Although COVID-19 impacted the economies of Africa and the Middle East in three key ways – the cost of coping with the pandemic, suppressed oil prices and reduced trade flows – several economic forecasts suggest a rebound and opportunities in 2021, a management consultant said during an online conference last month.
“They’re going to have to firstly deal with the direct cost of the health crisis,” Nick Strange, principal with international management consulting firm Arthur D. Little, said during his presentation, “Macro Economic Outlook,” on Oct. 12 during the ICIS African & Middle Eastern Base Oils & Lubricants Virtual Conference. Both regions rely heavily on commodity exports, and parts of Africa and much of the Middle East rely especially on oil, he noted, meaning they’ve been heavily impacted by the low oil prices. “Also, trade volumes have been restricted – I think we can include tourism in this – and have been reduced. That also affects their economies quite dramatically.”
He noted that Sub-Saharan Africa, which encompasses 48 countries, has enjoyed a solid 25 years of gross domestic product growth, averaging about 3% annually over that period. Forecasts by the World Bank and the Organization for Economic Co-operation and Development suggest a GDP decline this year of around 2%-5% in Sub Saharan Africa, Strange said. However, he suggested the situation has created for Africa three opportunities to come out of the situation stronger.
The first is embracing the digital age. “In Africa they’re quite good at leapfrogging technology,” he said. “So for example, many people didn’t have a landline, but now everyone has a mobile phone. It’s a good example of leaping forward. I think they can do that across the service sector, whether in banking, retail and education. That can have a big impact.”
The second is taking steps to strengthen the region’s intra-regional trade, which he pointed out is quite limited.
“They could do a lot if they work together to harmonize intercontinental trade, whether it’s reducing customs controls and reducing tariff or non-tariff barriers,” Strange suggested. Reducing logistics costs with improved infrastructure and connectivity would also help, he added.
Building new international trade agreements with major economies to support fragile export sectors would also benefit the region, he said. “They could definitely come up with new, favorable trade deals, whether it’s with Asia, with Europe or America of course,” Strange said.
He cited forecasts by the International Monetary Fund and World Bank that economies in the Middle East will shrink around 3%-4% during 2020.
Strange contended that Saudi Arabia’s government reacted swiftly to the pandemic, shutting down its national borders, domestic flights, shopping malls and religious tourism. “What we’ve seen in Saudi Arabia is not just the oil revenue is falling, but for the first time in more than a decade, non-oil revenue has contracted, which shows the severity of the situation there,” he said.
Total debt in Saudi Arabia has surged to 30% of its GDP, he noted. The country could still potentially be in deficit in 2022 but has announced clear plans to get its deficit under control and down to zero by 2023, Strange said.
He added that all major economies in the Middle East have responded swiftly with a range of fiscal and monetary policies to reduce the impacts of pandemic-related lockdowns. “They’ve all done similar things, with large stimulus packages in the region of 2%-10% or sometimes 15% of GDP and lot of tax deferral,” he said. “Wherever government fees or taxes can be deferred has been pushed out for a year or so. So a lot has been done in terms of fiscal and monetary policy to keep things alive in the Middle East.”
Strange noted that the 2021 forecasts from the IMF, the World Bank and OECD all predict some positive growth for countries in the Middle East. “It is going to be a challenging time for everyone, but I think the future remains bright,” he said, emphasizing that the extent of any economic growth next year will depend heavily on handling of the crisis.
“That’s she speed at which we can control the pandemic, and the speed at which things open up,” Strange said. “Of course, one factor that will always affect these economies is the oil price. It’s very difficult to really accurately predict the oil price next year. What we can say with more confidence is that the lockdowns will release, demand will return and I think certainly non-oil sector revenue will rebound quite a lot in 2021.”
He said that many countries in the Middle East have ambitious plans featuring giga projects designed to stimulate the economy. Although some of the smaller industry projects have been shelved temporarily, “some of the largest projects – the giga projects, that you may know of – are pushing ahead, they’re keeping momentum and energy going throughout the Middle East. I think that’s a positive sign.”