COVID-19 has affected Middle East economies, societies and even politics in an unprecedented way. A stinging economic shock, with three times the losses incurred during the 2008 financial crisis, has shut down potential paths to recovery.
The climate of uncertainty has exacerbated political fractures, giving rise to tensions in society, especially among unemployed young people facing a bleak futures. This situation is not helped by dilapidated healthcare infrastructure and cultural norms not accustomed to social distancing, lockdowns and quarantines.
Curiously, the region has fared better than most parts of the world in terms of curbing the spread of the coronavirus and limiting the death toll. However, reliance on oil and gas exports, poor regional integration and excessive dependence on the EU and US for trade or investment will combine with depressed energy prices to ensure that the region will face long-term economic pain.
The IMF and the World Bank project global GDP contraction of between 4 and 5 percent, but at least 5.4 percent in the Middle East. Worse, a sustained recovery is unlikely to begin before the end of 2021, assuming a vaccine is made available to most of the world’s population in 12-18 months.
For an oil-dependent region, as long as low global energy prices persist, even these projections appear optimistic. This year alone, exports of hydrocarbons from the region declined by as much as 40 percent. Demand will remain low for the foreseeable future as countries resume lockdowns, reducing overall economic activity making it harder for the world’s economies to consume through an oil glut caused by over-supply.
Pandemic recovery is not the only challenge facing the Middle East. As climate change takes center stage in the world’s legislatures, the region’s oil and gas-dependent economies will have to adjust projections of peak demand and how to emerge from it unscathed. Conventionally, low oil prices would have resulted in sharp demand growth as importers stock up to lock in more profits.
But these are unprecedented times and OPEC models dependent on adjusting supplies and quotas to maintain a consensus price are increasingly unreliable. More countries are increasingly shunning fossil fuels in favor of renewables, because of of climate legislation and growing pressure from the public.
This does not bode well for the Middle East, since countries will need substantial revenues to absorb IMF predictions of as much as $221 billion in deficit spending or replenishing rapidly shrinking reserves.
“Ultimately, rosy projections not grounded in reality will not serve the Middle East well or make the job of Arab governments easier. The greatest asset to climbing out of this crisis is to confront ugly truths and uncomfortable realities.”
Deficits aside, while it is wise to prioritize diversifying the economic mix and expanding revenue sources, such transformations cost time and money. And therein lies the problem — time is fast running out, and many governments cannot find adequate funding to pursue diversification, let alone ensure its success.
Fortunately, for the wealthy Gulf region, much of the foundations for these transformations have already been laid, so there is still room to fund generous stimulus packages and mount an effective pandemic response. The rest of the region, however, is doomed to coping with low energy prices over the next few years, plugging holes where necessary and weighing the economically prudent but politically suicidal option of increasing taxes during a recession. It will require careful planning and management, with little room for error, to guide economies through a rocky and unpredictable recovery path. Failure to do so will result in a number of countries facing the realities that now beset Iraq.
Oil revenues fund more than 90 percent of Iraq’s essential expenditure. However, sustained low oil prices have left a 40 percent gap in the budget, meaning critical needs are either underfunded or face painful cuts. The ramifications increase exponentially when factoring in Iraq’s high levels of social unrest and political uncertainty, the pandemic and a mostly stalled postwar recovery.
Already, Jordan, Lebanon and Egypt are faced with some of these same factors. They cannot rely on inflows from the Gulf region to address issues of decreasing remittances, political insecurity, unemployment and declining tourism. The pandemic has also hit the service and informal sectors at a time when the region needed the latter to take on its usual role as a buffer to global economic shocks, as happened in 2008.
Poverty rates are now climbing while shrinking middle classes face tremendous pressure as fewer and fewer options are left for governments to address these runaway crises. Libya, Syria and Yemen also face exceptionally challenging circumstances and remain stark examples of what happens when governments take their eye off the ball.
All is not all doom and gloom, however. A few bright spots offer opportunities for the region to reshuffle its priorities. For instance, China’s growing demand for hydrocarbons, petrochemicals and fertilizers is a welcome reprieve for Gulf region economies seeking to obtain crucial export revenues from East Asia’s pandemic recovery. China’s economy is projected to grow by 1.9 percent this year, which elevates its profile as an important trade partner and a means for some of the region’s economies to recover.
However, China’s plan to take its currency international would move trade away from the US dollar, eroding Washington’s influence in the Middle East.
It is an uncomfortable prospect for countries that benefit heavily from the US global security umbrella. Additionally, a likely US response via a revival of the Trans-Pacific Partnership (TPP), for instance, could stall progress on China’s Belt & Road Initiative (BRI) investments, as well as force the region to choose between geopolitical and geoeconomic rivals.
In Washington, a Biden administration would undoubtedly shift US policy in the region, given a presidential election platform that emphasized climate change priorities and making the US carbon neutral by 2050. Should a Biden White House reduce or eliminate fossil fuel subsidies and spearhead an aggressive reduction in hydrocarbon investments, Middle East oil and gas economies would benefit in the short term from the drop in US supply.
Over the long term, investment in renewables could boost funding in Gulf economies already investing heavily in the industry, particularly in solar power, green hydrogen and green ammonia. Additionally, multilateralism is a better guarantee of the region’s peace, security and stability far better than the transactional foreign policy of the outgoing administration.
Ultimately, rosy projections not grounded in reality will not serve the Middle East well or make the job of Arab governments easier. The greatest asset to climbing out of this crisis is to confront ugly truths and uncomfortable realities. It also offers opportunities often missed because of the relative ease and convenience of exporting hydrocarbons.
COVID-19 has severely diminished the capacity of the region’s external partners to arrive and “save the day.” The Middle East must not only work on surviving the pandemic and dealing with its side effects.
The region needs more integration to build resilience and remain globally competitive, which means solving regional issues internally instead of looking to troubled and often uncommitted partners.
There is still hope.