Key Issues

Middle East and North Africa

This post is also available in: Arabic

International Financial Institutions Active in the Region

Water Scarcity

MENA is the world’s most water-scarce region. At present, 44 million people in the region, most of them living in rural areas, do not have access to clean water. Meanwhile, the combination of population growth and dwindling freshwater resources presents one of the region’s greatest challenges. Experts estimate that per capita water availability – already the world’s lowest – could be cut in half by 2050.

The IFIs have recently stepped up their involvement in the region’s water sector. The World Bank, African Development Bank (AfDB) and European Investment Bank (EIB) together have provided over $2 billion in financing for water and sanitation projects in the last five years alone. The World Bank specifically has identified water management as a key area of its regional strategy, and has indicated that it will continue to pursue greater private sector participation to address shortcomings in the sector.

While water supply and management clearly represent critical issues confronting the region, the Bank’s emphasis on private sector involvement in the ownership and provision of water services has sparked concerns over access to and the affordability of water. Are the Bank’s assumptions that the private sector will prove more successful in delivering quality service accurate, or will the reliance on a cost-recovery model further marginalize the region’s poor?

The scramble for the region’s natural resources

The worldwide scramble for natural resources combined with record high oil prices has centered attention on the fossil fuel-rich MENA region. According to the World Bank, the MENA region sits on 57% of the world’s proven oil reserves and 41% of proven natural gas resources. Meanwhile, an estimated 28 million people in the region still lack access to electricity, and around 8 million depend on biomass to meet their energy needs.

While the IFIs on the whole are still minor players in the region’s lucrative fossil fuel industry, their role is expanding. The International Finance Corporation (IFC), the World Bank’s private sector lending arm, began financing the region’s oil industry in 2004 and has since invested a modest but significant $190 million. The European Investment Bank (EIB), on the other hand, has placed its emphasis on natural gas projects, committing over €1 billion in the last 4 years to ensure greater energy security within the EU.

Although IFI investments represent a small share of the region’s lucrative oil and gas industry, many question whether these institutions should be investing scarce public funds in fossil fuels, particularly in light of their public commitments to combat climate change and the availability of private financing for the sector.

IFIs in a Region Rife with Conflict

The World Bank Group has stated its intent to increase its operations in ‘fragile states’ and post-conflict countries around the globe. MENA is among the world’s most politically unstable regions, with many countries currently suffering or recently emerging from conflict. The Bank and other IFIs are heavily involved in several of the most conflict-stricken countries in the region: Iraq, Lebanon and Palestine. Their engagements vary from supporting humanitarian activities, as in the case of the Palestinian Territories, to promotion of trade, private investment and even privatization of some basic services, as in Lebanon and Iraq.

Increased IFI engagement in conflict and post-conflict settings raises many questions: What are these institutions’ track records in this field? How well placed are IFIs to deliver the type of support and services most needed in the wake of war or civil disturbance? Are governments in fragile states prepared to manage and regulate the private investment encouraged by the IFIs and ensure effective distribution of benefits?  Who stands to gain from privatization and investor-friendly policies in a time of conflict or recovery? Are conflict-affected countries able to compete effectively in the world economy? What impact might donor influence have on state sovereignty, especially in countries emerging from prolonged shocks? Will private investors assist governments in restoring stability? Only close monitoring will reveal answers to these questions.

The three conflicts that are arguably the most severe in the region are each of a different nature. Lebanon is still healing after the Cedar Revolution of March 2005 against the Syrian occupation. The Lebanese government is still shaken by internal conflicts and the country is in need of massive reconstruction. The situation in the West Bank and Gaza is unique. Besides prolonged conflict with Israel, the Palestinian Territories suffer from internal tensions and political fractures. As for Iraq, violence remains at devastatingly high levels. The country is far from stable and the conflict, far from over. Many observers see another Somalia developing in Iraq.

Unemployment

The MENA region has the lowest employment rate of any region in the world. The World Bank estimates that only 47% of the working-age population is actually employed. Unemployment problems are likely to become more severe in the near future, with 40 million additional people expected to enter MENA’s labor force between 2000 and 2010. This demographic trend is a result of the high population growth rates in the 1970s and 1980s. Experts project that the region needs to create approximately 100 million new jobs by 2020 to meet this unemployment challenge. At the same time, the rapid privatization of public assets in the region, encouraged by IFIs like the World Bank, is contributing to job losses in the public sector.

The World Bank considers employment generation to be the greatest challenge facing the region and emphasizes private investment and international trade as the principal strategies to meet this need. However, it remains to be seen whether this reliance on private sector growth will address issues of distributional equity or whether investors will create the 5 million new jobs annually needed to fill the employment gap.