REALITY CHECK: FORECASTING GROWTH IN THE MIDDLE EAST AND NORTH AFRICA IN TIMES OF UNCERTAINTY
If the continued rise accelerates, it may compel central banks to raise interest rates more forcefully than previously anticipated (see Cox, 2022). In fact, the Federal Reserve raised its policy rate by 25 bps in March 17 and is prepared to raise rates more aggressively in coming months (Timiraos, 2022), although it is not clear if this was previously planned prior to the onset of the conflict in Europe. In turn, tightening global financial markets with rising interest rates and lower access to credit could cause capital outflows and financial instability for many developing countries, especially those with elevated dollarized debt, current account deficits, or fiscal deficits. In fact, Egypt’s central bank raised its policy rates on March 21 to reign in inflationary pressures and prevent further currency depreciations. Ì Potential channels of impact on the regional economy The potential channels of impact on MENA can be characterized as direct impacts and indirect (knock-on) impacts. Direct Impacts Figure I.4. MENA Countries are Mostly Net Food Importers and Many are Large Net Fuel Exporters
25.7
36.4
44.5
49.8 32.7
9.4
18.7
24.0
-1.8
-1.2
-3.8
-1.3
-2.2
-2.6
-6.8
-5.3
-2.1
-9.2
-4.5 -12.7
-5.7 -7.3
0.5 -1.6 -6.6
-6.2
70 60 50 40 30 20 10 0 -10 -20 -30
60.2
Percent of GDP
-3.3 -0.7
Direct impacts refer to the first-round effects caused by changing prices, excluding potential responses by capital markets, governments, firms and households. Many MENA economies may be hit hard by the conflict due to rising food prices, increasing the risk of inflation and food insecurity. For example, the net import of food in Egypt is as much as 3 percent of GDP (see figure I.4), and the same indicator reads more than 9 percent for Yemen.
3
Qatar
UAE
Kuwait
Bahrain
Saudi Arabia
Oman
Libya
Algeria
Iran
Yemen
Lebanon
Jordan
Tunisia
Morocco
Egypt, Arab Rep.
It is widely accepted that rising food prices, especially wheat prices, are likely to raise inflationary pressures and increase food insecurity in MENA countries. However, the Developing Developing GCC Oil Importers Oil Exporters overall impact will largely depend on the direct (first order) J Net Food Exports J Net Fuel Exports effects of price increases, attenuated by any government Source: World Development Indicators (for countries with available data). Notes: A positive value indicates net exports. A negative value indicates net imports. Data are 2019, except subsidy programs. The broader and longer-term welfare Oman, Libya, Iran, Yemen (2018), Algeria (2017). Fuel exports data for Yemen is not available. Countries are ordered by ascending GDP per capita within each country group. Note that countries with data older effects are likely to depend on the context of the specific than 2017 are excluded. MENA economy being considered.3 The direct impacts are realized in the short run where, due to sticky production and consumption of food commodities, the welfare loss is large, stemming from increases in prices of wheat and grain. Many MENA countries with large tourism sectors may experience less revenue from tourism receipts induced by fewer tourists from Russia and Ukraine. For example, almost a third of Egypt's tourists are from either Russia or Ukraine (see Emam, 2022). The impact on tourism can be both direct (e.g., through travel disruptions) and indirect, through lower global demand (for example, due to rising oil prices).
As discussed in Lederman and Porto (2016), in the short run, households are unable to adjust consumption, production, and employment decisions unlike the medium-run where partial adjustment is feasible, and the long-run where there is much more flexibility. Changes in the responsiveness of domestic supply will depend on the elasticity of domestic supply of wheat. The first order effects are largely determined by budget and income shares. Poor households tend to spend a larger share of expenditures. However, poor households tend also to be dependent on commodities as a source of income, and thus the overall effect will depend on the net-consumer net-producer position. Furthermore, depending on “wage-price” elasticities, changes in relative prices can lead to shifts in sectoral demands for labor, with some households benefiting from increasing wages. The possibility of spillover effects and the likelihood of perfect price pass through from international to domestic markets will frame the overall effects of rising prices. However, while it is plausible that households can adapt through their consumption, production and employment decisions, these second order adjustments are likely to be small and thus dominated by the first order effects.
Chapter I. Recovery Under Uncertainty
7
