Complex Made Simple

The Arab economy is now facing a new major constraint, says the EIB

The European Investment Bank's Director of the Economics Department, Deborah Revoltella, shares key insights with AMEinfo regarding the Middle East economy.

"I think there are a number of issues that are reflected from the international environment with headwinds coming from decelerating growth in Europe, China and the US" "What we saw in 2013 was that political instability was the main constraint. Today, things are changing" If you really want the private sector to grow and develop, then you have to create the conditions for it"

The Middle East economy continues to undergo major changes in the face of great adversity. The European Investment Bank’s (EIB) EIBMED 2019 conference addressed this at the end of September, under the theme of “Investing in a resilient and inclusive future.” 

Speaking at the event was the bank’s Director of the Economics Department, Deborah Revoltella, who also spoke to AMEinfo. Revoltella discussed with us the current state of the region’s economy, and even revealed its key, often understated strength.  

What do you believe are the main obstacles halting economic growth in the Middle East? 

I think there are a number of issues that are reflected from the international environment with headwinds coming from decelerating growth in Europe, China and the US. We are seeing this have an impact on the region. There are structural issues in the region as well that are constraining growth. 

Based on continuing studies done in collaboration with the World Bank, the EIB has noted some trends in the region. Their results of their 2013 study had shown some changes occuring.

What we saw in 2013 was that political instability was the main constraint. Today, things are changing. Political stability is still an issue, but the real challenges to [regional] firms are related to a number of facts [that relate to governance]. There are regulatory issues, corruption issues, and governance issues that are constraining the private sector. The region needs a push in terms of transforming the governance of the system and the private sector. 

At the EIBMED 2019. Image: EIBMED

What are the first steps that could be taken to address these obstacles whether they relate to political stability or governance?

I think there are a number of things that can be done. If you really want the private sector to grow and develop, then you have to create the conditions for it. That means you need to have clear rules for the functioning of the private sector. There also needs to be a flexibility in the system, such as with the entry and exit of firms. 

Talking about this flexibility of the system, Revoltella mentions the new bankruptcy law that was put in place in Egypt recently, which for the first time introduces an out-of-court restructuring system which helps troubled companies reorganize their business.

On the other side, I think there are important challenges related to the educational system. In the region, the educational system was pushing to create jobs for the public sector, while the kind of education that you prefer for the private sector and entrepreneurship tends to be relatively different. So, there needs to be a change in the education system moving towards a new kind of learning. There is also a huge opportunity coming with the technological transformation, because it offers new kinds of skills. 

Another point to consider is the access to finance. This is an important problem in Lebanon as lack of confidence drives up interest rates. Quite a few countries in the region have a financial sector that is developed but targeting primarily the public sector and large corporates. The challenge is to reconnect the financial sector with the needs of SMEs, and there are ways for doing it. There are examples of guarantee schemes that have been put in place. There are other reforms that are placed on collateral regimes – collateral for moveable assets. 

Certainly. Countries like the UAE and Saudi Arabia are very effective at securing financing for SMEs, as we often see. 

Yes, in the region, we’ve started to see some excellence in terms of startup scaling, etc. There is a strong liquidity in the market for the early stages of development. The problem is always that the market has to grow up. It’s only about support in the very early stages – you need create a constant generation of investment funds and venture capital, etc. to allow firms to grow and eventually exit. This is something that we are not seeing much today. 

We often talk about the issues and weaknesses of the Middle East economy, but rarely about its unique strengths. Do you believe the Middle East has any unique features or benefits that perhaps differentiate it from other economies?

I think the very unique features in the region pertain to the younger population. It’s a challenge, but a huge opportunity at the same time. It’s a challenge because many young people enter the labour market even though youth unemployment is high. But on the other side, the region can really capitalize on the opportunity, particularly if the transformation of the educational system allows the youth to really catch up and enter the new technological phase.  

Read: EIBMED 2019: Conference reveals the two greatest obstacles holding back the Arab economy