Helping to improve the region’s economic prospects
The Biden administration is widely expected to focus on pressing domestic concerns, like mass vaccination, unemployment, and poverty, but the president-elect is keenly aware that governments around world, including in the Middle East, are facing similar challenges. While his foreign policy is expected to be based on traditional U.S. values, he is likely to use U.S. financial and technical support for developing countries more strategically, as a key pillar of his foreign policy, as opposed to his predecessor’s seemingly chaotic approach.
Middle Eastern governments are currently grappling with the aftereffects of the pandemic on their economies. Although the rich oil exporters have been more resilient than the rest of the region, they too have faced tightened fiscal and financial conditions, leading to sharp reductions in trade, remittances, and financial flows that have severely affected lower-income countries in the region.
The macroeconomic situation in MENA deteriorated sharply during 2020, as the region was hit by two massive and reinforcing shocks. In addition to the pandemic, the region faced simultaneous demand and supply shocks, severely affecting trade and financial flows, causing oil prices to plunge, and triggering major disruptions in domestic production of goods and services. The job-rich manufacturing, tourism, and hospitality sectors, as well as the informal sector, have been particularly hard hit.
According to the World Bank, income per capita in MENA is estimated to have contracted by 6.5 percent in 2020. Poor performance is nothing new as the region has been suffering from low growth and rising poverty and unemployment for a decade. The Arab Spring uprisings of 2010-11 were only the most dramatic expression of a century-long trend of individuals seeking to become active citizens and play their part in shaping stable societies and modern states. In their aftermath, however, the region has experienced a period of low growth and rising youth unemployment, with some two-thirds of citizens considered either poor or vulnerable.
In Yemen, violent conflict has entered its sixth year and the country continues to face an unprecedented humanitarian, social, and economic crisis, now aggravated by COVID-19. The Libyan economy has been hit by multiple shocks, including an intensifying conflict and the pandemic, underscoring the urgent need for a political solution. Iraq’s economy has contracted in 2020 due to lower oil prices, COVID-19, and political instability, and it faces rapidly rising fiscal and current account deficits. In the Palestinian Territories, economic activity has been affected by coronavirus lockdowns and has not stabilized. The fiscal position has worsened due to the pandemic and the political standoff that has disrupted the flow of revenues and aid.
Lebanon’s economy has been in free fall, losing nearly a third of its national income since 2018. A financial crisis, resulting from a banking, debt, and exchange rate crisis, has worsened as result of the pandemic, leading to political instability. The conflict in Syria, which has entered its tenth year, has inflicted massive devastation: over 400,000 are dead, millions injured, more than half the country’s pre-conflict population has been displaced, and its economy has contracted by 60 percent.
Given the magnitude of economic fallout from COVID-19, oil importers, such as Egypt, Jordan, Morocco, and Tunisia, have announced fiscal stimulus packages with increased spending on health and social safety nets, financed in part by greater international debt issuance. The scope for fiscal support, however, has been limited by high government debt (Egypt, Tunisia). An unexpectedly sharp tightening of financing conditions would put further strain on already-elevated government debt burdens.
In Iran, the unilateral U.S. withdrawal from the nuclear deal and the Trump administration’s “maximum pressure” campaign have led to a more than 15 percent drop in per capita income, a quadrupling of inflation, and a sharp rise in poverty. Combined with devastating losses from COVID-19, this is likely to create a humanitarian crisis if not addressed urgently.
Further resurgence of COVID-19 or delayed vaccination rollouts are significant risks for all countries in the region. The outbreak’s socioeconomic consequences, including rising joblessness, food insecurity, and poverty, and their potential impact on political instability constitute a major downside risk.
The Biden administration is well placed to take the lead in assisting MENA countries to improve their economic prospects. Dealing with the following issues is likely reduce tensions, mitigate some of the downside risks, and have positive economic spillover effects:
- Assisting with an effective vaccination rollout;
- Working with international financial institutions and the G20 to provide financial assistance, debt service suspension, and relief to highly indebted countries;
- Restoring aid to the Palestinian Territories and encouraging resumption of economic and political dialogue between the Palestinian Authority and Israel;
- Helping ease economic tensions between Qatar, Saudi Arabia, and the UAE;
- Helping to bring an end to the Yemen war;
- Opening up pathways to ease tensions with Iran and revive the nuclear deal;
- Encouraging trade and investment within the region and with the rest of the world;
- Assisting countries in preparing to deal with climate change and take advantage of digitalization and other new technologies;
- Initiating strategic and multilateral dialogue on Syria’s future and refugee return.
Shahrokh Fardoust is a research professor at the Global Research Institute, College of William and Mary, and a non-resident scholar at MEI.