared with 69 percent for larger companies. Egyptian companies report a similar di- Banking sector demonstrates a marked aversion to vide: of the 17 percent of firms utilizing the formal lending credit market, this comprised only 13 percent of small companies, compared with 36 percent of larg- A close examination of MENA's banking sector er companies. And in Oman, small businesses rep- suggests that such low levels of corporate lending resent a mere 2­5 percent of most banks' lending are not a function of limited capacity. Indeed, the portfolios, contributing to a low rate of new busi- relative share of loans to total assets fell across ness formation in the country. MENA from 46 percent in 1998 to 41 percent in 69 The ICAs also reveal stringent conditions under 2004 (figure 2.12). Gulf economies exhibit the which loans are made by banks, principally the ex- highest proportion of total assets dedicated to lend- tremely high level of collateral required. As a re- ing at 54 percent, unchanged since 1998. By con- gion, more than 80 percent of all loans require col- trast, Egypt, Jordan, Morocco, and Tunisia all saw a World Bank 2006d. 68 "Loans" is measured net of provisioning. 69 Financial Sectors in a New Age of Oil 53 Figure 2.11: Collateral requirements in MENA 180 160 140 120 100 80 percentage 60 40 20 0 Middle East East Asia Europe and Latin America OECD/ South Asia Sub-Saharan and and Central and the High-income Africa North Africa Pacific Asia Caribbean Collateral needed for a loan (% of loan) Loans requiring collateral (%) Source: World Bank Investment Climate Assessments, various years. Figure 2.12: Lending to assets in MENA 60 50 (%) ratio 40 assets 30 total to 20 loans net 10 0 Resource-rich, MENA total Resource-poor, Resource-rich, labor abundant labor abundant labor importing 1998 2000 2004 Source: World Bank Investment Climate Assessments, various years. 54 Economic Developments and Prospects significant expansion in the banking sector's asset The channels by which the financial sector can base relative to GDP such that, with the exception enhance growth include improving resource alloca- of Tunisia, the proportion of loans to total assets fell tion, enhancing the efficiency of investment, accel- over the period to an average of 43 percent by erating the pace of total factor productivity growth 70 2004. Lebanon also saw a decrease in loans to to- and technological change, and hence contributing 73 tal assets, with the ratio for four leading banks to long-term economic growth. Another impor- 71 standing below 20 percent by 2004. Among the tant channel linking financial development to eco- resource-rich, labor-abundant economies (except nomic growth is the role of well-functioning finan- the Islamic Republic of Iran), all saw a substantial cial intermediaries in improving borrowing firms' fall in the ratio between 1998 and 2004, with the access to external sources of funding, hence easing subregional average falling from 43 percent to 31 their financing constraints and promoting their in- percent. vestment and growth. In place of lending, the region's banking systems But in MENA, six critical factors lie at the heart exhibit a bias toward liquid assets, with cash, deposits of the structural disconnect between the relatively with the central bank and other financial institutions, plentiful financial resources found across the region and holdings of government debt forming a large and the scarcity of external financing for enterpris- proportion of the sector's asset base, particularly es: (a) high levels of public sector ownership signif- among resource-rich, labor-abundant economies. icantly impact the direction of credit, operating ef- Thus, although the oil boom has translated into ficiency, and the ability of the banking sector to widespread gains in liquidity for MENA, several fac- conduct robust risk analysis; (b) regulatory frame- tors have acted to undermine access to credit by the works, with limited market forms of oversight and wider corporate market and the majority of con- discipline, have created adverse outcomes for credit sumers, in spite of a seemingly deep financial sector. allocation; (c) banking access remains comparative- ly limited across the region and in many cases is re- stricted to public sector banking networks, concen- 2.4 Factors Inhibiting the Growth- trating credit provision upon a relatively privileged Finance Nexus in MENA minority; (d) contractual savings and capital mar- kets remain underdeveloped, removing a source of In the long term, the degree to which the financial competition for the banks and an alternate avenue intermediation of oil-related flows will enhance eco- for firm finance; (e) governance structures under- nomic efficiency, per capita GDP growth, and sta- mine formal financial relationships across much of bility across MENA will depend upon whether as- MENA; and (f) a host of problems with the busi- sets have been, and will continue to be, channeled ness climate further undermine commercial-finance toward productive investment. relationships. Ample empirical evidence exists on the positive and robust relationship between finance and 2.4.1 Public sector ownership of banking in growth. Countries with well-developed financial MENA systems tend to grow faster, and financial interme- diaries can impact long-term equilibrium growth Because the banking system is the primary conduit rates through a variety of mechanisms, including for savings and investment in the MENA region, mobilizing savings, collecting and analyzing infor- the ownership of the banking sector is a matter of mation, screening potential entrepreneurs, allocat- ing investment to highest-return projects, exerting corporate control, sharing risk, providing liquidity, Levine, Loayza, and Beck (2000a) find evidence of strong links 73 and overcoming asymmetric information problems between financial sector development and both real per capita 72 that typically exist in financial markets. GDP growth and total factor productivity growth. Wurgler (2000) shows that countries with well-developed financial sys- tems improve the allocation of capital--by increasing invest- ment in their growing industries and decreasing investment in Tunisia alone saw a high and growing proportion of assets ded- 70 declining ones--more than those countries with underdevel- icated to lending, at 75 percent (BANKSCOPE). oped financial systems. Neusser and Kugler (1998) establish a CIG 2004. 71 positive link between financial depth and technical progress in For a detailed discussion of the role of the financial system in 72 the manufacturing sector (as measured by manufacturing total economic growth, see Levine (1997). factor productivity) in a number of OECD countries. Financial Sectors in a New Age of Oil 55 considerable importance to efficient financial inter- Skewed credit provision across MENA mediation and the fostering of long-term econom- ic growth. Even after a decline in exposure to the public sec- State ownership in MENA remains high, at 42 tor witnessed in recent years, MENA's banks con- percent of bank assets, double that in middle-income tinue to extend significant credit to the state. At countries and six times that in high-income countries an average of 18 percent of GDP, claims on the (figure 2.13). In Algeria, Libya, and the Islamic Re- public sector by deposit money banks in MENA public of Iran, 89­100 percent of banking assets is stand ahead of all comparable income groups (in majority-controlled by the state, while at the other absolute terms). Even after adjusting for the rela- end of the spectrum lie the Gulf states of Bahrain and tive share of public credit in total bank credit, Oman, which have no direct majority state owner- MENA stands with a high exposure to the state. ship in any bank. Egypt, Morocco, Qatar, Tunisia, At more than 30 percent of total credit, MENA's and the UAE stand between these extremes, with banking system extends a far higher proportion to state control of 35­65 percent. Yet these figures un- the public sector than the 7 percent found in high- derstate the often substantial (though minority) income countries or the 20­25 percent across stakes that MENA governments have in the banking middle-income countries (figure 2.14). Many of sectors: the Omani government owns 40 percent of the countries with the greatest relative exposure to the nation's leading bank, and the Saudi Arabian state the public sector also exhibit the highest share of 74 also has substantial minority positions in five banks. majority state ownership of banking assets (such as The impact of state ownership appears to have Algeria, Egypt, Libya, Qatar, and Syria). The clear been felt in three key respects: first, high credit pro- implication is that state-directed lending to the vision to the public sector; second, a weak credit public sector is a significant driver of resource al- culture and endemic inefficiencies; and third, low location in many countries, a finding echoed in profitability and high nonperforming loans. many ICA reports. It is also worth noting the ownership of leading banks or fi- 74 nancial conglomerates by individuals closely tied to the ruling family. Figure 2.13: State ownership of bank assets 120 100 assets 80 system 60 of % 40 20 0 of of Rep. Lebanon MoroccoTunisiaOman Bahrain Kuwait ArabiaEmirates Qatar Libya Algeria Rep. Arab Saudi Low-income Arab High-income Islamic -middle-income -middle-income Egypt, United Iran, Upper Lower Source: World Bank FSDI. Note: Results plotted against average for all middle-income economies. 56 Economic Developments and Prospects Figure 2.14: Credit to the public sector as a percentage of total bank credit 80 60 40 percent 20 0 of of Rep. Rep.LebanonJordan Morocco TunisiaDjiboutiOmanBahrainKuwaitArabiaEmiratesQatar LibyaAlgeria Rep. Arab Arab SaudiArab Yemen, High-income Low-income Syrian -middle-income-middle-income Egypt, United Upper Lower Source: World Bank FSDI. Note: Results plotted against average for all middle-income economies. Weak credit culture credit officers, because of fear that the default of any borrower can lead to suspicion of corruption A more intangible effect of high state ownership is and expose them to the risk of criminal charges for the impact of state control on banking practices and misuse of public assets--similarly for administration risk assessment. A culture of risk aversion and cen- 76 officials. tralized credit allocation appears to be a common Such a credit culture has a number of conse- theme across MENA's state-controlled banks and is quences for the banking sector: First, weak credit manifested in a lack of qualified credit officers who skills create a bias toward lending to larger and more are capable of assessing business risk. In many coun- mature companies with sufficient collateral at the tries in MENA, public banks exhibit classic charac- expense of smaller companies, thereby starving a teristics of unwieldy bureaucracy, poor manage- dynamic segment of the economy of capital. Sec- ment, and overcentralization of decision making, ond, poor credit decisions or state-directed lending inhibiting lending to enterprises and efficient re- to ailing public enterprises is likely to result in a high source allocation. In Algeria, for example, state- level of reoccurring nonperforming loans (NPLs), owned banks--the only ones with a large enough destroying capital and necessitating the periodic re- network to service small and medium enterprises, capitalization of the banking system. Third, operat- the bulk of the enterprise sector in Algeria--are bu- ing costs are likely to be higher, diluting profitabili- reaucratic, not business-friendly, and they lack mod- ty and the sector's long-term health. ern information and payments systems. They also have little incentive to take responsibilities or man- Higher costs and lagging asset quality age risk--partly because of bureaucratic human re- sources management, as well as explicit constraints Analysis of MENA's banking system according to imposed by their state shareholder. Decision capital adequacy, asset quality, and operating costs processes in the public banks are also complex and would confirm many of these expectations, with 75 highly centralized. In Egypt, the aversion to risk is state-dominated banking systems largely exhibiting disproportionate among branch managers and ratios inferior to those predominantly controlled by World Bank 2003h. 75 World Bank 2005d. 76 Financial Sectors in a New Age of Oil 57 state bank privatizations and the selective opening 77 the private sector. Poor asset quality has been a hindrance to strengthening balance sheets across of domestic banking systems to foreign entrants. MENA, and a gap has appeared between the Increased profitability, greater integration into the stronger capital adequacy ratios (CARs) exhibited global economy, and the prospect of monetary by the largely private sector­controlled Gulf banks union in the GCC by 2010 have helped drive a wave and the less robust figures presented elsewhere. of cross-border investment in the Gulf. Merger and CARs average about 14 percent among resource- acquisition activity has also accelerated outside of poor economies, while resource-rich, labor-import- the Gulf, and governments are proving more ing GCC economies have average CARs of some 19 amenable to the entry of foreign banks. percent. The Gulf has been successful in reducing In the resource-rich, labor-abundant countries, a NPLs over 2002­2005 from more than 9 percent notable feature has been the issuance of new licens- to 3 percent in Saudi Arabia and from 8 percent to es for private sector banks. In 2004 and 2005, the 5 percent in Kuwait (figure 2.15). In contrast, re- Syrian authorities issued a total of six new bank li- source-poor economies have relatively high levels of censes, and four new private banks have come into NPLs, which have actually increased over recent operation in the Islamic Republic of Iran since a law years. In a few cases, the increase appears to be the was passed in 2001 (with two more licenses issued 78 result of a delayed recognition of prior NPLs, al- in 2005). In Algeria, some 15 private banks were though this is far from a universal phenomenon. issued licenses between 1998 and 2003, although the six state-owned banks continue to control the Patterns of ownership are beginning to change overwhelming majority of bank assets. Privatization and the divestment of residual Although state ownership of bank assets and the stakes held by state banks have also been prevalent in share of the public sector in total credit remain high, Egypt, reducing the total number of banks from 57 recent years have seen an encouraging trend toward 79 at the end of 2004 to 46 by late 2005. Tunisia has also privatized two banks since 2002, while Moroc- The high operational efficiency, strong capital adequacy ratio, 77 and low NPLs of the state-dominated Qatari banking system is an important reminder that this correlation is by no means au- The Banker (November 2005 for Syria and August 2005 for 78 tomatic, but rather dependent upon the overriding managerial the Islamic Republic of Iran). and institutional culture that pervades the system. World Bank 2003g. 79 Figure 2.15: Nonperforming loans 40 35 30 25 loans 20 total 15 % 10 5 0 of of Rep. Rep. Arabia Qatar Rep. Lebanon Jordan Tunisia Oman Kuwait Algeria Morocco Djibouti Bahrain Emirates Arab Arab Saudi Arab Yemen, Syrian Egypt, United Source: World Bank FSDI. 58 Economic Developments and Prospects Box 2.4 GCC capital markets' integration through competitiveness How will the capital markets in the Gulf Cooperation thermore, given the sheer size and the uniqueness of Council (GCC) region continue to evolve? The rules the Saudi market, GCC capital market integration of the game have apparently been changing. The pri- through competitiveness may result in the region end- vate sector has been taking over the public sector as ing up with more than one financial center, each with the driving force of the regional integration of GCC its own unique focus. capital markets. As such, competitiveness appears to be The GCC capital markets have been structurally more effective than harmonization for expediting cap- mutating in favor of market integration through com- ital market integration in the GCC. The initiatives that petitiveness. Investment companies, in contrast to op- were launched almost simultaneously by Bahrain, erating companies, have been becoming increasingly Dubai, and Qatar for becoming regional financial cen- dominant among companies listed on the GCC stock ters illustrate this shift. exchanges. On top of the traditionally oil and gas­ Harmonization or compatibility underlies govern- centric economy in the GCC countries, excess liquidi- ment-backed market integration across the countries ty resulting from the recent oil price hike has made fi- in the GCC region. With the exception of Saudi Ara- nancial services one of the industries most in demand bia, the generally small economies of the GCC have in the region. Meanwhile, intermediaries have become had to urge their capital market policy makers to seek increasingly polarized between regional wholesale and cross-border expansion and diversification of supply local retail institutions. Regional wholesale investment and demand bases. GCC stock exchanges as national banks have emerged to cover the entire GCC region flagship institutions sought the benefits of a substan- and some non-GCC Arab countries, providing a broad tially larger market in a cooperative manner. Coopera- scope of investment banking services. The separation tive attempts took the form of cross-listing, trading of wholesale and retail functions in the financial indus- system networking, and a common settlements sys- try normally helps to make a wider range of financial tem; however, none of them has yet been successful, products available to end investors. On the demand typically because of delays in technology development, side, affluent investors have been "massively" joining cross-jurisdictional legal problems, disagreements over high-net-worth investors or ultra-high-net-worth in- governance, and difficulties in creating continuing vestors in capital market activity. They are generally contractual commitments. sensitive to delivery costs of financial services. Mobi- Instead, competitiveness has begun integrating lizing them and integrating their investment behavior GCC capital markets by attracting investors and is- are likely to lead to regional market integration. suers across borders to particular stock exchanges. Yet it is still too early to determine which market has Lowering cross-border information costs, coupled achieved capital market integration with its competitive- with regulatory liberalization in the GCC region, has ness. Relatively new markets like the Dubai and Doha allowed exchanges to compete for investors and issuers markets have not experienced a full market cycle. They on a regional basis. The average investor and issuer are have yet to be tested for their sustainability and re- now able to cross borders in search of return, liquidi- silience in all aspects of market function. As mass afflu- ty, reliability, integrity, variety, and transparency at an ent investors learn lessons, the competitiveness factors affordable cost. Information technology and regulato- in the GCC region may further evolve. In addition, ry liberalization have also enabled intermediaries to competitiveness factors leading to market integration operate in all the national markets, while placing most are likely to differ between fund-flow activity (for exam- of their people and headquarters in a single country. ple, trading and corporate finance) and fund-stock ac- As a result, trading liquidity or financial assets (or tivity (for example, asset management). We have so far both) converge on a particular market or markets. Fur- been seeing the cars only running simply straight ahead. Financial Sectors in a New Age of Oil 59 co has seen some consolidation and has announced bank activities, authorities exhibit significant con- its intention to sell public stakes in the banking sec- trol; however, this is not unambiguously positive tor. Finally, the Lebanese banking sector has clearly for efficient outcomes. While regulatory regimes outgrown its borders, and banks have acquired posi- are designed to address the host of principal agent tions across MENA in the past few years. problems that the banking sector faces, recent evi- With a monetary union planned for 2010, the dence suggests that the institutional environment GCC financial markets are becoming increasingly and ownership of bank assets can have a significant integrated. Bahrain, Dubai, Qatar, and (as of May) effect, both positive and negative, upon the manner 80 Saudi Arabia are all moving ahead with competing in which supervision and regulation actually impact 81 plans to become regional financial hubs, and con- financial intermediation. siderable cross-border activity has been seen within MENA is characterized by extremely powerful the GCC (see box 2.4). Banks from across the re- "hands-on" supervisory authorities with wide-rang- gion have opened branches and sought new licens- ing powers to prevent and correct problems and es within each other's jurisdictions. regulate activities (figure 2.16). Supervisory offi- cials have considerable powers to investigate and take action against banks suspected of fraud or neg- 2.4.2 Regulatory frameworks and limited ligence, including the power to intervene and re- private monitoring structure banks, remove management, and super- Another manner in which MENA's public sector sede shareholder rights where it is considered exhibits substantial influence over the financial sec- necessary. Only a few countries, including Kuwait, tor concerns official powers to regulate and super- Lebanon, and Qatar, exhibit supervisory regimes vise the banking industry. With regard to both offi- with lesser powers of intervention than the average cial supervision and the restrictions placed upon for middle-income economies worldwide. Financial Times (May 10, 2006). See Barth, Caprio, and Levine (2006). 80 81 Figure 2.16: Official bank supervisory powers in MENA 16 14 12 10 8 index 6 4 2 0 of Rep. Libya Oman Qatar Algeria Kuwait MoroccoJordan TunisiaLebanon ArabiaBahrain Emirates Arab Saudi Low-income Arab High-income -middle-income -middle-income Egypt, United Lower Upper Source: World Bank 2003g. Note: Official Supervisory Powers Index from 1 to 14, with higher values indicating greater official supervisory powers: the right to meet with external auditors to discuss their report without the approval of the bank, take legal action against external auditors for negligence, force a bank to change its internal organizational structure and order the bank's directors or management to constitute provisions to cover actual or potential losses. Results plotted against average for all middle-income economies. 60 Economic Developments and Prospects MENA economies are also relatively restrictive a relatively low level of development and exhibited with regard to the range of activities they allow to a higher tendency toward inefficient resource allo- 82 be conducted within the banking system, with few cation. Looked at through this prism, the relative- countries falling far below the average for all mid- ly high state ownership and tight supervisory and dle-income economies and a few countries main- regulatory regimes across MENA may mean that taining relatively restrictive regimes, including many banking systems are at risk of performing Libya, Lebanon, and Tunisia (figure 2.17). Turning poorly because of a combination of high superviso- to market discipline and the degree to which private ry powers and low private monitoring. market forces monitor and enforce prudential stan- dards upon the banking sector, MENA registers a 2.4.3 Limited bank access strong degree of private monitoring, ahead of the high-income average and in line with countries such As a whole, MENA also exhibits below-average access as Japan and the United States. to banking facilities, in part because of poor physical access. In number of bank branches and automated What kind of regulation may matter more than how teller machines (ATMs) per 100,000 people, MENA much there is ranks ahead of low- and lower-middle-income coun- tries, but still falls far short of high-income countries However, recent analysis of banks worldwide sug- (figure 2.18). In addition, relative to GDP per capita, gests a broad separation between those countries that rely less on official supervision and more on private sector monitoring to ensure efficiency and transparency in the banking sector and those coun- Barth, Caprio, and Levine 2006. The report finds an empirical 82 tries that tend to have higher state ownership of the relationship between tight regulation of bank activity, high banking sector and tight supervisory and regulato- state ownership, and poor bank performance and less stability. In addition, the authors find little relationship between the ry regimes with limited market monitoring. The lat- strength of capital requirements in a banking system and bank ter were found to have banking systems that were at development, efficiency, governance, or corruption. Figure 2.17: Restrictions on bank activities 14 12 10 8 index 6 4 2 0 of Rep. Libya Oman Qatar Algeria Kuwait MoroccoJordan TunisiaLebanon ArabiaBahrain Emirates Arab Saudi Low-income Arab High-income -middle-income -middle-income Egypt, United Lower Upper Source: World Bank 2003g. Note: Restriction on Bank Activities Index from 1 to 12, with higher values indicating greater restrictiveness: whether banks can engage in certain activities, such as securities, insurance, and real estate. Results plotted against average for all middle-income economies. Financial Sectors in a New Age of Oil 61 Figure 2.18: Financial access in MENA 80 70 TMsA 60 and 50 40 branches 30 of 20 number 10 0 of of Gaza Rep. Jordan Rep. Arabia and Lebanon Bahrain Kuwait average Arab Saudi Low-income Bank Islamic MENA -middle-income -middle-income Egypt, West Iran, High-income/OECD Lower Upper Branches ATMs Source: World Bank FSDI. Note: Number of branches and ATMs per 100,000 persons. 83 average loans and deposits are large. Both measures At present, the contractual savings industry re- indicate that the banking sector may currently serve a mains relatively underdeveloped in MENA, with relatively wealthy segment of the population. Given asset accumulation overstated, and its perform- the importance of providing basic banking services to ance is often marred by high state intervention. smaller firms and the poorer segments of the popula- The failure to develop a substantial pool of con- tion, skewed access is an issue to address. tractual savings across MENA has inhibited the development of alternate capital markets and en- sured a continued dependency upon bank finance. 2.4.4 Underdeveloped capital markets Insurance penetration--total written premiums Deepening contractual savings markets and ensuring (life and nonlife)--relative to GDP stands at 1.5 wider access to these instruments are of great impor- percent across MENA, just below the average of tance to the development of financial markets and 1.7 percent for low-income countries and far be- long-term economic growth. The creation of transpar- low the 7.1 percent recorded by high-income 85 ent and accessible instruments for insuring against risk countries. Most resource-poor countries, such as can generate a valuable pool of long-term savings for Jordan, Lebanon, Morocco, and Tunisia, are investment. These can provide the building blocks for ahead of the rest of the region with total written market liquidity and create new financing options for premiums worth 2­3 percent of GDP. On a per the corporate sector and the state, from venture capi- capita basis, insurance premiums average US$120 tal to the securitization of mortgages. At the level of per capita in MENA, ahead of low- and lower- the household or individual, contractual savings pro- middle-income countries; however, the majority vides a critical risk management tool, enabling savers of written premiums comprises nonlife (casualty 84 to insure against death, disability, or retirement. and property) insurance, at US$103 per capita. World Bank 2004a (Jordan, Lebanon, and Saudi Arabia). 83 See Catalan, Impavido, and Musalem (2000) for discussion on 84 In total written premiums (life and nonlife) for domestic busi- 85 contractual savings benefits for the real economy. ness by registered insurers. 62 Economic Developments and Prospects The more discretionary life insurance sector ment benefits, often extended to a small proportion amounts to only US$17 per capita (figure 2.19). of the population, have led to massive unfunded fu- At slightly more than 14 percent of GDP, accu- ture liabilities in much of the region. Typically, state mulated state pension assets in MENA are signifi- pensions in MENA are guaranteed at an average of cantly lower than the 43 percent recorded for G-10 80 percent of earnings before retirement. As an ex- 86 countries. However, some state schemes within ample, because of differential tax treatment, a re- the region appear large (at least on paper), such as tiree in Egypt can earn more income following re- Bahrain and Saudi Arabia with more than 50 per- tirement than while working. Besides creating cent of GDP in accumulated assets, Egypt at 45 per- massive actuarial liabilities, these schemes also act as cent, the Republic of Yemen at 34 percent, and Jor- a strong disincentive to save outside the mandatory dan at 23 percent. To put these figures in state structure. The final result is actuarial deficits as perspective, the United States and the United King- high as 50 percent in the Islamic Republic of Iran 88 dom have pension assets worth some 66 percent of and 170 percent in Jordan. 87 GDP, while Japan stands at only 13 percent. Even where pension and insurance assets have However, current asset values can be hard to de- been accumulated, there is significant evidence of termine, because the true value of accumulated these funds being diverted away from the real econ- state assets in MENA is rarely well accounted for. omy toward state deficit financing. In Egypt, some For example, some 85 percent of the "surplus" as- 40 percent of insurance assets were placed on de- sets of the Egyptian state pension fund is by law in- posit at public sector banks, with a further 25 per- vested in government debt, creating a circular rela- cent placed in government securities. In Lebanon tionship in which the "virtual" reserves of the fund and Libya, 50 percent and 64 percent, respectively, are swamped by the government's total implicit of pension fund assets are invested in government deficit to the system of 140 percent of GDP. So a debt, while the supposedly independent public pen- seemingly large stock of assets can still fall short of sion fund managers in Morocco saw the minimum pension liabilities. Excessively generous state retire- While many countries, including Egypt, Jordan, Morocco, and 88 MENA data from Robalino (2005); G-10 data from OECD 86 Lebanon, are in the process of addressing this issue, other (2005a). countries, such as Algeria, Libya, and Syria, have yet to ade- OECD 2005b. 87 quately tackle the problem (Robalino 2005). Figure 2.19: Premiums per capita in MENA 1,400 1,200 1,000 800 US$ 600 400 200 0 of of Rep. AlgeriaRep. Arabia MoroccoJordanTunisiaLebanon OmanKuwaitEmirates Qatar Average Arab Saudi Low-income High-income Islamic Arab MENA -middle-income -middle-income Egypt, Iran, United Lower Upper life insurance non-life insurance Source: Swiss Re Sigma Study, "World Insurance in 2004." Financial Sectors in a New Age of Oil 63 required asset allocation in government securities However, public sector divestment has lagged be- 89 increased from 80 percent to 88 percent. hind potential supply, with substantial state owner- ship of assets prevalent across the region. Equity markets remain concentrated in the GCC The increased competition between countries to develop regional financial centers has encouraged As noted in section 2.2.4, equity markets in MENA some loosening in the historically tight control on enjoyed a spectacular run-up over 2002­2005; nonnational participation in the local equity mar- however, with the notable exception of the Islamic kets. To the degree that this encourages mediating Republic of Iran, equity markets remain absent foreign flows of capital and new sources of research from most of the resource-rich, labor-abundant and evaluation, this should heighten the knowledge economies, and (with the obvious exception of Jor- base of the market. However, despite recent dan) the majority of markets within the resource- changes in the Gulf, foreign investment in the mar- poor, labor-abundant economies remain small rela- kets remains very limited, and regulators will need tive to the size of their underlying economies. As a to tackle not only legal restrictions on non-GCC result, the Gulf states have come to represent a participation but also corporate transparency and greater proportion of the region's total market cap- minority shareholder rights before there will be in- italization, rising from 73 percent in 2002 to 86 creased flows into the region. Even where non- percent by late 2005. Liquidity has become similar- GCC investors have had increased latitude to in- ly concentrated, with the majority of markets out- vest, actual participation has been limited: in side of the Gulf trading less than US$10 million per Bahrain, non-GCC investors represented only 2 day in 2005, compared with the US$4.6 billion av- percent of traded stocks by value, while non-GCC erage daily turnover in the Saudi market. ownership stood at around 7 percent in Oman. As markets became more liquid after 2002, many The consequence of foreign ownership restric- of MENA's largest companies raised equity capital tions has been most obvious in the relative under- for the first time, somewhat decreasing dependence representation of the MENA region in global equi- upon the banking sector and increasing the breadth ty indexes. Taking the index weighting of the and depth of investment opportunities to investors; unrestricted S&P/IFC Emerging Markets General however, the scale of new listing must not be over- Index, it is clear that the region gained considerable stated. The shortage of new supply may have been, representation by late 2005, in particular Saudi Ara- in fact, a large contributory reason for the dramatic bia (with a weight of almost 12 percent), in line increase in stock prices over the period. The total with established market heavyweights such as the number of stocks in the GCC rose by only 50 be- Republic of Korea and Taiwan (China) and ahead tween 2003 and 2005 and by 62 across all the of Brazil and the Russian Federation (table 2.2). emerging economies. In addition, the majority of However, within the S&P/IFC Investable Index, new corporate listings were concentrated in the which takes into account the ability of foreign in- markets of Jordan and the UAE. vestors to actually participate in the market, the re- The partial privatization of state companies gion's representation falls to 1.4 percent, compris- through equity offerings to nationals has been char- ing only Egypt and Morocco. It is illustrative to acteristic of many MENA markets in recent years: note that if the region had been ranked purely on both Jordan in 2002 and Morocco in 2004 divest- market capitalization, it would have represented ed minority stakes in their respective state-owned some 17.5 percent of the entire emerging market's telecommunication carriers (in the latter case, al- universe toward the end of 2005. most doubling the size of the equity market). In the Gulf, state utilities from Oman, Saudi Arabia, and the UAE were issued onto the market, which often Bond markets are almost nonexistent outside of GCC had a catalytic effect, as in the case of Saudi Arabia, In the long term, the creation of liquid bond mar- where the listing of the national telecommunica- kets would prove enormously beneficial to the ma- tions carrier increased the size of the market by jority of MENA's economic actors. The state can more than 40 percent and encouraged a wider par- benefit from decreased dependence upon external ticipation by Saudi Arabians in equity investment. debt and be provided with an additional tool to manage domestic liquidity. Corporations, both pri- Robalino 2005. vate and public, would have access to a new pool of 89 64 Economic Developments and Prospects Table 2.2: MENA equity market representation in global indexes (as of November 2005) IFCG market cap Weight in IFCG IFCI market cap Weight in IFCI Country (US$bn) composite (US$bn) composite Bahrain 8 0.3 .. .. Egypt, Arab Republic of 20 0.8 19 1.0 Jordan 21 0.8 .. .. Morocco 8 0.3 7 0.4 Oman 5 0.2 .. .. Saudi Arabia 304 11.9 .. .. Brazil 207 8.1 196 10.3 Korea, Republic of 390 15.3 369 19.5 Russian Federation 228 8.9 122 6.4 Taiwan (China) 287 11.2 283 15.0 Source: S&P/IFCG. Note: IFCG = International Finance Corporation Global index; IFCI = International Finance Corporation Investable index. long-term capital, particularly well suited to large yield curve and restricted the corporate sector's fi- infrastructure projects. Savers would also be pro- nancing options. vided with a range of new instruments, and this Recent years have seen some signs of change. would be of particular use to the contractual sav- Several borrowers have begun to construct market 90 ings industry, which requires assets to match long- infrastructure and commenced issuance programs ; term liabilities. however, liquidity remains low in absolute terms Largely absent from MENA's financial system and relative to the size of the local economy, result- until recently, secondary bond markets have begun ing in constant excess demand for issuance and to develop, particularly in the Gulf region. A combi- bonds that are tightly held, once issued. nation of rising liquidity, substantial domestic in- vestor appetite for longer-term assets, and local am- This has created a limited market for corporate bonds bitions to launch regional financial hubs has helped With the development of formal market mecha- create favorable momentum for the establishment of nisms and an investor base eager to access fixed-in- local infrastructure. Principally, this has meant the come instruments, corporations have taken advan- creation of tradable government securities, which tage of abundant domestic liquidity, and the has facilitated some local corporate issuance. Both number and sophistication of corporate issues have public and private issuers have launched bonds that increased, particularly in the area of Islamic finance. accord to the principles of Islamic finance, and these A sample of corporate sector debt across MENA re- have met strong demand from local and internation- veals increasing issuance over recent years, with the al investors, who face a shortage of such instruments. annual total rising from below 10 over 1999­2001 However, while an encouraging start has been 91 to 15 in 2002, 23 in 2004, and 41 in 2005. made, outside of the Gulf and a few resource-poor economies, bond markets remain almost nonexist- ent. Even within the Gulf, the liquidity of second- In Kuwait and Oman, a limited market for domestic govern- 90 ary markets remains low, and actual trading is slight. ment debt has arisen, with the issuance of treasury and devel- opment bonds. In both cases, however, overall supply remains The number of corporate issues is also small relative limited relative to demand, and greater liquidity will be need- to the size of local economies. ed before bonds are less tightly held by their buyers. Bahrain Despite a preponderance of domestic debt fi- has issued more than 20 bonds locally, primarily Islamic, estab- lishing a range of maturities that it issues according to a prean- nancing in the Gulf, the region had not developed nounced calendar; however, the overall size of issued instru- liquid secondary markets for government debt by ments remains small relative to the size of the economy, and the late 1990s. Instead, states historically used cap- these also seldom trade. In Saudi Arabia, the process remains at a very early stage, with a government initiative to establish a tive institutions (such as state banks and pension market for public debt initiated only in 2005. funds) to fulfill the majority of their financing All listed corporate debt is taken from Bloomberg and includes 91 needs. This inhibited the creation of a benchmark some international bond issues (1999­2005). Financial Sectors in a New Age of Oil 65 However, issuance has been concentrated within lished among high-income OECD countries. In ad- the Gulf economies and largely in only three coun- dition, the severely poor showing in overall quality tries: Bahrain, Kuwait, and the UAE (figure 2.20). of public sector administration by some countries, By contrast, in Saudi Arabia (the GCC's largest particularly among the resource-rich, labor-abun- economy), the corporate debt market remains very dant group, raises fundamental questions as to how small, although it may begin to expand because of well their financial systems are currently operating. government initiatives concerning public debt and The governance deficiencies exhibited in a few 92 likely issues from leading state enterprises. countries suggests that development will be stunted unless these issues are addressed (see chapter 3). 2.4.5 Poor-quality governance can under- mine financial intermediation 2.4.6 A business climate not conducive for lending There is an established link between the effective- ness of the institutional environment and a well-func- A range of issues related to the business climate im- tioning financial system; as a result, issues relating to pinge on a well-functioning relationship between the quality of public sector administration have im- the financial sector and the real economy. Deficien- portant implications for the growth-finance link. In cies in MENA's business and regulatory structures addition to fair and transparent legal systems, limited have been strongly felt in contract enforcement and corruption and bureaucratic effectiveness are critical the availability and quality of financial information. to effective financial intermediation and assuring The natural outcome has been a bias on the part of proper financial sector regulation and supervision. MENA's banks toward relationship banking, lend- As will be discussed further in chapter 3, most of ing to larger companies with sufficient collateral, the resource-rich, labor-importing economies of the public sector, or high-net-worth individuals. the GCC register well across many dimensions re- Regional surveys suggest that such conservatism is lating to the quality of public sector administration, widespread in MENA. Moroccan banks appear to but there is variation among the group, and coun- compete for business from a relatively small pool of tries continue to fall short of best practices estab- large corporate borrowers, typically where there has been a long-term relationship of 10 years or more and the borrower can demonstrate significant col- 93 lateral. Elsewhere, the ability to secure loans di- SABIC and the Saudi Electricity Company are expected to is- 92 sue in 2006: the first (a SRls 1 billion issue) is anticipated to be Islamic (The Banker [April 2005] and Euromoney [September 2005]). World Bank 2005f. 93 Figure 2.20: Bond issuance in MENA 35 30 25 issued 20 bonds of 15 10 number 5 0 Egypt, Morocco Jordan Tunisia Lebanon Algeria Iran, Saudi Oman Kuwait United Qatar Arab Islamic Arabia Arab Rep. of Rep. of Emirates Source: Bloomberg. 66 Economic Developments and Prospects rectly against salaries has made the high end of the approval and making a public sale. World Bank Do- retail market an attractive proposition for banks. In ing Business surveys support these country-specific Oman, the high profits and perceived lower risk of findings, with contracts proving time-consuming to lending secured by salaries has lessened bank pene- enforce, with numerous procedures and creditors, tration into the smaller-company segment. Similar- ending with a very low recovery rate on their loans. ly, Saudi Arabian banks continue to compete fierce- Not only does this lessen the likelihood of lending, ly in the retail segment to the detriment of the but it can also seriously impede the development of enterprise sector. important segments of the financial marketplace. The low likelihood of collecting collateral in the One of these has been the leasing business across face of default, as well as difficulties in valuing col- MENA, with an inability to collect upon collateral, lateral or even registering it in the first place, have a serious obstacle to establishing what, in many made MENA's banks reluctant to lend. In addition, countries, is often a vital source of finance for small- a lack of reliable financial information plus short- er companies: Saudi Arabia's and Egypt's volume of ages of sufficiently skilled credit officers have leasing business relative to GDP stands at only 0.1 pushed many banks toward demanding very sub- percent and 0.8 percent, respectively, as against 1.8 97 stantial collateral when loans are extended: in Syria percent in North America and 3.4 percent in Asia. and Morocco, collateral stands (on average) at 217 As important as enforcing collateral contracts in percent and 230 percent, respectively, of the value the event of bankruptcy is the ability to register of the loan, while collateral represents a still-high property in the first place, and many companies face 130 percent in Egypt. difficulties and high costs in doing so. Often land Not only is the rule of law inadequate across and other immovable assets prove to be the chief as- much of the region, but so is the capacity of the ju- set of smaller companies, and an inability to record dicial system and the specific design of collateral title can lock companies out of the credit market. and bankruptcy laws. ICAs across MENA point to Corruption is also cited in a number of ICAs as acute deficiencies in legal systems: in Morocco, one- an impediment to financing. Many firms choose to third of surveyed firms cited the judicial system as a opt out of the formal sector rather than surmount major constraint on growth, with almost a fifth the repeated inspections, taxes, and administrative mentioning corruption and administrative con- red tape that are required to operate a business, of- straints (such as obtaining licenses and permits) as ten negotiated with the help of "informal" pay- 94 further obstacles. In Algeria and Syria, the judicial ments. The impact of corruption upon financing is system was repeatedly pinpointed as a major imped- twofold: First, firms may prefer to self-finance or iment to financial intermediation, with cost, lengthy seek financial support through informal networks procedures, insufficient staffing and expertise, and of friends and family, rather than deal with formal poor enforcement deterring enterprises from utiliz- institutions. Second, where formal channels are ing legal redress. Only 1 percent of Syrian firms sur- used, a separate set of books may be presented to veyed had used the legal system to resolve business financiers, presenting difficulties of risk assessment. 95 conflicts over the prior three years, and 93 percent The ICA for Algeria notes that most firms underre- of cases involving smaller companies in Algeria had port sales and have no certified balance sheets, self- been settled privately, but only 2 percent through selecting out of the formal credit market, while in 96 the judicial system. Syria the typical business experiences around 25 in- With regard to securing collateral in bankruptcy spections a year. Typically, more than half of these proceedings, ICA evidence and cross-regional sur- encounters involve some expectation of informal 98 veys paint a similarly difficult picture. ICA evidence payment. from Algeria and Syria suggests that collateral col- Banks across the region cite poor quality of in- lection is not only time-consuming but also difficult formation and a lack of high-quality investment to enforce, while repossession of immovable collat- projects as a severe impediment to increased enter- eral in Egypt can take seven to eight years for court prise finance. Evidence from ICAs paints a picture World Bank 2005f. 94 Data taken from Euromoney, World Leasing Yearbook 97 World Bank 2005g. (2001­2005). 95 World Bank 2003h. World Bank 2005g. 96 98 Financial Sectors in a New Age of Oil 67 of poor transparency and limited disclosure by With several states vying to become regional finan- firms. In Morocco, fewer than 20 percent of firms cial hubs, competitive pressures are likely to acceler- have financial statements that have been certified ate further market development and opening, with by an external audit, and the banking sector notes positive spillover effects for the wider economy. a lack of creditworthy or viable investment proj- At the other end of the spectrum lie several fi- 99 ects. In both Algeria and Syria, ICAs point to sys- nancial systems that, despite recent growth in lend- tematic underreporting of sales. In the latter, few- ing to the private sector, are relatively underdevel- er than 35 percent of firms have audited financial oped in scale and sophistication, characterized by statements, and many firms are reported to keep high operational costs, weak risk management prac- two sets of accounts. tices, and poor asset quality. Largely isolated from outside influence and with sometimes nonexistent capital markets, the real economy remains depend- 2.4.7 Improving the impact of financial sec- ent upon a fragile banking system that is inadequate tors on growth in MENA for the task ahead. Not only has this impeded cur- Record oil receipts and strong economic growth rent growth, but it may also create future vulnera- present an important challenge for the financial sys- bilities when the present pace of economic growth tems of MENA: to channel this liquidity into the subsides. real economy, boosting sustainable, efficient, and To meet the challenge of effectively intermediat- equitable growth. ing the large oil-related flows and to build the fi- In some countries, particularly those of the nancial infrastructure that can be an engine for GCC, the financial system is beginning to act as a growth and productivity improvements, the region more efficient conduit for savings: lending to the must address a range of underlying structural defi- private sector is rising, capital markets have some- ciencies that inhibit efficient and sound resource al- what deepened, and national systems have become location. In chapter 3, the recent progress with more integrated into the global financial system. some of these reforms is evaluated. World Bank 2005f. 99 68 Economic Developments and Prospects 3 Structural Reform Progress for Long-Term Growth 3.1 Introduction reform progress over the past several years than the 101 region's resource-poor economies have along two Although continuing high oil prices are expected to major structural reform fronts: improving the busi- contribute to solid growth for oil producers in the ness climate and liberalizing trade. medium term and an anticipated recovery in Euro- However, the more subdued progress made by pean demand should provide for stronger econom- oil exporters in these areas of reform in large part ic growth among the region's resource-poor, labor- reflects lack of improvements among GCC abundant economies, longer-term growth economies, which have traditionally maintained prospects throughout the region depend upon the more open and business-friendly trade and invest- progress that is made in transitioning to sustainable ment policies. Perhaps more important, as a group, sources of stronger economic growth and job cre- the oil economies have demonstrated long-awaited ation through implementing broad-based structur- progress in governance, an area in which the group al reform. demonstrates significant deficit relative to the rest Over the past three to five years, MENA has tak- of the world. Specifically, notable progress has tak- en a number of steps to transition to more open, en place over the past five years in enhancing public private sector­oriented economies with more effi- sector accountability mechanisms, which augers cient and accountable governments. With the large well for continuing reform success. Although oil windfall revenues accruing to oil producers since economies continue to rank in the bottom 20th 2002, a natural question emerges as to what impact percentile relative to the rest of the world with re- oil is having on the reform process. As noted in gard to measures of public sector accountability (in- chapter 1, the large budget surpluses accruing to oil cluding political and civil liberties, freedom of in- 102 producers appear to have delayed the imperative for formation, and so forth), over the past five years, reform of the oil subsidy system in resource-rich oil economies have made greater progress in im- economies. Based on structural reform measure- proving public sector accountability than have all 100 ments, oil producers have also exhibited weaker other regions of the world, ranking (on average) in Resource-rich (oil) economies include (a) resource-rich, labor-importing economies Bahrain, Kuwait, Libya, Oman, Qatar, Saudi 100 Arabia, and the United Arab Emirates and (b) resource-rich, labor-abundant economies Algeria, the Islamic Republic of Iran, Iraq, the Syrian Arab Republic, and the Republic of Yemen. Resource-poor economies include Djibouti, the Arab Republic of Egypt, Jordan, Lebanon, Morocco, Tunisia, and the West Bank 101 and Gaza. See appendix B for a description of, and the methodology behind, governance indexes. 102 Structural Reform Progress for Long-Term Growth 69 the 66th percentile worldwide with regard to im- the region's resource-rich economies. In improving proving public accountability. the quality of public sector administration, howev- Worldwide, successful reform efforts have de- er, the group realized even stronger progress. With pended critically upon the support and participa- a number of efforts toward public sector modern- tion of those in society whom reforms will impact. ization, civil service reform, and anticorruption leg- The governance improvements in MENA, by en- islation, resource-poor economies ranked (on aver- hancing the accountability of governments and age) in the 82nd percentile with regard to reform, granting greater voice in development to MENA's the strongest progress worldwide, led by achieve- people, are important not only to take into account ments in Egypt, Morocco, and Tunisia. the needs and values of those who are affected by Along with across-the-board policy reform, reforms but also to ensure that in the transition to a MENA economies continue to look to selective in- new development model, the economic outcomes dustrial policies to complement more broad-based are socially acceptable among those who have ben- structural reform, including Morocco's recent efited from the old systems. The MENA region "Emergence" program (designed to enhance spe- continues to have the greatest gap with the rest of cific sector competitiveness). Although the views on the world with regard to accountable and inclusive industrial policies are changing and a variety of eco- governance structures, ranking (on average) in the nomic justifications can be made for their use, bottom quintile worldwide. It is thus an important MENA's own unsuccessful history with industrial development that both resource-rich and resource- policies (and the difficulty in transitioning out of poor economies in MENA are making a start at them) should serve as a cautious reminder that the these vital changes. most effective policies for promoting growth rely With diminishing positive links to the oil on strategies to create a neutral and internationally economies (and increasing negative impacts from competitive business environment. higher oil prices), the resource-poor economies in the MENA region have maintained a solid pace of reform, generally exceeding other regions of the 3.2 Measuring Structural Reform world across all areas of reform. Strong achieve- ments have come in improving the business and The World Bank Middle East and North Africa re- 103 regulatory environment (resource-poor economies gion's recent flagship reports on trade, gover- 104 105 106 rank (on average) in the 63rd percentile worldwide nance, employment, and gender highlight an with regard to improving the business environment, extensive list of development challenges facing higher than all other regions of the world but Eu- MENA countries over the coming decades. Many of rope and Central Asia). Trade reform (by reducing these challenges are well known, and they encom- average tariffs) has also advanced strongly, largely in pass a broad range of sectors and themes, from man- connection with recent bilateral and multilateral aging scarce water resources to reducing poverty to trade agreements. Led by deep tariff reductions un- promoting gender equity. But one issue--employ- dertaken in Egypt, progress among resource-poor ment creation--was identified as perhaps the single economies outpaced (on average) all other regions most important economic development challenge 107 of the world, with resource-poor countries ranking facing the region, requiring three fundamental (on average) in the 71st percentile with regard to and interrelated realignments on the part of MENA tariff reform. Nonetheless, much greater trade lib- economies: (a) from closed to more open economies, to eralization can take place. The resource-poor create more competitive industries, to benefit from economies as a group continue to maintain some of international best practices, and to gain access to the highest tariffs in the world, ranking in the bot- new technology; (b) from public sector­dominated to tom quartile worldwide with regard to low tariff private sector­led economies, to provide the basis for protection. Resource-poor economies also made strong ad- vancements in the area of governance. Measures to World Bank 2003a. 103 improve public sector accountability resulted in re- World Bank 2003b. 104 source-poor economies ranking (on average) in the World Bank 2003d. 105 62nd percentile with regard to reform progress over World Bank 2003c. 106 the past five years, second only to the gains made by World Bank 2003e. 107 70 Economic Developments and Prospects improved efficiency and expansion of employment; Utilizing these reform indicators, this chapter and (c) from oil-dominated to more diversified evaluates the recent progress that has been made by economies, to reduce the region's dependence on the region on the structural reform front. Because volatile sources of growth, maintain fiscal stability, many economic reforms take time to result in meas- and preserve important social expenditures. Achiev- urable development outcomes, we also discuss the ing these realignments require interrelated policy ac- region's more recent efforts and emerging trends. tions on several fronts, including improved gover- The chapter proceeds as follows: In section 3.3, the nance, particularly with regard to strengthening region's progress with trade reform is examined, 108 inclusiveness and accountability. highlighting the trade initiatives undertaken and For the first MENA Economic Developments measuring progress in lowering trade barriers. In and Prospects report (MEDP), published in 2005, section 3.4, progress on improving the business cli- we attempted to better understand how the region mate is discussed, highlighting the region's recent is faring with this economic realignment by con- efforts at liberalization and measuring progress in structing a set of structural reform indicators that improving the business environment, based on a could allow us to see where the MENA region range of business climate indicators. In section 3.5, stood relative to the rest of the world in various ar- we highlight the region's progress with governance eas of reform and--as important--that could allow reform, both in improving the quality of administra- us to monitor the progress that the region is mak- tion and in improving government accountability. ing in this transition. For that report, structural re- form indexes were constructed in three key areas of reform: trade orientation, business climate, and 3.3 Outward Orientation in MENA governance. Incorporating a range of relevant indi- cators available at the time of the report's publica- 3.3.1 Developments in trade reform tion, composite indexes of reform were constructed in each reform area for 2000 and 2004 (the most Much of the region's recent progress with structur- recent available data at that time) to analyze the re- al reform has occurred in the area of trade policy, gion's reform progress. especially in connection with a recent proliferation In this year's MEDP, we again aim to evaluate re- of bilateral and regional trade agreements. The re- form across these three broad areas both to under- gion entered the new millennium with high average stand where countries currently stand relative to one tariffs (averaging 19 percent) and with pervasive use another and to monitor reform progress over time. of nontariff barriers (NTBs), covering (on average) In the meantime, across all three areas of reform, ad- more than 14 percent of tariff lines (table 3.1). In ditional indicators have become available that addition, the MENA region had extensive behind- strengthen our true understanding of the current re- the-border constraints, including high transport, form status in each country. In the area of trade ori- logistics, and communication costs, increasing the entation, for example, new information has become overall costs (and disincentives) to trade. available on behind-the-border constraints to trade Since 2000, the MENA region has made signifi- and on the extent of nontariff barrier coverage. New cant strides in reducing obstacles to trade, partly in indicators have also been added to our measure- conjunction with bilateral and multilateral trade ments of governance reform and business climate re- agreements. In many economies in the region form, particularly in the area of financial sector de- (namely, Algeria, Egypt, Jordan, Lebanon, Moroc- 109 velopment, the theme of this year's MEDP. co, Syria, Tunisia, and the West Bank and Gaza), tariffs have been reduced and nontariff barriers dis- mantled with the region's largest trading partner, World Bank 2005a. 108 the European Union (EU), as part of the EU Asso- Because much of this new information is available only for 109 ciation Agreements. Other bilateral and regional 2005, it is not possible to evaluate progress with reform by agreements--including free trade agreements with utilizing the new information. As a result, the evaluation of the current status of structural reform (based on the widest set the United States in Bahrain, Jordan, and Morocco; of indicators available in 2005) is not entirely comparable with the Pan-Arab Free Trade Agreement; and the our measures of structural reform progress (based on a more Agadir Agreement between Egypt, Jordan, Moroc- limited set of indicators available in both 2000 and 2005). (For a fuller description of the data and methodology behind co, and Tunisia--have also helped the process of the structural reform indicators, see appendix B.) trade liberalization in the MENA region. Structural Reform Progress for Long-Term Growth 71 Table 3.1: Trade protection in MENA, 2000 Country/regiona Simple average tariff Nontariff barrier coverageb Algeria 24.0 7.4 Bahrain 7.9 7.7 Djibouti 31.0 .. Egypt, Arab Republic of 21.4 26.6 Iran, Islamic Republic of 41.1 39.1c Jordan 23.1 0.1 Kuwait 3.6 .. Lebanon 10.7 22.3 Libya 17.0 .. Morocco 30.5 18.2 Oman 5.7 1.7 Saudi Arabia 12.0 1.9 Syrian Arab Republic 21.0 .. Tunisia 29.1 16.8 Yemen, Republic of 12.8 .. MENA 19.4 14.2 Resource-poor 24.3 16.8 Resource-rich 16.1 11.6 Resource-rich, labor-abundant 24.7 23.2 Resource-rich, labor-importing 9.2 3.8 ECA4 9.1 13.2 LAC4 14.5 10.5 EAP5 13.0 28.8 Source: United Nations Conference on Trade and Development (UNCTAD) staff estimates provided for this report. Note: Data for 2000 or closest year available. a. Regional average represents the simple averages of the data for the respective countries they represent. b. Nontariff barrier coverage refers to the number of tariff lines that have at least one core nontariff barrier (quantitative restriction). c. Number of tariff lines requiring license from Ministry of Industry (from World Bank 2001). The comparators are ECA4 (four countries in the Europe and Central Asia region--the Czech Republic, Hungary, Poland, and Turkey), LAC4 (four countries in the Latin America and the Caribbean region--Argentina, Brazil, Chile, and Mexico), and EAP5 (five countries in the East Asia and Pacific region--China, Indonesia, Malaysia, Republic of Korea, and Thailand). Resource-poor economies, with higher initial Association Agreement with the EU and negotia- levels of protection, have seen the greatest reduc- tions to joining the WTO have also resulted in sub- tion in tariffs. Jordan significantly strengthened its stantial trade liberalization efforts over the past few trade reform program beginning in 2000 by cut- years. ting tariffs sharply and lowering other trade barri- A few of the resource-rich economies also un- ers; joining the World Trade Organization (WTO); dertook a series of trade liberalization measures. and launching an economic-integration project The Islamic Republic of Iran's trade reform strate- with Israel, providing tariff-free access for clothes, gy, adopted in its third five-year development plan jewelry, and other goods from joint Jordanian-Is- (2000/2001­2004/2005), consisted of trade re- raeli factories into the United States. Jordan also form in two stages: in the first stage, emphasizing completed a free trade agreement with the United the elimination of export restrictions and replacing States. Egypt undertook unprecedented tariff re- NTBs with tariffs, and in the second, rationalizing form in the fall of 2004, reducing the number of the tariff structure, reducing tariff bands, and low- tariff bands, annulling import fees and surcharges ering the average tariffs. Algeria, early in 2000, be- incompatible with the General Agreement on Tar- gan a wave of trade reform measures, including iffs and Trade, and instituting strong tariff rate cuts abolishing remaining NTBs to trade, comprehen- on most imports. Lebanon's implementation of the sive tariff reform, signing an Association Agreement 72 Economic Developments and Prospects with the EU, and beginning negotiations toward tant agreement with Turkey, which will allow it to accession to the WTO. take advantage of cheaper Turkish inputs in the pro- 110 Among the resource-rich, labor-importing duction of its own textiles to European markets. economies, which had historically maintained more Among resource-rich economies, in December, open trade, the GCC countries have worked almost Saudi Arabia joined the WTO, following 12 years of in unison to develop trade ties and to encourage negotiations. In meeting the WTO requirements, greater foreign participation in their economies. Al- the kingdom undertook important steps in liberaliz- most all have taken further steps to cement greater ing its trade regime, particularly for import licens- ties with the West. All of the GCC economies have ing, customs valuation and fees, standards and tech- pursued free trade agreements (FTAs) or trade and nical regulations, and revising its legislation for investment framework agreements (TIFAs) with intellectual property rights and patent registration. the United States. To date, Bahrain has an FTA, With regard to specific markets, Saudi Arabia has and similar agreements are being pursued or nego- agreed to revise the rules it applies to agricultural tiated with Kuwait, Oman (signed, but not yet com- imports, including shelf-life restrictions and other pleted), Saudi Arabia, and the United Arab Emi- nontariff measures that have long hindered the im- rates. TIFAs are in force in Bahrain, Kuwait, Qatar, portation of agricultural goods to the kingdom. Al- Saudi Arabia, and the United Arab Emirates. The most all agricultural tariffs will be lowered to 15 per- GCC economies have also worked to strengthen cent or less. Membership in the WTO is expected ties with emerging economies in Asia, particularly help the Saudi Arabian economy diversify more rap- China and India. Most implemented further tariff idly, improve competitiveness, and create new em- reform (from already relatively low levels) with the ployment opportunities. Oman, meanwhile, com- introduction of the common external tariff among pleted its negotiations to conclude its free trade the GCC in 2003. agreement with the United States. Among the resource-rich, labor-abundant Progress over 2005 economies, widespread smuggling of imported Over the past year, achievements have been made goods into the Republic of Yemen, combined with on the trade policy front by several of the resource- a desire to harmonize tariff rates with the GCC, poor economies that had not yet undertaken deep prompted the Yemeni government to move strong- reform. Under the EU Association Agreement, ly in lowering import tariff rates over 2005, reduc- Tunisia's tariffs on imports originating in the EU ing the number of bands from four to three, with were lowered, while imports from the 16 other the maximum rate still at 25 percent, but with two- members of the Greater Arab Free Trade Area have thirds of the commodities attracting only a 5 per- been admitted completely duty-free since January cent tariff rate. After the recent changes, the un- 2005. In addition, Tunisian customs carried out re- weighted tariff rate fell to 7 percent, the lowest forms to simplify import procedures, with special average tariff outside the GCC in MENA. emphasis on documentation and the implementa- tion of the WTO Agreement on Customs Valua- 3.3.2 Quantifying progress with trade reform tion. Although technical import inspection proce- dures remain lengthy and complex, a start was made MENA's trade policy was evaluated in two ways: on reforming these procedures in 2005. First, the trade policy status in 2005 was assessed Morocco also made some progress over the year in deepening trade liberalization. Although the level One of the major constraints faced by textiles exporters in Mo- 110 and dispersion of multilateral tariffs remain high (the rocco is the EU's restrictive rules of origin. For Moroccan simple average tariff is 30 percent), over 2004, most- clothing products to satisfy EU rules of origin and qualify for favored-nation (MFN) tariffs were reduced for duty-free access in that market, they must be made from do- goods freely traded with the EU--and in the con- mestically produced fabrics, fabrics from EU countries, or fab- rics from Tunisia or Algeria (countries that are considered as text of the FTA with the EU--and further tariff re- qualifying areas through full accumulation). These rules force ductions were applied in March 2005 on selected in- suppliers to forgo cheaper inputs from third-country suppliers termediate and consumption goods. Customs to qualify for duty-free entry to the EU. With its recent free trade agreement with Turkey, Morocco has positioned itself to services have been streamlined, and implementation exploit an accumulation of origin with that country--as part of of the free-trade agreement with the United States the Pan-Euro-Mediterranean initiative--to reduce Morocco's began in January 2006. Morocco signed an impor- costs and improve competitiveness. Structural Reform Progress for Long-Term Growth 73 based on current information on average tariffs, five years in the area of trade reform, with contin- the prevalence of NTBs (with regard to percentage ued progress by many countries to lower barriers to of tariff lines), and behind-the-border constraints trade and to establish trade ties through regional to trade (including average time required for both and bilateral trade agreements. MENA countries exporting and importing goods). Second, the re- rank (on average) in the 63rd percentile with regard gion's progress with trade policy reform was evalu- to their progress in lowering import tariffs, only ated, based on the progress made with reducing slightly behind developing countries of Europe and average tariffs (the only trade policy indicator wide- Central Asia and high-income OECD economies ly available in 2000, the initial period for compari- (table 3.2). son). Particularly strong progress has occurred among Based on these evaluations, MENA countries the resource-poor economies of the region, led by have demonstrated strong progress over the past deep tariff reform in Egypt. With average tariffs de- Table 3.2: Structural reform progress: trade reform Current trade policy,a Trade policy reform progress,b Country/region 2005 2000­2005 Algeria 43.6 70.7 Bahrain -- 62.0 Djibouti -- 51.1 Egypt, Arab Republic of 42.8 100.0 Iran, Islamic Republic of 22.3 73.9 Jordan 47.1 85.9 Kuwait 52.6 65.2 Lebanon 61.1 80.4 Libya -- 27.2 Morocco 38.4 52.2 Oman 70.8 10.9 Saudi Arabia 39.5 77.2 Syrian Arab Republic 18.4 43.5 Tunisia 50.9 56.5 Yemen, Republic of 61.7 81.5 MENA 45.8 62.5 Resource-poor 48.0 71.0 Resource-rich 44.1 56.9 Resource-rich, labor-abundant 36.5 67.4 Resource-rich, labor-importing 54.3 48.5 East Asia and Pacific 56.2 37.2 Europe and Central Asia 50.9 69.5 Latin America and the Caribbean 56.6 50.2 High-income OECD 70.2 64.4 South Asia 41.4 47.6 Sub-Saharan Africa 34.4 26.9 World 50.0 50.0 Sources: See appendix B. Note: Regional averages reflect the simple average of the data for the countries included. -- = Not available. a. "Current trade policy" status reflects country's current placement in a worldwide ordering of countries, based on four major categories of trade policy indicators available in 2005, expressed as a cumulative frequency distribution, with "100" reflecting the country with the most-open trade policies (worldwide) and "0" representing the country with the most-closed trade policies (worldwide). b. "Reform progress" reflects the improvement in a country's rank between 2000 and 2005 in a worldwide ordering of countries, based on the simple average tariff (the only trade policy indicator available for a large group of countries in 2000) expressed as a cumulative frequency distribution, with "100" reflecting the country that exhibited the greatest improvement in rank and "0" reflecting the country that exhibited the greatest deterioration. A larger sample of indicators was used to compute the current trade policy because some indicators have only been made available in 2005. 74 Economic Developments and Prospects clining from around 21 percent to 9 percent, region continues to be one of the most trade-re- Egypt's progress in reducing import tariffs places it strictive in the world, ranking (on average) in the at the top of the worldwide ordering of countries bottom 46th percentile of countries worldwide with with regard to tariff reductions.111 But strong regard to trade regime openness, higher than only progress also occurred in Jordan and Lebanon, and Sub-Saharan Africa and South Asia. the region's resource-poor economies as a group Much of this stems from the continuing high tar- ranked in the 71st percentile with regard to reduc- iff protection (MENA countries rank [on average] ing tariffs over the past five years, greater than any in the bottom 38th percentile worldwide with re- other region of the world. gard to average tariffs)112 that remains common- Resource-rich economies exhibited weaker place. About half the countries in the region--Alge- progress, but this partly reflects the lower average ria, Djibouti, the Islamic Republic of Iran, Jordan, tariffs initially, with an average tariff level in 2000 of Libya, Morocco, Syria, and Tunisia--maintain sim- 16.1 percent, compared with more than 24.3 per- ple average tariffs in excess of 10 percent, the world cent among resource-poor economies (see appendix average. This is especially true among resource-poor table B1). Among resource-rich economies, relative- economies, where simple tariffs continue to average ly strong progress was made among the resource- close to 20 percent, placing them in the bottom rich, labor-abundant economies of Algeria, the Is- quartile worldwide with regard to tariff protection. lamic Republic of Iran, Syria, and the Republic of In Tunisia, the simple average of the MFN tariffs ap- Yemen, which as a group had higher average tariff plied in 2005 was more than 28 percent.113 The protection initially (averaging 24.7 percent in 2000, heavy MFN tariff protection of the domestic market relative to only 9.2 percent among the labor-im- has changed only slightly in the course of the past 10 porting economies). Average tariffs for the group years. The average duty on agricultural products fell from an average of 24.7 percent in 2000 to 16.9 (WTO definition) is 67 percent, with a maximum percent in 2005, led by significant tariff reductions rate of 150 percent; the average duty on nonagricul- in the Islamic Republic of Iran (between 2000 and tural products is 23 percent. MFN customs duties in 2005, the Islamic Republic of Iran's average tariff the manufacturing sector average 30 percent, with fell from about 41 percent to around 22 percent). rates extending up to 150 percent. The modal rate Oil-producing, labor-abundant economies ranked (that most frequently applied) is 43 percent, and (on average) in the 67th percentile worldwide with products corresponding to only 15 percent of tariff regard to lowering tariffs. lines are admitted duty-free. Among the region's oil-producing, labor-im- But the region also suffers from proliferation of porting economies of the GCC and Libya, though NTBs, as well as lengthy processes for both import- tariff reform has been more limited (the group ing and exporting. Trade protection is most acute ranked [on average] in the 49th percentile world- among the oil-exporting, labor-abundant wide with regard to lowering tariffs), this partly re- economies, particularly because of high levels of flects lower initial tariff protection. Still, relatively protection in the Islamic Republic of Iran and Syr- strong progress in lowering tariffs occurred in Sau- ia, with regard not only to tariff protection but also di Arabia, where the simple average tariff declined to cumbersome processes for both exporting and from an average of 12 percent in 2000 to an aver- importing. Syria, for example, ranks in the bottom age of 6 percent in 2005. 15th percentile worldwide in both the time re- Although the region has made strong progress quired to export as well as the time required to im- with tariff reform over the past five years, MENA's port. It requires (on average) some 63 days to com- trade liberalization remains far from complete. The plete the processes associated with importing and 49 days to complete the processes associated with exporting.114 In addition, with tariffs that average Progress with tariff reform is measured by the change made 111 close to 20 percent, it ranks in the bottom decile in by a country in its placement in a worldwide ordering of coun- tariff protection. The Islamic Republic of Iran, with tries based on their simple average tariffs. Egypt, which moved from the bottom decile of countries worldwide in 2000 (based on simple average tariff) to almost the 50th percentile in 2005, improved its ranking by the greatest amount over the See appendix table B2. 112 period (with regard to progress, it thus ranked in the 100th percentile with regard to tariff reform). (See appendix B for a Staff estimates from UNCTAD TRAINS database. 113 further description of methodology.) World Bank 2006a. 114 Structural Reform Progress for Long-Term Growth 75 average tariffs of 22 percent (despite significant tar- counting for behind-the-border constraints to trade iff reduction), ranks in the bottom 5th percentile in (particularly prevalent in Saudi Arabia), the group tariff protection. It also faces lengthy processes to ranks (on average) in only the 54th percentile comply with import and export regulations, rank- worldwide, below the Latin America and the ing in the bottom 20th percentile in the time need- Caribbean region, the East Asia and the Pacific re- ed to export and in the bottom 30th percentile in gion, and high-income economies. the time needed to import (table 3.3). Thus, while MENA has made relatively strong Even among the relatively open GCC economies progress with trade reform over the past several (with regard to tariff barriers to trade), when ac- years, much work remains on the trade liberaliza- Table 3.3: Current trade policy in MENA (Based on simple average tariffs, NTB coverage, average time required for exporting, and average time required for importing) Average Average Overall NTB coverage time for Export time for Import trade Country/region Average Tariff (% of NTB exports time imports time policy tariff index tariff lines) index (days) index (days) index index (1­100) Algeria 18.7 8 0.0 88 29 52 51 27 44 Bahrain 5.2 71 0.5 40 .. .. .. .. .. Djibouti 31.0 0 2.7 24 .. .. .. .. .. Egypt, Arab Rep. of 9.1 48 6.1 7 27 55 29 62 43 Iran, Islamic Rep. of 22.1 5 0.5 40 45 17 51 27 22 Jordan 13.1 21 0.3 51 28 54 28 63 47 Kuwait 3.6 92 2.1 26 30 50 39 44 53 Lebanon 5.4 71 0.2 53 22 67 34 54 61 Libya 17.0 14 2.2 26 .. .. .. .. .. Morocco 30.1 1 0.3 51 31 47 33 55 38 Oman 5.7 67 0.0 88 23 64 27 65 71 Qatar 5.0 74 1.0 32 .. .. .. .. .. Saudi Arabia 6.0 63 1.2 30 36 32 44 33 39 Syrian Arab Rep. 19.6 6 0.5 40 49 14 63 13 18 Tunisia 28.3 3 0.0 88 25 58 33 55 51 Yemen, Rep. of 7.0 58 0.0 88 33 43 31 59 62 MENA 14.2 38 1.1 48 31.5 46 38.6 46 46 Resource-poor 19.5 24 1.6 46 26.6 56 31.4 58 48 Resource-rich 11.0 46 0.8 50 35.0 39 43.7 38 44 RRLA 16.9 19 0.2 64 32.5 32 42.0 31 36 RRLI 7.0 64 1.2 40 29.7 49 36.7 47 54 East Asia abd Pacific 7.4 57 0.6 52 27.6 60 31.3 63 56 Europe and Central Asia 7.0 67 5.7 36 31.3 53 42.8 51 51 Latin America and the Caribbean 10.2 43 0.5 72 29.7 50 36.8 49 57 High-income OECD 3.7 90 9.2 18 12.0 86 13.4 88 70 South Asia 16.8 14 0.0 69 33.7 39 39.3 44 41 Sub-Saharan Africa 13.7 30 6.6 57 49.2 24 61.1 4 34 LMIC average 10.4 47 2.3 52 28.5 55 33.8 56 53 World 10.0 50 2.7 50 32.2 50 40.4 50 50 Sources: See appendix B. Note: 2005 or closest year available. LMIC = Low- and middle-income economies. Regional averages reflect the simple average of the data for the countries included. For each index, a country's value represents the country's current placement in a worldwide ordering of countries, based on that trade characteristic expressed as a cumula- tive frequency distribution, with "100" reflecting the countries with the most-open/friendly trade policies and "0" reflecting the countries with the most-closed/burden- some trade policies. 76 Economic Developments and Prospects tion front. Factoring in tariffs, NTBs, and trade pro- ing the conditions for the operation of private en- cedures, the MENA region ranks ahead of only terprises and easing the restrictions on foreign own- Sub-Saharan Africa and South Asia with regard to ership.115 Under the new law, Bahrain has become trade openness, and only one country in the region one of the first countries in the GCC to abolish the (Oman) ranks in the top third of countries world- sole agency Commercial Law. During 2003­2004, wide with regard to trade facilitation. Many coun- a number of key sectors (such as telecommunica- tries in the region have lowered tariffs in parallel tions, electricity generation, and petrochemicals) with integration efforts with the EU, but the region were opened to competition. The UAE has also es- needs to continue liberalization efforts on a multi- tablished new laws on foreign ownership and has lateral basis to tap into the trade potential with non- set its sights on several new industrial free trade EU countries. zones targeted at attracting more foreign firms.116 Plans to attract FDI to Qatar are leading to the cre- ation of a "one-stop shop" for investors. A recent 3.4 Business Climate law allowing foreign ownership in prespecified sec- tors, with the approval of the finance minister in each case, is being proposed (with up to 100 per- 3.4.1 Developments in business and cent ownership in selected sectors such as tourism, regulatory reform health, and education). Under the terms of Saudi Just as MENA's trade policies will impact the devel- Arabia's accession to the WTO, significant steps are opment of competitive export-oriented businesses, also being taken toward removing the barriers to MENA's policies and practices regulating business FDI. Among the sectors expected to witness for- will impact the development of a productive, com- eign entry are insurance, banks and other financial petitive private sector that can drive economic de- intermediaries (banks can now set up branches, and velopment and job growth. Thus, a critical focus of existing banks can increase their foreign equity from MENA's economic transition relates to creating a 40 to 60 percent), and energy companies operating pro-competitive business environment, free of ex- in the downstream and midstream sectors. cessive regulation. The Gulf economies have also moved aggressive- With diminishing links to oil economies, re- ly over the past few years to establish themselves as source-poor economies in MENA have led the way regional and international hubs for a variety of serv- in improving the regulatory environment for pri- ices, including financial services, trading, tourism, vate investment. Both Morocco and Tunisia, as part and transport. Bahrain and Qatar have established of their industrial modernization efforts under the themselves as regional financial hubs, and the Qatar mise à niveau program, undertook various meas- Financial Center created a financial free zone for in- ures to create a more favorable investment climate. ternational banks and investment companies in Major achievements in Morocco include strength- 2005. But other services are also emerging: Kuwait ening the legal, regulatory, and supervisory frame- is developing a technology free trade zone, and work of the financial sector, strengthening property Qatar is positioning itself as a regional education rights, the passage of a new labor code, and--as part and health services hub, most recently establishing of its national privatization program--liberalization Education City and Hamad Medical City. of many sectors of the economy, including air trans- Progress over 2005 port (significantly improving the potential for tourism) and telecommunications. Structural re- Over 2005, continued progress has been made by forms in Tunisia have included significant progress several of the resource-poor economies to improve in privatizing state enterprises, some strengthening aspects of the business environment. Morocco's re- of the banking sector, streamlining several business cent achievements included selling a second fixed- procedures, and reforming the legal framework for asset recovery and bankruptcy. But a strong drive to attract business has also Under the existing rules, foreign ownership of commercial ac- 115 emerged from resource-rich, labor-importing coun- tivities is permitted up to 100 percent of unlisted companies, up to 49 percent of public shareholding companies; further- tries, particularly through opening up to and cap- more, foreigners can buy property in certain designated areas turing greater foreign investment. Bahrain passed of the country. an amended Commercial Law in 2003, streamlin- EIU, UAE Country Report, February 2006. 116 Structural Reform Progress for Long-Term Growth 77 line telephone license to a private company, consol- establishment of a large taxpayer's office and the idating financial reforms, and accelerating civil serv- completed registration of private sector employees ice reform with a successful program of 38,000 civ- permitted the Ministry of Finance to raise its collec- il servants (8 percent of the total) voluntarily tion efficiency. retiring. Tunisia's preparations for the implementa- Among the resource-rich, labor-abundant tion of a broad money-targeting framework are at economies, however, recent progress with structur- an advanced stage and will lay the groundwork for al reforms has been more mixed. Algeria strength- more flexible exchange rate management in the fu- ened performance contracts of public bank man- ture. With respect to the financial sector, the gov- agers and shareholder oversight, initiated the ernment pursued measures to strengthen financial privatization of a public bank, and made progress in stability. A new round of reforms is expected to be modernizing the payments system. A new hydro- gradually implemented in preparation for the open- carbon law was adopted that further liberalizes in- ing of the banking sector to foreign competition. vestment in this sector. In the Islamic Republic of The reforms involve tighter operating standards and Iran, however, structural reforms slowed, with little a strategy to deal with nonperforming loans and government activity in pursuing the reform agenda bank restructuring. before the June presidential elections, and a new Starting in July 2004, Egypt's privatization pro- government formed only in late August. Syria's re- gram was resurrected, and the speed was further ac- forms have been limited to date, but over the year celerated over 2005. The government has sold several policy reforms have been initiated, including stakes in a number of commercial banks and com- taking steps to liberalize the banking sector and panies, the largest privatization thus far being the modify taxation. sale of a 20 percent stake in Telecom Egypt in De- cember 2005, which brought in revenues of more 3.4.2 Quantifying progress with business and than LE 5.1 billion (close to $900 million). The regulatory reform government announced in January that it is consid- ering the sale of 45 companies, both minority stakes As with trade policy, MENA's business climate was via public offerings and controlling stakes to corpo- evaluated in two ways. First, the business climate in rate investors. This should result in continued 2005 was evaluated based on current information strong FDI inflows for 2006. on eight different areas important for doing busi- Egypt also signed into law a new, more simpli- ness (ease of starting a business, ease of closing a fied income tax in 2005 that substantially cut the business, access to finance, ease of hiring and firing, personal and corporate tax rates, resurrected the ease of contract enforcement, ease of dealing with privatization program, and undertook several re- pertinent licenses, ease of paying taxes, and ease of forms in the financial sector, including restructur- registering property). In each of these areas, a vari- ing the banking and nonbanking sectors--a pro- ety of information about the ease of doing business gram relying on both privatization and bank was utilized, often including average time, cost, and consolidation as two major pillars in the drive to total number of procedures required for each busi- strengthen the banking sector by reducing the ness obligation (see appendix B for a fuller descrip- number of institutions. tion). In addition to evaluating the current status of For Lebanon, in contrast, 2005 was a lost year the business environment, the progress with reform for structural reforms, with government changes, of the business climate was evaluated, based upon practical inability to convene parliamentary sessions, progress made along four different fronts (the four boycott of cabinet meetings, and a very divisive po- areas for which information was available in both litical situation hindering the country from imple- 2003 and 2005): starting a business, hiring and fir- menting significant structural reforms. A number of ing, access to credit, and enforcing contracts. From laws prepared in the fields of trade, competition, in- these data, an overall reform progress index was cal- tellectual property rights, e-commerce, public pro- culated, reflecting the average progress along all curement and auditing, public enterprises manage- four fronts, expressed as a cumulative frequency dis- ment, public debt management, public and private tribution. pensions, and capital markets are still pending in Based on the composite reform index, the parliament. The budget law for 2005 was passed MENA region's progress over the past five years in only by the end of the year. On the positive side, the improving the environment for investment was be- 78 Economic Developments and Prospects low the world average. MENA countries ranked (on Much more limited progress occurred among the average) in the 42nd percentile worldwide with re- resource-rich economies, ranking (on average) in gard to business and regulatory reform, about on only the 23rd percentile with regard to reform, with par with the reform progress in South Asia and Sub- the weakest progress among the resource-rich, la- Saharan Africa, and well behind the progress made bor-importing economies (15th percentile). In part, in Europe and Central Asia (table 3.4). this reflects an overall friendlier business climate ini- The greatest progress has occurred among tially among the GCC economies. Resource-rich, la- MENA's resource-poor economies, averaging in bor-importing economies, as a group, rank (on av- the 63rd percentile worldwide, driven by strong erage) in the 65th percentile with regard to all achievements in Jordan (89th percentile) and aspects of the business environment. Resource-rich, Tunisia (93rd percentile), stemming from progress labor-importing economies, however, which rank mainly in removing obstacles to starting a business the lowest in the region (and second-lowest in the but also in improving access to finance. world, behind Sub-Saharan Africa) with regard to a Table 3.4: Structural reform progress: business and regulatory reform Current business Reform progress,b Country/region environment,a 2005 2003­2005 Algeria 13.1 37.6 Egypt, Arab Republic of 11.1 35.9 Iran, Islamic Republic of 56.9 43.7 Iraq 66.0 .. Jordan 58.2 88.6 Kuwait 58.8 6.7 Lebanon 37.3 31.4 Morocco 60.8 54.4 Oman 77.8 15.1 Saudi Arabia 79.7 25.8 Syrian Arab Republic 30.1 5.0 Tunisia 83.0 92.5 United Arab Emirates 43.1 14.0 Yemen, Republic of 35.0 56.6 MENA 50.7 41.5 Resource-poor 50.1 62.8 Resource-rich 51.1 23.5 RRLA 40.1 35.8 RRLI 64.9 15.4 East Asia and Pacific 61.1 46.8 Europe and Central Asia 48.1 64.4 Latin America and the Caribbean 40.4 51.4 High-income OECD 83.5 50.3 South Asia 48.0 41.0 Sub-Saharan Africa 27.4 43.1 World 50.0 50.0 Sources: See appendix B. Note: Regional averages reflect the simple average of the data for the countries included. a. "Current business environment" reflects country's current placement in a worldwide ordering of countries, based on eight major categories of business environment indicators available for 2005, expressed as a cumulative frequency distribution, with "100" reflecting the country with the most-friendly business policies (worldwide) and "0" representing the country with the most-unfriendly business policies (worldwide). b. "Reform progress" reflects the improvement in a country's rank between 2003 and 2005 in a worldwide ordering of countries, based on four major categories of busi- ness and regulatory policies available in 2003 and 2005, expressed as a cumulative frequency distribution, with "100" reflecting the country that exhibited the greatest improvement in rank and "0" reflecting the country that exhibited the greatest deterioration. A larger sample of indicators has been used to compute the current business environment because some indicators have only been made available in 2005. Structural Reform Progress for Long-Term Growth 79 conducive business environment, also managed rel- key areas. Regionwide, starting a business remains atively limited progress. RRLA economies ranked exceptionally cumbersome, with MENA countries (on average) in the 36th percentile worldwide with ranking (on average) in the bottom third of coun- regard to business reforms, with the strongest tries worldwide with respect to time, cost, and pro- progress from the Republic of Yemen (primarily cedures necessary to start a business (table 3.5). In- through improvements in hiring and firing, the re- vestors in resource-poor economies also face sult of a revision to the labor code facilitating the particular impediments with regard to labor laws, hiring of foreign labor by private investors). with RPLA economies ranking (on average) in the Despite the progress made by a few MENA 41st percentile worldwide with regard to the ease of countries, there remain large impediments to con- hiring and firing workers. Resource-rich, labor- ducting business in the region, evidenced in several abundant economies face obstacles in a number of Table 3.5: Current business and regulatory environment in MENA Access Dealing Overall Contract to Hiring/ Starting Closing with Registering Paying business Country/region enforcement finance firing a business a business licenses property taxes climate Algeria 16 13 35 30 73 34 11 3 13 Egypt, Arab Rep. of 24 51 13 26 14 3 14 46 11 Iran, Islamic Rep. of 64 63 28 65 34 3 39 74 57 Iraq 53 .. 30 25 .. 53 72 .. 66 Jordan 63 75 59 23 45 60 34 92 58 Kuwait 38 79 84 43 68 37 49 .. 59 Lebanon 9 82 71 36 20 39 45 73 37 Morocco 82 43 16 67 67 17 58 19 61 Oman 43 31 76 60 47 24 89 98 78 Saudi Arabia 39 80 84 5 45 78 99 97 80 Syrian Arab Rep. 5 22 42 13 48 48 48 74 30 Tunisia 97 64 34 74 87 41 55 58 83 United Arab Emirates 15 52 58 14 6 81 94 97 43 West Bank and Gaza 43 .. 54 3 .. 49 44 .. .. Yemen, Rep. of 63 4 65 3 63 77 74 28 35 MENA 44 53 50 32 48 44 55 66 51 Resource-poor 53 63 41 38 47 46 42 58 50 Resource-rich 37 40 56 29 48 43 64 71 51 RRLA 40 27 40 27 55 46 49 56 40 RRLI 34 80 75 31 42 39 83 97 65 East Asia and Pacific 41 53 71 61 35 63 62 73 61 Europe and Central Asia 59 51 42 56 49 38 56 42 48 Latin American and the Caribbean 38 58 46 42 45 52 52 25 40 OECD 84 90 56 77 85 78 68 71 84 South Asia 37 48 51 62 50 50 39 56 50 Sub-Saharan Africa 38 24 40 29 37 32 24 36 26 LMIC average 49 58 52 51 46 50 55 50 53 World 50 50 50 50 50 50 50 50 50 Sources: See appendix B. Note: 2005 or closest year available. Regional averages reflect the simple average of the data for the countries included. For each column, a country's value represents the country's current placement in a worldwide ordering of countries, based on that business climate characteristic expressed as a cumulative frequency distribution, with "100" reflecting the countries with the most-friendly policies for doing business, and "0" reflecting the country with the most-cumbersome policies for doing business. OECD = High-income/OECD economies; LMIC = Low- and middle-income economies. 80 Economic Developments and Prospects key areas. Of the eight key areas of doing business, The continued use of industrial policies through- in only two (closing a business and paying taxes) do out MENA comes at a time of renewed interest in the RPLA economies rank (on average) in the top their effectiveness. Although economists agree that half of countries worldwide. Impediments are par- market forces and private entrepreneurship need to ticularly large with regard to contract enforcement, be the driving forces behind growth and productiv- access to finance, and business entry requirements. ity enhancements, increasing analysis of late has fo- In resource-rich, labor-importing economies, cused on the complementary role to market forces meanwhile, though generally more business-friend- that industrial policies can play.117 ly (in a few areas, such as access to finance, register- While a variety of economic justifications can be ing property, and paying taxes, they average in the made for the use of selective industrial policies (in- top quintile of countries, worldwide), there remain cluding coordination problems and information areas with especially burdensome regulations, in- externalities), several caveats for their use are war- cluding contract enforcement and the procedures ranted, particularly for MENA economies. MENA for starting a business. has a long history with industrial policy (from in- fant industry protection to state planning to wide- Industrial policy as a complement to market forces spread consumer subsidies), and although the lim- Along with across-the-board reforms of the busi- its of the region's protective interventions were ness environment, several MENA economies con- realized as early as the 1980s, the transition out of tinue to utilize industrial policies (designed to pro- these policies has been painstaking, in large part mote specific industries or sectors) to complement because it has involved the profoundly difficult task more broad-based policies that promote market of cutting back economic rents that have been built forces. In Morocco, for example, a new industrial over the years. strategy--"Emergence"--was adopted in 2005, de- Moreover, the international history of industrial signed to enhance specific sector competitiveness policy has demonstrated, if nothing else, the ability and employment creation and to improve the coun- to "get it wrong." Well-motivated or not, world- try's growth potential. The strategy focuses on the wide experience with industrial policy has been re- identification of specific sectors' weaknesses and markably divergent, with as many (or more) failures strengths and upgrading the industrial sector as successes and with significant unintended conse- through the modernization of its production quences (including rent seeking and corruption). processes and the consolidation of its competitive MENA's recent selective interventions to promote edge (see box 3.1). various industries appear on the surface, at least, to be Tunisia, in the midst of progress along certain intrinsically different from those in the past (aimed structural reform fronts, continues to maintain a less at protecting domestic industries than at improv- dual system of investment promotion and trade ing their chances for international competitiveness). policy. Generous privileges are extended for invest- And indeed, most countries maintain a mixture of ments in selected economic activities and for ex- both mainstream free-market measures and industrial porting, by supporting the creation of "offshore" policies. Nonetheless, given the region's difficulty firms, but the government still discourages foreign with extracting itself from the legacy of past industrial investment in protected service sectors. For more policies, MENA should be cautious in looking to a than 30 years, the strategy pursued by Tunisia has new system of industrial policies to promote growth, consisted of promoting exports, especially manu- but instead look to create a neutral and international- factured goods, while heavily protecting enterpris- ly competitive business environment. es that supply the local market. This strategy has created a dualism within the economy between an export sector whose competitiveness depends 3.5 Governance largely on concessions (including tax exemptions, transport cost subsidies, facilitated customs proce- Improving governance in the region is at the fore- dures, and foreign exchange concessions) and a do- front of improvements in economic policy. Parallel mestic sector that is still heavily protected (despite to the economic reforms the region faces, it must the opening up of bilateral trade in nonagricultural products under the Association Agreement with the EU). See, for example, Rodrik (2004). 117 Structural Reform Progress for Long-Term Growth 81 Box 3.1 Morocco's Emergence program Morocco's Emergence program is aimed at overhaul- from its present position as subcontractors for EU sup- ing the industrial apparatus while enhancing its com- pliers to full-service providers, working directly with petitiveness and carrying out voluntarist policies in fa- the final buyers, and (b) to upgrade from the produc- vor of emerging sectors. The strategy takes into tion of commodity garments to higher-value-added account changing regional and international environ- fashion garments. The main instruments of the plan ments. It encompasses a set of measures designed to include tariff and customs reforms; transport and lo- improve the access of Morocco's domestic products to gistics improvements; financial and fiscal incentives to world markets and to the attraction of foreign invest- boost new investments, establish export platforms, ment. The industrial sector has been divided into three and help firms restructure their balance sheets; and ed- poles: the first, made of expanding activities, needs lit- ucation and training. tle public help; the second requires public support, The vision of moving away from basic garment given the tough competition it faces; and the third is products and subcontracting is consistent with the composed of new global activities in which Morocco global dynamics of retailing. This will provide some ad- could position itself favorably. The latter two poles vantages to nearby suppliers of fashion goods and will comprise eight subsectors: the aeronautical, agropro- require additional services. The focus of the plan is on cessing, automotive, craft, electronic, offshoring, skills development (including design, merchandising, seafood, and textile industries. and material sourcing). Trade and customs reforms and Within the textile industries, in close partnership trade facilitation are also pertinent. The real test, how- with the Association of the Textile and Garment In- ever, is that of implementation because Morocco lags dustries (AMITH), the government is aiming to re- slightly behind most major competitors with regard to structure the competitiveness of the textile and cloth- putting in place reforms to adjust to the Multifiber ing sectors. The two interrelated strategic goals of this Agreement removal. A swift and effective implementa- plan are (a) to move the textile and garment industry tion of the plan is crucial to the survival of the industry. strengthen the incentives, mechanisms, and capaci- have been taken by MENA countries over the past sev- ties for public institutions, both to improve eco- eral years. On the administrative side, there have been nomic policies and to forge the broad social con- various achievements by both resource-poor sensus needed to successfully enact reform. economies and oil exporters. Jordan, Morocco, and The governance challenges facing MENA are the Republic of Yemen have each embarked on ambi- twofold: First, it faces the challenge of modernizing tious programs of civil service management reform, governance structures and operations for more effi- and in Egypt, civil service reform was advanced with cient public sector management. It involves adminis- the announcement of a new system of early retirement trative reform of the public sector to enhance the ef- for public sector employees in December 2005. There ficiency of the bureaucracy, to improve mechanisms has been additional progress by the region in attacking of internal accountability, and to reduce corruption. corruption, including in Algeria, Egypt, Jordan, and Second, the MENA region faces the more difficult Libya, which recently enacted anticorruption legisla- challenge of increasing public sector accountability. tion (although implementation is forthcoming). This governance challenge requires improving trans- In addition, several countries in the region have parency in governance mechanisms and enhancing taken important steps in opening up the political contestability in government policies. space and allowing for greater accountability in public policy. Many of these steps have been taken by the GCC countries. In 2001, Bahrain became a 3.5.1 Developments in governance reform constitutional monarchy with a bicameral parlia- Several important steps toward governance reform ment, granting full suffrage to all male and female 82 Economic Developments and Prospects citizens, and creating an independent judiciary. spheres of governance were examined: governance Qatar's political environment has also undergone related to public accountability and governance re- rapid changes, including introducing an electoral lated to the quality of public administration. For process in conjunction with the Municipal Council. comparability, those governance indicators have In May 2003, Qatar also established a Human been computed again, utilizing the methodology Rights Committee and became the first country in established, but with a minor adjustment to the un- the Gulf to have a female holding a public office. In derlying data and an adjustment to the computa- 2004, the government introduced new legislation tion methodology (see appendix B). granting more freedoms and permitting demon- From these two governance spheres, we evaluated strations, labor union formation, and public meet- both the current status of governance in MENA (in ings. These steps toward allowing greater voice in quality of public administration and in public sector development are an important element in moving accountability) and the progress with governance further with the economic reform agenda, ensuring over 2000­2005. Based on the composite reform in- that in the transition to a new development model, dexes, the MENA region has made significant strides the economic outcomes are socially acceptable. In in the realm of governance over the past few years. Oman, a consultative parliament was established in In the area of improving the quality of public ad- 2003, enabling all eligible adults to vote.118 Political ministration, the MENA region ranked (on average) rights have been extended to women, and starting in the 63rd percentile worldwide, ahead of all other in 2004, a number of other key appointments of regions of the world. The strongest reform effort women to ministerial and ambassadorial posts have has occurred among resource-poor economies in the occurred. Allowing greater information about do- region, which ranked (on average) in the top quin- mestic economic policies has also begun to enter tile worldwide with regard to improving the quality the agenda. In 2005, the Omani government grant- of public administration, led by strong achievements ed a license for private television and radio stations in Egypt, Morocco, and Tunisia. But a few resource- for the first time. Taken together, these steps pro- rich economies also made strong gains, including vide greater incentives to regional governments to Algeria, Oman, Qatar, Saudi Arabia, and the Repub- pursue sound and effective policies. lic of Yemen. Elsewhere, a major achievement in enhancing But perhaps even more important, the region public sector accountability has occurred with Mo- has made strong progress in improving mechanisms rocco's recent adoption of the Law on Political Par- for greater government accountability. Between ties, which helps consolidate the credibility and effi- 2000 and 2005, MENA countries ranked (on aver- ciency of political parties and institutions. First, the age) in the 64th percentile with regard to improv- law aims at enabling the political parties to take more ing mechanisms for government accountability, responsibility and be more accountable to their con- stronger progress than in any other region of the stituencies. Second, it seeks a more efficient parlia- world (table 3.6). The greatest improvement has ment, with two or three homogeneous groups be- emanated from the resource-rich, labor-importing coming healthy coalitions. Third, the law includes economies, where a few countries (such as Bahrain, provisions to ensure good governance inside politi- Oman, and Qatar) have taken significant steps to cal parties by allowing the judicial system to abolish open up the political space for greater participation parties that do not abide by internal regulations. in public policy. These essential reforms toward greater public sector accountability are particularly important for 3.5.2 Quantifying progress with governance the successful implementation of other areas of the reform reform agenda. Worldwide successful reform efforts Governance in the MENA region is evaluated based have depended critically upon the support and par- on the set of governance indicators established in ticipation of those in society whom reforms will im- the World Bank's 2003 report on governance in the pact. The governance improvements in MENA, MENA region.119 From that report, two separate with regard to granting greater voice in develop- ment to MENA's people, are important not only to take into account the needs and values of those who Despite the parliamentary elections, however, the powers of 118 the parliament are still limited. are affected by reforms but also to ensure that in the World Bank 2003b. 119 transition to a new development model, the eco- Structural Reform Progress for Long-Term Growth 83 Table 3.6: Structural reform progress: governance reform Quality of Public sector administration, Reform progress,b accountability, Reform progress,b Country/region current statusa 2000­2005 current statusa 2000­2005 Algeria 37.6 91 29.1 91 Bahrain 76.6 26 22.7 91 Egypt, Arab Republic of 42.6 92 24.8 84 Iran, Islamic Republic of 16.3 19 20.6 4 Jordan 66.0 67 34.0 60 Kuwait 58.2 24 31.2 65 Libya 10.6 64 0.0 42 Morocco 73.0 83 32.6 81 Oman 61.0 75 15.6 81 Qatar 59.6 89 13.5 74 Saudi Arabia 57.4 77 5.0 69 Syrian Arab Republic 14.9 67 7.1 74 Tunisia 74.5 87 22.0 22 United Arab Emirates 58.9 6 17.0 41 Yemen, Republic of 28.4 71 19.9 89 MENA 49.0 63 19.7 64 Resource-poor 64.0 82 28.4 62 Resource-rich 43.6 55 16.5 65 Resource-rich, labor-abundant 24.3 62 19.1 64 Resource-rich, labor-importing 54.6 52 15.0 66 East Asia and Pacific 43.3 45 41.0 48 Europe and Central Asia 47.0 46 51.8 51 Latin America and the Caribbean 45.8 50 57.0 53 High-income OECD 89.2 47 91.2 49 South Asia 47.5 53 38.9 31 Sub-Saharan Africa 39.4 53 36.7 55 World 50.0 50 50.0 50 Sources: World Bank Staff estimates; see appendix B. Note: Regional averages reflect unweighted average of countries included. a. "Current status" reflects country's current placement in a worldwide ordering of countries, based on a variety of governance indicators expressed as a cumulative fre- quency distribution, with "100" reflecting the country with the most-efficient/accountable governance processes (worldwide) and "0" representing the country with the most-inefficient/unaccountable governance processes (worldwide). b. "Reform progress" reflects the improvement in a country's rank between 2000 and 2005 in a worldwide ordering of countries, based on governance indicators expressed as a cumulative frequency distribution, with "100" reflecting the country that exhibited the greatest improvement in rank and "0" reflecting the country that exhibited the greatest deterioration. nomic outcomes are socially acceptable among regard to accountable governance structures. Every those who have benefited from the old systems. country in the region except one--Jordan--ranks At the same time, it must be emphasized that the in the bottom third with regard to public sector ac- MENA region continues to have the greatest gap countability (and Jordan is only marginally higher). with the rest of the world with regard to account- Given this especially large gap in public sector ac- able and inclusive governance structures, ranking countability with the rest of the world, it is thus an (on average) in the bottom quintile worldwide, by important development that both resource-rich and far the lowest average ranking worldwide. More- resource-poor economies in MENA are making a over, there is almost no diversity in the region with start at these vital changes. 84 Economic Developments and Prospects Appendix A: Statistical Tables Appendix Table A1: Gross domestic product and prices: real GDP Growth, 1995­2005 (percentage per year) Country 1995­2000 2000­2002 2003 2004 2005 MENA region (incl. Iraq) .. 3.0 5.6 6.3 6.0 MENA (excl. Iraq) 3.7 3.3 6.9 5.6 6.0 Resource-poor, labor-abundant 4.7 3.7 4.1 4.8 4.0 Djibouti ­0.5 2.3 3.2 3.0 3.2 Egypt, Arab Republic of 5.6 3.3 3.1 4.2 4.9 Jordan 3.2 5.5 4.1 7.7 7.2 Lebanon 1.9 3.5 4.9 6.3 1.0 Morocco 3.6 4.7 5.5 4.2 1.5 Tunisia 5.6 3.5 5.6 5.8 5.0 West Bank and Gaza .. ­12.5 6.2 6.2 6.3 Resource-rich, labor-abundant (incl. Iraq) .. 3.1 1.2 7.2 5.3 Resource-rich, labor-abundant (excl. Iraq) 3.4 4.5 6.1 4.7 5.5 Algeria 3.2 3.3 6.8 5.2 5.5 Iran, Islamic Republic of 3.5 5.3 6.7 4.8 5.9 Iraq .. ­7.2 ­41.4 46.5 2.6 Syrian Arab Republic 2.4 3.3 2.5 3.6 4.0 Yemen, Republic of 5.5 4.2 3.1 2.6 3.8 Resource-rich, labor-importing 3.3 2.5 8.6 6.5 7.2 Bahrain 4.3 4.9 7.2 5.4 6.9 Kuwait 1.9 2.9 13.4 6.2 8.5 Libya 1.6 3.3 9.1 9.3 8.5 Oman 3.4 4.6 1.4 3.1 4.1 Qatar 11.8 5.9 5.9 9.9 8.8 Saudi Arabia 2.7 0.3 7.7 5.2 6.5 United Arab Emirates 5.2 6.0 11.3 8.5 8.0 Source: World Bank Staff estimates. Note: The MENA region includes the resource-poor, labor-abundant (RPLA) economies of Djibouti, Arab Republic of Egypt, Jordan, Lebanon, Morocco, Tunisia, and the West Bank and Gaza; the resource-rich, labor-abundant (RRLA) economies of Algeria, the Islamic Republic of Iran, Iraq, the Syrian Arab Republic, and the Republic of Yemen; and the resource-rich, labor-importing (RRLI) economies of Bahrain, Kuwait, Libya, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. The West Bank and Gaza is not included in the regional or subregional aggregates. Appendix A: Statistical Tables 85 Appendix Table A2: Gross domestic product and prices: GDP, 1995­2005 (constant US$ billions) Country Average 1995­2000 Average 2000­2002 2003 2004 2005 MENA region (incl. Iraq) .. 779.3 846.6 899.7 953.4 MENA (excl. Iraq) 660.2 755.1 833.5 880.5 933.8 Resource-poor, labor-abundant 156.4 184.9 199.0 208.5 216.8 Djibouti 0.5 0.6 0.6 0.6 0.6 Egypt, Arab Republic of 84.4 102.8 109.5 114.1 119.7 Jordan 7.6 8.9 9.8 10.5 11.3 Lebanon 16.0 17.2 18.6 19.8 20.0 Morocco 31.2 35.1 38.6 40.2 40.8 Tunisia 16.7 20.2 21.9 23.2 24.4 West Bank and Gaza .. 4.0 3.8 4.0 4.3 Resource-rich, labor-abundant (incl. Iraq) .. 208.6 218.3 234.0 246.4 Resource-rich, labor-abundant (excl. Iraq) 161.5 184.4 205.2 214.9 226.7 Algeria 48.8 55.1 61.0 64.1 67.7 Iran, Islamic Republic of 87.2 100.8 113.9 119.4 126.5 Iraq .. 24.1 13.1 19.2 19.7 Syrian Arab Republic 17.2 18.6 19.7 20.4 21.3 Yemen, Republic of 8.2 9.9 10.6 10.9 11.3 Resource-rich, labor-importing 342.3 385.8 429.3 457.2 490.2 Bahrain 7.0 8.4 9.4 9.9 10.6 Kuwait 34.7 37.8 44.4 47.2 51.2 Libya 33.3 35.7 40.2 43.9 47.6 Oman 18.1 21.0 22.0 22.7 23.6 Qatar 13.3 18.7 21.1 23.2 25.2 Saudi Arabia 174.7 189.2 204.2 214.9 229.0 United Arab Emirates 61.1 75.0 87.9 95.3 103.0 Source: World Bank staff estimates. Note: The MENA region includes the resource-poor, labor-abundant (RPLA) economies of Djibouti, Arab Republic of Egypt, Jordan, Lebanon, Morocco, Tunisia, and the West Bank and Gaza; the resource-rich, labor-abundant (RRLA) economies of Algeria, the Islamic Republic of Iran, Iraq, the Syrian Arab Republic, and the Republic of Yemen; and the resource-rich, labor-importing (RRLI) economies of Bahrain, Kuwait, Libya, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. The West Bank and Gaza is not included in the regional or subregional aggregates. 86 Economic Developments and Prospects Appendix Table A3: Gross domestic product and prices: real GDP per capita growth, 1995­2005 (percentage per year) Country 1995­2000 2000­2002 2003 2004 2005 MENA region (incl. Iraq) .. 0.9 3.4 4.3 3.8 MENA (excl. Iraq) 1.7 1.3 4.9 3.8 4.0 Resource-poor, labor-abundant 2.8 1.9 2.3 3.0 2.2 Djibouti ­3.2 0.3 1.4 1.5 1.4 Egypt, Arab Republic of 3.7 1.5 1.3 2.4 3.0 Jordan 0.1 2.5 1.4 5.1 4.4 Lebanon 0.4 2.2 3.6 5.0 ­0.3 Morocco 1.8 3.1 3.9 2.6 ­0.1 Tunisia 4.2 2.1 4.4 4.6 3.8 West Bank and Gaza .. ­15.7 2.5 2.4 2.7 Resource-rich, labor-abundant (incl. Iraq) .. 0.8 ­0.8 5.3 3.2 Resource-rich, labor-abundant (excl. Iraq) 1.5 2.6 4.3 3.1 3.7 Algeria 1.5 1.8 5.1 3.4 3.9 Iran, Islamic Republic of 1.9 3.8 5.4 4.0 4.6 Iraq .. ­10.3 ­43.3 41.6 ­0.8 Syrian Arab Republic ­0.2 0.8 0.1 1.3 1.6 Yemen, Republic of 2.6 1.1 0.0 ­0.5 0.7 Resource-rich, labor-importing 0.4 ­0.5 5.3 3.3 3.9 Bahrain 1.2 2.8 5.1 3.4 4.8 Kuwait ­2.0 ­0.4 10.5 3.5 5.4 Libya ­0.4 1.3 6.9 7.1 6.3 Oman 0.9 1.9 ­1.0 0.8 1.6 Qatar 8.5 3.7 3.6 7.6 6.5 Saudi Arabia 0.0 ­2.4 4.6 2.1 3.6 United Arab Emirates ­0.9 ­1.4 3.7 2.1 0.8 Source: World Bank Staff estimates. Note: The MENA region includes the resource-poor, labor-abundant (RPLA) economies of Djibouti, Arab Republic of Egypt, Jordan, Lebanon, Morocco, Tunisia, and the West Bank and Gaza; the resource-rich, labor-abundant (RRLA) economies of Algeria, the Islamic Republic of Iran, Iraq, the Syrian Arab Republic, and the Republic of Yemen; and the resource-rich, labor-importing (RRLI) economies of Bahrain, Kuwait, Libya, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. The West Bank and Gaza is not included in the regional or subregional aggregates. Appendix A: Statistical Tables 87 Appendix Table A4: Gross domestic product and prices: consumer prices, 1995­2005 (average annual change) Country Average 1995­2000 Average 2000­2002 2003 2004 2005 MENA region (incl. Iraq) .. .. .. .. .. MENA (excl. Iraq) 5.2 2.8 4.5 5.1 6.1 Resource-poor, labor-abundant 3.3 2.3 4.4 5.6 5.6 Djibouti 2.5 1.2 2.0 3.1 3.0 Egypt, Arab Republic of 3.8 2.8 7.1 9.5 8.9 Jordan 2.8 1.8 1.6 3.4 3.5 Lebanon 4.1 0.7 3.9 4.7 1.3 Morocco 1.9 1.7 1.2 1.5 3.9 Tunisia 3.2 2.3 2.8 3.6 2.6 West Bank and Gaza 6.5 3.4 .. .. .. Resource-rich, labor-abundant (incl. Iraq) .. 9.9 11.7 12.6 14.0 Resource-rich, labor-abundant (excl. Iraq) 14.1 9.0 10.5 10.9 12.1 Algeria 6.3 2.8 2.6 3.6 3.5 Iran, Islamic Republic of 19.3 13.6 15.6 15.6 17.9 Iraq .. 17.8 34.0 31.7 32.8 Syrian Arab Republic 1.8 0.1 1.3 3.3 3.0 Yemen, Republic of 11.1 8.7 11.9 12.0 14.6 Resource-rich, labor-importing 0.5 ­0.1 1.1 1.6 3.0 Bahrain ­0.2 ­0.8 1.7 2.3 2.7 Kuwait 1.8 1.5 1.2 1.3 4.0 Libya .. ­9.3 ­2.1 ­3.4 3.4 Oman ­1.0 ­0.6 0.2 0.8 1.9 Qatar 3.3 1.2 2.3 6.8 7.8 Saudi Arabia ­0.3 ­0.3 0.6 0.3 1.1 United Arab Emirates 2.3 2.9 3.1 4.6 6.0 Source: World Bank Staff estimates. Note: The MENA region includes the resource-poor, labor-abundant (RPLA) economies of Djibouti, Arab Republic of Egypt, Jordan, Lebanon, Morocco, Tunisia, and the West Bank and Gaza; the resource-rich, labor-abundant (RRLA) economies of Algeria, the Islamic Republic of Iran, Iraq, the Syrian Arab Republic, and the Republic of Yemen; and the resource-rich, labor-importing (RRLI) economies of Bahrain, Kuwait, Libya, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. The West Bank and Gaza is not included in the regional or subregional aggregates. 88 Economic Developments and Prospects Appendix Table A5: Government finance: total expenditures, 1995­2005 (percentage of GDP) Country Average 1995­1999 Average 2000­2002 2003 2004 2005 MENA region (incl. Iraq) .. .. .. 31.9 30.6 MENA (excl. Iraq) 32.0 32.3 31.3 30.2 29.2 Resource-poor, labor-abundant 28.9 30.9 30.7 30.0 30.6 Djibouti 35.1 31.9 36.6 38.1 36.5 Egypt, Arab Republic of 26.8 29.9 30.1 29.3 29.4 Jordan 35.3 34.9 37.6 38.1 38.2 Lebanon 35.4 38.8 35.8 32.7 31.2 Morocco 29.3 30.8 30.0 29.8 33.1 Tunisia 29.0 27.8 27.0 26.5 26.5 West Bank and Gaza .. .. 41.1 42.3 49.7 Resource-rich, labor-abundant (incl. Iraq) .. .. .. 33.5 33.8 Resource-rich, labor-abundant (excl. Iraq) 27.0 27.2 27.7 27.6 29.4 Algeria 30.8 32.2 32.4 28.8 26.6 Iran, Islamic Republic of 25.2 24.1 24.2 25.3 29.2 Iraqa .. .. .. 98.3 78.9 Syrian Arab Republic 27.0 30.5 27.8 28.0 28.0 Yemen, Republic of 30.1 32.9 35.7 34.2 40.5 Resource-rich, labor-importing 36.8 35.6 33.6 31.7 28.6 Bahrain 31.0 31.1 33.4 31.1 30.6 Kuwait 48.1 40.2 38.6 36.9 30.7 Libya .. 38.8 44.2 40.8 40.8 Oman 39.7 37.4 39.7 39.9 40.1 Qatar 44.6 31.7 31.4 30.7 26.7 Saudi Arabia 33.8 35.5 33.3 32.1 29.6 United Arab Emirates 38.5 33.6 28.2 24.4 20.0 Source: World Bank Staff estimates Note: The MENA region includes the resource-poor, labor-abundant (RPLA) economies of Djibouti, Arab Republic of Egypt, Jordan, Lebanon, Morocco, Tunisia, and the West Bank and Gaza; the resource-rich, labor-abundant (RRLA) economies of Algeria, the Islamic Republic of Iran, Iraq, the Syrian Arab Republic, and the Republic of Yemen; and the resource-rich, labor-importing (RRLI) economies of Bahrain, Kuwait, Libya, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. The West Bank and Gaza is not included in the regional or subregional aggregates. Current expenditures. a Appendix A: Statistical Tables 89 Appendix Table A6: Government finance: current expenditures, 1995­2005 (percentage of GDP) Country Average 1995­1999 Average 2000­2002 2003 2004 2005 MENA region (incl. Iraq) .. .. .. 25.9 24.5 MENA (excl. Iraq) 25.4 25.8 24.1 23.9 22.6 Resource-poor, labor-abundant 23.1 25.0 25.1 24.7 25.5 Djibouti 30.8 28.6 29.9 30.3 28.4 Egypt, Arab Republic of 21.1 23.7 24.4 24.0 24.4 Jordan 28.0 28.5 28.7 28.3 31.2 Lebanon 28.3 35.9 32.8 29.5 28.9 Morocco 24.9 25.5 25.3 25.4 28.3 Tunisia 22.0 19.9 19.6 19.9 19.1 West Bank and Gaza .. .. 33.9 36.6 39.7 Resource-rich, labor-abundant (incl. Iraq) .. .. .. 25.8 26.2 Resource-rich, labor-abundant (excl. Iraq) 17.5 18.6 20.0 19.2 21.0 Algeria 23.1 22.9 22.6 19.0 15.1 Iran, Islamic Republic of 14.8 16.1 18.4 18.7 23.2 Iraq .. .. .. 98.3 78.9 Syrian Arab Republic 15.4 18.5 15.6 15.6 15.6 Yemen, Republic of 24.1 26.2 26.7 24.7 31.2 Resource-rich, labor-importing 31.6 30.0 27.1 26.5 23.0 Bahrain 25.6 24.9 26.3 25.3 25.5 Kuwait 42.5 36.3 33.8 32.2 26.5 Libya .. 21.5 14.7 .. .. Oman 32.2 29.5 29.4 28.9 27.2 Qatar 38.6 26.9 25.3 22.1 18.6 Saudi Arabia 29.6 31.0 28.5 28.1 25.0 United Arab Emirates 31.7 28.9 23.2 20.3 16.5 Source: World Bank Staff estimates. Note: The MENA region includes the resource-poor, labor-abundant (RPLA) economies of Djibouti, Arab Republic of Egypt, Jordan, Lebanon, Morocco, Tunisia, and the West Bank and Gaza; the resource-rich, labor-abundant (RRLA) economies of Algeria, the Islamic Republic of Iran, Iraq, the Syrian Arab Republic, and the Republic of Yemen; and the resource-rich, labor-importing (RRLI) economies of Bahrain, Kuwait, Libya, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. The West Bank and Gaza is not included in the regional or subregional aggregates. 90 Economic Developments and Prospects Appendix Table A7: Government finance: total revenues, 1995­2005 (percentage of GDP) Country Average 1995­1999 Average 2000­2002 2003 2004 2005 MENA region (incl. Iraq) .. .. .. 39.2 43.1 MENA (excl. Iraq) 29.2 34.6 34.3 37.8 41.6 Resource-poor, labor-abundant 25.0 26.9 27.0 26.8 25.7 Djibouti 31.5 29.6 34.3 35.9 34.3 Egypt, Arab Republic of 25.1 27.9 27.7 26.8 23.6 Jordan 33.3 32.5 36.3 36.2 33.6 Lebanon 16.8 20.5 22.1 22.8 22.1 Morocco 27.0 27.4 27.3 27.6 29.8 Tunisia 24.5 24.4 23.9 24.1 24.0 West Bank and Gaza .. .. 24.3 26.4 30.3 Resource-rich, labor-abundant (incl. Iraq) .. .. .. 37.3 42.0 Resource-rich, labor-abundant (excl. Iraq) 25.4 31.4 30.1 32.2 26.7 Algeria 30.8 36.7 37.0 36.2 40.1 Iran, Islamic Republic of 22.8 28.8 26.7 30.3 35.3 Iraq .. .. .. 93.6 96.3 Syrian Arab Republic 25.8 28.1 24.8 23.0 23.0 Yemen, Republic of 27.0 36.0 30.9 32.0 38.1 Resource-rich, labor-importing 33.9 40.0 39.9 45.2 49.7 Bahrain 26.6 33.4 31.4 31.4 32.5 Kuwait 57.7 67.1 56.6 60.5 67.1 Libya .. 46.6 54.8 59.5 59.5 Oman 39.4 45.7 45.6 46.0 47.2 Qatar 37.0 37.9 35.8 46.8 44.5 Saudi Arabia 28.6 33.3 34.5 41.8 48.0 United Arab Emirates 34.5 41.0 41.1 42.7 45.0 Source: World Bank Staff estimates. Note: The MENA region includes the resource-poor, labor-abundant (RPLA) economies of Djibouti, Arab Republic of Egypt, Jordan, Lebanon, Morocco, Tunisia, and the West Bank and Gaza; the resource-rich, labor-abundant (RRLA) economies of Algeria, the Islamic Republic of Iran, Iraq, the Syrian Arab Republic, and the Republic of Yemen; and the resource-rich, labor-importing (RRLI) economies of Bahrain, Kuwait, Libya, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. The West Bank and Gaza is not included in the regional or subregional aggregates. Appendix A: Statistical Tables 91 Appendix Table A8: Government finance: overall fiscal balance, 1995­2005 (percentage of GDP) Country Average 1995­1999 Average 2000­2002 2003 2004 2005 MENA region (incl. Iraq) .. .. .. 6.4 11.8 MENA (excl. Iraq) ­2.9 2.3 3.0 7.6 12.4 Resource-poor, labor-abundant ­3.9 ­4.0 ­3.7 ­3.2 ­4.9 Djibouti ­3.6 ­2.2 ­2.3 ­2.1 ­2.2 Egypt, Arab Republic of ­1.7 ­2.0 ­2.4 ­2.4 ­5.8 Jordan ­2.0 ­2.4 ­1.4 ­1.9 ­4.6 Lebanon ­18.6 ­18.3 ­13.7 ­9.9 ­9.1 Morocco ­2.3 ­3.4 ­2.7 ­2.3 ­3.3 Tunisia ­4.4 ­3.4 ­3.2 ­2.5 ­2.5 West Bank and Gaza .. .. ­16.8 ­15.9 ­19.4 Resource-rich, labor-abundant (incl. Iraq) ... .. .. 0.9 5.6 Resource-rich, labor-abundant (excl. Iraq) ­2.0 4.3 2.3 4.6 7.3 Algeria ­0.1 4.5 4.6 7.4 13.5 Iran, Islamic Republic of ­2.8 4.7 2.5 5.0 6.1 Iraq .. .. .. ­40.5 ­10.9 Syrian Arab Republic ­1.3 ­2.3 ­3.1 ­5.0 ­5.0 Yemen, Republic of ­3.1 3.1 ­4.8 ­2.3 ­2.4 Resource-rich, labor-importing ­2.9 4.4 6.3 13.4 21.0 Bahrain ­4.4 2.3 ­2.0 0.3 1.9 Kuwait 9.6 26.9 8.0 23.6 36.5 Libya .. 7.8 10.6 18.7 18.7 Oman ­0.3 8.3 6.0 6.1 7.1 Qatar ­7.7 6.2 4.3 16.2 17.9 Saudi Arabia ­5.2 ­2.2 1.2 9.6 8.4 United Arab Emirates ­4.0 7.4 13.0 18.3 24.9 Source: World Bank Staff estimates. Note: The MENA region includes the resource-poor, labor-abundant (RPLA) economies of Djibouti, Arab Republic of Egypt, Jordan, Lebanon, Morocco, Tunisia, and the West Bank and Gaza; the resource-rich, labor-abundant (RRLA) economies of Algeria, the Islamic Republic of Iran, Iraq, the Syrian Arab Republic, and the Republic of Yemen; and the resource-rich, labor-importing (RRLI) economies of Bahrain, Kuwait, Libya, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. The West Bank and Gaza is not included in the regional or subregional aggregates. 92 Economic Developments and Prospects Appendix Table A9: External sector: exports of goods and services, 1995­2005 (percentage of GDP) Country Average 1995­1999 Average 2000­2002 2003 2004 2005 MENA region (incl. Iraq) .. .. .. 49.1 .. MENA (excl. Iraq) 34.2 39.9 43.8 48.6 54.4 Resource-poor, labor-abundant 24.5 24.5 28.5 33.2 34.6 Djibouti 38.9 37.0 39.9 37.3 36.9 Egypt, Arab Republic of 18.1 17.0 21.7 29.2 31.1 Jordan 48.5 43.9 47.5 52.0 51.1 Lebanon 12.8 14.8 18.8 20.5 20.8 Morocco 28.0 32.7 32.5 33.1 35.0 Tunisia 42.8 45.7 43.9 46.4 47.2 West Bank and Gaza .. .. .. .. .. Resource-rich, labor-abundant (incl. Iraq) .. .. .. 37.3 .. Resource-rich, labor-abundant (excl. Iraq) 23.6 32.0 31.8 34.4 37.7 Algeria 27.5 38.2 38.3 40.2 45.3 Iran, Islamic Republic of 19.0 27.4 28.2 31.8 34.1 Iraq .. .. .. 69.1 .. Syrian Arab Republic 39.9 37.5 32.0 28.7 29.2 Yemen, Republic of 38.2 39.4 39.0 38.1 43.1 Resource-rich, labor-importing 45.4 51.6 57.1 62.5 69.1 Bahrain 78.5 85.2 82.3 83.3 79.8 Kuwait 49.4 50.8 53.9 60.5 66.5 Libya 26.0 42.4 65.4 72.0 86.7 Oman 46.8 57.6 56.2 57.0 59.1 Qatar 47.1 65.0 62.3 71.5 73.2 Saudi Arabia 36.8 41.6 46.1 52.7 60.8 United Arab Emirates 77.7 72.8 79.1 81.9 84.9 Source: World Bank Staff estimates. Note: The MENA region includes the resource-poor, labor-abundant (RPLA) economies of Djibouti, Arab Republic of Egypt, Jordan, Lebanon, Morocco, Tunisia, and the West Bank and Gaza; the resource-rich, labor-abundant (RRLA) economies of Algeria, the Islamic Republic of Iran, Iraq, the Syrian Arab Republic, and the Republic of Yemen; and the resource-rich, labor-importing (RRLI) economies of Bahrain, Kuwait, Libya, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. The West Bank and Gaza is not included in the regional or subregional aggregates. Appendix A: Statistical Tables 93 Appendix Table A10: External sector: merchandise exports, 1995­2005 (current US$ billions) Country Average 1995­1999 Average 2000­2002 2003 2004 2005 MENA region (incl. Iraq) .. 272.8 337.1 436.7 600.0 MENA (excl. Iraq) 182.4 260.1 327.0 418.9 577.3 Resource-poor, labor-abundant 20.5 24.9 30.6 36.7 42.4 Djibouti 0.0 0.0 0.0 0.0 0.0 Egypt, Arab Republic of 4.9 6.9 8.2 10.5 14.0 Jordan 1.8 2.3 3.1 3.9 4.3 Lebanon 1.1 1.3 2.1 2.4 2.6 Morocco 7.1 7.5 8.8 9.7 10.3 Tunisia 5.6 6.4 8.0 9.7 10.7 West Bank and Gaza .. 0.5 0.4 0.5 0.6 Resource-rich, labor-abundant (incl. Iraq) .. 68.4 77.6 103.9 141.2 Resource-rich, labor-abundant (excl. Iraq) 36.5 55.7 67.6 86.1 118.5 Algeria 12.0 19.8 24.5 32.2 45.8 Iran, Islamic Republic of 18.7 26.9 33.8 44.4 61.0 Iraq .. 12.7 10.1 17.8 22.8 Syrian Arab Republic 3.8 5.4 5.4 4.9 5.3 Yemen, Republic of 2.1 3.6 3.9 4.7 6.4 Resource-rich, labor-importing 125.4 179.5 228.8 296.1 416.4 Bahrain 4.2 5.9 6.7 7.6 10.4 Kuwait 12.8 17.0 21.8 30.1 45.1 Libya 8.4 11.5 14.7 17.4 29.6 Oman 6.8 11.2 11.7 13.3 16.3 Qatar 4.8 11.4 13.6 19.4 24.9 Saudi Arabia 52.2 72.6 93.1 125.9 180.6 United Arab Emirates 36.4 49.9 67.3 82.3 109.5 Source: World Bank Staff estimates. Note: The MENA region includes the resource-poor, labor-abundant (RPLA) economies of Djibouti, Arab Republic of Egypt, Jordan, Lebanon, Morocco, Tunisia, and the West Bank and Gaza; the resource-rich, labor-abundant (RRLA) economies of Algeria, the Islamic Republic of Iran, Iraq, the Syrian Arab Republic, and the Republic of Yemen; and the resource-rich, labor-importing (RRLI) economies of Bahrain, Kuwait, Libya, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. The West Bank and Gaza is not included in the regional or subregional aggregates. 94 Economic Developments and Prospects Appendix Table A11: External sector: imports of goods and services, 1995­2005 (percentage of GDP) Country Average 1995­1999 Average 2000­2002 2003 2004 2005 MENA region (incl. Iraq) .. .. .. 37.9 .. MENA (excl. Iraq) 32.3 32.1 34.4 36.5 35.8 Resource-poor, labor-abundant 34.1 32.2 34.0 40.0 42.2 Djibouti 50.7 46.6 49.1 54.6 54.0 Egypt, Arab Republic of 25.6 22.3 23.6 29.6 31.3 Jordan 69.8 67.6 68.7 81.8 92.0 Lebanon 49.0 38.1 37.0 44.0 43.2 Morocco 32.3 36.9 36.4 39.3 43.9 Tunisia 45.5 49.9 47.6 49.3 50.2 West Bank and Gaza .. .. .. .. .. Resource-rich, labor-abundant (incl. Iraq) .. .. .. 35.0 .. Resource-rich, labor-abundant (excl. Iraq) 20.8 23.7 27.6 29.8 29.0 Algeria 24.3 23.2 23.9 25.8 23.5 Iran, Islamic Republic of 15.4 21.2 27.6 30.1 28.8 Iraq .. .. .. 92.7 .. Syrian Arab Republic 38.4 32.1 31.5 37.6 50.3 Yemen, Republic of 47.4 38.6 42.5 37.8 36.9 Resource-rich, labor-importing 38.2 36.5 38.4 38.9 37.2 Bahrain 69.8 63.8 64.0 64.2 64.6 Kuwait 44.2 34.1 35.6 36.0 30.3 Libya 22.7 26.7 38.0 41.7 37.2 Oman 39.5 34.8 37.7 42.9 47.0 Qatar 50.1 35.0 33.7 26.7 26.7 Saudi Arabia 27.2 28.9 27.5 28.2 29.1 United Arab Emirates 72.3 60.0 65.1 65.3 57.6 Source: World Bank Staff estimates. Note: The MENA region includes the resource-poor, labor-abundant (RPLA) economies of Djibouti, Arab Republic of Egypt, Jordan, Lebanon, Morocco, Tunisia, and the West Bank and Gaza; the resource-rich, labor-abundant (RRLA) economies of Algeria, the Islamic Republic of Iran, Iraq, the Syrian Arab Republic, and the Republic of Yemen; and the resource-rich, labor-importing (RRLI) economies of Bahrain, Kuwait, Libya, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. The West Bank and Gaza is not included in the regional or subregional aggregates. Appendix A: Statistical Tables 95 Appendix Table A12: External sector: current account balance, 1995­2005 (percentage of GDP) Country Average 1995­1999 Average 2000­2002 2003 2004 2005 MENA region (incl. Iraq) .. .. .. 10.7 17.4 MENA (excl. Iraq) 0.2 6.9 7.8 11.9 18.3 Resource-poor, labor-abundant ­3.9 ­1.8 0.1 ­0.5 ­1.7 Djibouti 1.5 2.0 6.6 ­0.5 ­0.5 Egypt, Arab Republic of ­0.9 ­0.2 2.3 4.4 4.6 Jordan ­0.3 2.1 11.6 ­0.2 ­17.8 Lebanon ­29.2 ­18.7 ­19.4 ­22.7 ­21.6 Morocco ­0.9 2.5 3.6 2.2 0.1 Tunisia ­3.1 ­4.0 ­2.9 ­2.0 ­2.6 West Bank and Gaza .. .. .. .. .. Resource-rich, labor-abundant (incl. Iraq) .. .. .. 2.1 7.3 Resource-rich, labor-abundant (excl. Iraq) 2.8 8.5 4.3 5.6 9.5 Algeria 0.4 12.5 13.0 13.1 17.8 Iran, Islamic Republic of 4.1 6.9 1.4 2.5 5.9 Iraq .. .. .. ­36.8 ­14.4 Syrian Arab Republic 0.9 6.5 ­2.2 2.3 2.2 Yemen, Republic of 2.9 8.1 ­0.1 2.0 7.6 Resource-rich, labor-importing 0.9 10.3 13.2 20.3 29.7 Bahrain ­1.1 4.2 2.1 3.8 6.4 Kuwait 18.5 24.6 20.4 31.4 44.1 Libya 4.1 11.9 51.9 30.3 30.3 Oman ­6.2 11.5 6.6 3.3 3.1 Qatar ­18.6 18.2 23.9 38.3 41.5 Saudi Arabia ­2.7 6.3 13.1 20.6 28.3 United Arab Emirates 5.5 10.5 8.7 11.9 29.8 Source: World Bank Staff estimates. Note: The MENA region includes the resource-poor, labor-abundant (RPLA) economies of Djibouti, Arab Republic of Egypt, Jordan, Lebanon, Morocco, Tunisia, and the West Bank and Gaza; the resource-rich, labor-abundant (RRLA) economies of Algeria, the Islamic Republic of Iran, Iraq, the Syrian Arab Republic, and the Republic of Yemen; and the resource-rich, labor-importing (RRLI) economies of Bahrain, Kuwait, Libya, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. The West Bank and Gaza is not included in the regional or subregional aggregates. 96 Economic Developments and Prospects Appendix Table A13: External sector: external reserves, 1995­2005 (current US$ billions) Country Average 1995­1999 Average 2000­2002 2003 2004 2005 MENA region (incl. Iraq) .. .. 229.1 296.9 373.3 MENA (excl. Iraq) .. 167.3 227.9 289.0 364.0 Resource-poor, labor-abundant .. 36.4 51.8 56.1 62.3 Djibouti 0.1 0.1 0.1 0.1 0.1 Egypt, Arab Republic of .. 14.5 14.8 14.8 19.2 Jordan 2.1 3.6 5.4 5.5 5.5 Lebanon 9.1 7.9 14.0 14.1 14.6 Morocco 4.5 8.3 14.6 17.6 18.7 Tunisia 1.9 2.0 3.0 4.1 4.2 West Bank and Gaza .. .. .. .. .. Resource-rich, labor-abundant (incl. Iraq) .. .. 67.6 93.8 126.3 Resource-rich, labor-abundant (excl. Iraq) .. 41.7 66.5 85.9 117.0 Algeria 5.4 18.0 33.2 43.5 57.4 Iran, Islamic Republic of 6.8 16.8 24.4 33.0 49.8 Iraq .. .. 1.1 7.9 9.3 Syrian Arab Republic .. 3.4 4.5 4.3 4.4 Yemen, Republic of 1.1 3.5 4.4 5.1 5.4 Resource-rich, labor-importing 35.1 89.2 109.6 147.0 184.6 Bahrain 1.3 1.6 1.5 1.7 1.7 Kuwait 1.0 8.8 7.7 8.4 9.5 Libya 6.6 14.1 18.9 24.6 39.5 Oman 2.2 2.7 3.6 3.6 4.1 Qatar 0.9 1.3 2.9 3.4 4.9 Saudi Arabia 14.0 46.2 59.8 86.8 101.9 United Arab Emirates 8.9 14.5 15.1 18.6 23.0 Source: World Bank Staff estimates. Note: The MENA region includes the resource-poor, labor-abundant (RPLA) economies of Djibouti, Arab Republic of Egypt, Jordan, Lebanon, Morocco, Tunisia, and the West Bank and Gaza; the resource-rich, labor-abundant (RRLA) economies of Algeria, the Islamic Republic of Iran, Iraq, the Syrian Arab Republic, and the Republic of Yemen; and the resource-rich, labor-importing (RRLI) economies of Bahrain, Kuwait, Libya, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. The West Bank and Gaza is not included in the regional or subregional aggregates. Appendix A: Statistical Tables 97 Appendix Table A14: External sector: external reserves, 1995­2005 (months of goods imports) Country Average 1995­1999 Average 2000­2002 2003 2004 2005 MENA region (incl. Iraq) .. .. .. 12.6 .. MENA (excl. Iraq) .. 11.7 12.7 13.2 13.7 Resource-poor, labor-abundant .. 9.4 12.3 10.6 10.0 Djibouti 4.6 4.3 5.1 4.1 4.2 Egypt, Arab Republic of .. 10.7 12.0 9.7 10.0 Jordan 6.3 10.0 12.7 9.0 7.1 Lebanon 15.7 14.8 23.5 18.0 18.7 Morocco 5.8 9.4 13.3 13.0 11.8 Tunisia 3.0 2.8 3.4 4.1 3.7 West Bank and Gaza .. .. .. .. .. Resource-rich, labor-abundant (incl. Iraq) .. .. .. 13.3 .. Resource-rich, labor-abundant (excl. Iraq) .. 13.8 15.8 15.9 18.5 Algeria 7.5 20.8 29.9 29.1 33.8 Iran, Islamic Republic of .. 10.8 10.2 10.8 14.6 Iraq .. .. .. 4.8 .. Syrian Arab Republic .. 9.3 11.1 8.1 5.4 Yemen, Republic of 5.9 14.7 15.0 15.9 14.2 Resource-rich, labor-importing 5.3 12.0 11.6 13.1 13.1 Bahrain 4.4 4.4 3.5 3.3 2.4 Kuwait 1.8 14.7 9.3 8.3 8.4 Libya 13.6 32.6 31.5 33.7 43.8 Oman 5.9 6.2 7.1 5.4 4.6 Qatar 3.0 3.6 6.4 8.4 8.9 Saudi Arabia 6.4 19.4 21.2 25.5 21.2 United Arab Emirates 3.9 5.1 4.0 4.1 4.5 Source: World Bank Staff estimates. Note: The MENA region includes the resource-poor, labor-abundant (RPLA) economies of Djibouti, Arab Republic of Egypt, Jordan, Lebanon, Morocco, Tunisia, and the West Bank and Gaza; the resource-rich, labor-abundant (RRLA) economies of Algeria, the Islamic Republic of Iran, Iraq, the Syrian Arab Republic, and the Republic of Yemen; and the resource-rich, labor-importing (RRLI) economies of Bahrain, Kuwait, Libya, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. The West Bank and Gaza is not included in the regional or subregional aggregates. 98 Economic Developments and Prospects Appendix Table A15: External sector: real effective exchange rate index, 1995­2005 (2000 = 100)a Country Average 1995­1999 Average 2000­2002 2003 2004 2005 MENA region (incl. Iraq) .. .. .. .. .. MENA (excl. Iraq) 87.8 105.5 103.0 101.1 .. Resource-poor, labor-abundant 85.2 97.3 85.9 80.4 78.0 Djibouti .. .. .. .. .. Egypt, Arab Republic of 99.6 89.8 69.7 62.2 56.7 Jordan 89.2 101.2 91.9 88.4 94.3 Lebanon 20.7 98.0 96.1 93.7 94.9 Morocco 86.5 104.0 91.0 83.9 82.2 Tunisia 100.9 98.0 92.6 89.0 88.2 West Bank and Gaza .. .. .. .. .. Resource-rich, labor-abundant (incl. Iraq) .. .. .. .. .. Resource-rich, labor-abundant (excl. Iraq) 74.7 123.1 145.2 154.9 144.7 Algeria 102.1 99.2 84.7 85.0 85.5 Iran, Islamic Republic of 57.5 141.5 188.1 205.2 198.6 Iraq .. .. .. .. .. Syrian Arab Republic .. .. .. .. .. Yemen, Republic of 69.8 98.3 91.4 87.9 .. Resource-rich, labor-importing 93.3 102.0 93.1 87.5 .. Bahrain 95.7 100.9 92.0 86.9 .. Kuwait .. 103.2 96.0 91.0 .. Libya .. .. .. .. .. Oman 96.3 100.4 87.1 78.8 .. Qatar 89.5 101.2 93.3 95.8 .. Saudi Arabia 97.3 100.4 89.1 82.3 .. United Arab Emirates 87.8 104.1 97.7 92.8 98.3 Source: World Bank Staff estimates. Note: The MENA region includes the resource-poor, labor-abundant (RPLA) economies of Djibouti, Arab Republic of Egypt, Jordan, Lebanon, Morocco, Tunisia, and the West Bank and Gaza; the resource-rich, labor-abundant (RRLA) economies of Algeria, the Islamic Republic of Iran, Iraq, the Syrian Arab Republic, and the Republic of Yemen; and the resource-rich, labor-importing (RRLI) economies of Bahrain, Kuwait, Libya, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. The West Bank and Gaza is not included in the regional or subregional aggregates. Regional REER indexes weighted by total trade. a Appendix A: Statistical Tables 99 Appendix B: Structural Reform Indicators for 2006 B1 Trade Openness average tariffs) reflects where the economy is locat- ed in a normalized cumulative frequency distribu- In the 2005 MENA Economic Developments and tion of worldwide tariffs--where a value of "100" Prospects report (MEDP), the index for trade poli- indicates the economy that has the lowest average cy was constructed using a single policy-based tariff rate worldwide, "0" indicates the economy measure (because of data limitations): the average that has the highest average tariffs, and (by design) simple tariff on imports. In the 2006 MEDP, a larg- the world average tariff index value is "50." The in- er range of trade openness and facilitation measures dex is constructed for two periods of time: 2000 were available. For comparability, appendix table and 2005. B1 presents the abbreviated trade policy index, re- In constructing the enhanced trade policy index, flecting the status of tariff policy in 2000 versus in addition to the index on tariff policy mentioned 2005 (or the closest years available). Appendix table above, indexes on trade policy were constructed in a B2 presents the "enhanced trade policy index," uti- similar manner across the other three areas of trade lizing not only the (a) information on tariffs (above) policy information (NTBs, average time to export from UNCTAD's TRAINS (TRade Analysis and goods, and average time to import goods) such that INformation System) database but also information for each area, a country's policy value reflected on (b) the average number of tariff lines subject to where the economy was located in the normalized nontariff barriers (NTBs) from the World Trade Or- cumulative frequency distribution of that policy fea- ganization's (WTO's) statistical database; in addi- ture worldwide, where "100" indicated the econo- tion, the trade reform index now includes informa- my that had the "best" policy (lowest NTBs, lowest tion on behind-the-border constraints to trade time to export, lowest time to import), "0" indicat- captured through (c) the average time (in days) nec- ed the economy that had the "worst" policy, and the essary to comply with all procedures required to ex- world average value was "50." port goods (from the World Bank's Doing Business The composite trade policy index (the "en- Indicators) and (d) the average time (in days) nec- hanced trade policy index") was constructed by av- essary to comply with all procedures required to eraging across all four subindexes (recalling that import goods (again from the World Bank's Doing each subindex reflects where the economy is locat- Business Indicators). ed in the worldwide distribution with regard to that A given country's value for the abbreviated trade policy feature) and expressing the final value as a policy index (utilizing only information on simple normalized cumulative frequency distribution. Appendix B: Structural Reform Indicators for 2006 101 Thus, a score of "100" reflects the economy that Finally, "trade reform progress" was estimated as had (on average) the best trade policies (relative to the change in each country's rank according to the the world) across a range of trade policy measures, (abbreviated) trade policy index between 2000 and "0" reflects the economy that had (on average) the 2005, expressed as a point in the relative cumulative "worst" trade policies, and the world average value frequency distribution ("100" being the highest was "50." Regional averages for all of the structur- value, representing the greatest change in rank over al reform indexes reflect the simple average of the the period). countries in that regional grouping. Appendix Table B1: Abbreviated trade policy index, 2000 and 2005, and trade reform progress (based on simple average tariffs) Trade Abbreviated Abbreviated reform Average tariff, trade policy Average tariff, trade policy index, Country/region 2000 index, 2000 2005 index, 2005 2000­2005 Algeria 24.0 7 18.7 8 71 Bahrain 7.9 73 5.2 71 62 Djibouti 31.0 3 31.0 0 51 Egypt, Arab Rep. of 21.4 9 9.1 48 100 Iran, Islamic Rep. of 41.1 1 22.1 5 74 Jordan 23.1 8 13.1 21 86 Kuwait 3.6 92 3.6 92 65 Lebanon 10.7 63 5.4 71 80 Libya 17.0 27 17.0 14 27 Morocco 30.5 4 30.1 1 52 Oman 5.7 85 5.7 67 11 Qatar .. .. 5.0 74 .. Saudi Arabia 12.0 57 6.0 63 77 Syrian Arab Republic 21.0 12 19.6 6 43 Tunisia 29.1 5 28.3 3 57 Yemen, Republic of 12.8 50 7.0 58 82 MENA 19.3 33 14.2 38 63 Resource-poor 24.3 15 19.5 24 71 Resource-rich 16.1 45 11.0 46 57 RRLA 24.7 17 16.9 19 67 RRLI 9.2 67 7.1 64 48 East Asia and Pacific 10.4 60 7.5 57 37 Europe and Central Asia 8.9 69 6.8 67 69 Latin America and the Caribbean 13.4 45 10.2 43 50 High-income OECD 3.2 93 3.7 90 64 South Asia 24.2 21 16.8 14 48 Sub-Saharan Africa 13.5 44 13.7 30 27 LMIC average 15.0 43 10.4 47 56 World 13.3 50 10.0 50 50 Source: World Bank Staff estimates. Note: 2005 or closest years available. 102 Economic Developments and Prospects Appendix Table B2: Enhanced trade policy index, 2005 (based on simple average tariffs, NTB coverage, average time required for exporting, and average time required for importing) NTB Average Export Average Import Enhanced Tariff coverage NTB time for time time for time trade policy Average index (% of index exports index imports index index, 2005 Country/region tariff (1­100) tariff lines) (1­100) (days) (1­100) (days) (1­100) (1­100) Algeria 18.7 8 0.0 88 29 52 51 27 44 Bahrain 5.2 71 0.5 40 .. .. .. .. .. Djibouti 31.0 0 2.7 24 .. .. .. .. .. Egypt, Arab Rep. of 9.1 48 6.1 7 27 55 29 62 43 Iran, Islamic Rep. of 22.1 5 0.5 40 45 17 51 27 22 Jordan 13.1 21 0.3 51 28 54 28 63 47 Kuwait 3.6 92 2.1 26 30 50 39 44 53 Lebanon 5.4 71 0.2 53 22 67 34 54 61 Libya 17.0 14 2.2 26 .. .. .. .. .. Morocco 30.1 1 0.3 51 31 47 33 55 38 Oman 5.7 67 0.0 88 23 64 27 65 71 Qatar 5.0 74 1.0 32 .. .. .. .. .. Saudi Arabia 6.0 63 1.2 30 36 32 44 33 39 Syrian Arab Rep. 19.6 6 0.5 40 49 14 63 13 18 Tunisia 28.3 3 0.0 88 25 58 33 55 51 Yemen, Rep. of 7.0 58 0.0 88 33 43 31 59 62 MENA 14.2 38 1.1 48 31.5 46 38.6 46 46 Resource-poor 19.5 24 1.6 46 26.6 56 31.4 58 48 Resource-rich 11.0 46 0.8 50 35.0 39 43.7 38 44 RRLA 16.9 19 0.3 64 39.0 32 49.0 31 36 RRLI 9.3 58 0.9 46 28.6 52 34.0 52 54 East Asia and Pacific 7.5 57 0.6 52 27.6 60 31.3 63 56 Europe and Central Asia 6.8 67 3.7 36 31.3 53 42.8 51 51 Latin America and the Caribbean 10.2 43 0.4 72 29.7 50 36.8 49 57 High-income OECD 3.7 90 9.7 18 12.0 86 13.4 88 70 South Asia 16.8 14 0.2 69 33.7 39 39.3 44 41 Sub-Saharan Africa 13.7 30 1.8 57 49.2 24 61.1 24 34 LMIC average 10.4 47 2.3 52 28.5 55 33.8 56 53 World 10.0 50 2.7 50 32.2 50 40.4 50 50 Source: World Bank Staff estimates. Note: All trade policy data for 2005 or closest year available. Appendix B: Structural Reform Indicators for 2006 103 B2 Business Environment must notify the labor union or the labor min- istry for group dismissals; (d) whether the em- In the 2005 MEDP, the business environment was ployer needs approval from the labor union or measured across a range of World Bank Doing Busi- the labor ministry for firing one redundant ness Indicators of business regulations and proce- worker; (e) whether the employer needs ap- dures, supplemented with financial sector informa- proval from the labor union or the labor min- tion from World Development Indicators. istry for group dismissals; (f) whether the law Composite indexes were developed across five sep- mandates training or replacement before dis- arate areas of business regulations and financial and missal; (g) whether priority rules apply for dis- legal development; based on these, a "composite missals; and (h) whether priority rules apply for index of business reform" was developed. reemployment. Available for 2003 and 2005. In the 2006 MEDP, much of that information is (3) Access to credit: Comprising two separate meas- retained, but where possible, additional informa- ures of credit from the World Development In- tion (including with regard to the financial sector) dicators database: (a) domestic credit provided has been supplemented to enhance our evaluation by the banking sector as a share of GDP and (b) of the business and regulatory environment. domestic credit provided to the private sector as The "abbreviated business climate index" is con- a share of GDP. Available for 2002 and 2004. structed utilizing information in four areas of the business regulatory environment and across two pe- (4) Enforcing contracts: Comprising three separate riods of time (generally 2003 and 2005)120: Doing Business components: (a) the average number of procedures required to enforce a (1) Starting a business: Comprising four separate contract, (b) the number of days required to components from the Doing Business Indica- enforce a contract, and (c) the average cost to tors: (a) the number of procedures for starting enforce a contract (in country income per capi- a business, (b) the time required to complete ta). Available for 2003 and 2005. the procedures, (c) the cost for starting a busi- ness (in income per capita), and (d) the mini- In addition to composite indexes for each area of mum capital required to start a business (in in- business regulation and financial and legal infra- come per capita). Available for 2003 and 2005. structure, an overall business environment index (2) Hiring and firing: Comprising two Doing ("abbreviated business reform index") was comput- Business indexes measuring the difficulty of hir- ed as the average of the four area composite scores, ing and the difficulty of firing. The difficulty- expressed as a relative cumulative frequency, with a of-hiring index measures a variety of aspects of score of "100" reflecting the country that had (on hiring, including (a) whether term contracts average) the "best" policies across the four areas of can be used only for temporary tasks; (b) the the business environment measured. maximum duration of term contracts; (c) the For the 2006 MEDP, in addition to the four ar- ratio of the mandated minimum wage (or ap- eas mentioned above, four new areas of information prentice wage, if available) to the average value were incorporated into the business climate index: added per working population. The difficulty- (5) Closing a business: Comprising two Doing Busi- of-firing index has eight components: (a) ness components: (a) the average time (in years) whether redundancy is grounds for dismissal; to close a business and (b) the cost (in percent- (b) whether the employer must notify the labor age of estate). union or the labor ministry for firing one re- dundant worker; (c) whether the employer (6) Dealing with licenses: Comprising three Doing Business components: (a) the average number of procedures to build a warehouse, (b) the av- One area of business and regulatory reform, the ease of clos- 120 erage time (in days) spent during these proce- ing a business, is not presented in the abbreviated reform in- dures, and (c) the average cost (in income per dex although it was originally available in the 2005 MEDP, capita) to comply with these procedures. because the information used to construct that index has been revised and historical information is no longer available. That (7) Registering property: Comprising three Doing area of reform is now only covered in the enhanced business reform index. Business components: (a) the number of proce- 104 Economic Developments and Prospects dures legally required to register property, (b) erage of the underlying distributions, expressed as a the time spent in completing the procedures normalized cumulative frequency distribution with (in days), and (c) the costs (as a percentage of mean "50." Thus, a score of "100" reflects the property value) for these procedures, including economy that had (on average) the best policies for fees, transfer taxes, stamp duties, and any other closing a business (relative to the world) across the payments to the property registry, notaries, range of measures of ease of closing a business, "0" public agencies, or lawyers. reflects the economy that had (on average) the "worst" policies for closing a business, and the (8) Paying taxes: Comprising three Doing Business world average value was "50." components: (a) the total number of taxes paid The composite business climate index (both the (number); (b) the time it takes to prepare, file, abbreviated and the enhanced versions) reflects the and pay (or withhold) the corporate income average of each composite subindex (the average of tax, the value added tax, and the social security the composite indexes for closing a business, hiring contributions (in hours); and (c) the total and firing, and so forth), expressed as a normalized amount of taxes payable by a business, except cumulative frequency distribution. for labor taxes (as a percentage of gross profit). Finally, "business reform progress" was estimat- In addition, the previous reform area, Access to ed in two steps: A composite progress index was Credit, was enhanced to include, in addition to the calculated for each of the four subindexes used in two components mentioned, information on two constructing the abbreviated business reform in- Doing Business components of access to credit: (a) dex (enforcing contracts and so forth) by calculat- the legal rights index, measuring the degree to ing the country's change in ranking worldwide ac- which collateral and bankruptcy laws facilitate lend- cording to that indicator and expressing it as a ing and (b) the credit information index, measuring cumulative frequency distribution (where "100" the scope, access, and quality of credit information. reflects the country that made the strongest Information available for 2005. progress worldwide with regard to improving its As with the trade policy index, the business and worldwide ranking according to that index, and regulatory climate index (both the abbreviated and "0" reflects the country that made the weakest the enhanced versions) was constructed by initially progress). The overall business reform progress evaluating each subindicator based on a worldwide index then represents the average of those four cumulative frequency distribution of that area, with composite progress indexes, expressed again as a a maximum value of "100" (best policies), a mini- cumulative frequency distribution. Thus, "100" mum value of "0" (worst policies), and a worldwide reflects the country that made the strongest mean of "50." The composite index for any area of progress along all areas of business and regulatory the business climate (for example, the composite in- reform, while "0" reflects the country that made dex for ease in closing a business) represents the av- the weakest progress. Appendix B: Structural Reform Indicators for 2006 105 Appendix Table B3: Abbreviated business climate index, 2003 and 2005, and business reform progress (based on five areas of business and regulatory reform) 2003 2005 Abbreviated Abbreviated Contract Access Hiring Starting business Contract Access Hiring Starting business enforce- to and a climate enforce- to and a climate Business Country/region ment finance firing business index ment finance firing business index reform Algeria 18 39 33 28 14 16 36 35 30 17 38 Bahrain .. 70 .. .. .. .. .. .. .. .. .. Egypt, Arab Rep. of 26 78 37 15 31 24 85 13 26 27 36 Iran, Islamic Rep. of 64 49 46 69 67 64 63 28 65 61 44 Iraq 54 .. .. .. .. 53 .. 30 25 25 .. Jordan 64 76 58 4 50 63 84 59 23 64 89 Kuwait 42 82 77 49 74 38 82 84 43 71 7 Lebanon 11 91 60 41 51 9 92 71 36 54 31 Libya .. 47 .. .. .. .. 12 .. .. .. .. Morocco 82 73 32 34 61 82 79 16 67 69 54 Oman 48 58 59 68 65 43 58 76 60 66 15 Qatar .. 49 .. .. .. .. 49 .. .. .. .. Saudi Arabia 42 71 85 5 52 39 77 84 5 52 26 Syrian Arab Rep. 6 26 56 18 13 5 .. 42 13 8 5 Tunisia 97 75 34 59 80 97 81 34 74 85 93 United Arab Emirates 16 67 62 19 35 15 67 58 14 29 14 West Bank and Gaza 46 .. .. 3 .. 43 .. 54 3 22 .. Yemen, Rep. of 65 2 56 2 16 63 7 65 3 24 57 MENA 45 60 53 30 47 44 62 50 32 45 42 Resource-poor 54 79 44 26 54 53 84 41 38 54 63 Resource-rich 39 51 59 32 42 37 48 56 29 39 23 RRLA 41 29 48 29 28 40 33 40 27 27 36 RRLI 37 66 70 35 56 34 67 75 31 54 15 East Asia and Pacific 41 54 69 63 60 41 60 71 61 61 47 Europe and Central Asia 57 35 46 51 46 59 47 42 56 53 64 Latin American and the Caribbean 38 50 47 41 39 38 52 46 42 40 51 OECD 84 88 56 78 86 84 87 56 77 79 50 South Asia 37 45 50 69 56 37 57 51 62 49 41 Sub-Saharan Africa 39 28 37 32 27 38 25 40 29 29 43 LMIC average 51 51 51 45 49 51 56 49 48 51 53 World 50 50 50 50 50 50 50 50 50 50 50 Source: World Bank Staff estimates. Note: Access to finance reflects 2002 and 2004, respectively. OECD = High-income/OECD region. 106 Economic Developments and Prospects Appendix Table B4: Enhanced business climate index, 2005 (based on eight areas of business and regulatory reform) Enhanced Hiring Dealing business Contract Access and Starting a Closing a with Registering Registering climate Country/region enforcement finance firing business business licenses property taxes index Algeria 16 13 35 30 73 34 11 3 13 Egypt, Arab Rep. of 24 51 13 26 14 3 14 46 11 Iran, Islamic Rep. of 64 63 28 65 34 3 39 74 57 Iraq 53 .. 30 25 .. 53 72 .. .. Jordan 63 75 59 23 45 60 34 92 58 Kuwait 38 79 84 43 68 37 49 .. 59 Lebanon 9 82 71 36 20 39 45 73 37 Morocco 82 43 16 67 67 17 58 19 61 Oman 43 31 76 60 47 24 89 98 78 Saudi Arabia 39 80 84 5 45 78 99 97 80 Syrian Arab Rep. 5 22 42 13 48 48 48 74 30 Tunisia 97 64 34 74 87 41 55 58 83 United Arab Emirates 15 52 58 14 6 81 94 97 43 West Bank Gaza 43 .. 54 3 .. 49 44 .. .. Yemen, Rep. of 63 4 65 3 63 77 74 28 35 MENA 44 53 50 32 48 44 55 66 51 Resource-poor 53 63 41 38 47 46 42 58 50 Resource-rich 37 40 56 29 48 43 64 71 51 RRLA 40 27 40 27 55 46 49 56 40 RRLI 34 80 75 31 42 39 83 97 65 East Asia and Pacific 41 53 71 61 35 63 62 73 61 Europe and Central Asia 59 51 42 56 49 38 56 42 48 Latin America and the Caribbean 38 58 46 42 45 52 52 25 40 High-income OECD 84 90 56 77 85 78 68 71 84 South Asia 37 48 51 62 50 50 39 56 48 Sub-Saharan Africa 38 24 40 29 37 32 24 36 27 LMIC average 51 59 48 48 49 47 53 46 50 World 50 50 50 50 50 50 50 50 50 Source: World Bank Staff estimates. Note: All business climate data for 2005 or closest year available. Access to finance indicator above differs from access to finance indicator utilized in constructing the abbreviated business climate index (in appendix table B3). Additional financial information was added, which gives a truer sense of a country's access to finance; howev- er, some of this additional information was not available before 2005. Thus, to evaluate structural reform progress, an abbreviated version of the financial sector indicator was utilized. (See earlier discussion on construction of business environment indicators.) B3 Governance and Public Sector lated to the quality of public administration. For Reforms comparability, those governance indicators have been computed again, utilizing the methodology In the 2005 MEDP, governance indicators were de- established, but with a minor adjustment to the un- veloped based on the methodology presented in the derlying data utilized and with an adjustment to the World Bank's 2003 report on governance in the computation methodology (see discussion). MENA region.121 From that report, two separate spheres of governance were examined: governance 1) Index of public accountability (IPA): related to public accountability and governance re- Comprises 11 measures: (a) Freedom House political rights measure World Bank 2003b. 121 (b) Freedom House civil liberties measure Appendix B: Structural Reform Indicators for 2006 107 (c) Freedom House freedom-of-the-press According to the methodology established in ranking the 2003 Governance Report, principal compo- (d) Center for International Development nent analysis (PCA) was performed on the 11 and and Conflict Management (CIDCM) 7 measures listed above to derive the two broad Polity IV database polity score governance indicators; unlike in last year's (e) CIDCM Polity IV database regulation of MEDP, however, the methodology has been re- executive recruitment regulation vised. The set of countries was reduced to 142 to (f) CIDCM Polity IV database competitive- remove countries with a large share of missing ness of executive recruitment competition data in the subindicators. Although the PCA ap- (g) CIDCM Polity IV database openness of proach was retained, the weights applied to the executive recruitment normalized underlying variables were derived (h) CIDCM Polity IV database regulation of from the first principal component (see appendix participation box for a brief explanation of PCA). The same (i) CIDCM Polity IV database competitive- weights generated for 2000 are now used for ness of participation 2005 to ensure consistency and comparability (j) CIDCM Policy IV database executive across time. In addition, the scale of the resulting constraints index was adjusted such that a maximum score of (k) Political Risk Services index of democratic "100" is given to a (hypothetical) country that is accountability at the top in each underlying variable that sup- ports a particular index, while the lowest score of "0" would be for a country that is at the bottom 2) Index of quality of public administration of each subindicator. Finally, these governance in- (IQA): Comprises 7 measures: dexes were also used to determine a country's po- (a) Political Risk Services index of corruption sition relative to others, using percentile ranking. (b) Political Risk Services index of bureaucrat- A country that is in the 90th percentile for a par- ic quality ticular governance index in a selected year implies (c) Heritage Foundation index of property that it performed better than 90 percent of all rights other countries in that year. (d) Heritage Foundation index of regulation Finally, as with the other structural reform areas, (e) World Bank Doing Business indicator of governance reform progress was estimated as the starting a business (number of proce- change in each country's rank according to the giv- dures) en governance reform index between 2000 and (f) World Bank Doing Business indicator of 2005, expressed as a point in the relative cumulative contract enforcement (average time) frequency distribution ("100" being the highest (g) World Bank Doing Business indicator of value, representing the greatest change in rank over closing a business (average time) the period). 108 Economic Developments and Prospects Appendix Table B5: Governance indexes, 2000 and 2005, and governance reform progress Quality of Quality of Quality of Public sector Public sector Public sector administration, administration, administration, accountability, accountability, accountability, Country/region 2000 2005 reform 2000 2005 reform Algeria 26 38 91 22 29 91 Bahrain 80 77 26 16 23 91 Egypt, Arab Rep. of 29 43 92 19 25 84 Iran, Islamic Rep. of 23 16 19 35 21 4 Jordan 63 66 67 33 34 60 Kuwait 62 58 24 30 31 65 Libya 9 11 64 1 0 42 Morocco 66 73 83 28 33 81 Oman 56 61 75 11 16 81 Qatar 49 60 89 10 13 74 Saudi Arabia 52 57 77 3 5 69 Syrian Arab Republic 12 15 67 4 7 74 Tunisia 65 74 87 26 22 22 United Arab Emirates 74 59 6 18 17 41 Yemen, Republic of 24 28 71 13 20 89 MENA 46 49 63 18 20 64 Resource-poor 56 64 82 27 28 62 Resource-rich 42 44 55 15 17 65 RRLA 21 24 62 19 19 64 RRLI 55 55 52 12 15 66 East Asia and Pacific 44 43 45 43 41 48 Europe and Central Asia 47 47 46 51 52 51 Latin America and the Caribbean 46 46 50 58 57 53 High-income OECD 89 89 47 92 91 49 South Asia 47 48 53 47 39 31 Sub-Saharan Africa 35 34 53 35 37 55 World 50 50 50 50 50 50 Source: World Bank Staff estimates. Note: Governance indexes reflect data for 2000 and 2005, or closest available years. Appendix Box Principal component analysis Principal component analysis (PCA) is an aggregation planatory variables as possible that was unaccounted technique designed to linearly transform a set of inter- for by the preceding principal components. PCA ex- related variables into a new set of uncorrelated princi- tracts from the data the true source of variation by giv- pal components that account for all of the variance in ing more weight to those variables that vary most the original variables. Each computed principal com- across countries (that is, the analysis gives more weight ponent is a linear combination of the underlying vari- to underlying variables that have more useful informa- ables weighted to capture as much of the variance tion relative to other variables with less useful infor- across observations in the variables as possible. There mation). It should be noted that typically in PCA are as many principal components as there are ex- work, only the first one or two principal components planatory variables. Each component is uncorrelated are retained, because they generally explain most of with the others, and each succeeding principal compo- the variance among all standardized linear combina- nent accounts for as much of the variation in the ex- tions of the original data. Appendix B: Structural Reform Indicators for 2006 109 Bibliography Airports Council International. www.airports.org. AMF (Arab Monetary Fund). 2005. Quarterly AMDB Bulletin (Quarter 3). www.amf.org. Amuzegar, Jahangir. 2005. "Iran's Oil Stabilization Fund: A Misnomer." Middle East Economic Survey 48 (47, November 21). Bacon, Robert. 2005. "The Impact of Higher Oil Prices on Low Income Countries and the Poor: Impacts and Policies." Report for UNDP/ESMAP (United Nations Development Programme/Energy Sector Manage- ment Assistance Program), World Bank, Washington, DC. http://wbln0018.worldbank.org/esmap/site.nsf/files/299-05_HigherOilPrices_Bacon.pdf/$FILE/ 299-05_HigherOilPrices_Bacon.pdf. Banker, The. London. Various issues. www.thebanker.com. BANKSCOPE. Database, Bureau Van Dijk Electronic Publishing. www.bankscope.bvdep.com. Barth, James, Gerald Caprio, and Ross Levine. 2006. Rethinking Bank Regulation: Till Angels Govern. Cambridge and New York: Cambridge University Press. BIS (Bank for International Settlements). 2005. BIS Quarterly Review (December). http://www.bis.org/publ/qtrpdf/r_qt0512.pdf. Bloomberg. Various data and articles. www.bloomberg.com. BMA (Bahrain Monetary Agency). 2005. Economic Indicators (10, December). http://www.bma.gov.bh/ cmsrule/media/pdf/statistics/economic/econ/December2005/BMA_Economic_Indicators_ December2005.pdf. Catalan, Mario, Gregorio Impavido, and Alberto R. Musalem. 2000. "Contractual Savings or Stock Market Development: Which Leads?" Journal of Applied Social Science Studies 120 (3): 445­87. Paper can also be downloaded as Social Protection Discussion Paper 0020, World Bank, Washington, DC, at http://site resources.worldbank.org/SOCIALPROTECTION/Resources/SP-Discussion-papers/ Pensions-DP/0020.pdf. Central Bank of Egypt. 2005 (March). Annual Report 2003/2004. Cairo, Egypt. Central Bank of Islamic Republic of Iran. 2005 (September). Annual Report 2004/2005. Tehran, Iran. Central Bank of Jordan. 2004. Annual Report 2004. Amman, Jordan. ------. 2005. Monthly Statistical Bulletin (for end of 2005). Amman, Jordan. Central Bank of Kuwait. 2005. Annual Report 2004/2005. Kuwait. Bibliography 111 Central Bank of Lebanon. 2005 (December 31). Financial Markets Handbook. Financial Markets Department. Beirut, Lebanon. Central Bank of Morocco (Bank Al-Maghrib). 2004. Annual Report 2004. Rabat, Morocco. www.bkam.ma/Download/Rapport%20annuel/En/RAP2004ENG.pdf. Central Bank of Oman. 2005 (June). Annual Report 2004. Muscat, Oman. Central Bank of Qatar. 2005 (August). Annual Report 2004. Department of Economic Policies. Doha, Qatar. Central Bank of the United Arab Emirates (UAE). 2004. Annual Report 2003. Abu Dhabi, UAE. ------. 2005. Annual Report 2004. Abu Dhabi, UAE. Central Bank of Tunisia. 2005 (June). Annual Report 2004. Tunis, Tunisia. CIG (Capital Intelligence Group). Various years. Selected country banking reports. http://www.ciratings.com. Deloitte & Touche LLP. 2004. Hotel Benchmark Survey 2004. http://www.deloitte.com/dtt/section_node/0,1042,sid%253D59738,00.html. Doha Stock Exchange. 2004. Doha Securities Market Annual Report 2004. Doha Securities Market Informa- tion and Market Relations Department. Doha, Qatar. Dubai International Airport. www.dubaiairport.com. Egyptian Textile Industry Official Portal. Various articles. www.egytex.com. EIU (Economist Intelligence Unit). Various years. Selected country profile reports. London. http://www.eiu.com/index.asp. ------. Various years. Selected country risk reports. London. http://www.eiu.com/index.asp. Emaar Properties. 2005. "Burj Dubai's Climb to Floor Five Lays Foundation for Global Chain of Armani Ho- tels." Press release (August). http://www.emaar.com/MediaCenter/PressReleases/August31.asp. Euromoney. London. Various issues. http://www.euromoney.com. ------. World Leasing Yearbook. Various years. London. Euronext. IPO Statistics History. www.euronext.com. Financial Times. London. Various issues. www.ft.com. GARP (Global Association of Risk Professionals). Risk News. www.garp.com/risknews. Global Investment House. 2005a (August). GCC Market Review. www.globalinv.net. ------. 2005b (June 6). Sector Report 2005. www.globalinv.net. Herrera, Santiago, Tala Khartabil, Gaobo Pang, and Stefano Paternostro. 2005. "Preliminary Estimates of the Financing, Growth, and Poverty Implications of the Oil Shock on Developing Nations." Note prepared by PREM, World Bank, Washington, DC. HSBC. 2005 (July). "Bridging the Gulf." HSBC Global Research. www.hsbcnet.com. IEA (International Energy Agency). http://www.iea.org. IIF (Institute of International Finance). 2005 (July 29). "Summary Appraisal: Gulf Cooperation Council Countries." IIF, Washington, DC. IMF (International Monetary Fund). Article IV Consultations. Various countries, years. Washington, DC. "Iran's Precarious Public Finance." 2003. Middle East Economic Survey 46 (April 28). Levine, Ross. 1997. "Financial Development and Economic Growth: Views and Agenda." Journal of Economic Literature 35 (2, June): 688­726. Levine, Ross, Norman Loayza, and Thorsten Beck. 2000a. "Finance and the Sources of Growth." Journal of Financial Economics 58 (1­2): 261­300. ------. 2000b. "Financial Intermediation and Growth: Causality and Causes." Journal of Monetary Economics 46 (1, August): 31­77. London Stock Exchange. 2006 (January 31). Statistics: Overseas Listed Companies. www.londonstock exchange.com. ------. www.londonstockexchange.com. Luxembourg Stock Exchange. 2005. FactBook 2005. www.bourse.lu. 112 Economic Developments and Prospects Metschies, Gerhard P. 2005. "International Fuel Prices 2005." 4th ed. GTZ (Deutsche Gesellschaft für Tech- nische Zusammenarbeit [German Agency for Technical Cooperation]), Eschborn, Germany. http://www.gtz.de/de/dokumente/en_International_Fuel_Prices_2005.pdf. Middle East Economic Digest (MEED). Various issues. Moody's (Moody's Investors Service). 2005 (September). "Saudi Arabia Banking System Outlook." Available online at www.moodys.com. Morgan Stanley. 2002. The Middle East & North Africa Business Guide 2001/2002. London: White Page Ltd. Muscat Securities. 2005 (October). Market Investors Guide. Muscat Securities Market. Available online at www.msm.gov.om. Nabli, Mustapha, and Jennifer Keller. 2006. "The Macroeconomics of Labor Market Outcomes in MENA: How Growth Has Failed to Keep Pace with a Burgeoning Labor Market." In Nabli, Mustapha, and Tarik Yousef, eds. Labor Markets in the Middle East and North Africa. London: Routledge Curzon (forthcoming). Neusser, Klaus, and Maurice Kugler. 1998. "Manufacturing Growth and Financial Development: Evidence from OECD Countries." Review of Economics and Statistics 80 (4, November): 638­46. OECD (Organisation for Economic Co-operation and Development). 2005a. Financial Market Trends: Age- ing and Pension System Reform: Implications for Financial Markets and Economic Policies. Paris: OECD Pub- lishing. ------. 2005b. Global Pension Fund Statistics. Oxford Analytica. London. Various issues. Qatar Central Bank. 2005 (August). Annual Report 2004. www.qcb.gov.qa/publications/Annual/annual_ report_eng_2004.pdf. Ravallian, Martin. 2004. "Pro-Poor Growth: A Primer." Policy Research Paper 3242, World Bank, Washing- ton, DC. Robalino, David A. 2005. Pensions in the Middle East and North Africa: Time for Change. MENA Orientations in Development series. Washington, DC: World Bank. http://siteresources.worldbank.org/INTMENA/Resources/MENA_Pension_Reform_Complete.pdf. Rodrik, Dani. 2004. "Industrial Policy for the Twenty-First Century." Discussion Paper 4767, Center for Eco- nomic Policy Research (CEPR), London. Said, Mohamed Kadry. 2004. "Potential Egyptian Contribution to a Security Framework in the Gulf." Middle East Policy 11 (3, Fall): 63­72. http://www.mepc.org/journal_vol11/said.pdf. SAMA (Saudi Arabian Monetary Agency). 2005a (August). "Economic Developments: Second Quarter of 2005." Research and Statistics Department, SAMA, Kingdom of Saudi Arabia. http://www.sama-ksa .org/en/publications/2005-2-en.pdf. ------. 2005b. Annual Report 2005. Standard & Poor's. S&P/IFCG Indexes. www.standardandpoors.com. Swiss Re. 2005. World Insurance in 2004. Sigma study. Zurich: Swiss Reinsurance Company. Tadawul Stock Exchange. 2005. Annual Review: Saudi Equity Market, 2004. http://www.cma.org.sa/cma_cms/upload_sec_content/dwfile137/tadawulE05.pdf. Tehran Stock Exchange. www.tse.ir. UAE Property Trends. 2005. Various issues. http://www.uaepropertytrends.com/ptrends/mvnforum/ listthreads?forum=1. UNCTAD (United Nations Conference on Trade and Development). TRAINS (TRade Analysis and INfor- mation System). Database. http://r0.unctad.org/trains. UNWTO (World Tourism Organization). 2006. World Tourism Barometer 4 (1, January). http://www.world- tourism.org/facts/eng/pdf/barometer/barom0601_ex_e.pdf. World Bank. 1983. "Jordan Energy Sector Study." World Bank, Washington, DC. ------. 2001. Iran: Trade and Foreign Exchange Policies in Iran: Reform Agenda, Economic Implications, and Impact on the Poor. Washington, DC: World Bank. Bibliography 113 ------. 2003a. Trade, Investment, and Development in the Middle East and North Africa: Engaging with the World. MENA Development Report. Washington, DC: World Bank. http://www- wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2003/10/03/000094946_0309250415266 1/Rendered/PDF/multi0page.pdf. ------. 2003b. Better Governance for Development in the Middle East and North Africa: Enhancing Inclusive- ness and Accountability. MENA Development Report. Washington, DC: World Bank. http://www- wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2003/11/06/000090341_2003110613583 5/Rendered/PDF/271460PAPER0Be1ance0for0development.pdf. ------. 2003c. Gender and Development in the Middle East and North Africa: Women in the Public Sphere. MENA Development Report. Washington, DC: World Bank. http://www- wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2004/03/09/000090341_2004030915295 3/Rendered/PDF/281150PAPER0Gender010Development0in0MNA.pdf. ------. 2003d. Unlocking the Employment Potential in the Middle East and North Africa: Toward a New Social Contract. MENA Development Report. Washington, DC: World Bank. http://www- wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2004/03/09/000090341_2004030915295 3/Rendered/PDF/281150PAPER0Gender010Development0in0MNA.pdf. ------. 2003e. Jobs, Growth, and Governance in the Middle East and North Africa: Unlocking the Potential for Prosperity. Washington, DC: World Bank. http://www-wds.worldbank.org/external/default/WDSCon- tentServer/IW3P/IB/2005/07/28/000160016_20050728190759/Rendered/PDF/33153a10 ENGLISH0intergrativepaper.pdf. ------. 2003f. Iran: Medium Term Framework for Transition: Converting Oil Wealth to Development. Country Economic Memorandum. Washington, DC: World Bank. http://www-wds.worldbank.org/external/de- fault/WDSContentServer/IW3P/IB/2003/05/30/000094946_03052104034123/Rendered/PDF/ multi0page.pdf. ------. 2003g. "World Bank Conference on Bank Concentration and Competition." Dataset, World Bank, Washington, DC. http://www.worldbank.org/research/interest/confs/042003/data.htm. ------. 2003h. "Algeria Investment Climate Assessment." World Bank, Washington DC. ------. 2004a. Financial Sector Development Indicators (FSDI). Washington, DC: World Bank. ------. 2004b. "Oman Investment Climate Assessment: Toward a Comprehensive SME Strategy for the Sul- tanate of Oman." World Bank, Washington DC. ------. 2005a. Middle East and North Africa: Economic Developments and Prospects, 2005: Oil Booms and Rev- enue Management. Washington, DC: World Bank. ------. 2005b (August). World Development Indicators (WDI) 2005. World Bank, Washington, DC. http://devdata.worldbank.org/wdi2005/index2.htm. ------. 2005c. "Preliminary Estimates of the Financing, Growth, and Poverty Implications of the Oil Shock on Developing Nations." PREM Note, World Bank, Washington, DC. http://wbln0018.worldbank.org/esmap/site.nsf/23e5e39594c064ee852564ae004fa010/2f1a4e33ee4fc1 fc85256fb90082d38b/$FILE/Oil%20Price%20Shock- Financing%20and%20Growth%20Impact%20On%20Developing%20%E2%80%A6.pdf. ------. 2005d (September). "Egypt: Toward a More Effective Social Policy: Subsidies and Social Safety Net." Draft report. World Bank, Washington, DC. ------. 2005e. "G10 data from OECD Financial Market Trends: Ageing and Pension System Reform 2005." World Bank, Washington, DC. ------. 2005f. "Morocco Investment Climate Assessment." World Bank, Washington DC. ------. 2005g. "Syrian Investment Climate Assessment: Unlocking the Potential of the Private Sector." World Bank, Washington, DC. ------. 2005h. "Egyptian Investment Climate Assessment." World Bank, Washington, DC. ------. 2005i. "Access to Financial Services in Egypt." Aide memoire, World Bank, Washington, DC. ------. 2006a. Doing Business in 2006: Creating Jobs. Washington, DC: World Bank. http://www.doing business.org/documents/DoingBusines2006_fullreport.pdf. 114 Economic Developments and Prospects ------. 2006b. Global Monitoring Report 2006: Millennium Development Goals: Strengthening Mutual Ac- countability, Aid, Trade, and Governance. Washington, DC: World Bank. http://siteresources.worldbank.org/INTGLOBALMONITORING2006/Resources/2186625- 1145565069381/GMR06Complete.pdf. ------. 2006c. Global Economic Prospects: Economic Implications of Remittances and Migration, 2006. Devel- opment Prospects Group. Washington, DC: World Bank. http://wdsbeta.worldbank.org/external/de- fault/WDSContentServer/IW3P/IB/2005/11/14/000112742_20051114174928/Rendered/PDF/34 3200GEP02006.pdf. ------. 2006d. "Saudi Arabia Investment Climate Assessment: Priorities for Diversifying, Competing, and Creating Employment." World Bank, Washington, DC. ------. 2006e. Enterprise Surveys. World Bank, Washington, DC. http://rru.worldbank.org/Enterprise Surveys. Wurgler, Jeffrey. 2000. "Financial Markets and the Allocation of Capital." Journal of Financial Economics 58 (1­2, October): 187­214. Bibliography 115