Arab Spring countries suffer a financial hangover

The turmoil following the Arab Spring uprisings has all but decimated the affected countries’ economies. Political assassinations and polarization in Tunisia, civil unrest and a military coup in Egypt, terrorist attacks in Yemen, an institutional vacuum in Libya, and civil war in Syria have contributed to a sharp fall in investment, tourism, exports, and GDP growth, aggravating macroeconomic imbalances. For example, Egypt’s fiscal deficit now stands at 14 percent of GDP, with public debt approaching 100 percent of GDP.

Worse, most of the Arab Spring countries lack buffers to withstand further economic shocks. But such shocks are likely, given that, beyond the removal of individual autocratic leaders, few of the problems that fueled the uprisings have been addressed.

Indeed, unemployment is higher today than in 2010. Untargeted fuel subsidies and the public-sector wage bill have increased, crowding out much-needed public investment and relief to poor families, while impeding the development of a dynamic and competitive private sector and limiting new firms’ access to finance. Meanwhile, public-service delivery has deteriorated.

Moreover, the political situation remains unsettled, with transitional or interim governments, unfinished constitutions, and uncertain timetables for future elections. In short, the Arab world’s transition countries are much more vulnerable today than they were at the height of the protests in 2011.

Against this background, an external shock could bring these fragile economies to a sudden stop, leading to devastating poverty and hardship. And imbalance-correcting policies — such as sharp tax increases, spending cuts, or currency devaluation — could backfire, fueling political unrest, delaying elections further, and exacerbating the very imbalances that they were meant to rectify.