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Middle East Economies To See Slow Growth in 2021

Middle East Economies To See Slow Growth in 2021

Pandemic, demographics, violence, US political transition will come into play in future GDP figures

Fluctuations in the price of oil and gas, access to coronavirus vaccines, the new US administration of President-elect Joe Biden and assorted military threats are all aspects of an uncertain 2021 for Middle East economies.

The coronavirus pandemic is currently the focus for the coming year and furnishes the biggest question mark regarding the region’s economic recovery.

The Palestinian Authority

The Palestinian economy, as measured by gross domestic product, shrunk by 14% in 2020. However, the GDP dropped by over 20% between the second quarter of 2019 and the same quarter of 2020 as the coronavirus pandemic erupted and the West Bank and Israel entered into their first lockdowns.

“COVID-19 exposed and highlighted existing economic problems and challenges for the Palestinian economy. One could say these are now ‘in your face,’” stated Prof. Wifag Adnan of the Economics Department at New York University Abu Dhabi.

“During the pandemic, especially the second quarter of 2020, establishments lost their supply chains, could not bring in raw materials and were forced to let workers go, while close to 78% of Palestinian migrant or day laborers in Israel lost their jobs,” she told The Media Line. This estimate is based on a study she coauthored on legally employed cross-border commuters.

Because wages in Israel are three times higher than those in the Palestinian areas, Adnan noted, this drop was significant for the Palestinian economy. Yet, by Q3 and Q4, almost all of these laborers had returned to work in Israel, either legally with work permits, or illegally.

In 2021, she reported, there is likely to be a joining of interests about these workers. Because they are virus vectors – potentially bringing the virus across the border to work and to home – both the Palestinian Authority and Israel recognize the upside in vaccinating them.

“The good news is that Israeli employers recognize this and many are willing to pay for Palestinian workers to get health insurance, and there is also a conversation about employers paying for the vaccine,” said Adnan.

She would be even more optimistic for the local economy if COVID-19 vaccines became readily available in the Palestinian areas.

The PA expects to receive its first shipment of coronavirus vaccines within about 10 days.

The World Bank forecasts that 2021 will be better for the Palestinian economy. The second half of 2021 will see a modest increase in economic activity, leading to 2.5% growth, the bank estimates.

The Palestinian Central Bureau of Statistics provides both an optimistic growth goal for the coming year of over 6%, and a pessimistic scenario showing GDP remaining about the same as in 2020, or some 12% lower than that of 2019.

Everything depends upon the coronavirus pandemic and the vaccines being available.

Jordan

The Hashemite kingdom, likewise riled by the pandemic, is seeking economic growth while working to constrain the pandemic.

Recent indicators show actions taken by the government to trim infection rates, such as closures and curtailing gatherings, are working. New infections are down by almost one-half since a peak in November, according to the Johns Hopkins Coronavirus Resource Center. But these measures come to the detriment of economic activity.

Almost a quarter of the labor force is unemployed, a jump of some 5 percentage points since 2019.

“We started out prior to the pandemic in bad shape economically, and the coronavirus is deepening the challenges that we have here,” stated Riad al Khouri, a Jordanian economist.

Jordan’s GDP is contracting, like in many other nations. In 2020, the economy contracted by about 5%, according to the International Monetary Fund, and the poverty rate rose by 11 percentage points.

“We have really been becoming poorer for about a decade,” Khouri, principal of the Discover Studies study abroad program in Amman, told The Media Line. Terming the economy “really feeble before the pandemic,” he could only point to the country’s healthcare sector as strong.

The upcoming changes in Washington, he posits, should bring more opportunities in 2021 and in the coming years.

“US President Trump froze Jordan out, whereas US President-elect Joe Biden will bring Jordan back,” he said, not forgetting that Jordan received an aid package of $1.6 billion last month. The change in administrations, he intoned, will be positive.

“The US is our largest trading partner and with a change in the White House we are back in the game,” Khouri said.

He concluded with an analogy from the world of American baseball: “Trump took us out of the game, but now we are in the lineup, batting 8th. The UAE is batting 3rd, Saudi Arabia is batting cleanup at 4th, and Egypt is at 5th, but we are back.”

For 2021, the IMF’s prognosis is for Jordan’s growth to rebound close to 3.4%.

The GCC States

Saudi Arabia expects its economy to grow by 3.2% in 2021, whereas in 2020 the kingdom’s economy is estimated to have contracted by as much as 5.4% according to the IMF, or by only 3.7%, according its Ministry of Finance.

In an attempt to contain the budget deficit to only 12% and in light of the deleterious effects of the pandemic on oil prices and a glut in oil production that has reduced state revenue, government spending is being cut by 7.5%.

For Dr. Gilles Feiler, director for the Middle East and North Africa at the Bank of Georgia, a commercial bank headquartered in Tbilisi, Georgia, with interests in the Middle East, this is just the beginning of a process.

“The era of rich Arab countries is coming to an end and the Kingdom of Saudi Arabia is only one example. It is not alone,” he told The Media Line.

For years, the Gulf Cooperation Council region has been seeking to diversify its economic engines. This has not borne fruit and no other large industries have grown up alongside those involving hydrocarbons.

In 2020, the pandemic and lower oil prices produced a double hit for the region, lowering the Gulf region’s GDP by 7-8%.

Feiler notes that this occurred in an already difficult economic atmosphere, not to mention the ongoing geo-political intrigues, such as facing Iran, continuing Iraqi strife, OPEC disagreements, Turkish pressures and the impending exit of the current US administration, that have creating increased uncertainty now and into the future.

Add to this, Feiler notes, are social and demographic issues facing the region.

In the United Arab Emirates, seven of eight inhabitants are not natives, while in the entire GCC region some 30 million foreigners earn their livelihood. According to Feiler, 90% of the Saudi private sector consists of foreign workers, whereas unemployment for Saudi natives is officially 12%, but likely higher.

The public sector, he believes, is overstaffed, with inefficient employment of locals in the bureaucracy.

“There is a local brain drain because there is no employment for the many university graduates, many of whom are women in the sciences who, by the way, also outnumber men. There are so few women in management positions. All of this is a drag on the economy,” he noted.

The numbers game affects the entire GCC region. Take food imports to the region, for example. In 2008, they cost $25 billion, whereas over 12 years they grew by more than 130%, to $57 billion.

This is where both Feiler and Khouri believe that the UAE and Bahrain made a shrewd move to normalizing relations with Israel.

Working with Israel “is a great idea for connecting to new industries, to help the Gulf diversify its business interests,” said Khouri.

Feiler pointed out that Israel’s agritech and foodtech could enable the Gulf states to create more efficient food industries. “It is a geo-strategic change and one that could help create new food efficiencies that could make a difference for the future.”

Yet, coming back to the numbers, the entire region is facing a reckoning. In 30 years, the Middle East, North Africa and GCC states will see their elderly population reach 130 million. They will retire and demand to be taken care of. Concurrently, some 250 million young people will join the workforce.

“If Saudi Arabia and the Gulf states can diversify into new industries, younger people will find work. If not, there will be social tensions and a great deal of unemployment which these countries cannot afford,” Feiler said.

The next few years will prove pivotal if the region can find its way back to economic growth. The pandemic brought its warning: Times are changing. If the region can diversify and better provide for its inhabitants, the economies will be able find their strengths and begin to grow again.

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