MinbarLibya – International
Destroyed buildings are seen in the Homs neighbourhood of Khaldiyeh, formerly held by rebel fighters and captured by Syrian government forces in summer 2013, on May 3, 2014. Syrian rebels evacuated Homs in May in a deal that handed the Old City back to the government, granting it a symbolic victory. The pullout leaves the rebels confined to a single district on the outskirts of Homs, Syria's third city and once dubbed "the capital of the revolution" against President Bashar al-Assad.  AFP PHOTO/JOSEPH EIDJOSEPH EID/AFP/Getty Images

It appears that 2017, like the previous year, will be saturated with economic challenges for the nations of the Middle East. These challenges arise in a context of the expected regression of vital sectors of the economy, the most significant being oil and tourism.

These sectors will remain impacted by the drop in global oil prices, and the escalation of terrorist attacks in certain areas of the region. Such factors may weaken the confidence of both consumers and investors in the prospects of Middle Eastern markets.

Middle Eastern nations have recently embarked on ambitious programs of economic reform in order to enhance their growth and development. Yet the slow progress of these programs, and their lack of breadth, has rendered them insufficient to contain the current economic problems such as budget deficits and poverty. This may foreshadow unstable economic conditions and reduced living standards for the majority of the region’s residents.  

General Indicators:

1-Reduced confidence in the economy: It appears that 2017 will witness escalating political dangers in some Middle Eastern states, which will increase economic pressure on the region generally. The continuation of terrorist activities, and political and social strife in the region, will reduce the confidence of both consumers and investors in the region’s markets, which will have an adverse effect on economic growth. 

Oil prices are expected to rise, reaching between 55 and 60 dollars per barrel, as per the OPEC agreement of November 2016. Yet these prices will remain lower than necessary to attain budgetary balance, which will lead to severe deficits in the public budgets and in the external transaction accounts of the oil-exporting Middle Eastern nations. 

In that context, the World Bank expects that regional economies will grow at a rate below 3.1% in 2017, which is higher than 2016’s 2.3%. Yet such growth will remain dependent on the local governments’ success in reforming and diversifying their economies, so as to become less oil-centered. 

2-The rise in debt ratios: Despite the austerity measures enacted by most of the region’s governments to cut budget deficits, it is expected that such deficits will increase for most of these states. This is in light of the rising wage bill and increased expenditures on infrastructure. Deficits are predicted to be at a level of 6.2% of the region’s GDP, a decrease from 9.6% in 2016. 

To reduce the deficit, regional regimes are likely to issue more local and foreign bonds instead of depending on foreign exchange reserves, which have been severely depleted since 2015. Such reserves have often been the main source of cutting budget deficits, especially in the oil-producing Gulf states. 

3-Currency fluctuations: Pressures on Middle Eastern currencies may well continue due to the continued shrinkage of sources of foreign cash, and a reduction in the region’s main exports such as oil, as well as the reduction in tourism. Added to this are the rising political threats in the region. In that context, it is probable that the Turkish lira will continue to decline, as it lost a quarter of its value in 2016, given the escalating terrorist attacks on Turkish soil. Iran’s rial will likely continue to decline as well, given the doubts over the actual implementation of the nuclear deal, a deal which had lifted many of the economic sanctions imposed on Iran. 

Possible Transformations:

1-Volatile economic reform programs: Many Middle Eastern states have lately adopted ambitious plans for economic reform, to promote job creation and economic growth. Some of the reforms entailed the strengthening of the role of the private sector, improving the investment climate, reducing social expenditures, and floating currencies. Some states such as Egypt and Algeria succeeded in implementing most of these reforms, but others such as Tunisia are struggling to do so due to widespread political and social opposition to them. Some oil-producing countries are facing even greater difficulties in carrying out their economic diversification plans laid out last year.

2-Diversifying energy sources: Population growth has substantially increased demand for energy in the Middle East, as well as increasing needs for economic growth. Demand for energy is expected to increase by 60% by 2035, which has incentivized governments in the region to develop plans to promote alternative energy, in hopes of diversifying energy resources and reducing carbon emissions. 

According to the International Renewable Energy Agency, renewable energy is expected to draw investments of up to 35 billion dollars per year by the year 2020. Saudi Arabia will commence its first steps for a renewable energy project in early 2017, a project valued at 1.5 billion dollars aimed at generating 700 megawatts of solar and wind energy.  

3-Slow-paced urban reconstruction: Some Middle Eastern governments like those of Iraq and Yemen have sought to rebuild areas damaged by terrorist attacks and military conflicts, with the aid of the international community. Despite the progress attained by the Iraqis and Yemenis in providing some basic necessities such as water, electricity and other infrastructure in the damaged areas, reconstruction may not proceed at a sufficient pace in 2017 in light of the rising security threats, added to the financial challenges.

To rebuild basic infrastructure and services in areas liberated from ISIS within Iraq would require financing of up to 13 or 14 billion dollars, according to estimates by Iraqi officials. Providing such sums of money in 2017 appears very difficult, given the financial pressures Iraq is facing due to decreasing oil revenues and the high costs of fighting ISIS.

4-The spread of startups: Despite the relative dearth of entrepreneurial culture in the Middle East, many youths have begun founding their own businesses in lieu of barren job markets. Many success stories have occurred, attained by older startups founded upon innovative ideas. 

According to some estimates, more than 12 successful startups are worth more than 100 million dollars each. These lucrative businesses have attracted the attention of governments and financers from the Middle East, the financers being businessmen or different investment funds. This may constitute an important first step for such businesses in overcoming previously confronted obstacles, such as a lack of risk-taking capital and stifling regulations. 

Multiple Directions:

1-The shrinkage of the middle class: It appears that the volatile economic regional situation will cause a decline in the middle class in terms of its percentage of the general population. This can threaten the middle class with poverty, especially the lower portions of said class. As real regional incomes declined, many governments simultaneously sought to dismantle the social safety nets in their countries without finding adequate alternatives, which has reduced the opportunities for a good quality of life for the middle class. 

This analysis is confirmed by the results of a study issued by the United Nations Economic and Social Commission for Western Assia (ESCWA) on the middle class in the Arab region. The study concluded that the middle class had shrunk to 37% of the overall population in 2013, as opposed to 45% before the beginning of the Arab uprisings. The poor and those threatened with poverty have in turn increased to 53%. 

2-Decline in economic security: The economic and political crises the Middle East has gone through for more than five years increase the levels of economic insecurity in some of its countries, especially in countries undergoing armed conflicts. This also applies to certain segments of the population, such as the Syrian refugees. The United Nations estimates that there are about 13.5 million people in Syria in need of humanitarian assistance, 8.7 million of them being in dire need, and 4.5 million of them being currently located in inaccessible areas. 

The Economics of Terrorism:

1-Restricting terrorist finances: Drying the financial well on which the Islamic State depends in Iraq has become a vital aspect of anti-terrorism efforts. The continuous strikes of the international coalition against the Islamic State in Iraq since September 2015 have led to many military successes and the re-taking of areas occupied by the terrorist group. This has reduced its resources by more than half of their previous amount, bringing down the Islamic State’s monthly revenue on the eve of the Mosul offensive to less than 30 dollars.

The Mosul offensive, launched by the Iraqi government in October 2016 to expel the Islamic State from this major city, destroyed the remaining sources of potential funding for the organization. The Iraqi government regained most of the oil fields under ISIS control, and the international community largely succeeded in isolating the financial networks which were providing ISIS with funds. Despite these successes, combating financing of individual terrorist operations in the Middle East constitutes the biggest challenge of 2017, as such operations often rely on low-value financing which is difficult to trace. 

2-Doubling security expenditures: increased fears of terrorist attacks and political turbulence will cause regional governments, in general, to increase their demand for security equipment to enable them to protect vital assets. In that context, it’s expected that security expenditures will increase from 5.2 billion dollars in 2016 to over 10.2 billion dollars by the year 2020, according to the consultancy firm Frost & Sullivan. 

3-Conflicts over economic resources: Though aims may differ, economic assets will be a main target for terrorist groups and armed factions warring throughout the region. Terrorist entities like the Islamic State seek to target economic assets and structures in stable nations to damage local economies, or to take control of these assets and therefore absorb more resources in weak states, such as Libya or Iraq or Yemen or Syria.

As for warring armed factions, it is likely that in a country like Libya, conflicts over oil fields will continue. The most recent of these was in December 2016, when an alliance of militias from Benghazi launched an attack to take over oil-exporting facilities in the Gulf of Sirte, though the attack ultimately failed.

Economic Partnerships:

It appears that the prevailing trend in the Middle East for years has been a diversification of economic partners, so as not to solely depend on traditional partners such as the United States and the European Union. This trend will probably gain traction in 2017 in light of the desire of the regional states to depend on partners in investment and trade which are more responsive to their developmental needs. It is likely that Middle Eastern countries will increase their economic relations with China, as Chinese companies have signed numerous major investment deals in the Middle East in 2016. Simultaneously, as Russian power increases in the region while American power falters, it is expected that Russian corporations will be in a good position to capitalize.  

In conclusion, it can be said that the economic situation in 2017 brings forth many challenges and difficulties for the countries of the Middle East. These challenges will necessitate a speedy application of economic-reform plans catered to promoting economic growth, which will simultaneously require these states to confront the political and social movements and factions opposed to them.

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