Southern and eastern Mediterranean countries face significant transition challenges, EBRD report says

By Nibal Zgheib

Countries in the southern and eastern Mediterranean (SEMED) region face some significant transition challenges, the EBRD said in its latest annual report, the Transition Report 2012.

This year’s Transition Report for the first time analyses the progress and future challenges on the economic reform front in this new region in which the EBRD is extending its operations.

The EBRD concluded its first investments in Jordan, Morocco and Tunisia in recent weeks and expects to start investing in Egypt shortly. It envisages investments of up to €2.5 billion a year in the four countries by 2015.

The Transition Report, entitled “Integration Across Borders” concludes that the SEMED region is in “mid-transition”, ahead of most Central Asian countries but behind most in central and eastern Europe, and roughly on a par with the Caucasus countries, Kazakhstan and Ukraine.

The analysis points to benefits in these economies that derive from earlier structural reforms. Although these reforms were partly successful in achieving higher growth, unemployment remained chronically high and the benefits of growth were not evenly distributed. (Chapter 1)

It notes that trade and capital flows in the SEMED region have been largely liberalised. However, subsidies for basic foods and fuels tend to be more pervasive, distorting markets and placing heavy burdens on state budgets. At the sector level, power and energy stand out as the least reformed areas. There is more work to be done in all four countries on governance and enterprise restructuring.

The Transition Report indicates that in Egypt a stronger regulatory framework is required to ensure a level playing field for private business. Municipal services in Egypt are in urgent need of investment to provide better access and improved quality. Subsidies constitute more than a quarter of total public spending and distort incentives across most sectors, and should be better targeted.

Jordan is facing reform challenges in improving governance, enhancing competitiveness and developing the private sector. The energy sector also needs major reforms to reduce import dependence and promote renewable sources.

Significant reforms are required in Morocco’s energy, power and natural resource sectors, and tariff reform is needed across the board to improve cost recovery. The Moroccan government has sought to address the issue by increasing fuel prices from June 2012. There are also urgent reform needs in the infrastructure sector, especially at the municipal level.

Tunisia faces systemic risks in the financial sector that have to be addressed. Major balance-sheet restructuring is needed as non-performing loans continue to rise. The infrastructure and transport sectors lack investment and require regulatory reforms. Developing transparent public-private partnership solutions to attract private sector participation will help in this regard.