The economies of Arab oil exporters are expected to contract by 4.7 per cent, while the more diversified Arab economies are expected to shrink by 2pc in 2020, says a new report.
The 12th edition of the Arab Economic Outlook Report issued yesterday by the Arab Monetary Fund (AMF) expects the Covid-19 pandemic to have a negative impact on Arab economies, especially as sectors affected by full or partial lockdown contribute about 70pc of the Arab GDP.
The SMEs sector, which contributes about 45pc of GDP and one-third of official employment, has been severely affected by the current crisis, the report says.
In addition, Arab oil exporters are more likely to bear nearly half of the burden of the oil supply cuts in 2020 and 2021 approved by the OPEC+ agreement, which will have a major impact on Arab economies.
Despite ongoing efforts towards diversifying oil-exporting economies, the oil sector continues to contribute about 27pc of the Arab economies’ GDP, 42pc of total exports, and 60pc of public revenues.
The Arab economies face a multidimensional challenge, which, says the AMF, will result in lower levels of activity in both the oil and non-oil sectors.
Consequently, Arab GDP is expected to contract by about 4pc this year.
In contrast, a gradual recovery is expected next year, with Arab economies registering a growth of 2.6pc.
Meanwhile, the global economy is expected to shrink by 5-8pc, and a loss of between $8 and $12 trillion is expected over 2020 and 2021, based on estimates released by international organisations.
As Arab countries move to open their economies fully or partially, there are significant challenges to economic recovery, including the narrow policy space available to support medium-term recovery due to the increasing internal and external imbalances, says the AMF.
The region also faces the urgent need to ensure the effective and rapid allocation of resources between economic sectors to keep pace with the dynamic structural transformation imposed by the spread of the virus, which requires accelerating the pace of digital transformation.
Maintaining an expansionary fiscal policy while ensuring debt sustainability needs a fine balance.
The Arab world also has to strengthen social safety nets and adopt active labour market policies to reduce job losses, especially in the SMEs sector.
Another key issue is the anticipated tightening of financial markets and its impact on the ability of Arab economies to meet their financing requirements and the need for innovative financing patterns for sustainable development goals, says the AMF.
Finally, the regional economies are faced with the difficult task of safeguarding financial stability and ensuring the ability of the banking sector to extend the required credit facilities needed to support the recovery amid the recent decline in bank profits.
Factors
On inflation levels, the overall level of prices in the Arab countries as a group during 2020 was affected by several factors such as the supply of goods and services due to the disruption of global supply chains, the increase in VAT levels in some Arab countries, as well as the unfavourable domestic developments in some Arab countries.
On the other hand, inflationary pressures, resulting from the significant decline in the value of some Arab currencies, against foreign currencies will continue to impact price levels in these economies.
However, the expected recession and measures taken to maintain stability in the prices of goods and services during this period due to the Covid-19 pandemic will lessen the inflationary pressures in most Arab countries this year.
As a result of these developments, the inflation rate in the Arab countries is expected to rise to about 8.8pc this year, while inflation is expected to fall to about 6.3pc next year.
Founded in 1976, the AMF’s main objectives are to correct and balance the payment of its member states, remove payment restrictions between members, improve Arab monetary cooperation, encourage the development of Arab financial markets (paving the way for a unified Arab currency), and to facilitate and promote trade between member states.
Bahrain is among the 22 member states of the AMF.
