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Fiscal Stimulus Packages amid COVID-19 Pandemic Not Promising in the Middle East and North Africa

The ways in which countries across the Middle East and North Africa are combating the economic backlash presented by coronavirus reveal much about the states of their economies and overall capacities to deal with the consequences of the pandemic.
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While the world struggles to halt the spread of the novel coronavirus, countries are also trying to minimize the economic fallout caused by widespread shutdowns. The IMF has already predicted that the world economy will contract by 4.9% in 2020. When economic recession is expected, countries usually resort to a number of both monetary and fiscal tools to prevent the realization of such predictions. To illustrate, as a monetary policy, central banks decrease interest rates and thereby contribute to economic growth by decreasing the cost of financing. Other fiscal tools that serve the same end can include countercyclical spending, whereby the state ramps up its spending while everyone else pumps the brakes amidst economic uncertainty.

You can listen to this analysis on FeniksPod:

However reasonable it may sound, the ability of a country to practice countercyclical spending is actually highly determined by its fiscal space to maneuver and its overall fiscal capacity. In this sense, the recent fiscal stimulus packages announced by countries in the Middle East and North Africa (MENA) region give us a glimpse into their economic health. Here, MENA countries have announced relatively modest fiscal packages when compared to the world average. While the average packages in the MENA region amounted to 3.2% of GDP, the global average hovers around 5.3%. Nonetheless, there are also some notable regional differences across the MENA region, for instance, while Iran’s fiscal stimulus package was around 13% of its GDP, negative fiscal spending as a percentage of GDP was witnessed in countries like Saudi Arabia and Oman.

 

Corona Virus Fiscal Stimulus (% of GDP):

Source:  Elgin, C., Basbug, G., Yalaman, A. (2020). Economic Policy Responses to a Pandemic: Developing the COVID-19 Economic Stimulus Index. Covid Economics: Vetted and Real Time Papers, 3, 40-54.

The amounts encompassed by these fiscal packages may also be influenced by political considerations, as Ceyhun Elgin notes, as some governments across the region might be motivated to boast about their fiscal packages. This observation should lead us to critically evaluate the data, as it does in fact rely on counties’ self-reporting. Yet, as it stands, it is possible to explain the region’s pandemic-period fiscal spending by considering MENA’s chronic statehood deficit, sinking oil prices, and the general intensity of the pandemic at the country level.

First of all, the MENA region largely lacks strong state capacities. States in the region are infamous for their lack of an extraction capacity, or in other words, their inability to earn revenue by levying taxes. After all, delivering fiscally also depends on a state’s tax revenues. A general dearth of such capacities negatively impacts fiscal policies in the region. This point is illustrated by the fact that, according to the World Bank, while the world’s average tax revenue (as a percentage of GDP) was around 15%, the average across the Arab world was just 5%.

Tax revenue (% of GDP):

Source:  World Bank, 2020, various years.

Moreover, the region also suffers from a variety of fragile and failed states, the latter being exemplified by Yemen, Syria, and Libya, which have all but lost their de facto state statuses. Resultant of civil wars, ethnic-sectarian divisions, and weak state legacies, many factors contribute to the conventional statehood deficit in the region. Here, the health of a statehood also affects a country’s ability to conduct fiscal operations as doing so requires the coordination of many state institutions across many spheres, from revenue collection to planning and delivery. Libya and Iraq are remarkable examples here: in spite of their ample oil reserves, which can serve in lieu of tax revenue, their governance problems have long prevented them from actually benefiting from oil revenues.

At this point, it should be also noted that easy oil money can also hamper the development of state institutions as it can suppress the imperative of a state to extract taxes. In the same vein, it is also not hard to see that reliance on oil revenue has recently brought about a new cost as oil prices sink to historic lows. That is why, as illustrated in the above graph, countries such as Saudi Arabia, and to a certain extent Oman, that could viscerally inject billions of dollars into their economies beforehand have suffered negative fiscal spending in 2020, as they struggle to adjust conventionally hefty state budgets to shrinking oil revenues. Diversification of such states’ carbon-driven economies will remain one of their greatest challenges.

Finally, the recent fiscal packages are also a reflection of the extent to which these countries have been hit by the pandemic. Iran, which announced the largest fiscal stimulus in relative terms in the region, is also the worst hit country in the region. Yet, as mentioned before, many other factors also affect states’ decisions and capacities to undertake countercyclical spending. Like Saudi Arabia, which is facing its own fiscal challenges, Turkey has been experiencing an economic crisis in slow-motion over the last few years, a reality that has forced it to limit its fiscal mitigation policies amid the pandemic due to its empty coffers. President Erdogan’s call private donations, rather than announcing generous state aid packages as was seen in the West, illustrates Turkey’s constricted room for maneuver in this sense.

There are also hidden explanations for the Corona map: even if we argue that the severity of the pandemic in local terms determines a state’s fiscal reaction, the severity of the problem itself is endogenous to another aspect of statehood, that is, the capacity for testing. In countries with few cumulative cases of the virus, like Yemen, Libya, and Syria, people already have limited access to healthcare services; and in the end, if there is no corona virus to talk about, then there is also no need to deal with it.

Cumulative Corona Cases:

Source:  Center for Systems Science and Engineering at Johns Hopkins University