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IMF ‘Call for Action’ for inclusive growth in MENA
Marrakech, Morocco
A ‘Call for Action’ to close the gap between the growth models of the past and the growth engines of the future and inclusive growth in MENA was issued by Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF) on Sunday.
Kristalina Georgieva
Following her meeting with ministers of finance and central bank governors of the Middle East and North Africa (MENA) and Pakistan during the World Bank-IMF Annual Meetings held in Marrakech, she outlined action on five points: Fostering a vibrant private sector, overhauling social protection systems, providing opportunities for the youth, easing barriers to female participation in economic life, and making green investment an engine of growth and job creation.
“The IMF-World Bank Annual Meetings have returned to the Arab World after 20 years when we were gathered in Dubai. Much has changed over the last two decades, but perhaps one of the most promising changes is that inclusive growth has become a household word and a unifying call across the region. Reflecting its importance, last year the IMF published a book highlighting the priority reforms that would allow MENA to achieve an inclusive and job-rich growth.
“For these Annual Meetings, we have built on this work and collaborated with policymakers, thinktanks, the youth, and partner institutions to bring the focus for the region back to the priorities of more and better jobs, shared prosperity, and enhanced voice for youth and underrepresented groups. Many countries in the region are still struggling to ensure greater and fairer opportunities for all. A large share of youth is inactive, wide rural/urban disparities continue, and economic opportunities for women remain scarce. Social protection systems are weak and job creation feeble. Recent shocks like the pandemic and Russia’s war in Ukraine, as well as global trends like climate change and automation have compounded these vulnerabilities. The result is rising inequalities and opportunity gaps and a narrower policy space to tackle them.
“We at the IMF are a long-standing partner to countries in the MENA region in the quest for more inclusive and resilient growth. In the Amman (2014) and Marrakech (2018) regional conferences, we called on MENA policymakers, the private sector, and civil society to build a new social contract to ensure that the benefits of economic development accrue more broadly to all citizens. While progress has been slow, preserving reform momentum is essential,” she said.
‘Call of Action’
Fostering a vibrant private sector: Developing the region’s private sector will require eliminating the many barriers preventing new firms from entering markets and existing small businesses and startups from growing in scale. In this context, leveling the playing field between public and private firms is a key priority for the region. Reforming burdensome government regulations, enhancing financial inclusion, and, more broadly, promoting good governance can significantly improve economic growth in MENA. Accelerating digitalization and investing in new technologies will help achieve many of these goals.
Overhaul of social protection systems: Guaranteeing citizens more equal access to basic services—such as health, education, and social insurance—through more efficient, cost-effective, and targeted social assistance will ensure that those most in need could experience a visible improvement in their livelihoods.
Providing opportunities for the youth: This will require revamping education and training systems to address skills mismatches and ensure that the 100 million youth reaching working age in the next 10 years will have the skills sought by 21st-century employers. Better access to finance will foster entrepreneurship and support innovation and creation.
Easing barriers to female participation in economic life: Many MENA economies have in common a relatively large pool of highly educated young women who do not find their way into effective participation in formal labor markets. The region cannot afford to continue underutilizing this human capital. Doubling the female labor force participation rate over the next 15 years can improve potential output in a country like Morocco by about 3 percent.
Making green investment an engine of growth and job creation: Adaptation strategies would not only boost growth but also improve inclusiveness, as it is the most vulnerable who benefit the most from reduced exposure to catastrophic events. The transition to renewable energy sources is not only necessary for sustainability reasons but could also be a powerful engine of growth and job creation.
“Macroeconomic stability will be an essential foundation for transformative change. High levels of public debt in a number of MENA economies leave them vulnerable to future shocks. Rebuilding fiscal buffers may require redesigning tax systems to widen tax bases, improve the progressivity of taxation, and reduce distortions that lead to informality,” said Georgieva.
“These principles will form the basis of the IMF’s engagement with MENA policymakers and other stakeholders for the years to come. Structural reforms take time. By working together, we can tackle old and new challenges and build a future for the region grounded in a more sustainable and inclusive model of development.”
Middle East and North Africa (MENA) Economies Grow by 5.5% But Benefits are Uneven
The World Bank Group
The economies of the Middle East and North Africa (MENA) region are expected to grow by 5.5% this year —the fastest rate since 2016—followed by a slowing of growth to 3.5% in 2023. Yet this growth is uneven across the region, as countries still struggling to overcome the lasting effects of the COVID-19 pandemic, face jolting new shocks from higher oil and food prices brought on by the war in Ukraine, rising global interest rates, and slowdowns in the United States, China, and the Euro area.The World Bank’s latest economic update, titled “A New State of Mind: Greater Transparency and Accountability in the Middle East and North Africa,” finds that the region’s oil exporting countries are benefitting from high hydrocarbon prices, but oil importing nations confront different circumstances. Oil importers face heightened stress and risk from higher import bills, especially for food and energy, and tightening fiscal space as they spend more on price subsidies to cushion the pain of price rises on their populations.
“All countries in the MENA region will have to make adjustments to deal with significantly higher prices for food and other imports, especially if they lead to an increase in government borrowing or currency devaluations,” said Ferid Belhaj, World Bank Vice President for the MENA region. “What countries need now is smart governance to weather the storm and begin to rebuild after multiple shocks on top of the pandemic.”
Published twice-yearly, the report says that responsive governance will help countries confront these challenges more effectively now and cement the foundations for long term growth. Each MENA Economic Update has an area of special focus, and this report looks at how reforms leading to more transparency and accountability in public institutions can promote a sustainable economic recovery. Countries are in dire need of establishing systems that allow state bureaucracies to measure results, align responsibilities, experiment, and learn from these results.
“Moving towards greater data transparency and accountability is a game changer for the region; it can help countries identify what is working and needs improvement and to act on it,” said Roberta Gatti, World Bank Chief Economist for the MENA region. “It will help them manage risk and shape progress towards a more sustainable and inclusive future. Not only are the potential benefits large, but the reforms needed to put institutions on a learning path are within reach.“
The Bank’s analysis forecasts diverging paths of growth in the region. The Gulf Cooperation Council (GCC) countries are on track to grow by 6.9% in 2022, buoyed by high hydrocarbon earnings, slowing to 3.7% in 2023 as hydrocarbon prices subside. Developing oil exporters are forecast to experience trends like those of the GCC but at lower levels—with 2022 growth expected to increase to 4.1%, led by Iraq, before falling back to 2.7% in 2023. Developing oil importing countries are expected to grow by 4.5% in 2022 and 4.3% in 2023. However, the slowdown of growth in Europe poses a particular risk, as this group of countries relies more on trade with the Euro area—especially the North African oil importers closest to Europe: Tunisia, Morocco, and Egypt.
Across the region, policymakers have introduced measures—especially price controls and subsidies—to make the domestic price of certain goods, such as food and energy, lower than the global price. The report finds that this has had the effect of keeping inflation in MENA lower than in other regions. In Egypt, for example, average year-on-year inflation during the period of March to July 2022 was 14.3%, but it would have been 4.1 percentage points higher at 18.4%, had authorities not intervened.
Some governments have made cash payments to poorer households—a more efficient way of helping the poor deal with rising prices than general market subsidies that lower prices for everyone, including the rich. For Egypt, to lower average inflation by the equivalent of 4.1 percentage points using a subsidy on food and energy prices that benefits the entire population costs 13.2 times more than allowing prices to increase and supporting just the poorest 10 percent of households with a cash transfer.
Governments will incur additional expenses as they increase subsidies and cash transfers to mitigate the damage to the living standards of their populations from higher food and energy prices. For the GCC and developing oil-exporting countries, this is not of much concern now. Windfall increases in state revenues from the rise in hydrocarbon prices have greatly increased their fiscal space and will result in fiscal surpluses for most oil exporters in 2022—even after the additional spending on inflation mitigation programs.
Developing oil importers, however, do not have such a windfall and will have to cut other expenditures, find new revenues, or increase deficits and debt to fund the inflation mitigation programs and any other additional spending. Moreover, as global interest rates rise, the debt service burden for oil importers will increase, as they must pay a higher rate of interest both on any new debt they incur and existing debt they refinance, weighing on countries’ debt sustainability over time—especially for countries with already high debt levels, such as Jordan, Tunisia, and Egypt.
Distributed by APO Group on behalf of The World Bank Group.
The Middle East is looking to advanced manufacturing as an opportunity for economic diversification from the rentier economies they have known to date. It is a matter of not only finding that goldfinch but going for strategic options that should bring that into the open.
Localising technology and digital manufacturing are major opportunities for economic growth and greater supply chain resilience
Economic diversification is imperative for the Middle East. The region’s overdependence on petrochemicals in manufacturing is a widely acknowledged risk that weakens resilience and could impede future economic growth. The industry contributes 24% of GDP in Saudi Arabia and 16% in the UAE in terms of oil rents, compared with less than 1% in the U.S. and China.
Middle East governments need to decide which tech segments within the vast technology universe—and even which product families within segments—they want to pursue with large-scale projects, and provide ample support to attract global tech companies as occupants.
Ambitious programmes
In recent years, some Middle East countries, chiefly in the GCC, have launched ambitious programmes to diversify and expand their manufacturing. These countries seek to meet national and regional demand, and position themselves as export platforms. Typically, these projects are part of a state-led master economic development plan.
Countries are prioritising technology for localisation because of its growth potential and strategic importance. At present, high-tech manufacturing is concentrated in a handful of countries (none in the Middle East), whose companies function as providers to the world.
The Covid-19 pandemic has highlighted the region’s susceptibility to supply chain disruptions and tested its resilience, making it sometimes difficult or impossible for companies to secure the technology on which they depend.
Manufacturing opportunity
In response, governments and regional authorities are accelerating their localisation initiatives, as are large, global tech manufacturers with similar interests.
Three categories of manufactured tech products, with a combined Middle East market size of roughly $125bn, are well-suited to Middle East localisation opportunities. These are:
Advanced materials such as nanomaterials, smart materials, and bioplastics;
Advanced components such as electronic semiconductor components, and battery components; and
Advanced finished products such as general-purpose robots, space systems, IoT [Internet of Things] devices, and 3D printers.
Some of these products are disruptive and innovative; others are mainstream but satisfy the pressing needs of regional companies in numerous sectors.
Fierce competition
Competition among countries will be fierce as they stake claims on lucrative tech segments, gain first-mover advantage, and attract tenants. Already in the Middle East, Neom Tech & Digital Company, founded in 2021 as the first subsidiary to be established out of Saudi Arabia’s $500bn Neom city project, is building advanced digital infrastructure. Likewise, the industrialisation and innovation strategy of the UAE, led by projects by Abu Dhabi’s Mubadala Investment Company, is focused on the localisation of high-tech products.
In this environment, Middle East governments must target first those localisation opportunities that have confirmed market potential and grant them the right to win. Experience elsewhere indicates that governments should select products that:
Have captive and sizeable national and regional demand;
Are in markets that are not yet highly concentrated;
Can be manufactured cost competitively in global terms; and
That could create potential network effects for additional manufacturing localisation opportunities.
Ecosystem facilitation
Next, after identifying the right opportunity, Middle East governments must put in place a supportive ecosystem. Financial incentives may include direct subsidies to lower upfront capital expenditure requirements, and indirect subsidies such as tax breaks to reduce long-term operating expenditures. Governments will also need to ensure seamless integration into global supply chains, enabled by reliable and modern physical infrastructure for road, sea, and air transport, and by digital networking capacity.
Likewise, regulatory and policy reforms targeted at the technology sector can help lure potential tenants to the region. These could include support for technology adoption, ensuring data security, and protecting intellectual property. Similarly, pure water, enabled by investments in desalination plants if needed, and high-quality and stable electricity, are prerequisites for a successful ecosystem.
Choice of tenants
Finally, to bolster their chances of success, governments should choose tenants carefully, giving priority to those that hold leadership positions in their industries and that can attract other companies into their operating sphere by virtue of their prominence. Likewise, companies that invest significantly in research and development (R&D) warrant special consideration. These companies are more apt to retain their leadership position and remain viable over the long term, given the pace of change in the tech industry. Companies that can demonstrate a strong financial position and have prior experience with greenfield localisation projects are more apt to possess the capabilities and resources to succeed.
As competition intensifies to establish tech manufacturing and satisfy captive and global demand, Middle East governments must move fast. They need to select those areas – materials, components, or products – where they have a right to win, and create the ecosystems to enable companies to thrive.
This MEED published article was produced byAlessandro BorgognaandChady Smayra, partners, andMaha Raad, principal from Strategy& Middle East, part of the PwC network.
According to the IMF, the Middle East saw a surge in capital inflows, the emerging market investments are shrinking. How will MENA countries hit FDI targets? Let us see how.
Emerging market investments are shrinking. How will MENA countries hit FDI targets?
As the pandemic-fuelled liquidity begins to wane and the reality of inflation and higher interest rates sets in, many economies will face considerable challenges. Middle East and North Africa (MENA) countries are vying to attract global investors and increase Foreign Direct Investment (FDI). Yet, capital flows are reversing from emerging to developed markets—specifically in the United States, where interest rates are rising to levels not seen since 2018. The year 2018 is illustrative: during that time, emerging markets experienced substantial capital outflows as international investors reduced their exposure and consolidated their risk into emerging economies with fewer perceived risks, given their proactive and progressive economic policies.
Attracting foreign investors into emerging market economies has always been difficult. Nevertheless, thanks to the extended period of near-zero interest rates, emerging markets were blessed with investors hungry for higher returns. The plentiful supply of money coupled with historically low yields in rich countries led investors to explore higher yields in riskier markets across various assets, including public equities, public debt, private equity, and venture capital. The lower cost of capital allowed investors to finance opportunities that otherwise would have been unfeasible.
Unfortunately, the party is over, and the pain is just beginning. The US Federal Reserve has started an aggressive interest rate hiking campaign, which will likely be the sharpest rise in interest rates since former chair of the Federal Reserve Paul Volcker’s war on inflation from 1979 to 1982. Many economists believe this will likely lead to a recession in the world’s biggest economy.
A US economic slowdown or a recession couldn’t come at a worse time for emerging markets, particularly those in MENA, where most are fighting chronic unemployment, especially among youth and women, slowing growth, and higher debt levels. Large oil-exporting countries in the Gulf Cooperation Council (GCC) — such as Qatar, Saudi Arabia, and the United Arab Emirates (UAE) — are better positioned given heightened commodity prices. However, their lack of interest rate autonomy given the dollar peg limits their ability to deviate their monetary policy from that of the United States.
Additionally, the global demand destruction cannot be ignored as the post-pandemic surge in demand levels off, with consumers beginning to feel the pinch from inflation and rising interest rates. This may put a damper on global energy demand and tourism. Inflation also impacts global emerging markets, causing a perfect storm for the arrival of tough economic times. Currency depreciation against the dollar is increasing the cost of imports and repaying foreign currency debts for banks, companies, and governments, many of which racked up significant debt during the pandemic.
Research suggests that the impact of US monetary tightening on emerging markets will vary depending on the factors for the change. Interest rate hikes driven by US economic expansion will likely lead to positive spillover effects that benefit more than hurt emerging markets and, therefore, are neutral on capital flows. On the other hand, interest rate hikes to fend off inflation will likely lead to emerging markets disruption. Here, there are two key points to mention. First, there is a more significant effect on emerging markets from rising interest rates due to inflation than those due to growth. Second, emerging economies with stable domestic conditions and policies tend to fare better and experience less volatility. In a global economic environment with slower growth, higher cost of capital, and a shrinking capital pool for riskier assets, discerning international investors will consolidate their investments in the highest-quality emerging markets.
The Goldilocks moment experienced in markets over the past couple of years is subsiding. Geopolitical risk, inflation, and US interest rates are all rising. In addition, two crucial macroeconomic trends will impact the future capital flows to emerging markets. First, globalization policies that have focused overwhelmingly on cost efficiency and rationalization will now focus on resiliency and values-based investments. At an Atlantic Council event on April 13, US Treasury Secretary Janet Yellen articulated a blueprint for US trade policy, stating, “The US would now favor the friend-shoring of supply chains to a large number of trusted countries that share a set of norms and values about how to operate in the global economy.”
Second, Environmental, Social, and Governance (ESG) issues are gaining more attention with countries and companies putting them on the agenda. For an indication of what’s to come, consider Total, the French oil and gas giant, marking its shift to renewable energy and rebranding to TotalEnergies, as well as Engine No. 1, a US impact hedge fund, hijacking ExxonMobil’s board to drive a green strategy at the company. As a result of the confluence of these complex issues on top of challenging macro-economic concerns, investor appetite for emerging market assets is weakening. It will become more discerning in the coming years.
But all isn’t lost. There will be divergent outcomes and risks depending on the domestic conditions of each emerging market. Thoughtful investors will continue to seek opportunities in emerging markets, especially in private markets, where the predominant share of opportunities exists. However, as financial conditions tighten, differentiation between emerging markets will increase. MENA countries can better position themselves amongst others competing for capital by:
Attracting and empowering strong policymakers to make dynamic and bold decisions that complex changes in the global economy require. Deepening the bench of talented policymakers should be another priority.
Driving policies supportive of private sector development and investment. Reducing government-owned enterprises and providing ample space for private companies to grow and prosper on an even playing field is critical to building a dynamic economy.
Continuing to nurture the nascent entrepreneurial ecosystem. Entrepreneurial economies are consistently more resilient and lead to better outcomes over the long term.
Enhancing regional and international economic integration through bilateral and multilateral agreements with more robust economies. Proactive engagement with multilateral financial institutions will also increase financial stability and resilience.
Standardizing policies according to global norms for greater regional and international integration. Investor appetite is greatly improved in emerging markets that adopt regulations and standards from developed countries.
Increasing transparency and reducing uncertainty around laws and regulations. Investors and companies need more clarity on the game’s rules in order to play it confidently and competently.
Several MENA countries continue to take bold steps to improve their global competitiveness. One such example is the privatization programs of government-owned enterprises in Egypt, Saudi Arabia, and the UAE to increase liquidity in local capital markets, improve transparency, and expand private sector participation. Those countries that maintain their momentum will be clear winners in the coming years. History is rich with evidence that economic challenges are followed by periods of historic gains.
Amjad Ahmad is Director and Senior Fellow at the Atlantic Council’s empower ME Initiative at the Rafik Hariri Center for the Middle East.
The above-featured image of Smart City Laguna in Fortaleza, one of Planet Smart City’s projects in Brazil
The acquisition will strengthen Planet Smart City’s ability to integrate proptech expertise and environmental, social and governance principles into real estate development around the world.
Smart affordable housing company Planet Smart City has signed an exclusive agreement to acquire Politecna Europa which specialises in architectural and engineering design.
The acquisition will strengthen Planet Smart City’s Competence Centre, offering expertise that integrates proptech and environmental, social and governance (ESG) principles into real estate development.
Intelligent neighbourhoods
Politecna Europa, founded by Luca Massimo Giacosa and Pietro Putetto, specialises in project management activities and is at the forefront of architectural, structural, and industrial design in the civil and infrastructure sectors.
The company is involved in activities across Italy, France, Switzerland, and Oman, leveraging a team of more than 100 engineers and architects. The specialist knowledge of both companies will be applied to create intelligent neighbourhoods and homes by increasing their efficiency and maximising the user experience of residents.
Planet Idea, Planet Smart City’s Competence Centre, and Politecna Europa are already working on joint projects around the world. Planet Idea designs innovative solutions in fields including technological systems, planning and architecture, social innovation, and the environment.
These solutions are integrated into real estate development projects that Planet Smart City carries out in Italy, India, Brazil, and the US, as well as supporting consultancy services to third party real estate developers.
“Planet Smart City and Politecna Europa have the same vision of real estate development aimed at the joint application of proptech together with the principles of ESG”
Planet Idea’s interdisciplinary team already includes architects, engineers, and urban planners, as well as digital transformation and social innovation specialists, who all work together at the Competence Centre in Turin.
After the two companies are fully integrated, an entity will be established including 350 professionals. A 4,000 square metre building has been chosen as the headquarters in Turin and, from October, will become an international centre of technological innovation and ESG in real estate.
“Planet Smart City and Politecna Europa have the same vision of real estate development aimed at the joint application of proptech together with the principles of ESG,” said Giovanni Savio, CEO of Planet Smart City.
He added: “The integration of our respective skills and professionalism will lead to the establishment of an interdisciplinary group that will increase our ability to generate and implement ground-breaking ideas.”
Planet Smart City’s mission is to create communities that respect local cultures and support inclusivity and sustainability. It does this through integrating innovative infrastructural, technological and social innovation solutions into its projects.
The research, development and integration of these innovative solutions is undertaken by subsidiary Planet Idea, which operates through multidisciplinary Competence Centres in Turin (Italy) and Pune (India). Planet Idea has, among other projects, created and launched the Planet App, a digital platform of high value-added services that also facilitates communication between residents in Planet Smart City’s neighbourhoods.
The Planet Smart City model has been rolled out in Brazil where four projects are underway: Smart City Laguna; Smart City Natal; Smart City Aquiraz; and Viva!Smart. In 2020, the business expanded into India and the US. In Italy, the company collaborates with leading real estate developers as an advisor in numerous smart social housing districts.
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Earth has been used as a building material for at least the last 12,000 years. Ethnographic research into earth being used as an element of Aboriginal architecture in Australia suggests its use probably goes back much further.
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