World Bank Forecasts Economic Deceleration in MENA for 2023

Growth of the economies in the Middle East and North Africa (MENA) is expected to fall sharply this year. The region’s gross domestic product (GDP) is forecast to plummet to 1.9% in 2023 from 6% in 2022, due to oil production cuts amidst subdued oil prices, tight global financial conditions, and high inflation, according to the latest issue of the World Bank MENA Economic Update (MEU).

Titled “Balancing Act: Jobs and Wages in the Middle East and North Africa When Crises Hit,” the report says that the decline in growth in MENA this year is expected to be more pronounced in the oil-exporting countries of the Gulf Cooperation Council (GCC). Real GDP growth in these countries is forecast at 1% in 2023, down from 7.3% in 2022 as a result of lower oil production and reduced oil prices. In developing oil exporting countries, growth is forecast to decline from 4.3% in 2022 to 2.4% in 2023. Among the oil importing countries in MENA, the tightening of global financial conditions and high inflation continue to constrain economic activity. Growth there is projected at 3.6% in 2023, down from 4.9% in 2022. These results signal the end of the “tale of two MENAs” from 2022, in which the region’s oil exporters were growing much faster than the oil importers.

Improvements in livelihoods is best shown by changes in per capita income. By this measure, growth across the region is forecast to decrease from 4.3% in 2022 to 0.4% in 2023. By the end of 2023, only 8 of 15 MENA economies will have returned to pre-pandemic real GDP per capita levels.

"If the region grows slowly, how will the 300 million young people who will be knocking at the door of the labor market by 2050 find jobs with dignity?” said Ferid Belhaj, World Bank Vice President for the MENA region. “Without proper policy reforms, we could inadvertently worsen the enduring structural challenges faced by MENA's labor markets as far as the eye can see. The time for reform is now.”

While the World Bank has not yet completed a full assessment of the economic impact of the recent natural disasters in Libya and Morocco, the World Bank forecasts that the macroeconomic effects could be modest as the potential disruptions are likely to be short-lived. Yet, empirical evidence on the effect of disasters in developing countries suggests a reduction in growth at the onset and an increase in indebtedness in the medium-term to finance the reconstruction. GDP growth tends to bounce back quickly after such events.

The second part of the report focuses on the human side of three macroeconomic shocks: COVID-19, large currency devaluations, and negative terms-of-trade shocks, by comparing labor markets in MENA with labor markets in other emerging market and developing economies (EMDEs) during economic contractions and expansions.

The report finds that MENA labor markets differ from those in other EMDEs in one critical dimension: during contractions, the response of unemployment in MENA is almost twice the response in other EMDEs. Between 2020 and 2022, global economic shocks hit the region’s employment levels particularly hard. Findings from the report suggest that this macroeconomic turmoil could have pushed an additional 5.1 million people out of work – beyond the already high unemployment rates before the pandemic. If MENA had the same unemployment response of other EMDEs, the shocks of 2020-22 would have resulted in 2.1 million fewer unemployed workers in MENA.

“In times of economic downturn, governments face a trade-off between more unemployment and lower real wages,” said Roberta Gatti, World Bank Chief Economist for the MENA region. “While neither outcome is desirable, the policy implications are clear: flexible real wages coupled with well-targeted cash transfers is the superior approach to reduce the long-term economic costs on the families in MENA borne by macroeconomic shocks.”

Even temporary macroeconomic shocks can leave permanent scars on the hard-working population of MENA. Job losses can affect workers’ employment prospects, earnings potential, and overall career trajectories in the long term.