BIS: Mideast driven global recessionary forces to unwind in 2003
Heightened concerns about developments in the Middle East are thought to have been a crucial factor in holding back global expansion in the most recent past, driving oil prices up and confidence down, according to the global outlook recently published by the Switzerland-based Bank for International Settlements.
The Bank’s 73rd Annual Report, covering the term ending March 31, 2003, asserts that although the present situation is still clouded by geopolitical uncertainties, the consensus view is for an abatement of previous recessionary forces.
Considering developments in the emerging market economies, the bank asserts that Egypt’s low export competitiveness, as well as lower tourist incomes and capital inflows, contributed to deteriorating growth performance. The rapid growth of a parallel exchange market raised doubts about the sustainability of the pegged exchange rate, prompting the authorities to adopt a floating exchange rate regime in January 2003.
Although the subsequent depreciation of the pound appears to have restored Egypt’s external competitiveness, the outlook remains uncertain. The depreciation could raise inflation significantly in the absence of a new nominal anchor for monetary policy. Fiscal policy might also have to be tightened to halt the rise in public debt and prevent a further downgrading of Egypt’s credit rating.
Elsewhere in the Middle East, Iran’s growth has increased in recent years and the current account balance has strengthened. However, high inflation—partly linked to a deteriorating fiscal position—remains a problem.
By contrast, consumer prices in Saudi Arabia have fallen since 1998 despite a high fiscal deficit and a public debt/Gross Domestic Product (GDP) ratio approaching 100 percent. While lower oil exports weakened GDP growth in 2002, the current account surplus remained close to five percent of GDP.
This contributed to a further rise in foreign reserves and enabled the authorities to keep interest rates very low. An improvement in growth is anticipated in 2003, although the outlook remains highly dependent on developments in the oil market.
In Israel, the recession, which started with the bursting of the Information Technology (IT) bubble, deepened, and unemployment rose above 10 percent. The fiscal imbalance remained high and the deficit on the current account increased to over two percent of GDP.
To counter the breaching of the inflation target and a surge in inflation expectations caused by the depreciation of the shekel, the central bank raised its lending rate by more than 500 basis points. This eventually arrested the depreciation of the exchange rate and stabilized the rate of inflation.
With the security situation continuing to weigh on tourism and export earnings, business and consumer surveys suggest, at best, a weak recovery of GDP this year.
In Africa, more prudent fiscal and monetary policies and a small exposure to foreign trade helped the region to weather the global slowdown in 2001. Nevertheless, growth slowed last year because of continued weakness in the euro area, the region’s main trading partner, and a variety of local problems.
These included difficulties in controlling budget deficits and constraints on growth imposed by oil production quotas in Nigeria, large budget deficits and the seizure of commercial farms in Zimbabwe, lower tourist incomes as a result of terrorist attacks, severe droughts in northern and southern Africa and increased adverse effects stemming from the HIV/AIDS pandemic.
At the same time, the median rate of inflation was only 41/2 percent last year, close to that of Latin America and Asia, and was even lower in the three Maghreb countries—Algeria, Morocco and Tunisia—which target monetary aggregates.
Among the Maghreb countries, Algeria’s economic performance is expected to improve in 2003, supported by oil and gas exports. In CFA franc zone countries, growth was somewhat lower than anticipated in 2002, as a crisis in Cote d’Ivoire and unfavorable conditions in international commodities markets adversely affected a number of economies in the region.
In Nigeria, the growth in fiscal spending had exceeded that of oil revenues in 2001, producing a deterioration of both the fiscal position and the current account balance. This was followed by exchange rate depreciation, rising prices and recession. In the second half of last year, Nigeria was forced to suspend debt service payments on bilateral official credits due to sharp reductions in foreign exchange reserves.
In South Africa, the Reserve Bank helped reverse most of an earlier rand depreciation by preemptively raising its policy rate four times last year. Nevertheless, the rate of inflation significantly exceeded the target, and exports weakened in response to the decline in competitiveness.
However, Gross Domestic Product (GDP) still managed to advance by three percent in 2002 and is projected to grow at the same rate this year. In part, this is thanks to a growth-supporting fiscal policy made possible by several years of consolidation and debt reduction.
In Tanzania and Uganda, exchange rate depreciation helped offset large terms of-trade losses arising from steep falls in the prices of coffee and other traditional exports. Moreover, the depreciations, combined with stable prices, encouraged diversification into new export sectors that was supported by FDI inflows. — (menareport.com)
© 2003 Mena Report (www.menareport.com)
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