Syria’s agony is imposing serious costs for neighbors in terms of refugees, lost trade and dampened investment.

Author: Justin Keay


The war has burdened Syria’s neighbors, most notably Jordan and Lebanon, and complicates Turkey’s attempts to deal with its own crisis stemming in part from an attempted military coup in July. Syria’s agony is imposing serious costs on all three countries in lost trade and investment and having to care for and house the millions of refugees that have flowed across their borders.

Jordan is just getting by, sustained to a large degree by financial support from multilateral donors and Gulf nations. Lebanon remains stymied by a political crisis that has seen it without a president since May 2014, led instead by a unity government that has proven incapable of maintaining even basic services such as water, sanitation and electricity—and that has little control outside Beirut. Both nations, though, expect some growth this year.

Jordan is looking at GDP growth around 2.4%, with confidence buoyed by a $723 million World Bank loan aimed at improving the investment climate and enabling macroeconomic adjustments. “Things are still difficult here; for example, all the roads to Iraq remain closed, which leaves Jordan heavily dependent on Aqaba port for commerce,” says Heike Harmgart, head of the European Bank for Reconstruction and Development’s office in Amman. “But there seems to be genuine recognition by the government of what needs to be done to improve the situation for investors.”

Harmgart points to the new investment law and progress made since the IMF and donor conference in Jordan in February. The EU now plans to simplify rules of origin for exports from 18 major industrial areas and development zones, which could boost exports and encourage FDI in such key sectors as textiles.

“If all goes to plan, this [accommodation by the EU] could provide as much of a boost to Jordan as its 2010 free-trade agreement with the US,” she says.

By contrast, Lebanon can expect perhaps 1% growth in GDP. The banks have been buoyed by higher-than-expected deposit inflows—largely due to remittances from abroad (projected at $7.6 billion for 2016). The rest of the economy is at a virtual standstill.

“Lebanon continues to be affected by structural weaknesses, such as a low level of competitiveness, high operating costs, poor infrastructure, the burden of the public sector on the private, as well as by a weak investment climate and inadequate business environment,” notes Nassib Ghobril, chief economist at Byblos Bank. He says the persistent vacuum at the presidential level and uncertainty about elections are paralyzing decision-making.

Butter, Chatham House: Egypt will need to be careful if it wants to stay on international investors radar.

Palestine’s economy continues to depend heavily on donor aid and Israeli support but has been battered by political instability. In August the authorities unleashed a “vision for the revival of the Palestine economy,” which includes a laundry list of initiatives to address the country’s problems and seeks support from local investors and the Bank of Palestine. Much needs to be done: Although GDP is expected to rise 3% this year, unemployment is the major concern—over 40% in Gaza.

By contrast, the outlook for Egypt is more encouraging. Despite huge loans from the Gulf states—including a $25 billion package from Saudi Arabia—the administration of Abdel Fattah al-Sisi has failed thus far to come to grips with the country’s endemic economic problems. These include high unemployment, a budget deficit of more than 10%, a current-account deficit of 7%, double-digit inflation and a grossly overvalued exchange rate—the official dollar exchange rate is around 8.5 Egyptian pounds, against a black market rate above 14—that leads to serious market distortions. Other concerns include the army’s close involvement in key areas of the economy: The private sector fears being squeezed out.

However, as Global Finance went to press, Cairo and the IMF were edging closer to agreement on a


“After all the false starts, there seems to be a new mood within the government,” says Jason Tuvey, Middle East analyst at Capital Economics in London, “an understanding they can’t stay on the same path of essentially doing nothing.”  The most populous country in the Levant and indeed the Arab world, Egypt’s

Tuvey, Capital Economics: We've come close to a new beginning, after a lot of false starts.

potential is huge. A vast number of infrastructure projects need funding. Growth of some 4.5% is expected this year, a rate that could be sustained over the medium to long term, if reforms get under way.three-year, $12 billion loan that officials hope will be bolstered by new money from other sources, including the African Development Bank and Gulf states.

Unfortunately, Egypt’s business environment is among the worst in the world. The latest World Bank Ease of Doing Business survey ranks Egypt 131st, down five places from 2016, while Transparency International puts the country at 88 out of 168, with public-sector corruption cited as a big concern. A new investment law is being drafted, but observers say it will have to overturn negative perceptions about doing business here.

“The authorities have scored a few goals recently, including overtax rates in duty-free zones and their handling of 4G licensing with the telecoms companies,” says David Butter, associate fellow of the Middle East and North Africa program at Chatham House. “They will need to be careful if they want to stay on international investor radar.”

Cairo will also need to tread carefully in the diplomatic sphere. Its recent support for Russia’s actions in Syria—which run contrary to Saudi Arabian interests—led Riyadh in mid-October to halt vital fuel supplies in retaliation. Alienating the wealthy Gulf States is probably the last thing Egypt’s fragile economy needs.

 

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