Growth in the Middle East and North Africa (MENA) is revised downward to 2.6 % in 2015 and the short term prospects remain “cautiously pessimistic”, according to the latest issue of the Quarterly Economic Brief for MENA (QEB).

The report examines the different ways in which civil wars affect the economies of the region, including the important channel of forced displacement, which has become a crisis. It also explores how economic fortunes will turn around if there is peace.

Economic consequences of the wars

Restoring Libya’s infrastructure will cost an estimated $200 billion over the next ten years. The damage to the capital stock in Syria as of mid-2014 is estimated between $70-80 billion. Syria’s neighboring countries (Turkey, Lebanon, Jordan, Iraq, and Egypt) have borne the brunt of the economic impact of the war. The cost to the five countries is close to $35 billion in output, measured in 2007 prices, equivalent to Syria’s GDP in 2007. 

A preliminary World Bank-led assessment of damage in six cities in Syria (Aleppo, Dar'a, Hama, Homs, Idlib, and Latakia), showed an estimate of $3.6-4.5 billion as of end 2014. As of end of 2014, damage to the housing sector in Syria accounted for more than 65 percent; restoring the energy sector in the six cities will require between $ 648 and $791 million; damages to the health sector infrastructure was estimated to be between $203 and $248 million; damages to education sector infrastructure was estimated to be between $101 and $123 million.

Continued conflict and violence have reversed years of educational attainments in Syria, Yemen, Iraq and Libya and created inequality in educational opportunities. More than half (50.8%) of all school-age children in Syria were prevented from attending school during 2014-2015. In Yemen, the number of poor people has increased from 12 million prior to war to more than 20 million people – 80 % of population after the war.

Countries bordering conflict zones (Turkey, Lebanon, Jordan, Egypt), many of them already in fragile situations, are facing tremendous budgetary pressure. World Bank estimates that the influx of more than 630,000 Syrian refugees have cost Jordan over US $2.5 billion a year. This amounts to 6% of GDP and one-fourth of government’s annual revenues.

Economic effects of the peace

Can the economic damage from the civil wars be reversed?

An end to the civil wars in MENA will improve macroeconomic indicators through restoring security, increase in investment, and reconstruction activity. Social indicators will also improve as public resources that were used for military expenses could be shifted to education and health.  But the pace and pattern of economic recovery in the short term is typically not smooth, as post-conflict countries inherit a weak economy, damaged physical, human and social capital, widespread poverty and high unemployment particularly among youth.

A peace settlement in Syria, Iraq, Libya and Yemen could lead to a swift rebound in oil output and exports allowing them to increase fiscal space, improve current account imbalances, increase foreign reserves, and boost economic growth in the medium term.

Being the least democratic region in the world, MENA could benefit from transitioning peacefully to democracy. According to the report, if transitions in MENA countries occurred in 2015, the growth rate of per capita GDP would reach 7.78 percent in 2020 compared to 3.3% in the absence of a transition to democracy.

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The Economic Effects of War and Peace in MENA

Key Messages

• Along with slowing global activity, growth in the Middle East and North Africa (MENA) is revised downward to 2.6 percent in 2015 and the short term prospects remain “cautiously pessimistic”.

• The main reasons of the slowdown are continued civil wars, terrorist attacks, and low oil prices. Moreover, the recent Saudi-Iran confrontation could increase military spending particularly in those countries that are directly involved and their allies. It could also increase geopolitical risks, affecting investment, tourism, and trade in an already fragile region

• Oil prices are likely to remain low, trading below $30 a barrel in January 2016, about one third of the level needed to balance government budgets in MENA oil exporters.

• MENA’s oil importers are facing either the spillover effects of the civil wars and conflicts in the region or the insecurity caused by terrorist attacks (or both), outweighing the benefits of cheap oil.

• At oil prices around $30-35 p/b this year, MENA oil exporters are losing fiscal revenues. Saudi Arabia will lose another $55 billion in 2016 addition to $110 billion loss in 2015. Without expenditure cuts, it will exhaust its reserves by the end of the decade.

• Most oil exporters have been eyeing fuel subsidy reform to bring their spending under control. Saudi Arabia raised gasoline prices by 50 percent on January 1, 2016 (to $0.24 per liter).

• Growth in war torn countries – Syria, Yemen, Libya and Iraq – is not expected to rebound soon, unless there is a peace settlement.

• Syria and Iraq are estimated to have seen per capita income in constant terms decline by 23 percent and 28 percent relative to the levels that would have been achieved had the war not broken out.

• Syria’s neighboring countries (Turkey, Lebanon, Jordan, Iraq, and Egypt) have borne the brunt of the economic impact of the war. The cost to the five countries is close to $35 billion in output, measured in 2007 prices, equivalent to Syria’s GDP in 2007. 

• In Lebanon only, real GDP growth is estimated to have dropped by 2.9 percentage points each year during 2012-14, pushing more than 170,000 Lebanese into poverty and doubling the unemployment rate to above 20 percent, most of them unskilled youth.

• The World Bank estimates the cost of hosting Syrian refugees in Jordan at about $2.5 billion a year, equivalent to 6 percent of GDP and one-fourth of government’s annual revenues.

• Standards of living of neighboring countries have been severely impacted due to the war in Syria. In Lebanon, per capita average income declined by an estimated 1.1 percent and by 1.5 percent in Turkey, Egypt, and Jordan relative to levels that could have been achieved if it weren’t for the war.

• The World Bank estimates that as of mid-2014 the damage to the capital stock in Syria amounted to $ 70-80 billion. Restoring Libya’s infrastructure will cost an estimated $200 billion over the next ten years.

• Humanitarian needs in Yemen are about $1.6 billion – and rising. Reconstruction needs for Yemen have not yet been estimated due to the ongoing conflict.

• A preliminary World Bank-led assessment of damage in six cities in Syria showed an estimate of $3.6-4.5 billion as of end 2014. The report focused on damage in Aleppo, Dar'a, Hama, Homs, Idlib, and Latakia, over seven sectors – housing, health, education, energy, water and sanitation, transport and agriculture.

• As of end of 2014, damage to the housing sector in Syria accounted for more than 65 percent; restoring the energy sector in the six cities will require between $648 and $791 million; damages to the health sector infrastructure was estimated to be between $203 and $248 million; damages to education sector infrastructure was estimated to be between $101 and $123 million.

• Damages to human capital are irreversible. According United Nations figures, more than 13 million children are out of school in Syria, Yemen, Iraq and Libya. Continued conflict and violence have reversed years of educational attainments.

• Unemployment is high among refugees, especially women and those who do work often work in the informal sector with no protection. About 92 percent of Syrian refugees in Lebanon have no work contract and more than half of them work on a seasonal, weekly or daily basis at low wages.

• Before the war, more than half of Yemen’s population lived in extreme poverty (below US$ 1.90 a day) and more than half of the youth were unemployed. These numbers have been increasing significantly after the war and more than 20 million people – 80 percent of Yemenis – are now considered poor.

• A peace settlement in Syria, Iraq, Libya and Yemen could lead to a swift rebound in oil output and exports allowing them to increase fiscal space, improve current account imbalances, increase foreign reserves, and boost economic growth in the medium term.

• In the event that conflicts subside in the region, a peaceful transition to democracy will increase economic growth by encouraging investment, schooling, economic reforms, public-good provision, and reducing social unrest. The World Bank estimates that, if, hypothetically, transitions in MENA countries occurred in 2015, the growth rate of per capita GDP would reach 7.78 percent in 2020 compared to 3.33 percent in the absence of a transition to democracy.