Riding to the rescue of Egypt and Tunisia

Posted on May 31, 2011

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About USD40 billion is ready to flow. Is it enough? Are there strings attached?

Saudi, Qatari, Kuwaiti and G8 pledges to lend or invest billions into MENA nations could be just the oil required to calm turbulent waters. Obviously, the USD40 billion (or thereabouts) pledged to stabilize Egypt and Tunisia economically will be only the tip of the iceberg required over the longer term.

Egyptian Finance Minister Samir Radwan has said his country faces a funding gap of USD10-12 billion until June 2012. Economic growth in the fiscal year to mid-2011, forecast at 6% before the revolution, is now expected to be 2.6%. Growth in Tunisia is expected to plummet from 3.7% in 2010 to about 1% this year. The instability brought in by the revolution is estimated to have cost the economy about 4% of GDP.

The International Monetary Fund has said the Middle East’s financing needs are about USD168 billion over the next three years as the region transforms its economic model to try to bring down high levels of unemployment, which triggered the protests earlier this year. The IMF estimates that the region needs to create 55-70 million jobs for the young in the coming decade.

The fact, however, that some of the richest nations in the world are running to the aid of the struggling economies speaks volumes for the need for stability in the Middle East and North Africa. For one thing, the billion-plus population is a massive market – one that is currently seen as underserved. If some of the aspirations of the young are met and prosperity arrives in that class of population, consumption will increase, to the benefit of western companies and brands.

For another, the financing needs of infrastructure-building can become one of the largest drivers of economic growth as global companies seek out transparent and well-regulated opportunities in the region. And trade between nations, both regional and external, will get a leg up if the politics match up.

But is this a case of: you get the money if you give us another democracy? That may work from the western perspective, while a well-functioning democratic set-up in the region may actually scare the likes of Saudi Arabia and Qatar. For the latter, however, the priority would be to stabilize the regimes in North Africa. This would help keep the peace at home.

The key to achieving these multiple aims is a smooth political transition that ensures economic reforms are implemented quickly in the former dictatorships of North Africa and disruptions to recovery are minimized. And USD40 billion is probably a small price to pay to see that happen.

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Posted in: Economy