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NEAR EAST AND NORTH AFRICA

REGIONAL OVERVIEW

Economic developments

Economic growth in most of the countries of the Near East and North Africa gained momentum in 1996. For the region as a whole, GDP growth in 1996 was estimated to be 4.5 percent, up from an average 3.5 percent during the previous five years. Factors contributing to the above-average economic growth were: higher oil prices, which led to larger than expected revenue flows for the oil-producing countries; timely rainfall in many countries of the region; progress in stabilization, leading to lower inflation rates (following from an average 34 percent in 1995 to 24.5 percent in 1996) and reduced current account imbalances; and the deepening of structural reforms, which created a better environment for trade and private sector investment. Political tensions, however, continued to dampen progress in several countries in the region while some others faced overheating problems, with accelerating inflation and a growing fiscal deficit.

The rise in oil prices in 1996, undisturbed by the entry of Iraq in the oil market, contributed to the increase in the rate of GDP growth in the oil-producing countries. The GDP increased by 9.9 and 4.2 percent in the United Arab Emirates and Iran, respectively, and by 2.5 percent in Saudi Arabia, the latter modest expansion representing, however, an improvement from the zero growth of the previous year. Gradual fiscal consolidation has been the centrepiece of Saudi Arabia’s reform efforts. Although public expenditure restraint exerted a depressing effect in this country, it also contributed to increased private sector confidence and a revival of economic activity. The impetus towards higher growth in Egypt, at 4.3 percent in 1996 compared with 3.2 percent in 1995, was as much due to an increase in oil revenue earnings as to substantial progress in structural reforms. Egypt also displayed declining internal and external imbalances and lower inflation rates of 7.2 percent in 1996, down from 9.4 percent in 1995. In Turkey the economy maintained high growth for the second consecutive year in 1996, at about 6.4 percent following the 7.5 percent of 1995, recovering from the effects of the strong contractionary economic adjustment measures adopted in 1994. Despite stringent demand management measures, however, the fiscal deficit climbed to more than 9 percent of GDP in Turkey, and interest rates reached more than 120 percent. Although attempts at curbing the triple-digit inflation, which peaked at 106.3 percent in 1994, showed some success, inflation still remained high at 82.3 percent in 1996. These inflationary pressures also spilled over to the Turkish-Cypriot zone, which is linked with the Turkish economy. Such pressures, combined with political uncertainty affecting revenues from tourism, led to a slowdown in the economy of Cyprus.

Figure 12A

Figure 12B

Economic adjustment measures continued in a majority of countries in the region, but progress remained mixed. Some countries such as Egypt, Jordan and Tunisia advanced considerably in privatization, while in others, such as the Syrian Arab Republic and Yemen, much remains to be done. Reform was impeded by political tension in several countries. In the Sudan, civil strife led to economic depression, high inflation of 85 percent and disruptions in trade flows and domestic marketing, leading inter alia to acute food shortages. Towards the end of 1996, the Sudan suspended payments on its arrears to IMF, and this had strong negative repercussions on the country’s creditworthiness. In Algeria, while most macroeconomic targets under the adjustment reform programme were achieved or surpassed thanks to strong performances in the oil and the agricultural sectors, recessionary trends persisted, with unemployment at 28 percent for example. In Lebanon, a rising external debt made debt management and fiscal consolidation the priority for government efforts over the next few years. Export diversification, a central objective of structural reform in Oman, remained elusive as the non-oil economy stagnated.

Prospects for the short and medium term appear generally promising. The price of oil is expected to come down, but only moderately, and it is expected to help sustain economic growth in oil-producing countries while having spillover effects in other countries of the region. Ongoing efforts at strengthening economic and trade links with the EU by many of the countries in the region, such as Turkey, Jordan, Morocco and Cyprus, are likely to lead to improved trade and growth prospects.

Uncertainty about peace prospects and the regional political situation, on the other hand, is likely to hinder the previous expectations of regional economic integration, especially in Jordan, Palestine and, to some extent, Egypt. The stalemate regarding peace between Israel and the Syrian Arab Republic is likely to retard economic progress further in the region as a whole. Planned or potential regional projects, especially in the water sector, may take longer to materialize, owing to political uncertainty and internal strife in some North African countries.

Agricultural performances and issues

Growth in the agricultural sector was higher in 1996 than in the previous year in most North African countries, in particular Tunisia, Morocco, Algeria, and in the Sudan, which contributed in turn to a higher rate of economic growth. In 1996, production of wheat in North Africa increased by 7.5 percent to a record 16.5 million tonnes as a result of above-average production in all countries. The production of coarse grains in 1996 increased in the subregion by 60 percent to 13.6 million tonnes. Above-average and timely rainfall and better management practices both contributed to higher output in the production of cereal and barley as well as other crops such as citrus, olives and lentils.

Emerging from a severe drought in 1995, Morocco in 1996 benefited from the highest rainfall levels in the past 30 years. As a result, wheat production in 1996, estimated to be 5.9 million tonnes, was more than five times larger than the previous year’s crop of only 1.1 million tonnes. The output of barley increased by 3.2 million to 3.8 million tonnes and that of maize to 235 000 tonnes, about five times higher than the previous year. The citrus crop in Morocco, at 1.4 million tonnes in 1996, also registered a large increase of about 35 percent. As a result, citrus exports are estimated to have expanded by about 50 percent.

In Tunisia, good farming conditions during the year led to an estimated increase of 18 percent in overall agricultural production, up from the 9.7 percent recorded in 1995. Cereal production reached a record high of 2.8 million tonnes – a threefold increase over 1995. This was also the case with the production of olive oil, which is expected to increase to more than 200 000 tonnes.


BOX 10

FOOD INSECURITY IN IRAQ

Large groups of Iraq’s population are suffering from severe problems of food insecurity. Whereas per caput calorie intake levels in the Near East and North Africa region remained broadly unchanged between 1988 and 1994, they decreased by 34 percent in Iraq during the same period. At 43 percent, the decline in protein intake was even more severe. More recent years have seen a further serious deterioration of the population’s nutritional and health situation.

Important relief is expected from an agreement, reached in December 1996 between Iraq and the United Nations, on the implementation of the oil-for-food deal, which allows Iraqi oil exports of up to $1 billion during each 90-day period in exchange for the importation of humanitarian goods such as food, health supplies and medicines and other basic necessities. Initially set for a six-month period, the oil-for-food deal was extended for another six months by the United Nations Security Council on 4 June 1997.

Under the oil-for-food deal, $804.63 million (out of a total of $1.3 billion for humanitarian assistance) were allocated to the procurement of food commodities to help ensure a daily energy intake of 2 030 kcal and daily protein intake of 47 g per caput. By the end of May, the country had received 692 000 tonnes of food, about one-third of the 2.2 million tonnes expected under the deal. The first commodities started arriving in late March, and the distribution of wheat flour started in April. In May, food distribution included rations of wheat flour, rice, pulses and oil. As for salt, sugar and tea, deliveries had not been sufficient for a monthly distribution. The distribution of the full ration quota is expected to start in July. An emergency feeding operation, targeted at vulnerable groups whose special food needs will not be covered by the distribution of food under the deal, has been jointly approved by FAO and WFP for the period 1 April to 31 December 1997. It is estimated, however, that the allocation of $804.63 million for food will only cover slightly more than 50 percent of the estimated food import requirements.

Although the food-for-oil deal will undoubtedly alleviate the present serious food shortages (as total monthly ration quotas will increase by 20 percent with the arrival of food under the deal) and ameliorate somewhat the nutritional and health situation of the affected population, food security remains precarious. The scarcity of basic agricultural inputs such as seeds, spare parts, vaccines and agrochemicals, together with the widespread incidence of pests, weeds and animal diseases, has resulted in low yields and productivity. The general performance of the agricultural sector, particularly in the 1996/97 season, is cause for concern. The output of wheat and barley for the 1996/97 winter crop season is forecast to be significantly below normal.

With expectations of continued sanctions, an increased domestic production of food remains vitally important and the government is making strong efforts in this direction. As part of these efforts, attention is currently focused on land reclamation and irrigation in the south. The reclaimed areas are also provided with services, including electricity, education and health. Research is under way in Iraq to develop new agricultural strains and increase seed production and to maximize the use of livestock resources. Iraqi authorities are reportedly considering ways of ensuring that farmers have a financial stake in these projects in order to ensure that they are fully involved.


In the Syrian Arab Republic, investment and better irrigation management, coupled with higher international prices, helped spur domestic agricultural crop production. Having achieved self-sufficiency in wheat in 1992, the Syrian Arab Republic produced more than 4.2 million tonnes of wheat in 1996 – about 2 million tonnes more than domestic requirements. In the first three quarters of the year, about 850 000 tonnes of cereals were exported, compared with 600 000 tonnes for the whole of 1995. Further increases in cereal exports are anticipated in the near future, as investments are being made to expand storage capacity, in particular with the assistance of the Islamic Development Bank. Among the country’s non-food crops, a record cotton harvest was recorded in 1996, about 11.5 percent over 1995 levels and approximately 20 percent above the average for 1991-95. Assisted by timely rainfall, the major factor behind increased output was the jump in yields to 3.4 tonnes/ha in 1996 from 3.1 tonnes/ha in 1995 and only 1.6 tonnes/ha in 1991.

Favourable climatic conditions in the Sudan resulted in increased wheat production in 1996 compared with the previous year. The production of other commodities, such as sesame seed, also increased. Timely rainfall also led to an increase in cotton production of more than 12 percent over last year, although yields have been tendentially declining and compare poorly with world averages. A major reason for the declining yields is a lack of maintenance and the consequent sedimentation of canals, which impedes an adequate flow of water, especially important for the cotton crop. There is cause for concern, as cotton is the Sudan’s largest single export earner and a major contributor to economic growth.

In Saudi Arabia, budgetary constraints over the last few years required a reconsideration of the policies in support of agriculture. Reforms begun in 1991, with the aim of reducing the production of highly subsidized wheat in harsh desert conditions, have continued and led to further reductions in the subsidies. As a result, wheat production, which reached a peak of 4.1 million tonnes in 1991/92, was down to between 1 million and 2 million tonnes by 1996. With an estimated local consumption of 1.8 million tonnes, the gap is expected to be met by existing stocks. Barley production, estimated to be 450 000 tonnes, also declined to half its previous level. Cereal production, which is mostly dependent on groundwater sources, has led to the rapid depletion of this non-renewable resource. Since the agricultural sector uses about 80 percent of available water in Saudi Arabia, efficient management of water resources is now a government priority, which has implications for grain production. Diversification from grain to crops that consume less water, such as fruits and vegetables, is being encouraged.

EGYPT

Economic overview

The economic adjustment programme initiated in 1991 in Egypt has marked a turning point in the country’s macroeconomic and sectoral policy orientation. Until the early 1970s, inward-looking, state-sponsored economic growth policies were the cornerstone of Egypt’s development strategy, with an emphasis on social welfare and state subsidization of basic needs. Although this approach did lead to improvements in living conditions for the majority of Egyptians in the 1960s and the 1970s, it nevertheless laid the basis for the economy’s structural imbalances which, by the 1990s, had proved to be unsustainable in the long term.

Notwithstanding a few liberalization initiatives in the mid-1970s, the economy remained characterized by pervasive controls and a predominantly import-substitution regime. As a result of the high oil prices and the concomitant remittances from expatriate Egyptian labour in the Gulf Cooperation Council (GCC) countries, together with earnings from the Suez Canal, the economy still grew at a very rapid pace. Expansionary policies continued well into the 1980s when oil prices were declining and financial and external account disequilibria were beginning to emerge as a serious problem.

By the end of the 1980s, together with the concomitant decline in oil prices after 1982, the prolonged recessionary global economic climate had made evident the structural weaknesses in the economy. These weaknesses were exacerbated by mounting external debt and fiscal deficits. An overreliance on oil exports, declining non-oil exports and inefficiencies in resource use made the pattern of growth unsustainable. GDP growth decelerated significantly during the latter part of the 1980s, translating into a decline in GDP per caput from an average of $615 in 1980-86 to $588 by the end of the decade.58 Budgetary deficits, financed primarily by the printing of money, led to double-digit inflation and contributed to the slowdown in growth. Mounting debt-service payments led to an accumulation of arrears.

In 1991, Egypt adopted an Economic Reform and Structural Adjustment Programme (ERSAP), aimed at stabilizing and restructuring the economy to achieve greater efficiency in resource use, and at restoring macroeconomic growth. The comprehensive policy agenda included liberalization of the foreign exchange market; trade liberalization; financial sector reforms; reform of public enterprises and their eventual sale; elimination of price controls, tax reform; and the institution of an effective regulatory framework. As part of the initial phase of the programme, key reforms undertaken in Egypt were the alignment of the exchange rate; the deregulation of agricultural, food and industrial prices; a gradual reduction in consumer food subsidies; and a move towards greater privatization in an effort to establish a more market-based economy.

The 1991 ERSAP was followed in 1993 by another economic reform programme, ERSAP Phase II. Reforms under the second phase helped to stabilize macroeconomic balances further and, after a difficult start, revive the economy. Economic growth remained weak during the early 1990s, averaging just over 1 percent during 1992-94, but it gained strength in 1995 (+3.2 percent) and again in 1996 (an estimated +4 percent). For the fiscal year 1997/98, the first year of the next five-year plan, targets include GDP growth of 6.2 percent. Underlying the improved growth performances in recent years were major advances in economic stabilization. Despite a reduction in fiscal revenues from duties, the budget deficit, which stood at around 8 percent in the late 1980s, is projected to decline to a remarkably low 1.1 percent of GDP in 1996/97. The rationalization of government expenditures and tight monetary policy brought the current account almost in balance in 1996, while inflation declined from about 20 percent in 1991 to an estimated 7.2 percent in 1996. This is a considerable achievement in the face of the substantial decontrol of prices for basic food commodities, electricity, petroleum and transport, among other things. A further reduction in subsidies on petroleum products, natural gas and electricity is expected in the coming years. After a devaluation of more than 300 percent between 1988 and 1991, the liberalization of the foreign exchange markets stabilized the currency, which has now become convertible.

Although it got off to a slow start, the privatization programme has since made some progress. More than 90 state enterprises are expected to be privatized by mid-1998, although company valuations could be a contentious issue. In addition, one of the four major public sector banks is expected to be put up for sale in the course of 1997. Debt restructuring of public enterprises is also expected to generate income. It is expected that privatization in 1997 alone will generate revenues equivalent to about 5 percent of GDP, some of which could go towards servicing the external debt which currently stands at about $37 billion. Private sector involvement is also being encouraged in energy projects. An investment law to streamline investment regulations as well as an anti-trust law are expected to be passed in 1997.

In late 1996, Egypt concluded another $391 million standby agreement with IMF in anticipation of the meeting of the Paris Club to facilitate the third and last $4 billion of a total $10 billion Paris Club debt write-off, contingent on the successful completion of an IMF programme. However, this is associated with stringent criteria requiring further macroeconomic, financial, trade and privatization reforms in the coming months. The debt relief is expected to save more than about $290 million per year in debt servicing and reduce external debt to around $28 billion, or a little more than half the total debt of $50 billion at the time the programme was adopted in 1991.

Agricultural resources and prospects

An overall scarcity of water is a constraint to the expansion of agricultural land in Egypt. Furthermore, rapid population increases in the last two decades have put additional pressure on domestic food production while, at the same time, urbanization has encroached on potentially viable agricultural land.

Cultivable area in Egypt is limited. Of the total land area of about 1 million km2, less than 4 percent is habitable, mainly along the Nile where most of the country’s population of more than 60 million people is concentrated. With the Nile providing almost the only source of water, owing to the very limited rainfall, the 3.7 million ha of arable land base is limited primarily to the irrigated area. At 0.06 ha per caput, Egypt’s per caput cultivable land area is therefore among the lowest in the world. The major crops in Egypt are cotton, rice, wheat, maize, sugar, berseem, beans and fruits and vegetables.

With an improved climate for investment and an economy on the road to recovery, large development schemes are being considered. A highly ambitious project recently launched is the Nile Irrigation Plan, aimed at diverting one-tenth of the flow of the Nile to irrigate the western desert. The project, which is expected to extend over 20 years, aims to pump water 5 km through a tunnel into a canal and then raise it to a height of 55 m, requiring the world’s largest pumping station. Only 20 percent of the cost of the project should be covered by the government, with the rest being financed by private investors who should be attracted by such incentives as cheap land. According to some analysts, however, the very high costs involved are not justified on economic grounds. Moreover, since the Sudan and Ethiopia are also building dams on the same river, the flow of water could be less than expected in Egypt. In the past, attempts at irrigating deserts in Egypt through long-haul canals have not been very successful, not least owing to huge evaporation losses and the problem of moving dunes. Since the proposed site is also in a depression, waterlogging is a potential drawback.

Agricultural performances and policies

Although agriculture remains an important sector in the Egyptian economy, its share in GDP has markedly declined, from more than 38 percent in 1975 to 25.6 percent in 1985 and 16 percent in 1994-95. The declining economic importance of agriculture reflected the greater dynamism of other sectors and, in particular, the rise in oil and Suez Canal revenues. However, the decline also reflects lacklustre performances in the agricultural sector, constrained as it is by natural resource limitations in addition to having been severely encumbered by controls during the past decades. Amid pronounced fluctuations, food and agricultural output has risen only slowly, particularly between the late 1960s and early 1980s when it actually declined by about 10 percent in per caput terms. Production growth subsequently accelerated to a fairly sustained rate, although with some temporary setbacks, particularly in 1988-89 and 1994. Overall, however, domestic production has been inadequate to cover the needs of a rapidly expanding population, thus requiring massive volumes of food imports, both commercial and in the form of food aid. The value of cereal imports, which account for more than one-third of total agricultural imports, rose steeply during the 1970s, peaking in 1982 at $1.7 billion, but declining since the late 1980s to about $900 million in recent years. In certain periods, particularly 1987-90, the value of food imports significantly exceeded the total value of merchandise exports. This was explained to a large extent by the important concessional or grant component of food imports. Indeed, after 1975-76, Egypt received considerable volumes of food aid in cereals which, in some years, largely exceeded 2 million tonnes or about one-third of the country’s total cereal imports. In those peak years, Egypt was receiving 15 to 20 percent of the world’s total food aid in cereals. Since 1991, however, cereal food aid to Egypt has sharply declined, reaching about 200 000 tonnes in recent years.

Social welfare considerations have traditionally been at the centre of the policy concerns of the Government of Egypt. Agricultural and food policies have aimed at ensuring the availability of basic food at cheap and affordable prices for the vast majority of the population. To the extent that they contributed to raising the average food intake and reducing poverty, these policies may be considered successful. However, they also had the effect of depressing the economic climate for agricultural development. To achieve "cheap food" objectives, interventions by the government in both food production and consumption were implemented through direct price controls as well as indirectly, through exchange rate policies. Until the alignment of the exchange rate in 1991, valuation of the agricultural food or non-food commodities at the official (overvalued) exchange rate led to artificially low prices both for imported agricultural products and domestically produced tradables. This resulted in a heavy tax on domestic producers; the implicit tax on wheat increased from 42 percent in 1973-79 to 55 percent in 1980-85, the same trend as exhibited for rice and maize.

At the same time, production was subsidized through the public provision of agricultural services and the granting of low rates or exemptions for the recovery of operation and maintenance costs on public sector investment. Direct subsidies to agricultural inputs, such as fertilizers, pesticides, seeds and animal feeds, started in the early 1970s. Socialist policies included land redistribution, the formation of agricultural cooperatives and state controls on cultivable area and cropping patterns. The government implemented large irrigation investment schemes to reclaim marginal lands, which contributed to increasing the effective cultivable land area. State intervention also included the nationalization of cotton trade, government monopolies and a mandatory delivery system for export crops.

Since the inception of the reform programme, both direct and indirect interventions in agriculture have generally been removed and most subsidies have been abolished. While economic reforms in the agriculture sector have no doubt contributed to a better environment for farm activity, the extent to which they have translated into output and productivity gains is difficult to assess. Overall, agricultural output growth averaged 2.7 percent yearly during 1991-96, close to the population growth rate, suggesting an improvement from the performances of previous decades. The picture varies significantly depending on the various crops, however, and agricultural production has remained subject to pronounced fluctuations. Indeed, behind the average growth of the 1990s, yearly variations ranged from -3.3 percent in 1994 to 7.4 percent in 1995. As regards individual crops, wheat production rose by a significant 34 percent between 1990 and 1996, thanks in particular to better extension and land reclamation programmes which started in the mid 1980s, but maize only rose by 14 percent during the same period. After two bad crop years that brought cotton production to the lowest levels in several decades, cotton output rose by almost 50 percent in 1996 (from the 1995 level), reflecting a 40 percent increase in the land area under this commodity as well as better pest control and improved market prices. Similarly, price liberalization over the years contributed to an increase in rice production to a record high of an estimated 2.8 million tonnes in 1996, with a projected export surplus of 600 000 tonnes. However, the large quantities of water required for this crop, together with its high production costs and considerable domestic demand, may not allow for large exportable surpluses in the future.

Consumer subsidies and food security

Despite the inadequacies of the domestic food supply system and the financial difficulties posed by the need to import large quantities of food, Egypt has achieved remarkable success in improving the nutritional status of its population. Calorie supplies rose steeply from about 2 500 kcal per day during the early 1970s to more than 3 200 kcal per day in the early 1980s and subsequently remained at a high level. The current level of 3 340 kcal per day is about 15 percent above the average for the Near East and North Africa region, and 25 percent above the average for the developing countries as a whole.

Improvements in the food consumption levels of a vast majority of the population have been achieved to a large extent through social welfare measures, including consumer food subsidies that have been generously provided during the expansionary fiscal policies of the last two decades.

By the 1980s, Egypt had one of the most extensive consumer subsidy systems in the world. Quotas of rice, oil, sugar, tea and soap were guaranteed by the government to each individual through a ration card system. In addition, state cooperative stores sold food items such as macaroni, eggs, oil, cheese, sugar and tea at below market prices. Bread was, and still is, available at subsidized prices in unlimited quantities.

In addition to the ration card schemes, the consumer prices of food commodities were officially controlled. From 1975 to 1979, the price to the consumer of locally produced wheat was about half its cost to the government, while that of imported wheat was one-third of the international cost. Similar policies were applied for sugar, wheat flour and beans.

Largely as a result of food subsidy policies, during the period of rapid economic growth, the percentage of urban poor, estimated to be approximately 37 percent of the population in 1974/75, declined to about 23 percent in 1981/82, and the decline was even more pronounced in the rural areas.

The high level of consumer protection, however, contributed to unsustainable budgetary deficits which reached a peak of about 10 percent of GDP in 1980-82. About half of the total subsidies went towards meeting the costs of highly subsidized wheat while another third went towards sugar.

With the global and regional recession that lasted throughout the better part of the 1980s, which for Egypt translated into macroeconomic imbalances and a slowdown in economic growth, the gains made towards increased food security and reduced poverty were reversed. Food production performances were particularly poor during the early part of the 1980s, and the cost of cereal imports more than doubled between 1978 and 1981. The financial burden of general and indefinite subsidies on food production and consumption went well beyond the means of the government. It became increasingly accepted that the short-term welfare gains created by these subsidies were largely outweighed by the losses involved in the ensuing financial disequilibria and long-term distortions arising from the extensively protected systems.

Thus, an important element of the economic reform programme in 1991 was the reduction in consumer subsidies, which declined to 2.3 percent of GDP in 1990-93. On a per caput basis, the real value of the average subsidy declined from 108.4 Egyptian pounds (LE) during 1980-89 to less than half that level, at LE 41.8, during 1990-93. By 1993, most subsidies were removed but those on wheat, oil and oil products and sugar remained. Since then, the selling price of most of these subsidized commodities has been gradually increased, with the price for wheat approaching its actual cost.

After an initial drop in welfare during the initial phase of the economic reform programme, food supply and access now seems to be on the increase in Egypt. Self-sufficiency rates in wheat have increased from about 20 percent in the mid-1980s to about 45 percent in 1996. Policies aimed at greater investments in extension services, land reclamation, research and development for HYVs and population planning since the 1980s, combined with the liberalization of prices in particular and the removal of controls on the agricultural sector as a whole, have led to increases in wheat yields and production. Egypt’s production and availability of fruits and vegetables has also improved. The liberalization of the economy has brought dividends in terms of stabilization and a decline in food prices, especially in the last couple of years.

58 UN. 1995. Impact of selected macroeconomic and social policies on poverty: The case of Egypt, Jordan and the Republic of Yemen, p. 14. E/ESCWA/ED/1995/6. New York.

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