The Impact of Low Oil Prices and COVID-19 on Arab Economies

The coronavirus pandemic has had a severe social and economic impact on the Arab world. Since March, Arab countries have reported varying degrees of infection that have resulted in lockdowns, hospitalizations, and deaths from COVID-19. By all accounts, addressing the ramifications of the virus will test the capabilities of all Arab states as well as their leaders’ readiness to make the necessary decisions and adjustments. Paramount among these are those related to addressing future economic stability in both oil-rich countries and those relying on labor remittances and services, two important economic activities that have already been impacted and will undoubtedly continue to experience difficulties in the future.

A General Take on Conditions

With very low international oil prices, the effects of the coronavirus on the Arab world will continue into the medium term at the very least, owing to the direct relationship between oil supplies and the international economy. The global demand for oil will remain low as the world’s slow economic recovery responds to the precipitous drop in aggregate production and consumption. In fact, oil producers have recently been forced to reach agreement to cut their production in order to hold the slide in crude prices.

This implies that the potential for an economic recovery throughout the Arab world will be slow. Oil exporters in the Gulf will naturally be negatively affected by low oil prices, which will have undesirable repercussions on many Arab oil importers who, simultaneously, rely on workers’ remittances from the region. This domino effect will be felt regionally as declining oil prices and public health disparities expose the Arab world’s inequities and exacerbate the problems of internally displaced people––such as those in Gaza, Syria, and Yemen––as well as the urban poor in Egypt, Morocco, and Iraq.

The China Syndrome

The global prospects of the continued health crisis and declining oil prices are grim. One of the largest engines of global economic growth is China, which consumes a significant share of the global oil supply. Economic forecasts do not anticipate a quick recovery there in the short term. China’s national data on economic growth figures have been unreliable for a number of years and one can expect the Chinese government to continue to mislead both its public and international audiences about the pace of the country’s economic recovery. Nevertheless, when one examines its electricity usage to pollution levels as proxies for economic growth, it is clear that China is yet to return to normal production levels. This is logical as demand for Chinese production is, and will likely remain, low while much of the world is in lockdown and not consuming goods and services at the pace it once was. Simply put, demand for oil in China will remain tepid in the short to medium term. The resulting impact on the Arab world will be consequential and painful.

One of the largest engines of global economic growth is China, which consumes a significant share of the global oil supply. Economic forecasts do not anticipate a quick recovery there in the short term.

The questions that should be on the minds of policy-makers and global economic analysts are: How much of this economic pain is semi-permanent, exhibiting “economic scarring”? Will the global economy start to re-fire its engine and reboot, once the lockdowns are lifted, or is the fallout of COVID-19 semi-permanent? It is more likely that significant economic restructuring is expected and applied to nearly every business sector. Perhaps the most vulnerable is the small business sector led by entrepreneurs, many of whom have been supported and promoted throughout the Arab world as new engines of economic growth. Sadly, the chances that these small businesses will survive the economic fallout of COVID-19 are quite low. Consequently, there will likely be a collapse leading to business mergers––from retail, to service, to manufacturing––both in the Arab world and the wider global economy. The ramifications of the pandemic will be long lasting.

Seeking Remedies

Undoubtedly, a number of Arab governments will be seeking external financing to cushion the economic blow. Jordan, Tunisia, and Egypt have already approached the International Monetary Fund for assistance. Arab Gulf countries still have relatively good investment ratings and will be able to turn to the international financial market for financing; some Arab Gulf countries may even want to consider issuing and raising domestic bonds. Over the years these countries have built impressive sovereign wealth funds, a fact that may spur public debates in the near future about whether this is the time to tap into such resources, especially if these governments decide to announce tax increases. Nevertheless, options for most Arab countries will be to turn to international financial institutions.          

Not all Arab countries will feel the same pain. Certainly, a number of them have decent levels of foreign exchange reserves which will serve as an important defense against potential economic shocks. However, as fiscal outlays increase from demands for both social welfare and public health spending, these reserve funds will slowly dry up as the coronavirus crisis continues. Many of the Arab oil exporters’ budgets have been based on assumptions of approximately $65 a barrel, which is far from the current $18. Several Arab Gulf countries have been injecting money into their economies to mitigate the crisis and have dispensed relief policies to their public and private sectors. Qatar, Kuwait, Saudi Arabia, and the UAE have been able to provide these stimulus packages, while Bahrain and Oman have less fiscal space to inject money into their systems and may be more vulnerable to economic shocks. Other than the oil exporters, the remaining countries of the Arab world will be negatively impacted by the economic depression that will ensue. Lebanon was in economic distress before the COVID-19 crisis and its situation is dire as the banking system is on the verge of collapse.

If prices continue to be low, countries may choose to keep oil reserves in the ground and not extract them. Consequently, there is a potential slowdown in state income receipts. 

Moreover, oil production costs in Arab countries vary and some countries will face greater hardship than others. In a country like Iraq the cost of production can be as low $5 a barrel whereas in parts of Saudi Arabia, it may be as low as $3 a barrel; however, in Algeria costs are $22.50. If prices continue to be low, countries may choose to keep oil reserves in the ground and not extract them. Consequently, there is a potential slowdown in state income receipts. At present there is inertia in oil production, where oil rigs will putter along and continue to flow at a slower pace, but many oil exporters may opt to decrease production significantly as international prices continue to plummet and oversupply ripples throughout the markets.

Impact on Other Economic Activities

Beyond oil, several Arab countries have worked to diversify their economies and have ventured into tourism and travel, the airline industry, logistics hubs, media production, and food manufacturing. It will be difficult to see a near-term recovery in these sectors. For example, the logistics sector is confronting the standstill in global trade and its consequences for UAE and Qatari ports or on the nascent Omani ports. As many of these port industries rely on moving goods between Asia and China and into Europe, Africa, or other parts of the Middle East, it is likely that this sector will be hit hard.

Moreover, one should not expect large sporting events in which Gulf countries have invested to resume for many years to come. The 2020 World Fair in Dubai (Expo 2020) and the 2022 World Cup in Qatar may not be able to meet the revenue targets on which these countries had set their hopes. The travel and tourism industry will have a slow recovery trajectory. Even if modest travel resumes, the psychological impact of the coronavirus on travelers is such that many individuals will remain uncomfortable sitting in stadiums and arenas among thousands of people, let alone simply getting on a plane without having had a vaccination against the virus. In fact, vaccine production and readiness is at minimum a year, if not more, away. That means there is no short-term fix to a recovery in the travel and tourism industry from which a number of Arab countries have benefited, such as the United Arab Emirates, Egypt, Lebanon, Jordan, and Morocco. Indeed, these countries will likely suffer from declining tourism receipts. Saudi Arabia also receives income from the annual hajj pilgrimage; while the 2020 Ramadan umrah has already been cancelled, the prospects of the 2020 hajj returning are very low.

Certain oil-importing Arab countries like Jordan, Egypt, and Lebanon will also feel the economic pain of declining oil prices as they rely greatly on workers’ remittances from the Arab Gulf. Consider the fact that more than 2.5 million Egyptians work in Saudi Arabia. Many are day laborers or work in the construction industry and their remittances are the main source of their families’ incomes in Egypt. They will be without wages in the short to medium term. Moreover, one-fifth of Lebanon’s GDP comes from Lebanese working in the Gulf. In 2015, as many as 400,000 Lebanese expatriates contributed between 43 and 60 of total remittances into Lebanon. As they face work shortages, these workers’ dwindling ability to remit money home will exacerbate an already crumbling Lebanese financial sector. Moreover, as the Gulf economic crisis continues, some Arab Gulf countries may also revert to nationalizing their workforces and increase quotas for nationals in the private sector, where many Arab expatriate workers currently occupy mid-management positions.

Vaccine production and readiness is at minimum a year, if not more, away. That means there is no short-term fix to a recovery in the travel and tourism industry from which a number of Arab countries have benefited.

In oil-importing Arab states, there is an added challenge: many Arab countries have a burgeoning informal economy that is often comprised of day laborers. Some estimates in Egypt show that the informal economy accounts for nearly 50 percent of GDP and perhaps for 60 percent of total employment. This implies that at a critical point—likely by early summer in places like Egypt, where the informal economy is large and highly dependent on day laborers— individuals will have to make the choice between going to work to afford buying food or abiding by the stay-at-home orders to quarantine. Unfortunately, the need to assure survival will mean that those day laborers are highly unlikely to abide by home isolation orders. The state will either respond with repression or it will allow them to work, thus obviating public protests.

Additionally, these vulnerable individuals live in highly dense environments. What happens when day laborers return to their slums and squalid conditions of ten people to a room, often composed of multi-generational households where elders live in the same home? These are all ripe conditions for the coronavirus to spread throughout dense Arab urban societies. Such realities will precipitate social, political, and economic unraveling throughout the region, which will be further exacerbated by the low level of trust in Arab governments and in public authority. State repression is not out of the question. To be sure, Arab citizens may not believe their governments’ public health directives and will be compelled to go out and work for sheer economic survival.

Another challenge facing Arab countries is their overall fiscal mix. Most have very shallow tax bases; other than resorting to value-added taxes levied on consumption of goods and services, for many of them there is relatively less government revenue coming from corporate or income taxes. The demise of public consumption throughout the Arab countries means that governments will also have less tax revenue and hence diminished fiscal space to deal with increased fiscal outlays that will be demanded by the people. Few Arab countries have strong social safety nets put in place and this will make recovery more difficult. Public health infrastructure throughout much of the oil-importing Arab states is weak, to say the least. While Arab elites certainly have better access to health care in most Arab states—and in some cases, particularly in the Gulf, care is relatively fair to good—the reality is that most Arabs do not have reliable access to good health care. As the virus overtakes Arab countries, the inequality of health care access will be further revealed.

As the virus overtakes Arab countries, the inequality of health care access will be further revealed.

Such inequities will be most exposed in the squalid living conditions of millions of guest workers in the Gulf. Their situation is rarely discussed outside the reports of Amnesty International and other human rights organizations, but this is another segment of society where the conditions for the spread of the virus will be ripe and dire. Guest workers in the Gulf tend to have lower baseline health; they are stuck in tight quarters with many individuals, mostly men, crammed into single rooms and exposed to COVID-19 outbreaks. The problem might get very difficult to manage. Moreover, there is systemic racism and discrimination against those communities, which means they will fall between the cracks.

Not Much of a Silver Lining

The oil price collapse and the COVID-19 public health crisis are a dual blow to the economic well-being of the Arab region. No country will be spared, though some will be better able to withstand the decline in income. There is little doubt that oil-importing Arab states will feel the crunch most negatively, so the need for external financial assistance will be important for many countries. Unfortunately, however, the global liquidity crisis may crest sooner rather than later and we have already seen an unprecedented number of countries seeking international financial support.

Bessma Momani is Assistant Vice-President of International Relations (2020) and Professor at the University of Waterloo. She is also Senior Fellow at the Centre for International Governance Innovation and non-resident at the Arab Gulf States Institute in Washington, DC.