Recoveries in the Middle East, North Africa, and Pakistan: have macroeconomic policies been effective?

^*The authors thank Paul Cashin, Reinout de Bock, Daniel Florea, Heiko Hesse, Sam Ouliaris, Niklas Westelius, and seminar participants at the IMF Institute for insightful comments.

Abstract

This paper identifies and documents the properties of output gap recessions and recoveries in the Middle East, North Africa, and Pakistan (MENAP) during the 1980 to 2008 period. It goes on to investigate the key determinants of the recoveries. The duration of MENAP countries' recessions and recoveries has increased from the 1990s to the 2000s. MENAP hydrocarbon exporting countries' recessions were on average more pronounced in the 2000s, and hydrocarbon importing countries' recessions milder. Fiscal policy is found to have played a key role during the recoveries to potential output, although with weaker effects for MENAP countries that are more open to trade. Monetary policy is found to have been less effective. This is likely to be related to the fact that many of the MENAP countries have fixed exchange rate regimes and hence have limited room for active monetary policy. At the same time, however, countries that experienced a depreciation of the real effective exchange rate (REER) or had undervalued REERs tended to recover faster.

Keywords:

• recessions
• recoveries
• Middle East
• North Africa
• Pakistan
• fiscal policy
• monetary policy
• investments
• hydrocarbon exporting countries
• trade openness

JEL Classifications:

• E32
• E62
• E63
• F43
• H30
• O43

Notes

^* The authors thank Paul Cashin, Reinout de Bock, Daniel Florea, Heiko Hesse, Sam Ouliaris, Niklas Westelius, and seminar participants at the IMF Institute for insightful comments.

1. It should also be noted that fiscal space is only loosely related to current oil prices. Most oil-exporting countries implement a fiscal rule whereby the budget is based on a conservative oil price. As a result, oil price windfalls are initially saved. Higher oil prices lead to higher spending in later years to the extent that the rise in the oil price persists. In the case of an economic downturn or a fall in oil prices, previous savings can be used to sustain higher spending than would otherwise be the case.

2. In a growing economy high-rate phases must coincide with expansions in the classical cycle, yet low-rate phases may be associated with either phase of the classical cycle.

3. For the cases in which the ±0.5% band is not instrumental to define the end date of the recovery, the last year of the recovery is the one that minimizes the distance from the observation in the last recovery year before the lower band is reached compared with the distance from the upper band to the first year's observation that exceeds the band.

4. Non-oil potential output was calculated by applying the HP filter.

5. Because of the limited availability of interest rate data for MENAP countries, monetary policy as deviations from a policy rule could not be measured.

6. Real exports growth rather than real non-oil exports growth has been included to control for the spillover effects of total export growth at the upturn on the non-oil output growth during the recovery. The significance of the variable implies that the recovery in the non-oil sector can be driven by an increase in total exports, as the latter has spillover effects on the non-oil industries of the economy.

7. Information on non-oil investments is not available. The investment to GDP ratio at U–1 is used to capture the pre-recession trough level of investments.

8. Countries are classified as hydrocarbon exporters if the share of hydrocarbon exports in total exports exceeds 50%. Some countries that are classified as hydrocarbon importers export hydrocarbons (e.g. Egypt and Syria). Because data on real non-hydrocarbon GDP is not available for a sufficiently long period for these countries, total GDP is used in the analysis. In the case of Sudan, total GDP is employed as the non-oil GDP series is not available for the entire period under consideration.

9. For the HP filter the smoothing parameter, λ, has been set to 100. For the BK filter, Burns-Mitchell recommendations for annual data have been adopted, setting plo and phi to 2 and 8, respectively. Finally, for the CF filter, plo and phi are set again to 2 and 8.

10. It should be noted that since annual data are used, the analysis in the paper does not take into account recessions and recoveries that are completed in the same year.

11. When the criterion to identify a recession phase is changed to have a negative output gap that exceeds 1% instead of 0.5%, results on the average duration and amplitude of the recession and recovery phases are robust.

12. Qatar 1995–96 (year of the coup) is excluded from the sample because without it the results are substantially more robust to dropping one country at a time. Lebanon 1982–84 is also excluded because of fiscal data inconsistencies related to the war in 1982.

13. Estimation of regressions that use the fraction of recovery completed in the first year (defined as ) as the dependent variable also confirm the results shown here that fiscal policy has been effective in speeding up recoveries in the MENAP countries while monetary policy has not. These estimations suggest that a 1% increase in the fiscal impulse causes a 5% reduction in the output gap or a 5% increase in the fraction of the recovery that is completed in the first year.

14. The pre-recovery remittance to non-oil GDP ratio is added into the Table 3 regression specifications to explore the possibility of interlinkages in the cycles of MENAP countries. Remittances, for example from GCC countries, support private consumption and investment in the labor exporting MENAP countries and could support their recovery from a slowdown. Due to a lack of availability of the remittance data, the sample size is considerably constrained and the results are not reported here. The pre-recovery remittance ratio is found to have a positive and significant effect on the strength of recovery in the third column regression specification. However, the coefficient on the remittance variable is weak and insignificant in the specifications that include the nominal and real money growth variables, possibly reflecting collinearity of the variables. MENAP countries tend to have fixed or stabilized exchange rate regimes. Therefore, a high ratio of remittances will be reflected in a stronger growth of money.

15. The specification in column (12) cannot be estimated because of the very low number of observations.