This edition of the Middle East andNorth Africa (MENA) regional economic update concerns theregion recovering from the financial crisis along with theglobal economy. Growth in 2010 is expected to be 4.4 percentregion-wide, driven by domestic absorption as well as apositive contribution from external demand. The recoveryfrom the crisis differs by country depending on initialconditions and the intensity of the impact via the threeprincipal channels through which the global financial crisisaffected MENA economies-the financial sector, the price ofoil, and the balance of payments, reflecting the impact ontrade, remittances and Foreign Direct Investment (FDI)flows. The Gulf Cooperation Council (GCC) countries areleading the regional recovery as oil prices have reboundedand the GCC financial sector is stabilizing. Developing oilexporters felt the impact of the crisis, and now therecovery, largely through the oil price channel, due to thelimited integration of their banking sectors into globalfinancial markets and the importance of oil in theirexports. The oil importers were affected by the crisisthrough the secondary effects on trade, remittances, and FDIflows, so their recovery will depend crucially on therecovery in key markets, especially the EU and the GCCcountries. High unemployment has been a problem in MENA foryears, and the crisis has dimmed prospects for improvementsin the near term. Ample oil and gas resources, a youthfuland growing workforce, and a growing momentum to look forways to diversify their economies imply that the growthpotential of the region is high, but MENA countries continueto face formidable longer term challenges. Ensuring accessto finance without compromising financial stability will bea major challenge in MENA, although issues related to weakregulatory systems, corporate governance and overdependenceon the banking system also loom large. Key problems of thebusiness environment in MENA include policy and regulatoryuncertainty and discretion in implementing reforms whichprevent a level playing field for all firms and encouragethe pursuit of privileged access. These problems, coupledwith barriers to entry and exit, have created an environmentof stagnation. Addressing these issues will require applyingrules and regulations consistently and withoutdiscrimination among firms and introducing reforms thatpromote business dynamism, private investment, and innovation.
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