Western Union releases a sponsored study on the MENA Region

Western Union (NYSE: WU), a leader in money transfer and global payment services at a conference held earlier today, discussed the implications that the Arab spring has had on remittances in the Middle East and North Africa (MENA) Region, highlighting the fact that remittance flows and migration are imperative to the sustained growth and economic performance of regional countries.

With the region comprising of countries that are sources and destinations for labor migration, as well as recipients and senders of remittances respectively, the uprising impacted various regional economies.

Jean Claude Farah, Western Union’s Senior Vice President for the Middle East and Africa said, “Despite the uprisings, the Middle East and Africa (MEA) region is still witnessing moderate economic growth. The evolution and changes in the political and economic structures of various countries have given rise to certain opportunities. Last year, economic prospects in the entire MEA Region have nevertheless improved, with the resumption of capital inflows, rising crude oil prices and the resurgence in domestic consumption. The GCC countries have been preferred destinations of recent migrants and we have started to witness an increase in Arab migrants from countries like Yemen and Egypt. The GCC countries sailed through the period of regional unrest nearly unscathed while also experiencing robust economic activity.”

In 2011, remittance flows to countries in the MEA region grew by 2.6%, the slowest among all developing regions due to the uncertainties and civil unrest triggered by the Arab Spring and notably, the GCC countries accounted for more than 25% of inward remittances to the various MENA countries [1].

During the conference, a Western Union sponsored study on the “Economic Impact of Uprisings on the MENA Region” conducted by Dr. Ahmed Ghoneim, Professor of Economics at Cairo University in Egypt was also released [2]. Conducted with assistance from Cairo-based, Heba El-Deken, Senior Economist at American University and Asmaa Ezzat, Assistant Lecturer at Cairo University, the study highlights the economic ramifications of the uprisings, in addition to providing analysis and policy recommendations for the countries in the MENA Region.

Commenting on the study Farah stated, “As a regional and global leader in providing money transfer services and solutions, we felt the innate need to grasp and understand the reality of the regional economies and the needs of our customers, who are at the core of everything we do. This study is part of our ongoing research efforts to better understand the markets we operate in and the customers we serve. Whether it is a regional market that receives remittance inflows or sends remittance outflows, or is a source or target of labor migration, the overall economic status and performance of economies in the aftermath of the uprising is crucial to our business strategy and decisions.”

Dr. Ghoneim has classified the MENA economies into four groups based on their economic characteristics. The first group comprises of those countries dominated by oil and/or natural gas such as the six GCC countries and Libya, while the second group comprising of those that export oil and/or natural gas but have more diversified economies such as Egypt and Syria. The third group consists of non-oil diversified economies such as Morocco, Tunisia, Lebanon and Jordan, while the fourth group comprises of those countries that are heavily dependent on oil and/or natural gas exports, that have experienced domestic conflicts and/or have low GDP per head such as Algeria, Sudan, Iraq and Yemen, in addition to the Palestinian territories.

Pointing out that the uprising in the MENA Region together with its political and economic repercussions has made it the focus of world attention, the study states that the four groups differ significantly from one another in many respects such as in their economic structures, size of population, and political and institutional frameworks, and as a consequence the economic impact of the uprising has differed between countries.

The paper addresses the different circumstances and how they are likely to affect MENA countries, with an emphasis on the effects of the upheaval on labor markets, migration, remittances and the financial sector which have differed across each group with different implications. For example:

• Labor markets in the countries that experienced revolutions are facing major disruptions, with increasing rates of unemployment, exacerbated in some cases by large-scale return of migrants from other troubled countries.
• Higher oil prices have also negatively affected major oil importing Arab countries, especially their balance of payments and government budget deficits which in turn affects the flow of remittances to some MENA countries, such as Egypt and Tunisia and further deepen the problem of unemployment.
• Other MENA countries such as Jordan and Lebanon are expected to face similar problems but to a lesser extent.

Regional economies that did not experience social and political unrests were also negatively affected by increased oil prices, inflationary pressures, and widening budget deficits to accommodate increased social spending and food and oil subsidies. The economic performance and future economic prospects of GCC countries are however favorable and have positive implications for remittance flows to migration-sending countries and could play an important role in relaxing foreign-exchange constraints in those countries.

Migration flows and remittances from the GCC countries have been broadly maintained in view of the expansionary social spending and investment plans. Qatar was the top immigration country relative to population with 87% comprising of migrants according to the World Bank’s Migration and Remittances Factbook 2011. Outward remittances from Qatar by foreign workers amounted to around $29.5 billion during 2006-2010, ranking fourth after Saudi Arabia, Kuwait and the UAE among GCC countries which recorded outward flows of $112.2 billion, $50.7 billion and $49.3 billion respectively, during the same period.

The upsurge in oil prices stemming from the turmoil in the region, notably after oil production in Libya was affected, positively impacted the GCC countries. The rise in oil prices implies growing surpluses in the government budgets of GCC countries which will enable higher public spending, and help GCC members to maintain the level of employment in their economies without negative impacts on immigrants’ status and remittances flows. However, GCC countries’ stock markets were slightly affected, as were their direct and indirect investments in MENA countries that experienced revolutions; nevertheless mild, when compared to what happened to their investments and sovereign wealth funds (SWFs) during the 2008-09 financial crises. 

Dr. Ghoneim’s study concludes by highlighting certain elements that need to be taken into consideration when discussing the future economic prospects of the MENA region. Although dealt with as one entity, the study states that MENA countries should be looked at separately, with emphasis on identifying the specific characteristics of each sub-region and each individual country. Social aspects are likely to shape government policy in all MENA countries in the coming years.

The Arab uprisings signalled that these, especially unemployment, are important for all governments in the MENA region, including the GCC countries. From an economic point of view, this implies larger public spending on social aspects which will result in widening budget deficits and paying greater attention to the quality of growth rather than simply the rate of growth. Financial sectors should be subject to strong reform measures, with a focus on better risk-management techniques, diversification of risks and enhancement of credit to small and medium-sized enterprises (SMEs).

The study proposes a few policy recommendations which include:

• The need to enhance good governance mechanisms as many of the economic and political problems that MENA economies have experienced in the last ten years have stemmed from a lack of transparency and accountability.
• The development paradigm in MENA countries also needs to be revisited; monetary and fiscal policies should continue to aim at disciplining the core functions of the economies, but their focus should be on inclusive growth that prioritises employment, income distribution and poverty reduction, and encompass social considerations as well.
• Building and/or reforming free-market institutions is a priority given its importance at this crucial stage.
• Moreover inflation is expected to rise sharply in all MENA countries and monetary policy alone is unlikely to be able to accommodate such inflationary pressures; a major source being anti-competitive behaviour which has long been prevalent in a range of economic sectors without serious attempts by MENA governments to combat it.
• Remittance-receiving countries should define specific policies on remittances, given that MENA countries have not made good use of remittances to finance productive investments. The importance of remittances as one of the most resilient sources of foreign exchange signifies that they merit greater attention from policymakers, especially in current times. Identifying specific development and investment projects for diaspora and migrants is a way of attracting remittances, and such a policy should be carefully designed and marketed.
• On the other hand expansionary fiscal policies are indispensable in current circumstances in MENA countries, to accommodate social demands and finance investment projects. However, MENA governments should initiate programmes that target subsidies for the poor and vulnerable groups. The present tendency to increase subsidies (especially on food and oil) without rationalising them can lead to serious fiscal problems.

The financial sector in MENA needs serious and rapid reform to attain several objectives, including widening access to credit for SMEs as it can help significantly in creating employment, and addressing the issue of non-performing loans, which represents a major problem in the MENA region. The financial sector in many MENA countries remains underdeveloped, with banks playing the main role as a source of financing. It is crucial to introduce other financing sources, diversify risk and enhance risk-management techniques.