Financing Sustainable Development in the Arab Region

Transcription

1 2015 Expert report for the Arab Sustainable Development Report Financing Sustainable Development in the Arab Region

2 Distr. LIMITED E/ESCWA/SDPD/2015/Technical Paper.2 17 April 2015 ORIGINAL: ENGLISH ECONOMIC AND SOCIAL COMMISSION FOR WESTERN ASIA (ESCWA) FINANCING SUSTAINABLE DEVELOPMENT IN THE ARAB REGION United Nations New York, 2015 Note: This document has been reproduced in the form in which it was received, without formal editing. The opinions expressed are those of the authors and do not necessarily reflect the views of ESCWA

3 Acknowledgement This report draws extensively on the consultancy work conducted by Ms. Sherine El-Sharkawy for the United Nations Economic and Social Commission for Western Asia (ESCWA). It was enriched by the comments and suggestions of a group of peer reviewers. In particular, valuable review and feedback were provided by Mr. Khaled Hussein, Economic Advisor, ESCWA, Ms. Monia Braham, Economic Affairs Officer, ESCWA, and Ms. Mylene Francois, Consultant at ESCWA. iii

4 Contents 1. Executive Summary Introduction Assessment of Financing Needs, Sources, Gaps and Opportunities in the Arab region Leveraging Opportunities in the Arab Region for Financing the SDGs Post-2015 Agenda Recommendations for Financing Sustainable Development in Arab Countries Conclusion Appendix I- Sustainable Development Goals Appendix II- Key Infrastructure Indicators in Arab Countries Appendix III- PPP Success Stories iv

5 1. Executive Summary Financing needs for sustainable development are large. Some estimates measure it to be in the vicinity US$ 2.5 trillion annually 1. It is generally believed that the current pattern of financing and investment is not effective to achieve sustainable development goals, yet that the efficient mobilization of global savings could prove sufficient to meet these needs 2. To finance sustainable development, there is a general consensus on the importance of tackling all issues and challenges impeding the full utilization of all financing sources, including public, private, domestic and international resources and considering them as complementary rather than substitutes. An integrated approach encompassing different financing options complemented by regional and international support to enhance the use of these resources is essential. A toolkit of policy recommendations covering regulatory reform, strong governance, and improved domestic, regional and international resource mobilization in addition to reliance on blended sources of finance has been put forward in this paper. Global partnership is needed to support the implementation of these policies, yet respecting national peculiarities is crucial to ensure success. Within this context, this paper aims to discuss various measures that Arab countries could use to bridge the funding gap, and that are available although they have not yet been used in an optimal manner. First, an estimate of the financing gap for the Arab countries is provided. This paper measures the financing gap in Arab countries between US$ 80 to US$ 85 billion per annum in 2015 and The estimate is calculated using balance of payment forecasts of the International Monetary Fund (IMF) and the Economist Intelligence Unit (EIU). These forecasts do not necessarily take into account additional and changed spending patterns geared to sustainable development, nor possible synergies between various sustainable development goals. This may lead to a different estimate for the financing gap. As a result, this estimate is purely indicative and should be considered as a baseline for the finance needed to achieve sustainable development. A more accurate figure can only be achieved based on a country specific prioritization of sustainable development goals (SDGs) and the identification of possible inter-linkages between these goals. With regards financing, all possible financing sources, private and public, domestic and international sources need to be considered. On one hand, public finance is mostly used as a short-term quick fix solution, and many Arab countries have increasingly resorted to public domestic debt, thereby crowding out the private sector which is a key development partner. A need exists to measure the efficacy of use of public debt and to explore the possibility of resorting to other means of finance which do not impose a burden on future generations. Official development assistance (ODA) has also been decreasing in the world but Arab countries are the ones most impacted. A one-sided framework for development assistance is not sustainable and mutually beneficial programs need to be developed, not only between international donors and Arab countries but also through Intra-Arab development assistance. Besides, tax reform is a cornerstone in attaining sustainable development as it represents a main source of funds, and no technical assistance will help so long as the political will is missing and the interest groups are dominating the scene. On the other hand, private funds play an important role in development. Foreign direct investment is only attractive in the medium and long term in countries with transparent and accountable governance frameworks and where Rule of Law is applied; otherwise, it becomes a short term measure to exploit temporary opportunities, in opposition to sustainability goals. With the exception of few countries, net foreign direct investment (inflows minus outflows) is negative and efforts to enhance Arab countries competitiveness in the global arena are needed. Additionally, most Arab countries fare badly with 1 World Investment Report 2014, Investing in the SDGs: An Action Plan. UNCTAD, To note is that such estimates vary widely, for example, the estimates for the investment in infrastructure alone including water, agriculture, telecoms, power, transport, buildings and industrial and forestry sectors are estimated at US$ 5-US$ 7 trillion per annum globally as per the Report of the Intergovernmental Committee of Experts on Sustainable Development Financing, UN, Report of the Intergovernmental Committee of Experts on Sustainable Development Financing, United Nations, August 2014.

6 respect to portfolio investment and savings mobilization in comparison to world standards. Furthermore, the channelling of domestic savings through the capital market and the banking sector to support growth is also below optimal. Capacity-building and regulatory reform in these areas is therefore needed in several Arab Countries. Blended means of finance include public-private partnerships (PPP) and Green finance (if supported by government off-take or guarantee). They are a means of cooperation between the government and the private sector to help fund various public goods which may not have been attractive otherwise in the eyes of private investors. Political support, institutional and regulatory reform, capacity-building, public acceptance, and appropriate financial structures need to be present for such complex products to be efficient. Nevertheless, there are success stories across various Arab countries in implementing PPP projects, which proves that with the relevant preparation and support, blended sources can prove useful. Green bonds and sukuk have not yet released their full potential, but they provide an opportunity to be tapped into given their feature of Islamic offering and their green, ethical, climatefriendly orientation. In summary, a concerted effort has to be exerted to successfully attain SDGs in the Arab countries. Guided by national priorities, regional and international cooperation will enhance and speed up the process of reform and result in synergies to the benefit of all. 2

7 2. Introduction Despite growing and continuous international attempts to promote development during the last decade, a serious gap in per capita income still persists, creating an urgent need to review and assess the efficacy of existing development frameworks and the effectiveness of their implementation. Within this backdrop, Arab countries are no exception. Arab countries experience a continuous gap in GDP per capita in comparison to the World and high income countries as per the below chart GDP Per Capita (constant 2005 US$) Arab World Upper Middle Income High Income World Source: World Development Indicators Most importantly, and despite the apparent comparability of Arab per capita income with upper middle income countries, Arab countries exhibit a huge discrepancy among each other in resources and per capita income leading to varying progress and levels of development. High income countries within the Arab region -namely the members of the Gulf Cooperation Council- are doing much better than other Arab countries, especially the least developed counties (LDCs) which are lagging behind as per the below chart. In general, it is important to be mindful that most aggregate indicators for the Arab world misleadingly appear to be in line with those of upper middle income countries. 3

8 GDP Per Capita in Arab Countries according to Income Group (constant 2005 US $) High Income - Arab Lower Middle Income - Arab Arab World Upper Middle Income - Arab Least Developed Countries - Arab Source: World Development Indicators Particularly for upper middle, lower middle income and least developed Arab countries, sustainable development is a challenging task, especially considering the fact that it is targeting several areas concurrently, including poverty, education, training, job creation, innovation, equitable rights, etc. Several Arab countries find themselves trapped below poverty levels, with only a few Arab countries displaying a positive financing position. While the concept of sustainable development may look like an enormous task to tackle, there seems to be no other option: challenges need to be faced, barriers broken down and constraints identified in order to be dealt with. When discussing development, financing becomes a main concern. How much needs to be mobilized and towards which sectors? What is the best and most effective way to mobilize the existing funds? There is a general awareness that the current modus operandi has, in most cases, not yielded the expected long-hanging fruits. Not only that, existing policies may have even deterred development and led to harmful effects on the environment. The United Nations continuously supports the process of assessing the existing financing needs, evaluating current policy frameworks and instruments, and considering alternatives with the objective of an effective sustainable development financing strategy aiming at maximizing the use of the existing resources and identifying innovative ways of finance to achieve sustainable development goals. Such a mission is pursued through interactive multistakeholder involvement including member countries, intergovernmental organizations, nongovernmental organizations, business sector organizations, etc., in order to safeguard specific conditions relevant to each country and achieve ownership at the national level. In the age of globalization, there is a common understanding of the interrelationships between all countries - even if not within geographical proximity - and the global paralyzing impact of underdeveloped societies. International collaboration is currently underway to support national endeavours and encourage regional partnerships to re-orient development and re-invent new methods of attaining it, methods that can finally yield to a sustainable world long hoped for and dreamt of. 4

9 3. Assessment of Financing Needs, Sources, Gaps and Opportunities in the Arab region a. The Financing Gap The quantification of the financing needs for sustainable development is an extremely difficult task, being mindful of the inter-linkages and mutual impact between various sustainable development goals as outlined by the Working Group on Sustainable Development Goals tasked by the Rio+20. The list of Sustainable Development Goals is available in Appendix I. The sustainable development goals encompass economic, social and environmental goals. Each goal stated above has its sub-goals or objectives which yield integrated improvements within each goal. To illustrate, Goal 1 which aims to end poverty in all its forms includes sub-goals of eradicating extreme poverty by 2030 as defined by people earning less than US$ 1.25 a day, reducing at least by half those living in poverty in all its dimensions in accordance with national definitions, providing equal rights for men and women with regards to economic resources, attaining the resilience of the poor to vulnerable situations, etc. Not only is each goal multi-faceted, sometimes with challenging, as in difficult to quantify, indicators (as in the case of promotion of a culture of peace and non-violence, global citizenship, and appreciation of cultural diversity and of culture s contribution to sustainable development 3 ), yet many indicators show a cross-cutting impact with several goals. For example, if poverty levels are measured by per capita income below a certain standard (included under Goal 1), the decrease in poverty levels would have an impact on reducing hunger, improving food security and nutrition (included under Goal 2), helping to attain healthy lives (included under Goal 3), etc. By the same token, Goal 8, which relates to full and productive employment and decent work for all, interweaves with poverty levels and education standards and quality (Goal 4). As a result, the measurement of the financing needs for sustainable development without falling in the trap of doublecounting becomes an extremely complex endeavour. Whereas this provides an interesting problematic in academia opening up further areas of research, resorting to a less precise proxy in order to focus on actual steps and initiate an action plan towards sustainability becomes more imperative, especially bearing in mind the current pressing needs faced by many Arab countries. Previous literature calculated the financing gap as the difference between available financing sources at a point in time and the resources needed to achieve a specific growth level 4. To estimate the required investment, several models have been developed including the Harrod and Domar Model (as outlined in the 1930s and 1940s and further developed by Chenery and Strout in the 1960s) and the Balance of Payments Constrained Growth Model developed by Thirlwall and Hussain (1982) 5. Both models are dependent on estimating an arbitrary target growth rate. The table below identifies some previous financing gap estimation attempts for Africa, the Arab countries, the MENA region, Islamic countries and least developed countries. As demonstrated below, because of the different goals, geographical coverage and methodologies, estimates for the financing gap vary. 3 Indeed, an accepted attribute in the Millennium Development Goals is targeting effectiveness and quality in various, the definition of which is often debatable and sometimes non-existent. 4 Assessing the Financing Gap in the Arab Region, ESCWA, New York, Foreign Aid, Conditionality and Ghost of the Financing Gap: A Forgotten Aspect of the AID Debate, Thilak Ranaweera, World Bank, April

10 Author/ Institution World Bank IMF M. N. Hussain/AfDB Source Region Date Objective Gap (billion US$) Global economic Africa 2009 Cover fiscal deficit 71.8 prospects Implications of the Africa 2009 Cover balance of 51.4 global crisis for lowincome payment deficits countries Exorcism of the Ghost: Alternative to measure the financing gap Africa 2000 Reach 7 percent growth in one year (1999) ECON G20 Paper Africa 2009 To reach pre-crisis 50 growth ECON G20 Paper Africa 2009 To reach 7 percent 117 growth ECON GDI Input Africa 2009 Growth to reach 52 MDGs ADB/GCI GCI Paper Africa 2009 Close infrastructure 90 gap Arab Organization for Agricultural Development LAS Social and Economic Summit 2009 (Kuwait) Arab 2010 Arab Food Gap 27 World Bank, IsDB World Bank, IsDB United Arab Emirates Arab Financing Facility for Infrastructure Arab Financing Facility for Infrastructure 2013 Annual Meeting of Arab Financial Institutions Arab 2011 Infrastructure to sustain growth Arab 2011 Meet electricity demand Arab 2013 Closing existing food gap ESCWA Paper Arab 2013 Assessing the Financing Gap (2009) using a 7% target growth rate IsDB IsDB IsDB IsDB United Nations IsDB Occasional Paper No. 16 IsDB Occasional Paper No. 16 IsDB Occasional Paper No. 16 IsDB Occasional Paper No. 16 Prototype Global Sustainable Development Report per year 30 per year 41 in 2010 US$ US$ 57.9 billion IsDB 40 countries 2011 Poverty eradication 23.6 percent of GDP MENA Poverty eradication 24.8 percent of GDP ISDB Poverty eradication per countries year MENA Poverty eradication per year All least 2014 Sustainable per developed Development year countries Source: Assessing the Financing Gap in the Arab Region, ESCWA, New York, 2013; Prototype Global Sustainable Development Report, 2014 Additionally, the World Bank in its Global Development Finance 2009: Analysis and Outlook applied the following methodology in its estimation of the financing gap. First, developing countries external financing needs are estimated. This is defined as the current account balance plus scheduled 6

11 principal payments on private debt. This estimate is compared to a forecast of private capital flows, which includes new loans on private debt, net equity flows 6, in addition to net unidentified capital outflows 7. The difference between the calculated financing needs and the projected private capital flows is the financing gap 8. This methodology was used in this paper given the fact that identifying the target growth rate needed to achieve SDGs is a challenging and debatable task. The Financing Gap = External Financing Need Private Sources of Finance External Financing Need Current account Principal repayments on private debt Net equity flows Disbursements of private debt Unidentified outflows Private Sources of Finance Two scenarios were developed to estimate the financing gap. Scenario I depends on the latest forecasts provided by the World Economic Outlook Database and published by the International Monetary Fund in October It includes forecasts for the current account balance and gross domestic product for most Arab countries including least developed countries (except Palestine and Syria). Scenario II is based on the Economist Intelligence Unit forecasts as of December 2014 and January 2015, hence more accurately reflecting the impact of the recent drop in oil prices 9. For the least developed countries not covered by the Economist Intelligence Unit, the IMF World Economic Outlook figures were used. The results should remain consistent considering the fact that the drop in oil prices is not expected to have a major effect on least developed countries since they are not rich in oil resources. Since there is no forecast of principal repayments and disbursements of private debt, the historical average starting 2009 till was used. Additionally, net equity flows including portfolio and net foreign direct investment were projected as a ratio to gross domestic product based on the average for the historical period. The following table shows the estimated financing gap for the Arab countries in 2015 and 2016 for scenarios I and II. 6 In many cases, net equity flows are negative representing net outflows. 7 Unidentified capital outflows represent a balancing entry equal to a. the difference between the current account deficit and all identified capital account transactions and b. the change in reserves. A portion of this item represents private capital transactions not declared to the authorities while the other portion represents inconsistencies in the balance of payments reporting. This item was not forecasted and was assumed to be zero. 8 Global Development Finance 2009: Analysis and Outlook, The IMF forecast in October 2014 was based on average oil price of US$ 99.4/barrel in 2015 and US$ 97.3/barrel in In comparison, the Economist Intelligence Unit forecast was based on an average oil price of US$ 88/barrel in 2015 and US $85.2/barrel in 2016 for country reports published during December This estimate was further decreased to an average of US $ 80.3/barrel and US $ 84/barrel in both respective years for country reports issued during January In some cases, the last available year was

12 Classification Country Financing Gap/Surplus 2015 Scenario I 11 (US$ bn) Financing Gap/Surplus 2016 Financing Gap/Surplus 2015 Scenario II 12 (US$ bn) Financing Gap/Surplus 2016 UMI Algeria HI Bahrain LDC Comoros LDC Djibouti LMI Egypt UMI Iraq UMI Jordan HI Kuwait UMI Lebanon UMI Libya LDC Mauritania LMI Morocco HI Oman LMI Palestine NA NA NA NA HI Qatar HI Saudi Arabia LDC Somalia NA NA NA NA LDC South Sudan LDC Sudan LMI Syria UMI Tunisia HI UAE LDC Yemen Scenario I Scenario II Number of Arab Countries with Financing Gap Financing Gap 2015 Financing Gap 2016 Financing Gap 2015 Financing Gap Total Financing Gap (US$ bn) Mainly using IMF forecasts dated October 2014 for current account balance and GDP except for Syria where EIU forecasts were used due to the unavailability of forecasts by the IMF. Principal repayments and disbursements of private debt were estimated in light of the historical average levels. Net investment and portfolio flows were estimated as per the historical average to GDP. 12 Mainly using Economist Intelligence Unit (EIU) forecasts dated December 2014 and January 2015 for current account balance and GDP except for Comoros, Djibouti, Mauritania, Sudan, South Sudan and Yemen forecasts where IMF forecasts were used due to the unavailability of forecasts by EIU. Principal repayments and disbursements of private debt and net private investment and portfolio flows are estimated in a similar manner to Scenario I. 8

13 The above table shows that from 13 to 15 Arab countries are expected to have a financing deficit for 2015 and 2016 and is estimated to range between US$ 80 billion and US$ 85 billion annually. The second scenario which is based on more updated projections of oil prices results in a lower financing gap, given that the funding gap is mostly experienced by Arab countries which are net oil importers and accordingly stand to benefit from a drop in oil prices. Countries were classified according to High Income (HI), Upper Middle Income (UMI), Lower Middle Income (LMI) and Least Developed Countries (LDC) in accordance with the OECD segregation. As expected, a financing surplus is found in high income countries. However, the fact that upper middle income countries reflect a higher financing gap when compared to lower middle income countries followed by least developed countries is contrary to the common belief that least developed countries should exhibit the highest needs. The reason behind that is that the forecasting processes do not necessarily put sustainable development goals at the forefront of the countries spending priorities. Instead, the dominant existing modus operandi which ignores sustainable development is expected to continue. This is an important limitation of this analysis. Several key indicators listed in Appendix II confirm that least developed countries require special attention, as per the UN General Assembly Synthesis report from December The determination of the additional anticipated growth in needed finance -above the current forecasts- is to be done on a country specific non-arbitrary basis, depending on prioritized sustainable development goals to arrive at a more accurate estimate. Another limitation of the above findings is the unavailability of forecast data on Somalia and Palestine. Both factors are expected to yield a higher financing gap estimate for Arab countries. Financing Gap/Surplus According to Income Group 2015 and Scenario I (US$ bn) Financing Gap/Surplus According to Income Group 2015 and Scenario II (US$ bn) (44.00) HI UMI LMI LDC 6.00 (44.00) HI UMI LMI LDC There are other factors which may lead to a lower estimate for the financing gap. As discussed above, inter-linkages between the various sectors may result in potential synergies, since the improvement 13 The road to dignity by 2030: ending poverty, transforming all lives and protecting the planet, UN General Assembly, Sixty-ninth session, 4 December

14 accomplished in one goal may generate positive outcomes in other goals, hence saving resources that would be dedicated towards the achievement of each goal isolated from one another. Efforts should be put in place by each country to arrive at a more concise figure through inter-sectoral dialogue and identification of the various synergies between the different goals. To conclude, the above estimate is purely indicative, providing an idea about the magnitude of the finance needed. Estimate for the Financing Gap The funding gap in the Arab countries is estimated to reach US$80 billion to US$ 85 billion annually in 2015 and 2016, observed in the upper middle, lower middle income and least developed Arab countries. It is expected that the actual financing gap will be higher if sustainable development goals are taken into consideration in the accounting exercise. b. Key Target Sectors Bearing in mind the above mentioned caveats in relation to quantitative estimates of investment requirements including the interweaving of the various Millennium Development Goals (MDGs) and their dependence on arbitrary growth targets, the Intergovernmental Committee of Experts on Sustainable Development Financing provided the following diagram to quantify the order of magnitude of priority sectors on a global level, where investment should be channelled. Orders of Magnitude of Investment Requirements for Various Sectors O c e a ns Fo re s ts B iodive rs ity C limate change mitigation C lim a te ch a ng e a da pta tion Universal access to energy Renewable energy E ne rg y e fficie ncy Land and agriculture Infrastructure (non energy) M D G S Annual investm ent requirem ents (billion US$ per year) Source: Report of the Intergovernmental Committee of Experts on Sustainable Development Financing, United Nations, A/69/315, 15 August 2014; x-axis is in logarithmic scale. In the above chart, it is clear thatt infrastructure, climate change mitigation and energy (with a focus on energy efficiency and renewablee energy) are priority investment sectors. Additionally, the Prototype Sustainable Development Report indicates that food security and sustainable agriculture; water and sanitation; and energy are the top three priority areas identified by governments for the Sustainable 10

15 Development Goals in December This section focuses on infrastructure (roads, rail, ports, airports, water and telecommunications) and energy as key target sectors for investment, with a special focus on renewable energy given its importance for climate change mitigation. Appendix II shows in more detail key infrastructure indicators for Arab countries. A snapshot of these indicators is provided in the below chart. Infrastructure Quality, Water and Electricity Access (Arab World vs. Other Income Groups) Logistics performance index 2014 Access to Electricity 2010 (% of Population) Access to Sanitation Facilities 2012 (% of Population) Access to Water Resources 2012 (% of Population) Arab World Upper Middle Income - World High Income - World World Source: World Development Indicators Index for logistics performance which indicates the quality of trade and transport related infrastructure was converted to a percentage score for ease of comparison From the data available, it is confirmed that the Arab countries have similar if not more grave sector priorities as the ones identified globally. Data on sanitation access does not capture the quality of sanitation facilities in the Arab world and hence the fact that sanitation access is higher in Arab countries than the world average may be misleading. Furthermore, the urban-rural differential may be another source of bias. It is also worth noting that the average population access to sanitation in Arab least developed countries is about 30% in comparison to 64% in the world. By the same token, access to electricity in least developed Arab countries amounts to 30% of population in comparison to 83% in the world. Charts in Appendix II highlight this large gap prevailing in Arab least developed countries in different sectors including infrastructure, water and energy in comparison to the world and Arab standards. The impact of infrastructure investment on economic growth cannot be underestimated, not only through its increase of the production capacity of the economy but also through raising productivity. Studies point out that increasing infrastructure investment in transport, telecommunication and utilities by 10% will lead to more output in the long term, implying an overall economic return of 17%. 15 Growth in Central Africa and Latin America stands to increase by 2%-2.2% annually if their investment in infrastructure is matched to that of India, Pakistan, Turkey or Bulgaria 16. Furthermore, it was found that an increase in infrastructure investment results in additional direct and indirect jobs Prototype Global Sustainable Development Report, United Nations, July Infrastructure Investing: It Matters. Swiss Re and Institute of Infrastructure Finance, Infrastructure productivity: How to save $ 1 trillion a year, McKinsey Global Institute, McKinsey Infrastructure Practice, January McKinsey estimates that an increase in investment directed to infrastructure by 1% of GDP would result in additional 3.4 million direct and indirect jobs in India, 1.5 million in the USA, 1.3 million in Brazil and 0.7 million in Indonesia. Infrastructure productivity: How to save $ 1 trillion a year, McKinsey Global Institute, McKinsey Infrastructure Practice, January

16 While historically infrastructure investment has been impacted in periods of rising deficits, the above findings prove the importance of prioritizing this sector given its trickle down effects. McKinsey estimates the infrastructure gap globally in two ways. The first method is based on the fact that historically, 3.8 percent of GDP were spent globally on infrastructure. The second approach is based on the ratio of the physical infrastructure stock to GDP which is measured to reflect an average asset to GDP ratio of 70 percent 18. Given that there is little information on the financial value of infrastructure assets in the Arab world, and bearing in mind the limitation that infrastructure capacity in developing countries lags behind that of developed countries and that this estimate does not possibly consider the additional cost of climate change adaptation and mitigation, it is estimated that Arab countries would need to spend US$ 110 billion to US$ 150 billion each year during the coming 5 years 19. Investment in energy efficiency and renewable energy are second after infrastructure in terms of importance. The International Energy Agency Outlook for 2014 provides the following annual yearly investment estimates for Africa and the Middle East. Africa Average Annual Investments (billion, year-2012 US dollars) Energy Supply Of which Transport Of which Renewables Energy Efficiency Of which Transport Source: IEA World Energy Investment Outlook, 2014 Middle East Average Annual Investments (billion, year-2012 US dollars) Energy Supply Of which Transport Of which Renewables Energy Efficiency Of which Transport Source: IEA World Energy Investment Outlook, 2014 To avoid double counting, transport is excluded from the total spending on energy. This leads to an average annual spending of US $ 120 billion in Africa and US $105 billion in the Middle East during No separate estimate for Arab countries is available; however, since many of the Arab countries fall within the Africa and Middle East category, it is not unsafe to assume that the needs of Arab countries would fall within this range. 18 Infrastructure productivity: How to save $ 1 trillion a year, McKinsey Global Institute, McKinsey Infrastructure Practice, January GDP forecasts of the IMF and the Economist Intelligence Unit were used. 12

17 c. Means of Finance Sources of funding to finance the gap include additional public and private sources both sourced domestically and internationally; furthermore, some funding sources are designed as a hybrid of public and private sources. Public sources of finance mainly include government domestic debt (e.g. through treasury bills and bonds) and international debt constituted of loans from foreign governments and international organizations as well as official development assistance. Tax revenues are among the sources of public funding. Private sources of finance mainly rely on foreign direct investment, portfolio investment, remittances, and domestic savings. Hybrid sources sometimes called blended finance products combine both public and private sources and include public-private partnerships and other government equity/quasi-equity/debt funding as well as government guarantees (as a form of risk mitigation) which are provided by public institutions in order to leverage private finance. Means of Finance Financing the gap will either rely on the main public sources (government debt, official development assistance (ODA) and taxes) as well as additional private sources (foreign direct investment (FDI), portfolio investment, remittances and domestic savings). Blendedd sources include a hybrid of both public and private means of finance. i. Public Debt Public debt is a key source to fund the budget deficit. Certain Arab countries have reached high levels of public debt to GDP such as Lebanon (145%), Egypt (95%), Jordan (86%) and Morocco (77%). Excluding least developed countries, Iraq and Palestine, average public debt to GDP is 31.2% in This is to be compared with 26.4% for developing countries as an aggregate 20. Furthermore, as a ratio to GDP, the public debt has mostly been increasing as per the below table. Public Debt/GDP 160% 140% 120% 100% 80% 60% 40% 20% 0% e Lebanon Egypt Jordan Morrocco Bahrain Syria Tunisia UAE Qatar Saudi Arabia Algeria Kuwait Oman Libya 20 Report of the Intergovernmental Committee of Experts on Sustainable Development Financing, 15 August

18 Public Debt (% of GDP) Country e Algeria 9.20% 8.40% 8.10% 7.10% 7.5% Bahrain % 48.80% 53.60% 57.80% 66.50% Comoros NA NA NA NA NA Djibouti NA NA NA NA NA Egypt 82.20% 84.30% 85.80% 91.60% 94.50% Iraq NA NA NA NA NA Jordan 61.10% 65.40% 75.50% 80.10% 85.60% Kuwait 11.70% 8.20% 6.20% 6% 6.80% Lebanon % % % % % Libya 5% 10.40% 3.90% 3.30% 2.70% Mauritania NA NA NA NA NA Morocco 61.00% 64.80% 71.20% 73.10% 76.60% Oman 5.00% 4.70% 4.30% 4.40% 4.80% Palestine NA NA NA NA NA Qatar 30.10% 34.80% 33.30% 32.20% 30.10% Saudi Arabia 14.10% 11.20% 10.10% 9.90% 9.60% Somalia NA NA NA NA NA Sudan NA NA NA NA NA Syria 22.70% 37.40% 54% 54.70% 57.30% Tunisia 40.40% 44.40% 44.50% 46.20% 49.60% UAE 53.20% 45.10% 44.70% 44.50% 44.20% Yemen NA NA NA NA NA Source: The Economist Intelligence Unit Reports Total public debt also includes external debt which is owned by the government to foreign entities. External debt owed by Arab countries to foreign entities as a percentage of GDP has been decreasing on average from 31.5% in 2010 to 22.18% in reflecting a trend of resorting to domestic finance over foreign funding. External debt is usually considered as a second alternative by governments as it creates a foreign exchange liability and exposure % 80.00% 60.00% 40.00% 20.00% 0.00% External Debt/GDP Lebanon Qatar Jordan Bahrain Tunisia UAE Source: The Economist Intelligence Unit Reports 21 Calculated from The Economist Intelligence Unit Data. 14

19 The maturity of public debt, especially domestic debt, is predominantly of short term nature. This debt may be directed to long term needs such as infrastructure or to short term needs like the purchase of food. Accordingly, governments rely on rolling over their public debt. Since public debt poses a burden on future generations arising from debt service and settlement, means to streamline it and optimize its use paralleled by efforts to replace it with other funding sources is strongly recommended. Public Debt There is increasing reliance on domestic public debt as a quick resort to finance government deficits of Arab countries. The ratio of public debt to GDP is higher than the world average. This measure should be used sparingly as it represents a burden on future generations and measures to monitor its efficacy and enduring development impact should be put in place. Suggested Reforms Public Debt Barriers, Constraints and Challenges Opportunities and Action Steps Responsibility Barriers, Constraints and Challenges Opportunities and Action Steps Responsibility Barriers, Constraints and Challenges Opportunities and Action Steps Responsibility The pressure on national governments to resort to short term quick-fix solutionss to finance their deficit. Put a plan in place and identify alternative sources of financing and address the barriers of their growth in order to gradually replace public debt to return to safe and acceptable levels. National governments/international community to create an enabling environment and develop expertise to deploy alternative funding sources. The lack of Key Performance Indicators (KPIs) that monitor the efficacy and enduring effects on the areas where public debt is channelled. Develop KPIs to monitor the best allocation of public debt in order to achieve sustainable development rather than channel debt for short-term quick fix solutions, which should only be tolerated for a planned and limited time period. Sustainable development to be set at the forefront when setting national financing strategies. Theree should be a national discussion on the priority sectors in order to achieve inclusion and obtain people buy-in on the priorities to be set. National Governments/International community to provide needed technical assistance The debt service constitutes a burden on future generations. International community to consider debt forgiveness/multilateral relief subject/sovereign debt restructuring and link it to achieving certain goals in relation to the mobilization of other finance sources and progress in the development of KPIs related to the best and optimal use of external debt aiming at its reduction. International community 15

20 ii. Official Development Assistance (ODA) As per the World Bank s definition, net official development assistance (ODA) represents loans and grants (net of repayments) made on a concessional basis by countries and multilateral institutions to promote economic development and welfare. It includes loans with a grant element of at least 25 percent (calculated at a rate of discount of 10 percent). Throughout the years, ODA from donors has almost never met the international target of 0.7% of donors' national income 22, equalling only about 0.3% on average in Arab countries have been the most impacted, given that ODA to the Arab world over the period has decreased both in total and per capita terms, though it slightly rebounded starting Net Official Development Assistance (Current US $) Net ODA Received by Arab Countries 35,000,000,000 30,000,000,000 25,000,000,000 20,000,000,000 15,000,000,000 10,000,000,000 5,000,000, Net ODA received per capita (Current US $) Net official development assistance received (current US$) Net ODA received per capita (current US$) Source: World Development Indicators US $ Million ODA to Arab Countries and Non-Arab Countries 300, , , , ,000 50, Arab Countries Non-Arab Countries Source: Calculated from OECD data 22 Integrated Implementation Framework Tracking Support for the MDGs, 16

21 Out of the total ODA, Arab beneficiary countries represented 10.91% in 2012 out of the total ODA disbursed in the world down from 14.45% in Classification Average Net Annual ODA Received by Arab Countries CAGR ( ) US$ bn International Donors 15, % Arab Donors 3, % Kuwait % Saudi Arabia 23 2, % UAE % Development Institutions % All Donors 18, % Source: Calculated from OECD data The above table shows the breakdown by source of ODA received by the Arab world. Despite maintaining the largest share (82% of the total amount of ODA), international donors ODA has decreased by a CAGR of 7.6% annually over the period , gradually replaced by Arab donors whose development assistance increased by 4.01% annually. The main Arab contributors are Saudi Arabia followed by the UAE. Source of Average Net Annual ODA Received by Arab Countries ( ) UAE 3% Arab Development Institutions 2% Kuwait 1% Saudi Arabia 12% International Donors 82% Source: Calculated from OECD data 23 Data used for Saudi Arabia data represents the net ODA for the Middle East which was used as a proxy since no breakdown is available for Arab Countries. 24 Data includes figures disbursed by the Islamic Development Bank 17

22 Official Development Assistance ODA to the Arab World has decreased both in total and per capita terms though it rebounded slightly after the financial crisis. The share of the Arab world in comparison to other countries in total ODA has droppedd and has been partially covered by Arab Donor countries and Arab and Islamic Development Institutions. Suggested Reforms Official Development Assistance Barriers, Constraints and Challenges Opportunities and Action Steps Responsibility Barriers, Constraints and Challenges Opportunities and Action Steps Responsibility Other countries have their national priorities which determine to which countries to direct their ODA. Levels and priority of concessionality should consider least developed countries and lower middle income countries as well as conflict areas. ODA should not be viewed as one directional. The identification of areas/ /sectors of mutual benefit/synergies for both the donor and the receiving country bearing in mind sustainable development goals and aiming at capacity building and know-how transfer is a must. Examples include USAID projects which allow for the mutual benefit of the donor country producers so long as the prices of the products imported do not deviate from the market standard. Recipient countries should demonstrate the efficiency of using ODA and its mutual benefit to the donor country to encourage its continuity. International community, Arab countries and national governments to identify priority sectors to benefit from ODA financing. Political agendas deter Intra-Arab ODA to be a key focus area Arab countries should realize that economic cooperation and sustainable development should be a goal to be pursued as an end in itself, given that income disparities and ethnic divisions have resulted in the destabilization of the whole region and have created a wide direct and indirect impact on adjacent economies. Arab Governments iii. Tax Revenue The size of a country s tax pool and its ability to efficiently collect and administer taxes determines one of the main sources of funding. The International Monetary Fund estimates the tax effort 25 in the Arab Countries in Transition to be much less than 100 percent, confirming the need for reform in the tax administration and collection branches. The estimate is based on comparing the country s tax revenues with a peer average (e.g. countries with similar per capita income) and the maximum tax receipts that other countries with similar characteristics have achieved (called the tax capacity) 26. The 25 Tax effort is an index demonstrating how well a country is doing in terms of tax collection, relative to its potential. How much a country should be collecting is determined by a number of factors, including its stage of economic development, the share of trade and agriculture in economic activity. 26 Toward New Horizons: Arab Economic Transformation and Political Transitions, International Monetary Fund, 2014, 18

23 difference between the collected tax revenues and the tax capacity indicates both the existence of technical inefficiencies in tax collection and administration as well as voluntary policy decisions by the concerned country allowing for tax exemptions, etc. 27 Classification Country Year Tax & Social Contributions/GDP Tax Effort HI Bahrain % 0.06 HI Kuwait % 0.05 HI Oman % 0.2 HI Qatar* NA NA NA HI Saudi Arabia % 0.07 HI United Arab Emirates* NA NA NA UMI Algeria % 0.47 UMI Iraq* NA NA NA UMI Jordan % 0.58 UMI Lebanon % 0.5 UMI Libya % 0.32 UMI Yemen* NA NA NA LMI Egypt % 0.46 LMI Morocco % 0.8 LMI Palestine* NA NA NA LMI Syria* NA NA NA LMI Tunisia % 0.74 LDC Comoros* NA NA NA LDC Djibouti* NA NA NA LDC Mauritania* NA NA NA LDC Somalia* NA NA NA LDC Sudan* NA NA NA Arab World* NA NA NA Middle Income World 24.10% 0.64 High Income - World 34.20% 0.76 World* NA NA NA *Data not Available + Using Truncated Normal Heterogenous in Mean and Decay Inefficiency Source: Ricard Fenochietto and Carola Pessino, Understanding Countries Tax Effort, IMF Working Paper, November Ricardo Fenochietto and Carola Pessino, Understanding Countries Tax Effort, IMF Working Paper, November

24 Tax Effort in Various Arab Countries Bahrain Kuwait Oman Qatar* Saudi Arabia United Arab Emirates* Algeria Iraq* Jordan Lebanon Libya Yemen* Egypt Morocco Palestine* Syria* Tunisia Comoros* Djibouti* Mauritania* Somalia* Sudan* Arab World* Middle Income - World High Income - World World* High Income - Arab Upper Middle Income - Arab Lower Middle Income - Arab Least Developed - Arab It is clear from the above graph that some countries like Morocco and Tunisia have a higher tax effort than other countries including Egypt, Jordan, Lebanon and Algeria. A limitation of the tax effort index is that it groups both the tax rate defficiency in comparison to other countries as well as other inefficincies in tax administration and collection. For example, other high income countries chose voluntarily to apply low tax rate policies. On the other hand, other middle income countries need reform not only with respect to the level of tax applicable but also with respect to tax collection and administration. Some lower middle income Arab countries have increasingly attempted to improve their tax effort including Morocco and Tunisia, while upper middle countries and high income countries have done less in this area. Inefficient tax collection and administration is sometimes a reflection of high illicit cash flows and a large informal sector. The IMF estimates the informal sector to range between 25% and 45% in non-gcc Arab economies 28. For example, in Egypt, experts state that the informal sector accounts for 40% of the economy; in Morocco, the sector is said to account for 44% of GDP 29 ; in Syria before the uprisings, it was measured to absorb 25% of the labour force and in Jordan the informal sector is measured at 20% of the economic activity. Furthermore, studies by informal research groups and UN organizations confirm that the informal sector is expanding all over the Arab region 30. The low incentive to engage in the formal sector is attributed to the perceived imbalance between the high financial burdens of formalization in comparison to the services rendered by the State. Bureaucratic procedures, high tax burdens, restrictive labour laws coupled with the low benefits of operating in the formal economy where in many cases such benefits are constrained to the privileged and well-connected businesses, are the main disincentive. In other words, a perception of low governance and high public corruption are the main reasons for preventing or delaying the decision to join the formal sector. The following table shows the Arab countries Perception Corruption Index as 28 Prescription to reform the World of Arab Business, Financial Times, October 8, Masood Ahmed, Bringing the Informal Sector into the Fold, Posted on November 16, 2011 by imfdirect, 30 Ibrahim Saif, The Bloated Informal Economies in Arab Countries, Al Hayat, February 12, 2013, 20