The Impact of the Crisis on Economic Growth in 2009 in ESCWA Countries By Mahmoud ABEL- FADIL Professor of Economics at Cairo University - Egypt A presentation to the Regional Meeting on the Impact of the Financial Crisis on ESCWA Countries Damascus: (5- 7 May 2009)

Contents  The Differential Impact of the Crisis on Growth Prospects in Countries of the ESCWA region  The Sectoral Impact of the Crisis  The mechanism of the recessionary cycle  The way forward

1- The Differential Impact of the Crisis on Growth Prospects in Countries of the ESCWA region

3 Depressing Factors Affecting Growth in ESCWA Countries Prospective Growth in (3) The oil income effect (2) Impact of the Negative "Wealth Effect" (1) The Impact of Skewed Income Distribution

a) The oil income effect The "income effect" of the decline in oil revenues would exercise a depressing effect on GDP growth in ESCWA countries. Such impact would vary across countries of the region according to the degree of dependence on oil revenues. The impact would be most felt in countries of the GCC, and to a lesser degree on other ESCWA countries more dependent on worker's remittances (i.e. Syria, Lebanon, Egypt, and Yemen). Oil prices currently fluctuate within the range 40 – 60 US dollars per barrel. According to some estimates, a more fair and stable price should revolve around 75 US $ per barrel through 2010.At any rate, such decline in oil revenues would result in major delays in planned mega projects financed by public expenditure in Gulf countries, thus affecting GDP growth. The impact of the crisis on growth prospects in countries of the ESCWA region in 2009 and beyond:

b) The Dampening Impact of the Negative "Wealth Effect" on Private Spending Decisions The impact of the negative "wealth effect" on the household and the corporate sectors was severe in many countries of the ESCWA region. The great decline in prices of financial assets and real estate. would certainly affect future spending decisions by the private and the corporate sectors, compounded by the low state of expectations and the prevailing mood of risk- aversion during the years 2009 – That would signal the end of the bubbles in real state and financial markets which prevailed during 2006 – 2007 and most of Cont. The impact of the crisis on growth prospects in countries of the ESCWA region in 2009 and beyond:

c) The Impact of the Skewed Income Distribution on Consumers Demand As a result of the highly skewed income distribution pattern in most ESCWA countries, consumer demand in such countries is highly segmented. We can identify at least three main segments: Cont. (i) The subsistence consumption: for the poor strata of the population, which is most likely going to suffer a major decline due to higher rates of unemployment and the decline in the level remittances due to "return migration"; (ii) The middle class consumption demand which most likely is going to suffer a major squeeze due to the recession and the end of windfalls derived from the previous boom in real estate and financial markets; The impact of the crisis on growth prospects in countries of the ESCWA region in 2009 and beyond:

(iii) The affluent consumer demand Which is mainly confined to the upper strata (10 – 15 top percent of the population), which may prove to be resilient, given the irreversibility of the prevailing consumption patterns which are mainly fuelled by "business income" and by drawing upon old savings. In the light of such composition of consumer demand in ESCWA countries, there would be little room for consumer demand expansion throughout 2009 – 2010, given the high "import – intensity" of the consumption baskets of the affluent sections of the society. The differential impact of the crisis on the growth forecasts for countries of ESCWA region is summarized in table (1). Cont. The impact of the crisis on growth prospects in countries of the ESCWA region in 2009 and beyond:

Segments of Consumer Demand in ESCWA Countries (3) Affluent Consumption “ Persisting ” (2) Middle Class Consumption “ Squeeze" (1) Subsistence Consumption “ Declining ”

Table (1) Forecasts of Real GDP Growth rate in ESCWA countries Forecasts (2009) * Country 2Bahrain 0.7Kuwait 1.5Oman 7Qatar 0.7Saudi Arabia 0.5United Arab Emirates 1.01GCC countries * March 2009 forecasts. Source: Summary of the survey of Economic and social Developments in the ESCWA region Forecasts (2009) * Country 4.5Egypt 5Iraq 3.6Jordan 3Lebanon Occupied Palestinian Territory 4.2Sudan 3.2Syrian Arab Republic 2Yemen 2.1Total ESCWA region

The forecasts for Egypt, Iraq and Sudan seem to be a bit optimistic. On the other hand, the forecast for Saudi Arabia seem to be too low, given the diversified nature of its economy. The UN World Economic Situation and Prospects for 2009 forecast a rate of 2.8% for real GDP growth for Saudi Arabia in 2009, and 2.7 rate of growth of real GDP for the whole region of Western Asia in 2009 (including other non – ESCWA countries). Hence, an average 2% real GDP growth for the whole ESCWA region in 2009 seems to be a realistic assumption.

2- The Sectoral Impact of the Crisis

The Sectoral Impact Depressed Sectors Most Affected Sectors Surviving Sectors Textiles and Apparel Telecommunications, IT and others construction, real estate, financial services and trade

As Gulf states are more integrated than other ESCWA countries in global trade and global financial markets, they are bound to suffer a "slow – down" in certain booming sectors, namely: construction, real estate, financial services and trade. Such activities are likely to hit the "Recessionary barrier" with a lag effect in late The Sectoral Impact of the Crisis

Other ESCWA countries would face balance of payments difficulties due to the decline of foreign direct investment and tourist income, thus exercising a "dampening effect" on the growth prospects and employment opportunities, with the associated negative "multiplier effects". The Sectoral Impact of the Crisis Cont.

On the other hand, as a sequel of the international financial Crisis, non – oil ESCWA countries would face a decline in certain important lines of export activities, notable among them the exports of textiles and apparel products from Egypt, Jordan and Syria. Some lines of activities like telecommunications, and IT, would continue to expand at lower rate and survive the crisis in 2009 and beyond. The Sectoral Impact of the Crisis Cont.

3- The mechanism of the recessionary cycle

3. The mechanism of the recessionary cycle Usually the crisis starts first within the financial sector, with all its components, then after a lag period, the crisis shifts to the real economy, (i.e. production, exporting, investment, activities), and then the crisis spills- over to the social sector. This leads to high levels of unemployment, lower wages, depletion of savings, and cultural impoverishment. In brief, these feedbacks in the social sector lead to the impoverishment middle and poor sections of the population.

Figure (1) The spill - over of the financial crisis across different sectors The Financial Sector The Real Sector The Social Sector Contagion effect Spill - over 2009 will witness shift of the crisis to the real economy.

In this way, the above-mentioned three sectors will suffer from the recessionary impact of the crisis through 2009, and such difficulties may persist to occur for the most of The negative impact of the crisis on the real economy and its spills – over effects into the social sector would be severe in 2009 and 2010, as the reduced financial resources available to the states of the ESCWA region would reduce the volume of social spending on employment creation and social safety nets. This would result into a rise in poverty rates and less social protection for the vulnerable groups of the population.

The anticipated deterioration of the employment situation in the ESCWA region would have adverse effects on female unemployment rates. From a Macro – view point, figure (2) illustrates the negative feedback effects within the recessionary cycle in ESCWA countries, which normally takes a cumulative form, as well as the role of the "liquidity squeeze" within the system. [5][5] cf. summary of the ESCWA survey, p. 11.

External Sector Governmen t Private Sector Household Sector Production Sector Banking Sector Reduced Demand of Household Sector Decline of Workers Remittances Squeeze on Credit lines Delays in Debt Payments Reduced Incomes and Increased Unemployment Demand contraction for Inputs Production Reduced Demand for Exports Deterioration of Taxes Revenues Figure (2) The Feedback Effects of the Financial Crisis on the Economies of the ESCWA Region Deterioration of External Resources (Oil revenue + Tourism + FDI) Reduced Social and Public Spending

4- The way forward

To break the current recessionary cycle, as described in the previous section, a number of initiatives and corrective measures need to be taken without delay; notable among them are the following moves within the Macro Policy Space: The way forward

First, the role of the public sector need to be enhanced in order to assist in dealing with problems of global recession in ESCWA region. The role of the fiscal stimulus becomes crucial in this respect, and Keynesian type policies need to be pursued in order to break the current recessionary cycle. Such types of policies would lead to a crowding – in of private investment and reduce the level of aggregate uncertainty in the system; The way forward

Second, social spending on infrastructure, employment creation, education, and basic health care need to be expanded in order to stimulate demand for goods and services and mitigate problems of increasing unemployment and rising poverty; The way forward Cont.

Third, there is room for more rationalization of investment policies by the private and corporate sectors by shifting away from reliance on "speculative funds" and "speculative outlets", and focusing more on the best use of "investible funds" designed to expand productive capacities and to expand sustainable employment opportunities. The way forward Cont.

Fourth, More coordination and cooperation among ESCWA countries (oil and non- oil) is badly needed to survive the crisis. New regional policies in trade and finance need to be designed to intensify inter – Arab (and intra – ESCWA countries) exchanges to compensate for the loss of export markets and financial investment outlets in Europe and USA. The way forward Cont.

Fifth, Monetary and fiscal policies, need to be closely coordinated among ESCWA countries, in order to increase their efficiency at the country level to counter the negative impacts of the crisis and stop the slippage from recession to a generalized and lengthy depression, as show in figure (3). The way forward Cont.

Figure (3) Slow - down Contraction RecessionDepression Slippage Scale of phases of the crisis

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