Arab economies grew by 1.4 percent in 2017
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Following is the first part of Arab Monetary Fund (AMF) report on Arab Economic Outlook including forecasts of macroeconomic performance for Arab countries in 2018 and 2019.
– Editor
In line with its continuous efforts to support policymakers in the Arab region, the Arab Monetary Fund (AMF) releases April edition of the “Arab Economic Outlook” report which includes projections for the macroeconomic performance of the Arab countries in 2018 and 2019.
The report indicated that the Global Economy has witnessed a wide recovery in 2017 as the level of economic activity rose in two-thirds of the world countries. This recovery was driven by improved investment and trade activities, the accommodative macroeconomic policies, the rising confidence levels, the favorable financial conditions, as well as the firming commodity prices.
The international organizations’ estimates for the world growth rate ranged between 3 to 3.7 percent in 2017 which is the highest growth level recorded in the wake of the global financial crisis. Most of the growth gains resulted from high growth rates recorded in a number of developed economies, East and South Asian countries, in addition to the recovery of some countries form the recession they witnessed in 2016.
The rebound of the global economy is expected to continue in 2018 and 2019, especially in light of the positive anticipated impact of the tax cuts in the United States of America on investment and trade activities in the USA and its trading partners. Although short-term growth prospects have improved, long-term growth remains precarious given the slow pace of growth in capital spending and productivity, the accumulation of financial vulnerabilities, and the continuing challenges facing the commodity exporters.
OPEC price basket rose 28.6 percent in 2017 to reach USD 52.43 per barrel supported by the recovery of global economic activity, which increased demand for oil. In addition to the impact of the agreement reached between the major oil producers inside and outside OPEC to adjust oil production by 1.8 million barrels a day starting from January 2017. This agreement which was extended until the end of 2018, has helped to reduce the accumulation of oil stocks partially. International oil prices also continued to rise during the first quarter of this year to reach USD 66.5 per barrel, an increase of 27 percent compared with the levels recorded by the end of 2017, which constitutes the highest level since 2015.
In light of the increased demand for oil, the balance of the global oil market will depend more on the supply side in 2018. In this context, high prices are expected to stimulate oil production, especially from the United States of America, which is expected to rise to 10.6 million barrels a day in 2018 -the highest level since 1970- compared with 9.3 million barrels a day recorded last year. Such increase would keep the oil inventories above their five-year average and could dampen the upward trend of the international oil prices in 2018 and 2019.
The Arab Economic Outlook Report indicated that the Growth Rate of the Arab economies has reached 1.4 percent in 2017 according to the AMF preliminary estimates compared with 2 percent for the growth recorded in 2016. This low pace of growth came as a result of the slowdown in economic activity in oil-exporting countries, whose growth rate declined to about 0.6 percent. A number of factors have affected the output levels in oil and non-oil sectors within this group. These factors include the reduction of oil production in light of the commitment of these countries to the OPEC agreement; the impact of the tightened fiscal and monetary policy on the aggregate demand, in addition to the repercussions of internal developments in some Arab countries and their spill-over effects on the economic growth in the region.
On the contrary, the moderate growth pace recorded in the oil-importing countries remains a key factor in mitigating the impact of slower growth in oil economies on the growth rate of Arab countries as a group. In this context, the growth rate of the Arab oil-importing increased to 3.8 percent during in 2017 reflecting higher growth rate recorded in a number of these countries.
The implementation of economic reform programs has reinforced the investments and exports levels, particularly in light of the adopted measures to increase the flexibility of the exchange rate regimes. On the other hand, it also helped to contain part of the imbalances in public budgets and provide some financial resources that have been used to stimulate economic growth and enhance social safety nets to lessen the impact of the reforms on low-income groups.
The Arab Economic Outlook Report expects a partial recovery of the economic activities in the Arab countries in 2018 supported by some factors that could increase the growth rate to 2.2 percent this year. In Arab oil-exporting countries, growth is forecasted at 1.7 percent in 2018 driven by the increased levels of public investment within the economic diversification strategies and plans to support the activities in non-oil sectors. The growth rate of this group of countries will also benefit from the gradual improvement of the internal conditions in some oil-exporting countries.
On the other hand, the moderate growth pace in the Arab oil importing countries is expected to continue at the 3.7 percent level in 2018, supported by the predicted increase in external demand due to the improved global economic activity, which will boost exports and investment levels. Moreover, this group of countries will continue to benefit from the positive impact of the economic reform programs. As for 2019, the growth rate of the Arab economies is forecasted to rise to 2.9 percent due to a combination of positive factors, led by the anticipated recovery of the oil sector.
Concerning Inflation Forecasts, the AMF report pointed out that the inflation rate in the Arab countries as a group rose to about 13.9 percent, in 2017 compared with about 7.6 percent recorded during 2016. The rise in the international oil prices, the reforms of the subsidy systems, the adoption of new taxes, as well as the increase in government fees have generated inflationary pressures in many Arab countries. On the other hand, the sluggish aggregate demand and the tightening of the monetary policy helped absorbing part of the inflationary pressures in some Arab countries.
The report expects the inflation rate to decline to 9 percent and 8 percent in 2018 and 2019 respectively. This decline will reflect further anticipated tightening of monetary policy either in some Arab countries to maintain the stability of the fixed exchange rate regimes or in other Arab countries to contain inflationary pressures and moving ahead with the inflation targeting policy. However, some inflationary pressures are expected to emerge in some Arab countries as a result of imposing new taxes such as the value-added and excise tax.
The Monetary Conditions in the Arab countries are still affected by the pressures resulting from the slowdown in the economic activity and the growing needs to finance the public budgets. These developments were reflected in the growth rate of domestic liquidity, which reached 7.8 percent in 2017 compared to a growth rate of around 8 percent in 2016. In light of the gradual normalization of monetary policy in the USA which resulted in the increase of the interest rate of the USD by 75 percentage points last year, official interest rates in Arab countries that adopt fixed exchange rates, mostly Arab oil-exporting countries, rose to maintain the stability of the exchange rate regimes. Interest rates have also risen in some Arab oil-importing countries, which adopt more flexible exchange rates to contain part of inflationary pressures and support domestic currencies.
In 2018 and 2019, the monetary conditions in the Arab countries will be affected by the normalization of monetary policy in the United States of America. The tightening of the monetary policy in the USA will be closely followed by a larger number of central banks to maintain the stability of the exchange rate regimes given the low margin between the interest rates of some of the Arab currencies and the dollar.
To be continued tomorrow
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