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Subject: Economic Development | Issued in: 2013 | Symbol: E/ESCWA/EDGD/2013/5

Assessing the Financing Gap in the Arab Region

This paper presents the key methodological considerations involved in calculating financing gaps, and then uses the balance of payments constrained growth model to estimate the gap in 2009 for selected Arab countries.

In 2009 the selected countries combined would have needed between 54.5 and 57.9 billion USD to grow at 7 per cent. The results are quite heterogeneous across countries, however. While not all the Arab countries considered had a gap, others, such as Egypt, had large financing deficits.  Taking into consideration the global financial crisis and the popular uprisings that have affected the region since 2010, today these gaps are likely to be much larger.

The paper also discusses some of the policy options that leaders in the Arab region have at their disposal to bridge financing gaps. Political stability, a sound macroeconomic environment and a solid investment climate are the three pillars necessary for development to be financed effectively. Governments should play a very active role in increasing and using Official Development Assistance (ODA) towards achieving reforms in those areas.

At the same time, financial flows are not equally responsive to those conditions; nor do all the countries share similar contexts. The drivers of remittances and portfolio investments seem to go beyond Governments’ direct influence, but this does not mean that Governments have no influence on those financial flows. Remittances and portfolio investments are stimulated by well-functioning financial markets and much can be done to improve the efficiency of financial markets in the region, from promoting higher financial inclusiveness to expanding and promoting depth in the region’s stock markets. Further research is recommended in this direction, so as to explore the sensitivity of financial flows with regards to specific policy interventions.

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