[Merissa Khurma] Welcome to this event on the World Bank's recent Middle East and North Africa Economic Update, Conflict and Debt in the Middle East and North Africa region. My name is Merissa Khurma, and I'm the Program Director of the Middle East program at the Wilson Center. I'll be moderating this event today, which is being broadcast on World Bank Live. I'd like to welcome all our viewers from around the world who are watching in English, Arabic, and French. I encourage all of you to participate in this conversation using the hashtag #MENAUpdate. Now, to kick off our program today, it's my honor to turn this over to the World Bank's Vice President for the Middle East and North Africa region, Mr. Ousmane Dione. Ousmane, it's over to you.
[Ousmane Dione] Thank you, Merissa. Let me also start by thanking Karen and Ishac for joining us today to share their valuable perspective. And to Roberta, who has spearheaded the work we are here to discuss. This regional economic update is an example of the World Bank's commitment to providing cutting-edge knowledge on key development challenges and to leverage that knowledge to help countries prioritize policies, reforms, and investment. The issues of debt and conflict could not be more central to the development challenges facing countries in the region today. I have been in this position for exactly one month today. Yet, I have embarked in a long month tour to the countries in the region, starting with Saudi Arabia, United Arab Emirates, Bahrain, Lebanon, Jordan, Palestine. And as we speak, I'm currently in Baghdad, in Iraq. I have met with leaders and stakeholders working to create better opportunities for people and looking to the Bank to support them with those challenges and with concrete solution on the ground. But I did notice also that our partners, our stakeholders, are facing a highly constant fiscal environment, which is driven in part by debt beggars. In this limited fiscal space, action has to be laser focused on policies and reforms that are going to have bigger payoff, the non-regular investment that will have the highest impact to support sustainable inclusive growth. Driving growth, hand in hand with inclusive development is the key to overcoming the cycle of death. This path, to get there, is unique to every country, but there are four priorities which I see cross-cutting. First is opening up economies to enable private sector-led growth, create new jobs, especially for young people and women. Let us face it, women must be included for economies to thrive. Building human capital by investing in people is a second cross-cutting priority. This is extremely important as it refers to good education, skills, and training for young people. It is the young generation who will drive the future of the region. Invest in green energy and water security. This has a triple payoff; [it] reduces cost, increases reliable supplies, and builds climate resilience. This is the third cross-cutting issue I do see. And the fourth, and not the least, is how to increase connectivity with digital access, digitized government services, and reliable safe transportation. These are further drivers of transparency, accountability, and economic inclusion. Those are just a few examples. Now, let me turn to the issue of conflict, which is also a focus on this report. As I mentioned earlier, I'm just coming from Palestine, and I'm currently in Iraq, so I have witnessed firsthand the impact of conflict, but also why it is important to remain engaged. We do know that the region has experienced more than its share of conflict. We at the World Bank, remaining engaged is extremely important in conflict settings such as Middle East and North Africa. This report, with its focus on the economic impact of conflict in the Middle East, is an example on how we deploy knowledge as a global public good, helping countries evaluate and mitigate the economic impact of conflicts, and identify steps for recovery. Staying engaged in conflict setting is also a means of mobilizing efforts and resources to help save lives and livelihoods. We are doing this now in supporting emergency relief to the people of Gaza, partnering with the UN agencies active on the ground to provide food, water, and medicine. But staying engaged also means always looking ahead to the future and being ready to support in recovery and reconstruction, laying the foundation for more sustainable development going forward. With those reflections, Merissa, it is my pleasure now to turn to Roberta Gatti to share the findings of this excellent report. I'm looking forward to the discussion. Thank you.
[Merissa Khurma] Thank you so much, Ousmane, for these insights. And as you mentioned, we're going to turn now and welcome, Roberta Gatti, the Chief Economist for the MENA region of the World Bank, to walk us through the key findings of the report. Roberta, over to you.
[Roberta Gatti] Thank you, Merissa. And thank you especially, Ousmane, for framing so thoughtfully and powerfully the conversation that we're going to have on the MENA Economic Update. Let me start with sharing this screen and see if you can see the presentation. Just give me a second full screen. Do you see it in full screen? Very good. Thank you. So... [Man] Roberta, it's in presentation mode right now. [Roberta Gatti] Okay, so let me see. Do you see it in full screen now? [Man] Excellent. Thank you. [Roberta Gatti] Very good. Excellent. As Ousmane mentioned, we focused in this MENA Economic Update on two important topics, conflict and debt. The MENA Economic Update is a product of the MENA Chief Economist Office, and this publication was led by Federico Bennett and was produced in a collaboration with all the country economists of our region. In particular, I wanted to acknowledge the work in the collaboration with Gianluca Mele, who's the Lead Economist for the West Bank and Gaza, which features very importantly in the report. Let me start with an overview of the key messages. Like all of these reports that we produce, and you'll see them twice a year, we first focus on the macroeconomic outlook, and then we delve into the specific topics. For the macroeconomic outlook, the one headline message that I would like to stay with you is that the region has returned to a pre-pandemic low growth during 2023. It has done so in ways where the growth rates of oil-exporting countries and oil-importing countries have converged to some extent, or at least the difference between them has become slower. We talked about conflict, and you will see the devastating impact on the economy of Gaza and the West Bank. By no means with these numbers, we are able to capture the vastity of the human loss that is occurring in the region. Nonetheless, we will be able to put some number to the economic losses. This conflict, as devastating as it is, overlays on already pre-existing macroeconomic vulnerability for the region, which are, in a way, exemplified by the indebtedness of the region, particularly in oil-importing countries. What we'll try to do is to answer two questions that we really saw floating around in the public domain of whether the region was able to grow out of debt, and in an environment of low inflation, whether the region was also able to inflate the debt away to some extent. But let me start with a macroeconomic outlook. Here we go. On the left-hand side, you see a graph with two horizontal lines. These two lines are... The purple one was the growth rate that was prevailing before the pandemic in MENA, and the yellow dotted line is the growth rate that was prevailing in other emerging and developing economies around the world before the pandemic. You already see something that has been, by now, a bit of a chronic drumbeat of our publication, which is the focus on the fact that MENA has underperformed over and over in terms of growth. But let's look at the dynamics of actually what happens starting from the pandemic. You see MENA here depicted in purple, and the region actually had a deeper recession in 2020 than other emerging countries. Let me try to... Than other emerging countries. Then comes 2021, and there is a recovery which is milder in MENA than it is in the rest of the world. But then comes 2022, and this is what we have labeled “the tale of two MENAs.” On the wake of the Russian invasion of Ukraine, oil prices increased and the region growth was boosted to 6% on average in 2022, while other emerging and developing economies were struggling. Let me shift your attention for one moment to the right-hand side graph, where you see probably this tale of two MENA more exemplified. What you see on the right-hand side graph are the subgroup of countries in our region. As you know, our region is very heterogeneous. You see in green depicted the Gulf Cooperation Council countries. In red, the developing oil importers without Egypt, and in blue, the developing oil exporters, Iraq, Iran, and Algeria. What you see in 2022 is this scissor pattern of growth where oil-exporting countries, and particularly GCC countries, were growing at stellar rates, and Saudi Arabia, their growth rate was above eight, while oil-importing countries were struggling because of the conjuncture of high inflation, high oil prices, fertilizer prices, hard food prices for these countries that are major food importers. Then comes 2023. 2023 was a year where the OPEC+ put a break on the production of oil, and also Saudi Arabia, with further voluntary cuts, put a break on the quantity of oil that was exported. Oil prices didn't bounce up as much as probably countries expected, and so actually growth, fiscal revenues decreased. This resulted in an estimated growth rate for the whole region in 2023 of 1.9%. What are the forecasts for 2024? We forecast the region's growth to inch up a little bit to 2.7%, and this is on the wake of two key assumptions. The first one is that the current conflict that is centered in Gaza does not expand geographically. The second one is that these restrictions on oil quantity production will be lessened towards the end of the year. You see on the left-hand side, the comparison of where men stand vis-a-vis other emerging and developing economies, and on the right-hand side, the various forecasts for the different groups of countries. Now, I really want to underline the word “forecasting.” I wanted to also interject a little bit of reality check because when we look at predictions for 2024, we know that by nature, forecasts reflect current expectations of the moment, but they are changing over time. Using private sector forecasts, which are issued on a monthly basis, we actually could see how the forecast for growth in 2024 has changed starting January 2023. You see how the forecasts in the different groups and for the region as a whole, always in purple, have reacted to different news and events which you see depicted on the vertical; but the one key feature of this forecast is that they all were revised downwards starting October 7. One of the realities of the region, which has implications for forecasting, but also beyond, is that uncertainty is high. You must have heard a lot the word “uncertainty increase” post-pandemic because that's the reality of where we are in the world. What the team has done is actually it has developed a measure to quantify uncertainty. What did they do? They looked at the dispersion of growth forecasting across a wide variety of forecasters in public and private sector, and they looked at the measure of discordance across these forecasts. That discordance is somehow a measure of uncertainty of how much disagreement there is out there among experts who are thinking about growth. You see here what happens in terms of this discordance in forecasting for MENA, always depicted in purple here, and for emerging and developing economies and high-income economies. What do we learn from this exercise? First of all, that uncertainty was higher in MENA way before the pandemic than in other regions. Then it shoots up during the pandemic for everyone, and I guess that's no surprise. Come 2021, uncertainty decreases. It has again a bleep up during the Russian invasion of Ukraine; but then what happens in MENA, and that's a divergence vis-a-vis the rest of the world is that uncertainty goes up again starting October 7. You see this very clearly on the right-hand side of this graph after the start of the conflict, how uncertainty has actually increased significantly. It is increasing significantly after the beginning of the conflict. Let us move on now to the economic impact of the conflict. I don't think I can stress enough how this is a very limited outlook on the conflict that really does not speak to the significant loss of life and human capital that is happening in this part of the world. But let's focus on the economics for a moment just here. On the left-hand side, you see what is the dynamics of real GDP growth in Gaza for the past 10 years. In the last quarter of 2023, GDP growth in Gaza, which was already inching downward, dropped by 83%. On a yearly basis, this means a 25% contraction in the economy. If you look at the stock of infrastructure, and this is something that is captured by this multicolor picture and graph on the right, is that the interim damage assessment that the World Bank, in partnership with other UN agencies, has issued, looking at the damage between October and January, shows a dramatic damage to infrastructure in all sectors. More than two-thirds of residential buildings are fully damaged. More than two-thirds of roads are fully damaged. If we look at primary access roads, the number goes up to 90%. Now, here we're talking about infrastructure, we know that dramatic costs really happen to human capital, but I hope that we'll have a chance to talk about this later. Here we focused on the impact on the Gaza's economy. However, also the West Bank and overall the Palestinian territories have been impacted significantly. They've been impacted by the overlap of the private sector and the public sector crisis. What happened? Because of restricted mobility, the more than 200,000 workers who were working in Israel cannot do that anymore. More than 70,000 workers who were working in different governorates because they cannot move across governorates cannot work anymore. What does it mean for the economy? This is a significant drop in aggregate demand, particularly because some of these workers had wages that were up to three times the typical wage of a worker in the West Bank in Gaza. On the public sector side, the drop in clearance revenues that the Israeli government collects on behalf of the Palestinian Authorities also meant that the Palestinian Authority was only able to pay partially the salary of public sector workers. What does that mean? Again, another drop in demand. We already see from pulse surveys that this is reflecting an increase in bankruptcy and distress in the private sector. Lastly, the effectiveness of social protection programs that were already pre-existing is hampered because of the limited fiscal space that the Palestinian Authority faces. Now, these are the impacts on the West Bank and Gaza, but also there have been repercussions of this conflict regionally and globally. The story of the message of the impact of the conflict regionally, it's a mixed one. There has been impact primarily on neighboring countries and much less of an impact in countries that did not have trade ties with this part of the world. In neighboring countries, Lebanon, Jordan, Egypt, these countries were ready for, I think, a very promising year in terms of tourism, and tourism is an important sector for these economies. In the aftermath, in the immediate aftermath of the conflict, they actually saw a significant drop in the arrival of passengers and tourism. Fortunately, this trend saw a reversal. The sector both had a negative impact but also showed significant resilience. If we think about [it] globally, the attack in the Red Sea in December had a significant impact initially on shipments. What you see here on the left-hand side is a measure of shipping cost which increased dramatically, both worldwide and particularly for the routes that went from China to Europe via the Swiss Canal. On the right-hand side, you see how that impact played out, which was a decrease in the ships passing through the Swiss Canal and an increase of rerouting through the Cape of Good Hope. This is a longer route, so for any three ships that would pass through the Swiss Canal at any point in time, four are actually needed now. However, also here we saw some signs of resilience. These are data until April. The decreasing cost has to do with the fact that in part, contracts had been pre-signed and that the shipping industry also had, in some sense, an abundance of ships as this has been a reaction to the pandemic, so they were able to deploy more ships without a dramatic increase in costs. What happened through the other potential channels of impact? Oil markets, gas markets, capital markets. There was in all of these markets an initial blip and an initial reaction, but then the trends have returned to where they were expected to be pre-conflict. This is what we see so far. All of the outlook that I presented earlier and this data are as of some February, some April, but they also predicated on the assumption that there wouldn't be a geographic expansion of the conflict, which is still ongoing. Now, as I mentioned earlier, this conflict has overlaid on pre-existing vulnerabilities on the macro side. The debt to GDP ratio is one of the key indicators that captures these vulnerabilities. Let me start with a big picture. The big picture is one where public debt has increased across the board. And any of you who's tuned in into this debate will have seen a lot of discussions about debt distress for many countries and debt restructuring. The debt accumulation trends all over the world predates COVID. Granted, COVID increased significantly public debt because at the same time when GDP contracted, revenues contracted, and countries were called to increase their expenditure to face the pandemic. Just in MENA, debt to GDP between 2019 and 2020 increased by 11 percentage points, which is a lot. The last observation that I wanted to make to this slide where you see debt to GDP ratio for the past decade across different groupings of countries, is that there is massive heterogeneity within the MENA region. The group of oil importers is exactly the group where we are particularly concerned. I just wanted to leave you with one number, which is the average debt to GDP ratio for oil importers in 2023, that's 88%. If we think about the debt to GDP ratio as contrasting debt stocks with the output, which is the capacity of an economy to repay its debt, these countries are nearing 100% of their GDP in debt. Now, the debt to GDP ratio might be difficult. It's difficult to unpack because there are a lot of moving parts. The team has developed a simple decomposition that can help us walk through what can affect the dynamics of the debt to GDP ratio. You see the debt to GDP ratio here, like in the black dot, and it essentially can be decomposed in three buckets. The first one, the changes in debt stocks. Keeping everything else fixed, if debt stocks increase, then the debt to GDP ratio increases. The other part is real GDP growth. Keeping everything else fixed. If real GDP increases, then the ability of a country to repaid debt increases. This should pull down the debt to GDP ratio. Finally, if prices go up, and so; the prices of what you produce go up, also your ability to repay debt, something that is fixed in nominal terms, goes up. You see that these three components push and pull the debt to GDP ratio in different directions. Let me now, to understand this better, dig down in what are the components or the determinants of changes in debt stock, which is probably the most relevant part for this conversation. You'll see them here, in this slide. Again, four components, but actually three buckets. The buckets are, the first one is the fiscal deficit, which has two parts. The primary balance, which could be a deficit or a surplus, and then the interest payments. Second, fluctuations in the foreign exchange. If a country issues debt in a foreign currency, and if there is a currency depreciation, then the foreign denominated debt becomes more expensive in local currency. Lastly, what turns out is that when you look at changes in nominal debt stock, they very rarely, precisely sum up to the first three elements here because there's a first factor, which is usually labeled stock and flow adjustments, which makes for everything that is not in the first three groups. This can include asset positions of the government, such as buying into sovereign wealth funds, but also revenue and expenditures below the line, so extra budgetary revenue and expenditure. Let me see through this graph, and the team has prepared these graphs where each of the bars’ colors matches the actual determinant of debt to really see what has gone on in our main oil exporters, oil importers, and then we'll see why we'll focus also on Egypt. Let's start with oil exporters. Look at 2020. What happened in 2020? A positive bar means that that stock goes up. What happened that year? It was the pandemic year. Oil prices dropped dramatically. With that, revenues in oil exporting countries dropped, and also, expenditure increased to tackle the pandemic. That stock increased significantly. Come 2022, we see a reversal of fortunes. Oil prices go up and oil-exporting countries benefit from the dynamics that results from the Russian invasion of Ukraine. We see fiscal surpluses, which draw down that stock, but that doesn't exactly decrease as much. You see that in the purple dot that indicates the movement in debt stock. The purple dot is still positive. What happened over there? It happens that buying into sovereign wealth funds almost match one by one the increase in fiscal surpluses. Actually, it matches so that debt stocks increased a little bit. Let's move on now to oil importers, a completely different story. Start with 2020. We see primary deficits, significant interest payment, which are depicted in beige, and we see increases in debt which persist. They persist because exactly these causes of increase in debt stocks persist. Fiscal deficits, interest payments, and then started 2021 and 2022, increasing debt stock because of the valuation of some currencies. Let's conclude this part with Egypt, which is unique for two reasons. One, because it reports not on calendar, but on fiscal year. The second one, because we see a very unique dynamic. Look at 2023, Egypt is a country with significantly high debt. It was also a country with a primary surplus. You see, the primary balance, which is depicted in orange, drawing down these debt stocks, and that's the negative bar. Then you see instead those three different colors, the fluctuation in the foreign exchange, increasing debt stocks, interest payments, which now are at 8% of GDP, increasing debt stocks, and also other factors, which in this case are actually extra budgetary expenditure. We see in Egypt, on a scale that, as you will have noticed, is magnified vis-a-vis the other two graphs, a significant increase in debt stock. Now, how do we bring it all together and how do we try to answer that question of, were our countries able to grow out of debt or inflate it away? I think that this slide does it, at least to me. You will see in these three graphs, the changes in the debt to GDP ratio depicted in the black dot, and then the changes in debt stock, the real GDP growth, and the inflation, as the key three components that push and pull on this ratio. Let's start with MENA oil exporters and let's go back to 2020. What happened there? A year of recession, increases in debt stock as we saw earlier, and also a drop in oil prices, all of which pushed the debt to GDP ratio up. Come 2021 and 22, reversal of fortune. High variability in debt to GDP ratio in the MENA oil exporter to the point that actually by 2023, the level of debt to GDP ratio in this country is almost at the level where it was in 2019. Different story for MENA oil importers. A consistent increase in debt stocks starting in 2020. Growth, which was a good recovery, both in 2021 and in the following year, pulling down, and inflation also pulling down. However, as you can see from the black dots, neither inflation nor growth were able to actually match the increases in debt stock and decrease the debt to GDP ratio. You see this very, very clearly in the last graph for Egypt. Look at 2023. Inflation was significant in Egypt at some point all the way to 40%. You see that inflation drawing down the debt to GDP ratio. Growth was robust in Egypt throughout this period. You see drawing down a little bit this ratio, but this was not enough because the increases in debt stock were that high, that actually debt continued to increase. If this type of country-by-country analysis didn't do it for you, we actually run this type of analysis throughout all emerging and developing economies and MENA countries to really try to answer the questions, “Have we been growing out of that? And was inflation at all helpful?” And so, what we find here is that the answer to both of these questions is no. And then, when we think about growth, actually, MENA oil importers are quite unique. So, about half of any decrease in debt to GDP ratio due to real growth is actually undone by these increases in debt stocks. Remember where those increases in debt stock came from? Particularly, it was from foreign exchange devaluation and from these stock and flow adjustments, that really represent extra budgetary expenditure. What's the story about inflation? The story about inflation is one where neither MENA nor other countries were able to inflate the debt away because as inflation happens, usually devaluations are happening in these countries and debt stocks increase in these countries. Here it is in a different graphic representation, how these different forces push and pull the debt to GDP ratio. Changes in real GDP growth and inflation tend to push it down and tend to make things better; but interest, primary deficits, currency depreciation, and these stock and flow adjustments tend to make the debt to GDP worse. What are some of the conclusions that we can bring about? The first one is that we saw that neither of these two strategies had been effective so far for our countries to decrease their debt to GDP ratio. Keeping rising debt in check is really fundamental, which is another way to say that fiscal discipline is fundamental. We also saw; however, that particularly for some oil importing countries, this stock and flow adjustment, this residual, these unmeasured factors are very important. To the extent that extra budgetary expenditure is very important, that transparency is fundamental for policymakers to have a clearer picture of what is behind their debt to GDP ratio and one of the key causes of vulnerability in the macro economy of their countries. Let me conclude here to leave space for a conversation with our esteemed panelists; but you have seen how, just to sum up very briefly, how the region has come back to the low growth that had characterized it before the pandemic, how dramatic the impact of the conflict is on the economy of Gaza and the West Bank, and how pre-existing vulnerabilities in the region, as exemplified by the dynamics of debt, need important focus on fiscal discipline, debt transparency, and if we think about the variability that is typical of the debt to GDP ratio in oil-exporting countries, also an important agenda of diversification. Thank you for listening, and thank you for this opportunity to present these findings. Over to you.
[Merissa Khurma] Thank you so much, Roberta. This was a very insightful and very thorough presentation walking us through your analysis and the key findings. I want to now welcome our panelists to join in, in addition to you, Roberta, Dr. Karen Young, who is the Senior Research Scholar at the Center on Global Energy Policy at Columbia University, as well as Dr. Ishac Diwan, the Director of Research for the Finance for Development Lab at the Paris School of Economics, of course, if you want to learn more about them, their bios are online. To kick off this conversation, I wanted to ask each one of you to just react to some of your own takeaways, react to the report, and share with us a few of your takeaways to the report. Karen, I'll start with you. You have about 4 to 5 minutes. Go ahead.
[Karen Young] Thank you so much. Thank you, Roberta and your excellent team at the Bank for making this data and analysis public and accessible. This report tackles traditional economic indicators, but it also seeks to establish measures of economic effects of conflict. As you mentioned, they're immediate, worsening, and really difficult to forecast. As in your previous work, you've emphasized access to reliable data, this time on the importance of debt and transfers in state assets that might change accounting of stock flows. The report emphasizes that we may be seeing a shift in the trend of disaggregation or the tale of two MENAs, which is really about the GCC states and the rest of MENA, of oil exporters and importers with Gulf states leading in growth, accessibility, and access to capital. With lower GDP growth rates converging across the region, this is really more of a global story as much as a MENA one, a muddling through in lower growth expectations, dimmed by inflationary pressure and trends in trade tension and geopolitics. However, I would note that your projections for GCC GDP growth in 2025 are again markedly higher and higher than the MENA average. There's another important trendline, which is the resilience of oil price volatility linked to GDP growth. This is the challenge, of course, of economic diversification away from a reliance on oil revenues. While non-oil growth rates across the GCC are improving, especially in the Saudi case, there remains a strong connection between oil price and GDP. The post-COVID period has been especially rocky because of the Russian invasion of Ukraine and other systemic factors that have created oil price risk, but the abundance of supply from the Americas is one reason why price hikes have been muted, but so too has been reluctant enforcement of sanctions and the choice to use a price cap rather than sanctions on Russian exports. Oil markets have kept prices supported as a floor by production quotas and cuts through OPEC +. Growth among Gulf oil exporters will also be closely linked to economic trends in Asia, namely in China, but importantly in India as well. An economic weakening in China and a longer-term trajectory of demographic change in decarbonization could diminish oil revenue and expectations across the MENA region over time. And that depends a lot, of course, on shifting demand for crude versus refined products and petrochemicals. Important and difficult to forecast is this linkage between GDP growth and oil demand. Traditionally, this relationship has been robust, but I think there's cause to believe that even across emerging developing economies of oil importers, countries are going to need less oil to increase GDP. As decarbonization efforts, digitization, and energy efficiencies change how economies can accelerate and expand, this is an enormous forecasting challenge as well as a fiscal policy challenge for oil exporters. The report has some really interesting engagement of the practice of forecasting and why and how we measure differences. I think this is an important conversation, especially as the Bank shares with its clients why assessments might change over time and be different at certain junctures. We seem to be in a period in which analysts are more frequently disagreeing on factors from geopolitical risk to even how best to understand inflation. Their report's engagement on measures of consumer price index as an inflation measure versus a GDP deflator measure is critical, which might more closely capture the impact of resource revenue prices in oil-exporting countries. The enduring tale of two MENAs can be seen in divergence in inflation rates, and this is attributed to monetary policy. Those tied to the US dollar, of course, have done better than those with floating currencies. I think what we… [Interpreter] [Cutting off, speaking in Arabic] [Karen Young] […] in transit and trade disruptions in the Red Sea, particularly on the impact in Egypt from revenues from the Suez Canal, but also in a steady increase in the cost of insurance and shipping container and transit costs, which could become a building of supply chain inflationary pressure already in an atmosphere of trade tensions between East and West. Some brief comments there. Just want to thank you very much for sharing your work and creating this publicly available assessment and for inviting comment and discussion from me and others. Thank you so much.
[Merissa Khurma] Thank you so much, Karen. Ishac, over to you for your takeaways on the report.
[Ishac Diwan] Thanks, Melissa. Let me first start by congratulating not just Roberta and her team, but really the whole Vice Presidency. You issue these reports twice a year and you issue domestic [reports] on each country. Also, very valuable reports that monitor the situation. I think this is really a great public service, and especially, it's very hard to get data directly from these countries. So, all of us interested in the region learn a whole lot from your work. Let me comment on the two core issues, perhaps conflict and debt. On conflict, Gaza, the slide you have on the economic cost of the conflict is absolutely incredible. We all know about the horrible death tolls. Every morning, we listen to the news with a new number, but to see this destruction at 75%, 80% of housing, health facilities, education, water, energy. This place is unlivable. This is promises of death for tomorrow and the year to come if nothing is done. Really, this needs to be popularized enormously. This is terribly important for the day after thinking, and it has to be known by populations in the region and around the world. I don't know what would be ballpark estimate of the cost of reconstruction, but clearly it's very high. It's in the tens of billions. And Gaza would not be reconstructed unless there is some… At least a cease fire, but something more sustainable, something credibly stable so that this reconstruction effort could be financed. I don't imagine... I mean, everybody's learned from the lessons of rebuilding every time, what was the word, “mowing the lawn.” And these were relatively low cost. We're left with this situation where we even have a horrible future, as horrible as the present, if not more, or some kind of an agreement. It's just this or that. It seems to me that really the World Bank needs to take the lead in putting this important message out there, talking the truth, the honest, the hard honest truth. It's either total misery or a cessation of hostility that's credible enough to be able to rebuild the place and the lives of the people that remain there. I think it's a terribly important slide. Let me move on a more pedestrian topic, debt, that I think your analysis is really illuminating. I want to bring it to a little bit more with the Tunisian and Egyptian examples, because both countries have been in a very unstable situation and keeping in mind the Lebanese situation. Now, in both countries, the problem is that the debt service is very high, as Ousmane started by saying, that the fiscal is under incredible stress. Just to give you a sense, in Tunisia, the interest on the debt is 12% of revenues and rising. In Egypt, before the recent bailout, it was close to 50%. And this is just the interest. The problem is that the debt markets have closed for both countries, the Euro debt market. So, you couldn't roll over the maturities as they were coming. They had to be either paid from the budget, which is horrendous, or take new loans at very high interest rate, short term loans, domestic loans, and a vicious circle of very fast rising debt stocks and debt service leading down the road to some kind of an explosion, very much the Lebanese-type mega crisis. A key problem, issue, challenge for both countries is how to reduce this debt service, how to stop this vicious circle. This is where your formulas are terribly useful because they tell us what can be done. Really, four broad possibilities to grow out of the problem, to make surpluses, to repay the debt over time, to default on external debt. You didn't say that, but that's one possibility, the ultimate one, or to default on domestic debt, which is to inflate it. Now, I want to argue that all of these situations are difficult. Therefore, it's a real dilemma to figure out a way out, and it takes a lot of leadership and political focus. Now, growing out of debt, it's hard because of basically, fiscal dominance. In Tunisia, gross was close to zero this year, a little bit more. In Egypt, you said it's a bit better. It's been 3%, 4%, 1%, 2% on a per capita basis. Now, what matters is the comparison of growth and the interest rate on the debt. The interest rates have been high and rising, the domestic one, especially in Egypt, and the external one because the Euro bond market was becoming more expensive. This dynamic was not good. When the market closed, the external market, increasingly, the borrowing was domestic. This crowded out the private sector, reduced domestic investment, and therefore, growth. The numbers on private investment in both countries are unbelievable. From your data, private investment in Egypt, down to 5% of GDP. Probably the historical lowest point ever. And in Tunisia, 7% of GDP. This is a country where it was 20% of GDP when it was growing before its revolution. Worse than that, you feel societies demobilized. Saving rates are incredibly low, and the labor force participation is coming down. It's as if societies demobilize. There's no trust in the future. The economy is literally collapsing. There are also political economy reasons why the regimes in power are not comfortable with the private sector. Populist Tunisia is attacking the corruption of the elites. In Egypt, we all know that the competition between the military and the private sector. How to regain growth is very challenging. Now, closing the fiscal deficits, Egypt, as you said, had with primary surpluses with terrible social costs. It's not clear how sustainable that is in the future. Now, Tunisia is more populistic, I guess, and the fact that there's no growth meant that there's increasing spending on the safety net. And of course, the debt service is also very large, so you need to squeeze all social expenditure. Instead, they've been rising. Subsidies right now and social transfer are 12% of GDP. The deficits have been around 7% of GDP, extremely large for now three years in a row. And so actually, that is zooming up because of increased deficits in Tunisia. External debt. Can we restructure external debt to save on debt service? Very hard. In both countries, external debt is extremely inflexible. There's a bit of market, there's a bit of bilateral, and there's a lot of multilaterals, including World Bank and other multilaterals, and so very hard to restructure, and there's a lot of domestic debt. The pressure is much more on domestic debt. Now, a bailout is always possible, basically, for donors to come in, put a lot of money to help pay the creditors, in addition to easing the domestic situation. Now, there are conditions attached, basically a big devaluation. Egypt did that after the elections. Tunisia is probably waiting for the election. Most have geopolitical rent, and so Egypt received a big bailout, about 50 billion dollars, UAE, World Bank, Europe. Now, if nothing changes in terms of the arithmetics that you described, this will close the gaps for two, three years, and then we're back to square one. Egypt is worse off than in 2016 because then debts were low, and it went out to the market, borrowed over 150 billion dollars, spent that on infrastructure. So, there was growth, not in exports, and therefore not sustainable growth. That is not possible anymore. When you look at the IMF document, the recent board document with the loan, it is really a caricature of debt sustainability analysis. It shows that external debt is falling and therefore it's a safe country for the IMF to lend to. It assumes that the growth rate of 5% a year with an investment rate of less than 10%, it's very hard to imagine how this can happen. And moreover, it assumes that the primary surplus goes up to 5% with interest rates adjusting at very high rates. It is a totally incredible situation, which means we'll be back to square one pretty soon with a totally inflexible debt, completely dominated by the MDBs. Now, I'm nearly done. The last possibility is inflating debt. Now, why isn't that done? And conceptually, to inflate domestic debt away, you have to close your capital account. You close your capital account so that money cannot go out, so you don't have to pay domestic capital as much as external capital, otherwise, it will go down. So, you're imprisoned, basically, and you give it negative real interest rate so that the debt comes down over time. Now, actually, both Egypt and Tunisia can't really do that because they depend enormously on remittances, a constant flow of remittances. Of course, Lebanon lives off remittances right now. What they tend to do is to keep the exchange rate fixed in order to keep attracting remittances until it's totally impossible to keep it fixed. There is a run on the reserves, especially they're borrowing more and more domestically, and the exchange rate collapses at once. Now, when it collapses, as you say, the inflation becomes devaluation and to 7% of GDP, and the external debt goes up from 4% to 6%. We end up with interest of 13% of GDP, which is even more than what we started with. It totally didn't work in reality. To conclude, the economies are literally collapsing, a la Lebanon. It's a vicious spiral that gets into a triple crisis. We're starting with fiscal, it's moving to balance of payment. I didn't speak of the banks which hold all the domestic debt. It threatens also a banking crisis. Really, the only alternative to a mega crisis is to move on growth. Unfortunately, it's a bit like the dilemma of Gaza. It's all or nothing at this stage. It's a very special situation. We have to think of it's not the old problem of we better grow, now it's growth or death in a sense.
[Merissa Khurma] Thank you so much, Ishac. This was very rich, and you've actually answered some of the questions that I did we have for you. I'm going to turn to you, Roberta, because you've showcased in your presentation the extent of the impact, the physical destruction of the physical capital. But of course, there's an impact on the human capital. If you can elaborate a little bit on that.
[Roberta Gatti] Thank you, Merissa, but especially thank you, Karen and Ishac, for all this food for thought on our work and also for the appreciation, we really committed to putting out analysis and data that we hope will be useful to other researchers and those involved in the policy-making space. Now, Merissa is asking me about human capital, not only because it is a topic that is very close to my heart and on which I dedicated many years of work, but because it is an issue of utmost importance for the West Bank and Gaza. We need to acknowledge that the biggest stall in human capital is the tragic loss of human life, and particularly for children who will not see their potential realized; but for those who are there, there are at least three key channels through which losses in human capital will affect their productivity, their working lives, and their individual lives. In the interest of time, let me just go through them. The first one is nutrition. The integrated food security phase classification puts Gaza in phase 3, which indicates acute food insecurity in February 2024. We have evidence from the literature, and it's vast, but just an example, we know that children who went through the Ethiopia famine in 1984, when they became adult, they faced losses in terms of earnings of 5% a year throughout their lifetime. Our own work, after this inflation flare up in 2022, looked at the impact of being exposed to four months of inflation while in utero, and just that exposure was likely to increase stunting, which is a marker of the signs that children health has as of age 2 or 5 by 17% to 25% in the MENA region. Now, the second channel is schooling. Before the war, there were 650,000 children in schools in Gaza, and now this infrastructure of schools is completely destroyed or schools are being used as shelters. From the pandemic, a lot of estimates have been done on the impact of school closures on learning of children. We know that learning is fundamental for productivity later on. Now, this sounds like a dry assessment. Actually, when we start thinking about health, and particularly, mental health, the question of trauma that people are facing becomes fundamental. Even before the conflict, a study from the World Bank in 2022 had found that about 58% of the population in the West Bank in Gaza already exhibited symptoms consistent with depression. The stress and the trauma brought about by the conflict compounds this type of situation and makes it particularly difficult for children. Let me conclude with the hope, the thought that what is really fundamental here is not only the reconstruction of the infrastructure, but really protecting and salvaging human capital for the future of Gaza. So, let me turn back to you, Merissa, with many thanks to all of you being here with us today.
[Merissa Khurma] Thank you. Thank you, Roberta, for emphasizing the importance of focusing on the human dimension for the present, but also the future. I'd like to turn this over to Vice President Ousmane Dione for very short final thoughts before we conclude our discussion today.
[Ousmane Dione] Merissa, just to say a vote of thanks to Ishac and Karen for the fantastic inputs, the suggestions, and really the great ideas they put forward on how this knowledge product contributes as a common global good in a time of uncertainties. I believe this is also one of the reasons which explains the relevancy of the analytical work we are doing in the Bank as a multilateral institution. Not to take side by all means, but instead really to provide analysis, to use data in order to show where challenges are and how it can really serve decision-makers on making the right policies, the right reforms, and also working with development partners and a different set of stakeholders to address some of those tough issues which currently are, I would say, in many ways, common problems across the world, and which will require, somehow, joint solution depending on the context and circumstances; but at the same time, will always require researchers, policymakers, decision makers, but also multilaterals to be there to support. So, much gratitude to my colleague and Chief Economist, Roberta Gatti and her team for this fantastic product. And we look forward to many more to come. Thank you.
[Merissa Khurma] Thank you so much, Ousmane. Thanks to all the audience from around the world tuning in. If you do want to look at the entirety of the report, you can download it on the World Bank website, worldbank.org/mena. Of course, thanks to our esteemed panelists, Roberta, Karen, and Ishac for sharing their insights today.
[Roberta Gatti] You see here part of the core team with me, Gianluca Mele and Federico Bennett, who all worked on this product. Thank you for being with us today.
[Merissa Khurma] Thank you for all your work.
[Ousmane Dione] Thank you, everyone.
[Merissa Khurma] Thank you.
