Published in Al-Sharq al-Awsat, International newspaper of the Arabs
October 27, 2021, Issue No. 15674
The world and the Middle East are nearing the end of their second year of dealing with an unprecedented global health and economic crisis amid new challenges, such as the repercussions of repeated waves of the corona pandemic, the latest caused by the Omicron variant, and new economic developments, such as high inflation and growing economic uncertainty. At this eventful year ends against the backdrop of a cloudy economic horizon, it is useful to review key developments in the region in 2021 and examine the economic prospects for 2022.
The year 2021 was marked by a gradual recovery in the region, with many countries in the region making appreciable progress after an exceptional crisis that led to an unprecedented contraction in domestic product during 2020.
In 2021, the countries of the region managed to varying degrees to contain the economic shocks caused by the pandemic and can look forward to 4.1 percent growth this year. However, the current recovery is uneven from one country to another. Some countries continue to experience the economic and social repercussions of the slow rollout of the vaccine, particularly countries facing instability, conflicts, and political volatility. By contrast, the oil market has improved significantly this year, with oil priced at more than $84/barrel in mid-October, compared to less than $25/barrel in April 2020. The countries of the region have remained able to obtain financing from the global financial markets, with assistance from the International Monetary Fund, which provided $17 billion in financing and the equivalent of $42 billion in special drawing rights in August of this year, for a total of $60 billion in support for the countries of the region.
On the positive side, the pandemic has accelerated the economic transformation paths of a number of countries, which have progressed in the areas of technology investments, digitalization of their economies, adaption of their production patterns to global changes and supply chain developments, and the development of social programs. Technology and digital transformation are essential to any strategy to build the future, support social safety nets, create new sectors that support growth, and ensure the region's global competitiveness.
As for the new challenges, inflation has risen in the countries of the region and is expected to reach 13 percent in 2021, in parallel with the global rise in prices. Food and energy prices have increased significantly. These developments could adversely affect the living conditions of low-income persons and the most vulnerable groups and are thus a source of concern. They also portend risks of social unrest, particularly in low-income countries and fragile economies, and could increase the challenges for countries with high fiscal deficits. More generally, the prospects for economic stability have become more complex in many countries, which face growing risks of exposure to the repercussions of sudden financial turmoil.
On the social front, employment rates are still weak and inequalities between social groups are increasing as 2021 comes to a close. The unemployment rate in the region has risen far above the rates seen in previous crises, increasing by about 1.5 per cent since the outbreak of the pandemic, after having reached 11.6 percent in 2020. Youth and women have been the most affected. For example, employment fell by 10 percent among youth, 4.3 percent among adults, 6.1 percent among women, and 3.9 percent among men. About 15-25 percent of small businesses face the possibility of restructuring or liquidation. The informal sector, unlike in previous recessions, has not provided a buffer against shocks, because social distancing measures have led to the closure of many establishments and job losses in this sector.
As for 2022, it can be called the year of major economic transformations, as the global economy enters a new phase characterized by uncertainty and wariness for several reasons, including: the possibility of new waves of the pandemic, which could impact economic movement and mobility; continued production and supply chain disruptions, which could increase the risk that inflation will persist and take root; the repercussions of a potential decline in demand in some major economies, such as China; and the impact of potential interest rate policy adjustments, which could impact the movement of global investments and increase the risk of capital flight from certain emerging markets, which would put pressure on their currencies. Higher interest rates will also likely make borrowing more expensive worldwide, straining public finances.
The global developments expected in the coming year will require many countries in the region to make delicate trade-offs in their economic decisionmaking, given the shrinking margin of maneuver and continual widening of social disparities. Hence the importance of wisely managing economic policies, which, if successful, will help in dealing carefully with the difficult trade-offs. Therefore, it is important for economic policies in 2022 to harmonize the surmounting of imminent challenges with action to transform the current crisis into a springboard for achieving a solid recovery that secures a path toward sustainable, inclusive growth.
The management of the current situation requires efforts to maintain the stability of the economic cycle, protect economies from any new shocks in 2022, and cope with new waves of the pandemic. This last point is the most urgent priority, as vaccinations are the best way to protect the lives of citizens, and the acceleration of the vaccination process can stimulate growth and reduce social inequalities. It is thus of paramount importance to strengthen regional and international cooperation frameworks to secure vaccines and ensure that they are distributed to all segments of society.
The global rise in inflation calls for close monitoring by central banks in the region. It may be necessary to raise interest rates as a prudential measure if global inflation expectations continue to rise. The short-term support provided through fiscal and monetary policies will also have to be aligned with efforts to maintain macroeconomic stability. Strengthening policy frameworks is of paramount importance to maintain debt levels within sustainable limits and to enhance the credibility of the ability of states to effectively meet the requirements of stability and prosperity. Debt accumulation in 2020 has led to a significant increase in future financing needs for the Middle East. These needs are expected to reach $1,075 billion during 2021/22, compared to $784 billion in 2018/19. A small number of countries account for the bulk of government financing needs.
Bold steps are needed to address inequalities, create jobs, and mitigate social risks. An important opportunity has arisen to shift the region's attention toward supporting the health and education sectors and strengthening social safety nets to build a new social system. Improving opportunities for vocational rehabilitation and providing employment incentives can help workers move to more productive sectors, support job opportunities for youth, and provide for the greater participation of women in economic activity.
At the same time, efforts to adapt to climate change are of the utmost importance to the countries of the region in view of the increasing frequency of climate disasters and the costs associated with them, which are expected to increase further in the coming decades. It is thus very important to perfect the process of adapting to the requirements of combating climate change through well-targeted investments that help create new, sustainable jobs for future generations.
The passage toward a better tomorrow remains the central objective of the economic policies of the countries of the region in 2022. This can be achieved by building a more advanced and solid economy that includes all segments of society and by making the current recovery a pivotal moment for the region. Failure to take prompt strategic action will saddle the peoples of the region with heavy burdens and deprive future generations of a historic opportunity for progress and prosperity. Therefore, next year will be the year of major economic transformations, which, if used properly, could constitute a milestone on the path toward building a promising and prosperous economic future.
