Five economic trends to follow in the Levant region

By: Badi Ubeidat and Khalid Attalla

Here at Economy Matters we often tend to focus on Gulf economic trends — as we did earlier this year with our five key economic trends to watch in the Gulf in 2019. Today, we take a look at the economic trends currently occurring in the Levant - more specifically Jordan, Lebanon, Palestine, Syria, in addition to Egypt.

1. A reversal of economic integration efforts

The Levant countries have traditionally favored efforts at regional economic integration. These efforts peaked in 2010 with an agreement between Jordan, Syria, Lebanon and Turkey to establish the Levant Free Trade Zone (LFTZ).¹

However, as the agreement was being signed, some signatory countries encountered difficulties caused by the 2008 financial crisis. Export bases weakened, consolidation in the shipping industry exposed the region’s underdeveloped logistics infrastructure, social unrest tested social programs, and domestic policies shifted to focus on protecting domestic industries. Shortly thereafter, signatory countries abandoned the LFTZ agreement with a view towards resuming cooperation once the geopolitical and economic situation normalized.² Aside from Turkey, the Levant has not witnessed any new trade agreement since 2010 and previous trade agreements are beginning to expire without renewal.

Free Trade Agreements in the Levant Region + Turkey (1990 - 2019)

^{Source: World Trade Organization (WTO) Database}

2. The budding revival of the tourism sector

Unlike their Gulf neighbors, Levantine countries do not have natural resource wealth. Instead, tourism represents a vital economic component throughout the region, accounting for anywhere between 10 and 20% of GDP. Jordan and Lebanon are especially reliant on tourism, with the sector contributing 19.2% and 19.1% to GDP, respectively, in 2018 – roughly double the global contribution of 10.4% and regional contribution of 8.7%.³

Recently, as geopolitical tensions have ebbed and flowed, so too have tourist arrivals. Egypt’s annual tourism arrivals peaked in 2010 at nearly 15 million and then dropped to approximately 5.4 million in 2016⁴; but, by 2018, tourist arrivals had nearly doubled, to 9 million, with further growth expected in 2019. Lebanon has also seen significant growth recently, with tourist arrivals increasing by approximately 50% through 2018.⁵ Jordan has experienced some growth in recent years, with an 8% increase year-on-year from 2017 to 2018, albeit remaining relatively flat overall since 2010.⁶

3. An increasing focus on digital innovation

Along with tourism, many Levantine governments have also prioritised the ICT sector to drive their economic development agendas in the absence of abundant natural resource wealth. From establishing dedicated ministries for digital economy to designing ambitious national digital transformation programs, national governments throughout the region are committed to ensuring that the Levant is a fertile ground for entrepreneurship and innovation. The benefits of this focus are beginning to show: the WEF estimates that the Levant is now home to more than half of the Arab World’s top one hundred (100) startups.⁷

Looking beyond the top-line numbers, several case studies exist. The ICT sector in Lebanon accounts for approximately 3% of GDP and the government is committed to strengthening and retaining local talent while seeking to build on legacy public initiatives such as Circular 331⁸ to attract new investment in ICT infrastructure and other digital environment projects. Meanwhile, in 2016, Jordan revised its national digitization strategy - Reach 2025 - to set an ambitious objective to digitize the entire Jordanian economy, of which the ICT sector makes up 13%. Egypt is following suit with plans to double its ICT sector’s economic contribution from 3% in 2017 to 6% by 2025, primarily by investing in digital infrastructure, platforms and financial services.⁹

4. The growing importance of remittances to economic growth

The Levant has witnessed a trend that sets them apart from their Gulf neighbors: rising remittances. As the region as a whole experiences rising populations, many people from the region seek employment in neighboring GCC countries. When workers seek employment outside their home country it does have an impact on local productivity, but the remittances they send back to their families also impacts their home country’s economy. Over the past several years, these remittances have contributed to GDP growth, bolstered domestic bank deposits, helped to finance imports, and increased foreign currency reserves while having minimal impact on the inflation rate.¹⁰

Lebanon in particular has seen remittances steadily grow over the past few decades – reaching a record high of 25% of GDP in 2005 – with two-thirds coming from expatriates in the GCC region. Recently, however, the volume of remittances has declined as regional economic growth slows. In 2016, for example, remittances measured only 11% of GDP for Lebanon (although it remains the largest recipient of remittances in the region and the Arab world). In Egypt – ranked second in the region for remittances – remittances are more important than ever to the economy after the government floated the Egyptian pound. Remittances are one of the main sources of foreign currency and have risen from 5% of GDP in 2016 to 11.5% of GDP in 2018. In Jordan, remittances continue to rise, accounting for approximately 9% of GDP in 2016, mainly from Jordanian expats in the GCC region.¹¹

5. Government debt and fiscal reform

The fiscal outlook for Levantine countries is complex. Government borrowing throughout the region accelerated after 2010, with Lebanon in particular accumulating a large debt load. At 157% debt-to-GDP in 2019, Lebanon is the third most indebted country in the world.¹² The IMF projects this figure to continue growing through 2024, to reach nearly 180% of GDP. Debt in Egypt and Jordan has also risen significantly since 2010, reaching approximately 100% of GDP in both countries.¹³ In recent years, the latter two countries have turned to the IMF for financial assistance and are implementing structural reforms to address their fiscal challenges. Credit worthiness throughout the region remains in focus, with all 3 major credit rating agencies declaring government bonds for many countries in the region to be non-investment grade.¹⁴ This raises borrowing costs while constraining access to international credit markets and potentially turning away much-needed foreign investment.

Reform remains underway in the region. Jordan and Lebanon are implementing various fiscal and budgetary changes. Egypt has seen measurable success by reducing their budget deficit to 9.5% in 2018 (its lowest level since 2011) and slashing its public debt by 10 percentage points in just two years to 93%.¹⁶

Our takeaways

The opportunities for the Levant appear to outweigh the existing challenges as long as countries continue pursuing efforts to build sustainable economic growth. Tourism and digital innovation will remain key priorities, and the drive towards renewables will likely intensify as governments seek to reduce the energy burden. Fiscal reforms should also continue given the need to gain investor confidence to improve foreign investment and capital inflows. That said, short-term growth will most likely continue to depend on public expenditure and free regional trade measures will likely remain on hold in light of the current regional circumstances.

^{1) The World Bank, “Over the Horizon: A New Levant”, Poverty Reduction and Economic Management Department, 2014.

2) Daniel, Jamal, “Reinventing the Levant”, The National Interest. 9 August 2016.

3) The World Travel & Tourism Council. “2019 Annual Research: Key Highlights”. 2019.

4) The World Bank, “Over the Horizon: A New Levant”, Poverty Reduction and Economic Management Department, 2014.

5) The World Bank, “Over the Horizon: A New Levant”, Poverty Reduction and Economic Management Department, 2014.

6) United Nations World Tourism Organization. “UNWTO Tourism Highlights: 2018 Edition”. 13 September 2018.

7) The World Economic Forum, “Meet the 100 Arab start-ups shaping the Fourth Industrial Revolution”, 2019.

8) Circular 331 is a strategic plan developed in 2014 by the Lebanese Central Bank to direct investments worth 400 million USD made by Lebanese banks into the country’s nascent ‘sharing economy’ sector

9) Statistics and initiatives were acquired from reports published by the respective central banks in Lebanon, Jordan and Egypt.

10) Jordan Strategy Forum, “The Economics of Jordanian Remittances”, March 2018.

11) Data on remittances was sourced from the central bank of each country as well as the World Bank’s World Development Indicators

12) IMF World Economic Outlook (April 2019)

13) IMF World Economic Outlook (April 2019)

14) Credit ratings were sourced for Jordan, Lebanon, Turkey and Egypt from S&P, Moody’s and Fitch. Recent data for Syria and Palestine is not available.

15) IMF, “IMF World Economic Outlook, April 2019”. April 2019.

16) Egyptian Ministry of Finance via Trading Economics “Egypt Government Budget”}