Challenges for Investment, Growth and Job Creation in the MENA Region: Consequences for the MENA-OECD Investment Programme

3 December 2013, RabatSteering Group

2

Agenda

1. Key message

2. The 3 Main Risks for Investment in the Region

3. Translate into Core Challenges

4. Which have Implications for the Activities of the MENA-OECD Investment Programme

3

1. MENA-OECD Investment Programme: Key message

2. In response to this pressing situation, the MENA-OECD Investment Programme focusses on structural reforms for inclusive growth and job creation through private sector development in four key areas:I. Investment policy and promotionII. Policies for small and medium-sized enterprises (SMEs)III. Women in the economyIV. Business integrity

1.1 Heightened risk perception in the MENA transition countries Crisis in Syria, domestic political tensions, increasing fiscal deficits

1.2 Stress on socio-economic outlook Economic growth in MENA transition countries is expected to remain too low (3-4% in 2013-14) Persisting high (youth) unemployment rates

1.3 Implications Risk of increased poverty, and refugee flows Immediate government action is needed as well as long-term structural reforms International community needs to scale up engagement: financially, but also structural reforms

4

Agenda

1. Key message

2. The 3 Main Risks for Investment in the Region

3. Translate into Core Challenges

4. Which have Implications for the Activities of the MENA-OECD Investment Programme

Source: Masood, Ahmed: Arab Countries in Transition: Update on Developments and Outlook.

2. MENA transition countries face three main risks

5

Source: The PRS Group, International.

1. Spill-over effectsfrom crisis in Syria and

heightened security concerns

2. Domestic uncertaintyand risks of political tensions halt private sector activity.

Political risk rating in MENA transition countries

3. Large fiscal deficits

Energy subsidies 8.5 % of GDP or 22 percent of government revenues in MENA region.

Social pressure impedes the reduction of subsidies.

2009 2010 2011 2012 2013 45

50

55

60

65

70

75

Egypt Jordan Libya

Morocco Tunisia Yemen

Arab Spring beginsIraq

206,632

Egypt127,876

Jordan553,311

Turkey600,000

Lebanon824,288

November 2013: 5 million internally displaced people. Over 2.2 million Syrian refugees in neighbouring countries.

Source: UNFPA November 2013

6

2. Political instability has become a major constraint to firms in MENA

Source: World Bank, Enterprise Surveys .

Figure: Leading constraints to firms in MENA

7

2. Large fiscal deficits which constrain governments

20012003

20052007

20092011

20132015

2017-20

-10

0

10Egypt

Jordan

Libya

Morocco

Tunisia

Yemen

Source: IMF World Economic Outlook (October 2013). Own calculation. Note: Y scale limited to improve overview. Libya had on average fiscal surplus of 17% in 2010 to 2010

Fiscal deficits in transition countries (in % of GDP)

Large fiscal deficits lead to increasing public debts and potentially crowd out private sector investments.

After the 2011, MENA governments increased spending for wages, pensions and subsidies, partly balancing the increases with lower capital investments.

Deficits are expected to decrease in 2013 and 2014 for Morocco, Jordan and Tunisia. In Egypt, deficits are estimated to rise further, increasing the current debt level to 100% of the GDP.

Fiscal deficits result from inefficient tax systems, economic weakness and energy subsidies which account for 22% of government revenues and 8.5% of GDP in MENA.

Several countries are looking to reduce energy subsidies or replace them with targeted cash transfers.

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2. MENA transition countries need adequate support from external partners

Gross external financing needs1

(Billions of U.S. dollars, 2012-13)

Egypt Tunisia Morocco Jordan Yemen0

2

4

6

8

10

12

14

16

182013 2014

ACTTotal

2013

2014

$33.9 bil-lion

$41.1 bil-lion

Sources: National authorities; and IMF staff calculationsCalculated as the sum of current account balance (before grants) and external amor-tization

G8, $2,826

GCC, $21,423

IFIs ex.

IMF, $6,762

IMF, $863

Othe

r, $6,579

Sources: National authorities; and IMF staff calculations

Official external disbursementsJanuary 2011-August 2013

(Millions of U.S Dollars, estimates)

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Agenda

1. Key message

2. The 3 Main Risks for Investment in the Region

3. Translate into Core Challenges

4. Which have Implications for the Activities of the MENA-OECD Investment Programme

10

3. The Growth Challenge: Economic growth is expected to remain too low…

Source: IMF World Economic Outlook, October 2013

2010 2011 2012 2013 2014

-14

-12

-10

-8

-6

-4

-2

0

2

4

6

4.45

-1.06

2.74

3.843.45

Egypt

Jordan

Morocco

Tunisia

Yemen

Average

GDP growthconstant prices, excluding Libya

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3. …to reduce unemployment

Economic growth rates in selected MENA countries (per cent of GDP)

AlgeriaEgypt

Iraq

Jord

an

Moro

cco

Tunisia

Middle East

-2

0

2

4

6

8

2001-08200920102011201220132014-18

Libya Yemen

-60

-40

-20

0

20

40

60

80

100

2001-08200920102011201220132014-18

Economic growth rates in the MENA region decreased from close to 6% per year on average from 2001 to 2008 to an estimated 2.2% in 2013.

Estimates for 2014 predict growth rates of 3.8% for MENA - too low to substantially reduce unemployment in the long-term.

Country disparities: Growth rates are improving in Jordan and are reaching pre- financial crisis level in Morocco.

Projected economic growth is too low to reduce unemployment.

Source: IMF World Economic Outlook Database, 2013

A growth rate of 6.5% in the MENA region is needed to create enough jobs, according to estimates of the World Bank

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3. The FDI Challenge: FDI inflows decreased significantly…

• FDI inflows predominate in sectors with low job creation (oil, non-tradables)• Political instability even further discouraged the FDI in labor-intensive manufacturing

and services sectors

2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

10000

20000

30000

40000

50000

60000

70000

80000

90000

100000

16,294.9

7,900.3

61,698.1

26,367.3

89,881.4

43,835.4

Inward FDI flows to MENA between 2003 and 2012 (US$ Billion)

Deauville Partnership countries

Golf Coopera-tion Council

total

Source: UNCTAD data

Beginning of global financial crisis

2011 events

Rebound

13

3. ….re-enforce the Unemployment Challenge

2 4 6 8 10 12 140

5

10

15

20

25

30

35Unemployment rates for different regions

(percent, latest available data)

Total unemployment rate

Yout

h un

empl

oym

ent r

ate

South Asia

Lower middle income

Latin America & Caribbean

OECD membersMorocco

Europe and Central Asia

EgyptEU

MENA transition countries

Jordan

Tunisia

MENA

Euro area

Source: World Bank Development Indicators and national authorities.

Unemployment in the MENA region rose by 3.3 million between 2007 and 2013 and is expected to reach 16.8 million in 2015.

Recent trends

Source: ILO 2013.

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Agenda

1. Key message

2. The 3 Main Risks for Investment in the Region

3. Translate into Core Challenges

4. Which have Implications for the Activities of the MENA-OECD Investment Programme

15

4. Implications for the MENA-OECD Investment Programme

The international community needs to scale up its engagement!

Focusing on structural reforms to improve the business environment with the aim to foster inclusive growth.

Reallocate public spending to

infrastructure and basic services along with

reducing unsustainable fiscal deficits

Foster private sector-led growth through investment climate improvement and

support to SME development: MENA-OECD

Investment Programme

Deepen regional integration in in

particular in trade and investment: MENA-OECD Investment

Programme

Address inequalities by increasing the inclusion of the

youth and women into the economy, fighting corruption

and improving business integrity: MENA-OECD

Investment Programme

Areas of governmental

actions:

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The focus areas of the Programme were adapted to support structural reforms

Inclusive Growth &

Job Creation in turbulent

times

B. SME PoliciesA. Investment Policy

D. Women in the EconomyC. Business Integrity

• Strengthening Integrity in Business

• Corporate Governance Networks

• Responsible Business Conduct

• Risk mitigation and investor protection:

• Working Group on Investment Policies and Promotion

• ISMED Support Programme

• DP related activities

• Working Group on SME to focus on business operations in transition

• DP related activities• SME policy index

• Supporting Women as Economic Actors during Periods of Transition

• OECD-MENA Women’s Business Forum

• DP related activities

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Programme is supporting the G8 Deauville Partnership process under the UK Chairmanship

Investment Policy

• Identification of the Investment Climate Reform Priorities in the six Arab Countries in Transition (ACTs)

• Assistance on the improvement of the investment legal and institutional frameworks

SME Policy

• Near-term plans for SME development in the transition countries

• IFI Coordination Plateform: Workshop on implementation of SME reform priorities in Morocco with IDB

Women as Economic

Actors

• Assess the legal and institutional framework to support women in the economic sphere in the TCs

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MENA Transition Fund projects: implemented with the support of the OECD

Project Implementation Support Agencies

Project Objective

Operationalising Public-Private Partnerships (PPPs) in Tunisia

OECD and AfDB Assist Tunisia in establishing a new law on PPPs

Establishment of Tunisia Investment Authority

OECD and IFC Assist Tunisia in implementing a new investment code

Invest in Youth in Tunisia OECD and IDB Assist Tunisia in strengthening employability of Youth during Tunisia’s transition to a green economy

SME Development Strategy in Libya

OECD / IDB Strengthening the legal and institutional framework for SMEs in Libya

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ANNEX – Governance and Financials

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Governance structure of the MENA-OECD Investment Programme

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B. SME Policy Theme WG on SME Policy,

Entrepreneurship & Human Capital Development (Chairs: Tunisia, Italy)

DP SME Action Plans

Regional Networks

Steering Group

Task Forces and Networks

Regional Representation

s

C. Women in the Economy Theme

Women Business Forum (Chairs: Jordan, Sweden)

Supporting Women as Economic Actors Network

D. Business Integrity Theme

Strengthening Integrity in Business Network Corporate Governance Networks Responsible Business Conduct Network

A. Investment Theme WG on Investment Policies &

Promotion (Chairs: Jordan, Japan)

DP Investment Policies Action Plans

ISMED project

MENA Co-chair (Morocco) H.E. Mr. Mohamed EL OUAFA

Minister delegate to the Head of Government in charge of General Affairs and Governance

OECD Co-chair (Sweden)H.E. Mr. Anders AHNLIDAmbassador, Delegation of Sweden to the OECD

Regional partners• Islamic Development Bank• League of Arab States• Gulf Co-operation Council • Arab Monetary Fund

International partners• UNDP, UNIDO & UNIFEM• European Commission• World Bank Group (MIGA & IFC)• Centre for International Private Enterprise (CIPE)• International Labour Organization• International Development Research Centre (IDRC)

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Financials: MENA-OECD Investment Programme

2012 2013 2014 2015General Programme FundCzech Republic 10,000Japan 100,000 85,000Sweden 1,967,080 983,540 983,541 983,541Spain 225,000Turkey 70,000 35,000 35,000 35,000TOTAL General Programme Fund 2,372,080 1,103,540 1,018,541 1,018,541Project related contributionsUnited States - Iraq Project 1,000,000 372,000Sweden Iraq 1,009,336 2,075,764 1,122,384EC Egypt BCDR 72,750 24,250Siemens 210,000 170,000UK - FCO - Business Integrity 86,930Sweden - Women 59,816EC ISMED 249,930 999,705 249,925France - ISMED 50,000EC SME project 80,000 330,000 190,000Sweden - WOMEN 333,333 333,333 333,333IMF/CEF - Kuwait 21,000Transition Fund - SME Libya 314,779 629,557 629,557TOTAL Project related contributions 1,759,426 3,624,403 3,478,579 2,085,274Expected contributionsJapan 80,000 80,000USAID - Competitiveness Working Group 334,000 334,000TOTAL Expected Contributions 0 334,000 414,000 80,000TOTAL Voluntary Contributions 4,131,506 5,061,943 4,911,120 3,183,815