REGIONAL MARKET ANALYSIS - Economic Trends across RBC Region H1 2021 Update
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REGIONAL MARKET ANALYSIS Economic Trends across RBC Region H1 2021 Update WFP/Deniz Akkus Issue #9 - July 2021 1
HIGHLIGHTS
The economic cost of the pandemic was observed in all economies of the RBC
region, yet, for different reasons and with different magnitudes. Most countries
in the region experienced twin shocks – that is the fallout of COVID-19 (implying
increased health and public expenditure to adjust social protection schemes)
and:
• Significant reduction in revenues following a global decline in oil demand
and reduced prices, which led to a large burden on government finances in
Algeria, Libya, Iraq, Iran
• Increased military expenditure and post-conflict costs, which contributed to
widen already existing deficits in Armenia and State of Palestine
• Devaluation of local currencies and widened central debt had different
impacts on general price level in Lebanon, Iraq, Libya
• Significant decline in revenues due to weakened vital sectors of the economy
such as tourism, which affected Egypt, Jordan, Lebanon, Tunisia, Turkey.
Most countries in the RBC region are heavily dependent on imports to meet
internal demand for food. This coupled with rising food prices at the global
level, led to an increase in general price level in nearly half countries in the
RBC region. As imported components of the food basket became more
expensive, the cost of the food basket went up, mainly in Syria, Lebanon, Iraq,
and Yemen – reporting the highest increase in the cost of food basket in the
first half of 2021 (H1 2021)1 compared with the second half of 2020 (H2 2020).
WFP/Mohammed Awadh
These countries have seen a depreciation of local currencies that has passed
through increasingly higher prices of imported commodities.
As a result of unprecedented economic crises in Lebanon and Syria, partial
removal of subsidies is already in place. Scenarios were designed on the
potential effect of gradual or full removal of subsidies on the price of subsidized
bread and wheat flour covering the timespan January-December 2021.
2
TABLE OF CONTENTS
Contents
Highlights ............................................................................................................................................................... 2
Table of contents .................................................................................................................................................. 3
I. Prices and exchange rates ...................................................................................................................... 4
a. Inflation rates ............................................................................................................................................... 4
b. Variation in the Cost of the Food Basket .................................................................................................. 5
c. Regional Comparison for the Cost of Food Basket ................................................................................. 7
d. Currency fluctuations .................................................................................................................................. 8
e. Transfer values ............................................................................................................................................. 9
II. Key macroeconomic indicators .............................................................................................................. 11
a. Gross Domestic Product (GDP) .................................................................................................................. 11
b. Trade .............................................................................................................................................................. 12
c. Remittances .................................................................................................................................................. 14
d. Government Debt ........................................................................................................................................ 17
e. Unemployment ............................................................................................................................................ 18
III. Case study 1: The impact of currency devaluation (Libya vs. Iraq) .............................................. 19
IV. Case study 2: Potential Removal of Bread Subsidies – Lebanon and Syria ................................ 22
V. Monetary Poverty and Unmet Needs .................................................................................................. 23
3
I. PRICES AND EXCHANGE RATES
a. Inflation rates
Nearly half countries in the RBC region experienced price pressures, yet, at different scales.
In terms of inflation rates, Lebanon followed by Iran and Turkey recorded the highest
annual inflation rates at 101, 48, and 18 percent, respectively in June 20212. The annual
increase in food price index was even more pronounced at a rate of 222, 63, and 20 per-
cent respectively. Drivers for increased inflationary pressure vary across countries. The
financial crisis that began in October 2019 compound with alarming debts and continuous
currency depreciation suffocated the Lebanese economy, affecting general price level. In
Iran, fallout of COVID-19, restricted access to foreign reserves due to U.S. sanctions and
declining income from the oil sector – one of the main income sources for the government
– heightened inflation rates from 23 percent in June 2020 to 48 percent in June 2021. The
sharp depreciation of the Turkish Lira coupled with high exchange rate pass-through,
credit-driven boost to domestic demand, supply constraints, and rising international com-
modity prices exerted pressure on producer and consumer prices. The inflation rate (18
percent in June 2021) deviates significantly from the one-digit target (5 percent)3.
Table 1: Total and food inflation rates in June 2021
Total inflation rate Food inflation rate
Armenia 6.50% 8.80%
Egypt 4.90% 3.30%
Iran 48% 62.70%
Jordan 1.77% -0.30%
Lebanon 101% 221.80%
Palestine 3.25% 2.13%
WFP/Deniz Akkus
Tunisia 5% 6%
Turkey 17.53% 19.99%
Source:Central banks and/or statistical bureaus
4
In terms of estimated inflation for the year 2021, inflationary pressures are expected to persist at a regional average of 13.9 percent – slight-
ly higher than 2020 level and double the pre-pandemic rates in 2019. The regional average is mainly led by the three above-mentioned coun-
tries recording the highest inflation rates – that is Lebanon (80 percent), Iran (29.3 percent) and Turkey (15.5 percent)4.
Table 2: Annual inflation rates 2019-2021
Country 2019 2020 2021
Algeria 2.3 2.1 3.9
Armenia 1.4 1.2 3.5
Egypt 13.9 5.7 5.3
Iran 41.3 36.9 29.3
Iraq -0.2 0.66 8.5
Jordan 0.8 0.3 1.5
Lebanon 2.9 84.3 80
Libya -3 -2 12
Morocco 0.2 0.7 1.1
Palestine 1.58 -0.7 0.7
Tunisia 6.7 5.6 5.8
Turkey 15.2 12.3 15.5
RBC Average 6.9 12.3 13.9
Source: World Bank, April 2021 outlook and National Bureau of Statistics
b. Variation in the Cost of the Food Basket
The cost of food basket can be used a proxy to estimate food inflation rates5. Syria, Lebanon, Iraq, and Yemen reported the highest increase
in the cost of food basket in H1 2021 compared with H2 2020. These countries also recorded the highest increase when comparing H1 2021
with H1 2020. It is worth mentioning that Turkey also recorded an alarming 17 percent increase for the same reference period.
5
Table 3: Food basket cost in LCU and food basket variations6
H1 2021 H1 2021/H2 2020 H1 2021/H1 2020
Armenia 12,435 6% 12%
Egypt 223 7% 4%
Iraq 23,744 14% 15%
Jordan 20 1% 0%
Lebanon 198,010 63% 163%
Libya 124 2% -1%
Palestine 27 2% 3%
Syria 31,303 70% 200%
Turkey 243 8% 17%
Yemen 7,071 17% 37%
Source: WFP COs
Hyperinflation in Syria is linked to the Lebanese financial crisis that trickled down to the Syrian economy through the withhold of hard cur-
rency Syrians deposited in Lebanese banks, which led to a shortfall of hard currency in the country and a sharp depreciation of the Syrian
Pound (SYP). Furthermore, fuel shortage is a key and a persistent challenge, which is indirectly pushing food prices up.
The Government of Iraq (GoI) decided to devaluate the local currency in late December 2020, which resulted into an increase in the cost of
food basket (up 15 percent in June 2021 compared with November 2020 – the month prior to currency devaluation).
The ongoing conflict compounded with currency devaluation and the surge in global prices of key food commodities7 kept pressuring prices
in Yemen, the country that is highly dependent on food imports with more than 90 percent import dependency8. The cost of the food basket
in H1 2021 increased by 37 percent compared with H1 2020. The food basket cost in International Recognized Government areas (IRG) is
pushing the national average up through a 58 percent increase in H1 2021 compared with H1 2020. Nevertheless, Sanaa’-based authorities
reported 19 percent increase during the same time interval.
6
c. Regional Comparison for the Cost of Food Basket9
A comparison for the food basket cost in the region is feasible by converting the cost of food basket from local currency units into USD. In the
below analysis, we controlled first for the exchange rate fluctuations by applying official rates10. To understand how much the cost would
change by applying different rates of conversion the same analysis was repeated for countries where parallel exchange rates exist (i.e. Libya,
Syria, and Yemen).
Due to the huge gap between official and parallel rates (LBP 1,505.7/USD11 against 14,600/USD in June 2021), Lebanon recorded the most
expensive food basket cost, higher than the regional average by 228 percent. Apart from Lebanon, the cost in other countries of the region
are comparable; yet, the food basket cost in Palestine, Iraq, and Egypt are particularly cheap (USD 8.4, USD 16.3, and USD 14.2, respectively).
Table 4: Cost of the food basket cost in USD (official vs. parallel rates)12
Cost of the food basket in H1 2021 Cost of the food basket in H1 2021
(in USD using parallel rates) (in USD using official rates)
Armenia 23.7 23.7
Egypt 14.2 14.2
Iraq 16.2 16.3
Jordan 28.7 28.7
Lebanon 17.2 131.3
Libya 24.2 28.1
Palestine 8.4 8.4
Syria 9.5 33.7
Turkey 30.9 30.9
Yemen 9.6 28.3
RBC average 18.2 34.3
Source: WFP COs
The scenario changes when applying parallel exchange rates, as the cost of the food basket for Lebanon, Syria and Yemen becomes less ex-
pensive (-87, -72 and -66 percent lower than the cost using official rates, respectively), pushing down the RBC average cost at USD 18.2.
Turkey followed by Jordan, Libya, and Armenia recorded the most expensive food basket in USD – higher than the RBC average by 69, 57, 32
and 30 percent, respectively. The cost in Yemen is particularly cheap for the high rate at which 1 USD is exchanged (1 USD = 763, as of June
2021).
7
d. Currency fluctuations
Currency fluctuations can lead to price pressures, especially in countries that heavily depend on imports to meet domestic demand. Curren-
cy depreciation is passed through higher prices of imported items that are eventually part of the food basket. Syria and Lebanon, the two
countries witnessing the highest increase in the cost of food basket in H1 2021, reported the sharpest currency depreciation in H1 2021 com-
pared with either H1 2020 or H2 2020.
Table 5: Depreciation rate of local currencies to the USD
Country H1 2021 H1 2021/H2 2020 H1 2021/H1 2020
Algeria 133.1 -3% -7%
Armenia 523.9 -7% -8%
Egypt 15.7 1% 1%
Iran 243,000.0 6% -34%
Iraq 1,463.7 -18% -19%
Jordan 0.7 0% 0%
Lebanon 11,500.6 -32% -71%
Libya 5.1 19% -1%
Palestine 3.3 3% 7%
Syria 3,280.0 -27% -56%
Tunisia 2.7 1% 5%
Turkey 7.9 -4% -18%
Yemen 736.0 -5% -15%
Source: WFP CO, government sources, FXtop
Both Lebanon and Syria, heavy rely on imports to cover domestic demand as import dependency ratio13 (indicating the extent to which a
country›s supply of commodities comes from imports) for most consumed items is no less than 100. Vegetable oil and sugar, two imported
components of the food basket in both countries, recorded exceptionally price increases.
8Table 6: Price variations and import dependency of some commodities in Lebanon and Syria
Lebanon Syria
Commodity Price variation Import Price variation Import
(H1 2021/H1 dependency (H1 2021/H1 dependency
2020) ratio 2020) ratio
Vegetable oil 386% 102 310% 100
Sugar 239% 135 170% 100
Source: FAO STAT, WFP field monitoring
It is also worth mentioning that fuel, a key imported item both in Syria and Lebanon, adds
a further strain to final prices paid by consumers, whether the commodity is imported or
locally produced. In Yemen, IRG area witnessed a sharp currency depreciation of 24 per-
cent in H1 2021 against H1 2020, while the exchange rate in Sanaa’-based authorities
remained almost the same with a minor 0.2 percent increase.
e. Transfer values
In this section the average cost of the food basket in H12021 for each country in the region
is compared against the transfer value WFP beneficiaries receive for food needs1516. This
analysis is not conceived as gap analysis, rather it is meant to understand how purchasing
power of households is eroded by fluctuations in prices (reflected in the cost of the food
basket) and how much the value of assistance received helps beneficiaries to meet their
food needs.
In countries experiencing a severe depreciation of their currency or high inflation rates,
the average cost of the food basket is found to be higher than the transfer values (103
percent in Turkey, 98 percent in Lebanon, 70 percent in Libya, and 40 percent in Syria1718).
WFP/Berna Cetin
For other countries such as Iraq, the cost of food needs are well covered by transfer values;
in Armenia, Egypt, and State of Palestine or the average cost of the food basket is even
lower than the transfer value, suggesting a stronger purchasing power for households
located in these countries.
9WFP/Shaza Moghraby Table 7: Food basket cost and transfer values in LCU in H1 202119 Country FB cost in LCU in H1 2021 (Food) transfer value in LCU FB cost/Transfer value Armenia 12,256 16,924 0.72 Egypt 223 400 0.56 Iraq 23,744 24,000 0.99 Jordan 20 23 0.89 Lebanon 198,010 100,000 1.98 Libya 124 73 1.70 Palestine 27 35 0.78 Syria 31,303 22,287 1.40 Turkey 243 120 2.03 Yemen 7,071 7,000 1.01 In countries going through hyperinflation and currency devaluations, diversification of assistance modalities or revision of transfer values might be considered as the political context also plays a role – e.g. some governments impose caps on the transfer values, especially for non-nationals. In a nutshell, continuous monitoring of the adopted assistance modality and levels are key to ensure addressing the needs of the vulnerable, especially the neediest. 10
II. KEY MACROECONOMIC INDICATORS a. Gross Domestic Product (GDP) Uncertainties around the duration of the health and economic crisis point to a slow economic recovery for 2021 and 2022. Yet, after having recorded negative growth in 2020 – except for Egypt (up 3 percent) and Turkey (up 1 percent)20 –, almost all economies in the region are ex- pected to rebound and record positive rate of growth in 2021, mainly Libya21 (up 67 percent), Tunisia (up 6 percent) and Turkey (up 5 percent). Despite an increase compared to 2020 level (-19 percent), Lebanon is the only country in the region that is seen to record negative GDP in 2021 (-13 percent) due to uncertainties around socio-political stability, severe depreciation of the Lira and related hyperinflation and fallouts of COVID-19 – which are likely to persist throughout 2021. Prospects for Algeria, Iraq and Libya are subject to the revenues from the hydrocarbon and oil market, which have already recorded an increase in global demand that, in turn, pushed production, exports and prices up – although lower than pre-pandemic level of 2019. Reforms implemented to boost domestic consumption (e.g. increase in public sector employees’ salary and minimum wage, implementation of social security net programs) coupled with higher volume of exports to meet the demand in the U.S. and Gulf countries are expected to result into GDP recovery in Jordan in 2021 (up 2 percent). The recent conflict in Gaza is expected to further disrupt the economic activity, glooming the outlook for State of Palestine, whose economic growth was projected to increase by 2 percent this year before the events of May. Destruction of factories, shops and farming assets coupled with restriction of movements of goods to and from the Gaza Strip since the es- calation of conflict are expected to result into losses of productive and economic assets, which, in turn, will contain the economic returns from all sectors and eventually affect growth22. Despite recovery is subject to the characteristics of each economy, the extent of the rebound remains linked to the roll out of the vaccination campaign both domestically and abroad. In addition, the spread of new variants of the virus could limit the ease of containment measures, depress demand for international travel and contain global demand of oil and hydrocarbon products, which will eventually subdue econom- ic recovery. Economic growth of Egypt, Jordan and Turkey might be affected by the above-mentioned risk factors as these countries are still experienc- ing severe drops in revenues from tourism (-25.6, -78 and -40.2 percent between Q1 2021 and Q1 2020, respectively)23; Lebanon, Tunisia24 are also expected to be exposed to similar risks. 11
Figure 1: GDP rate of growth, 2020-2022
67%
4% 3% 3% 2% 2% 2% 4% 2% 6% 5% 7%
-13%
RBC
Algeria Armenia Egypt Iraq Iran Jordan Lebanon Libya Morocco Palestine Tunisia Turkey Yemen Average
2020 2021 2022 Source: World Bank Macro Poverty Outlook, April 2021. No data available for Syria. For Yemen, data is available in 2020 only.
b. Trade
Compared to 2020, the volume of trade is expected to increase in 2021, however the rebound will be subject to pandemic-related factors such
as adequate production and distribution of vaccines, or the emergence of new variants of the virus. In addition, fiscal deficit and public debt
are also expected to affect trade, mainly, in highly indebted countries.
The latest data25 released by the World Trade Organization, show a decline in the volume of both imports and exports in the first quarter of
2021 (Q1 2021) against the same period in 2020 (Q1 2020), as in Q1 2020 trade relations had not been significantly affected by the pandemic.
Despite the ease of measurement to contain the spread of the virus, the fallout is still visible in 2021.
Countries where natural resources account for the highest share of exports recorded the highest drops as restrictions on movements and
travel ban to contain the pandemic led to a sharp decline in international global demand for hydrocarbon products and oil. Lebanon – where
gold, jewelry account for 26.5 and 11.2 percent of total exports26 – recorded the most severe decline (-35 percent), followed by Algeria (-29
percent) and Iran (-23 percent), where crude petroleum takes the lion share among exported goods (41.7 and 49.4 percent, respectively)27.
12Figure 2: Merchandise export volume indices*
Armenia – that mainly exports copper ore (26 percent) and gold
300 (13.2 percent)28 – also recorded a decline in exports, however less
11% severe than the previously mentioned countries as exports of this
250
country are more diversified.
-13%
Exports Volume
200
-5% Following the removal of trade bans2930, Turkey – whose exports
-5% are more diversified and whose largest share mainly consist of
150 -12%
-35% 3% manufactured goods such as vehicles and their parts (14.6 percent
100 of total exports) and machinery and appliances (10 percent) – has
-23%
-29% recorded a positive trend in both volume and value of exports,
50
starting from the last quarter of 2020. The positive trend has con-
0 tinued in 2021, with an 11 percent increase in the volume of ex-
Algeria Armenia Egypt Iran Jordan Lebanon Tunisia Turkey Average ports in Q1 compared to the same period in 2020.
2020 2021 Source: WTO *
Not seasonally adjusted- quartely (2005Q1 = 100)
The fallout of the pandemic also affected imports, which recorded an Figure 3: Merchandise imports volume indices*
average 9 percent decline that was, however less severe than the de-
cline in exports (-12 percent). The volume of imports between Q1 2020 250
-17% 0%
and Q1 2021 was stable in Egypt, Jordan, Tunisia, and Turkey; whilst 0%
200
Imports Volume
Iran, Algeria, Armenia, and Lebanon saw a pronounced decline (down
2% -9%
27, 18,17, 12 percent, respectively). Iran and Lebanon have been af- 150 -18% -3%
fected by extremely high hyperinflation, reducing demand for import- -27% -12%
100
ed goods – as their price would be higher than that of the same com-
modities locally produced. Despite the containment of inflation, Algeria 50
and Armenia saw a decline in private consumption and investment as
0
the economy contracted due to the fallout of COVID-19 on other sectors
Algeria Armenia Egypt Iran Jordan Lebanon Tunisia Turkey Average
of the economy and the job market, which, eventually resulted into a
fall in the demand of imported, more expensive goods. 2020 2021 Source: WTO *
Not seasonally adjusted- quartely (2005Q1 = 100)
13c. Remittances
Remittances play a big role in most economies of the RBC region31. Lebanon followed by State of Palestine, Yemen, Armenia, Jordan, and Egypt
rely heavily on remittances ranging from 8.2 percent of GDP up to 18.9 percent in 2020 – a way higher than the world average at 0.8 percent
of GDP. In terms of absolute values, Egypt is the highest recipient of remittance inflows with an estimated record of USD 29.6 billion, followed
by Lebanon (USD 6.3 billion).
Figure 4: Remittances inflow as % of GDP, 2020
World avg 0.8
RBC avg 7.9
Turkey 0.1
Iraq 0.4
Iran 0.7
Algeria 1.2
Tunisia 5.4
Egypt 8.2
Jordan 8.9
Armenia 10.5
Yemen 16.5
Palestine 17
Lebanon 18.9
Source: World Bank, WDI. Latest data available for Yemen dates to 2019. No data for Syria and Libya.
14Figure 5: Estimated remittance inflows (USD billions), 2020
RBC avg
Iraq
Turkey
Armenia
Iran
Syria
Algeria
Tunisia
Palestine
Yemen
Jordan
Lebanon
Egypt
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000
Source: World Bank Migration and Remittances data. No data for Libya.
Remittance inflows decreased because of the pandemic; yet, the reduction in inflows was less severe than what was initially estimated32.
In the RBC region, remittance inflows declined by 5 percent in 2020 compared with 2019 level33, with Iraq, Lebanon, Armenia, and Jordan
recording double-digit decline in remittance inflows.
Egypt – the largest recipient of remittances inflow in the RBC region – witnessed an annual increase by 11 percent in 2020, which reduced the
overall decrease rate of remittance inflows in the RBC region at an average of -6 percent.
The increase in inflows in Egypt can be explained by I) the increased number of expatriated Egyptians who could not afford the costs of living
abroad during the pandemic and decided to send their families back home – herby transferring money to them; II) inflow of bulk savings as
they were planning to move to their home country following job losses abroad34.
15WFP
Figure 6: Annual variation in remittance inflows, 2020 vs 2019 (%)
11%
2%
0% 0%
-2% -2%
-6% -6%
-7%
-8%
-11%
-13%
-15%
-17%
Egypt Tunisia Yemen Iran Turkey Algeria Palestine Syrian Jordan Armenia Lebanon Iraq RBC avg World
Source: World Bank Migration and Remittances data. No data for Libya.
16d. Government Debt
Despite a rebound foreseen for 2021, the size of the debt (as percentage of GDP) for almost all economies in the region is expected to remain
high and either increase or stay stable at 2020 level. Exceptionally high level of debts is explained by years of deficit, limited and non-diversi-
fied government income sources or limited production/trade role in the global economy. Other factors contributing to the increase in the size
of central debt are policies governments implemented to alleviate pressure on their citizens which, however, reduced public revenues, such
as deferred tax payments, temporarily reduction in social security contributions or consumption tax rates.
Demand for oil significantly fell amid the pandemic and was reflected in a notable decline in global oil prices. Accordingly, countries that are
heavily dependent on oil exports as main source of income were hit the hardest reflected in a jump in their debt levels between 2019 and
2020. Government debt in Iraq jumped from 48 percent in 2019 up to 61 percent in 2020, however, is seen to record reduction of its debt in
2021 (61 percent) with the recovery in global oil prices and the expected increase in revenues from the oil sector.
Lebanon, Jordan, and Tunisia are the countries with the highest level of indebtedness in the region (181, 114 and 90 percent of GDP against
77 percent regional average).
Figure 7: Debt as percentage of GDP, 2019-2023
200%
181%
160%
114%
120%
91%
71% 77%
80%
61%
56% 52%
41%
40%
26%
0%
Algeria Armenia Iran Iraq Jordan Lebanon Palestine Tunisia Turkey RBC avg
2019 2020 2021 2022 2023 Source: World Bank Macro Poverty Outlook, April 2021. No data available for Egypt, Libya, Syria, Yemen.
17e. Unemployment35
Despite economic activity is now resuming, the resurgence in COVID-19
cases and the threat of new variants are clouding the outlook from the
perspective of employment across the entire region, whose labor markets
were characterized by already high pre-pandemic unemployment rates and
pervasive presence of informal jobs and self-employed workers (e.g. Iraq,
Jordan). Somewhat mitigation measures implemented by national
governments in these two countries and the relatively short duration of
pandemic-related restrictions prevented an even greater increase in
unemployment. However, the unemployment rates remain high (13.8
percent in 2020 for Iraq and 25 percent for Jordan in the first quarter of
2021). Both rates are well above 2019, pre-pandemic level (12.8 percent for
Iraq and 19.3 percent for Jordan).
Compared to Q1 2020, unemployment rate in Armenia decreased in Q1
2021, passing from 19.8 to 16 percent. In Egypt, unemployment rate
rebounded, however remain high at 7.4 percent. This can be attributed to
the fallout of COVID-19, affecting sectors that are yet to recover and still
impacted by travel restrictions and other containment measures disruption
supply chains and trade relations (e.g. tourism, manufacturing, Suez Canal,
oil sector). A similar situation can be observed in Tunisia, where unemployment
rate reached 17.8 percent. In Iran, the preponderant role of public sector
keeps on hampering job creation and capital formation by the private sector.
This coupled with fallout of COVID-19, pushed unemployment rate to 9.5
percent in Q3 2020, with even higher rate among youth (23.1 percent).
The situation is particularly worrisome in State of Palestine, where more
than 120,000 workers employed in tourism, restaurants, and construction
WFP/Hani Mohammed
sectors lost their job the during the peak of the pandemic sectors due to
the implementation of containment measures36. Despite some 50,000 people
regaining their jobs and the unemployment rate reached 27.8 percent in
Q1 2021, the outlook is gloomy following the recent conflict and related
additional losses37.
18III. CASE STUDY 1: THE IMPACT OF CURRENCY DEVALUATION (LIBYA VS. IRAQ)
Most economies in the Middle East and North Africa peg their currencies to control inflation and/or attract investment by reducing the risk
of currency fluctuations. However, sustainability of this currency peg is subject to economic and political stability, fiscal balance, and the abil-
ity to maintain good level of foreign reserves. Governments that are going through economic downturns, having structural fiscal and current
account deficits, and dwindling foreign exchange reserves are very unlikely to sustain a pegged rate. In this section, we analyze reasons behind
currency devaluation and impact of such devaluation on prices in two countries that are very similar in terms of economic structure: Libya
and Iraq. Both countries have similar political and economic conditions, political instability, and poorly diversified and vulnerable economies
with heavy reliance on the oil sector. Furthermore, the two countries applied a currency peg to the USD for almost 17 years before the central
banks of both countries announced a devaluation of the local currency (down 70 percent since January 2021 in Libya and down 20 percent
since December 2020 in Iraq).
The main reason behind such decision was linked to economic slumps reflected in negative GDP growth rates, alarming budget and external
deficits, and declining gross international reserves. The economic deterioration38 was linked to the pandemic and an associated decline in
global demand for oil and related decline in global oil prices. As a result, the two countries reported twin deficits in 2020 and were forced to
devalue their currencies. Nevertheless, currency devaluation combined with a recovery in global oil prices are estimated to narrow deficits in
both countries in 2021.
Table 8: Libya and Iraq - Evolution of key Macroeconomic Indicators
Libya Iraq
2019 2020 2021 2019 2020 2021
Oil revenues (USD billions) 25.5 5.4 26.8 108.7 61.4 91.6
GDP growth rates 2.5% -31.3% 66.7% 2.4% -11.9% 1.9%
Budget deficit (% of GDP) 1.7% -64.4% -9% 1.4% -4.4% -5.4%
Current Account balance (as % of GDP) 11.6% -46.4% -6.2% 6.1% -12.9% -11.3%
Gross official reserves (USD billions) 73.4 51 51 68 54.1 52.5
Source: World Bank economic updates, April 2021 (Libya, Iraq), IMF, OPEC. Note: oil revenues are calculated by multiplying
average daily production by average prices in a respective year, then multiplying by 365 days to get yearly revenues.
19Despite similarities in terms of the underlying reasons forcing the two governments to depreciate their currencies, the impact of such deval-
uation on prices was not identical. The cost of food basket increased by 15 percent in June 2021 against November 2020 (the month prior to
currency devaluation) in Iraq, while there was no change in Libya 2021 against December 2020 (the month prior to currency devaluation) in
Libya.
The main reason behind such discrepancies is related to the existence of different exchange rates in Libya, which was not the case for Iraq.
Dual or multiple exchange rates are source of market distortions, let alone currency hedging, resulting in inflationary pressures. The rates
applied in Libya prior to the devaluation were I) the official rate of LYD 1.34/USD, II) the post-tax official rate39 at LYD 3.5/USD, and III) the par-
allel rate (LYD 5.8/USD). Together with the decision to devalue the Libyan Dinar, the central bank removed the post-tax official rate. Moreover,
the devaluation significantly reduced the gap between the official and parallel rates, with the Libyan dinar in the parallel market appreciating
from LYD 5.8/USD in December 2020 to LYD 5/USD in June 2021. Therefore, the currency devaluation was a pro for Libya reflected in less
market distortions through the narrowed gap between the official and parallel rate and the lifting of post-tax rate.
Figure 8: Exchange rates in Libya (USD/LYD)
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21
Parallel exchnage rate Official exchange rate Source: WFP field monitoring
20Developments in the oil sector (in terms of production and prices) account for another factor behind the price stability in Libya. Both Iraq and
Libya experienced similar losses in revenues from the oil sector following the decline in global oil prices; yet, Libya saw a significant drop in
oil production in 2020 (down 67 percent40 compared with 2019) due to an 8-month blockade on oil ports.
With the October 2020 cease fire agreement, oil production immediately rebound (up 658 percent, from an average of 121 thousand barrels
per day in Q3 2020 up to 917 in Q4 2020) and had positive outcomes on the overall economy of the country.
Iraq recorded a less severe decline in oil production in 2020 (down 13 percent41 compared with 2019) and oil production levels are expected
to remain unvaried in 2021, implying contained positive effects on growth and the overall economy.
Table 9: Libya and Iraq – Oil Price and Production Level
Libya Iraq
Oil
2019 2020 2021 2019 2020 2021
Prices (USD/barrel) 63.8 40.1 63.0 63.6 41.6 64.1
Production (million barrel/day) 1.1 0.4 1.2 4.7 4.0 3.9
Source: OPEC monthly reports
Given the above, we can conclude that pitfalls of currency devaluation in Libya were mitigated by narrowing gap between the official and
parallel rates (the main source of price instability) and a stronger recovery in hydrocarbon sector through both price and production levels
– which were not observed in Iraq.
Fiscal consolidation42 is essential to prevent or delay further currency devaluation. In 2021, the recovery in hydrocarbons sector is foreseen
to narrow budget and current account deficits in Libya, yet, no major change in Iraq’s’ deficits are anticipated in 2021. International reserves
in both Libya and Iraq will remain close to 2020 levels, lower than 2019 levels by 30 and 23 percent respectively.
21IV. CASE STUDY 2: POTENTIAL REMOVAL OF BREAD SUBSIDIES – LEBANON AND SYRIA43
After more than a year since the beginning of the social unrest in late 2019, Lebanon is still in the grip of an unprecedented economic crisis,
which has been worsened by the fallout of COVID-19 pandemic and the explosion of the Port of Beirut back in August 2020. Given the exten-
sive reliance on the Lebanese financial sector, the crisis in Lebanon had repercussions in neighboring Syria, where fluctuations in the exchange
rate and increase in prices of food and non-food commodities have been sensitive to the developments in Lebanon.
To make essential commodities (such as bread and fuel) available at a more affordable price, governments in both countries have implement-
ed subsidies. Yet, the implementation of subsidies implies substantial governmental costs, that – given the increasing dire economic conditions
– have already led to a reduced availability of subsidized items on markets – mainly through an increase in prices of subsidized goods.44
As a result of unprecedented economic crises in Lebanon and Syria, partial removal of subsidies is already in place. The below diagram shows
what could be the potential effect of gradual or full removal of subsidies on the price of subsidized bread and wheat flour covering the time-
span January-December 2021.
Figure 9: Summary of potential impact of gradual/full subsidy removal in Lebanon and Syria
LEBANON FULL REMOVAL GRADUAL REMOVAL
WHEAT FLOUR RATES & ESTIMATES ESTIMATES
BREAD PRICE MAY 2021 FOR 2021 FOR 2021
Preferential rate at 100% for Only parallel market rate available —› 738% increase in wheat flour price Preferential rate at 50% —› 369% increase in wheat flour price
wheat imports Subsidized bread price will increase by 147% Subsidized bread price will increase by 73%
Subsidized bread price = Price = LBP 6,400 in December 2021 Price = LBP 4,500 in December 2021
LBP 2,600
Unlikely given the severe impact on households Less burden on households, hence more likely
SYRIA FULL REMOVAL GRADUAL REMOVAL
PRICES – ESTIMATES ESTIMATES
APRIL 2021 FOR 2021 FOR 2021
Subsidized bread: SYP 120 Bread price at least 5 times higher SYP 600 Gradual removal in November 2020 led to 2x increase in price
Actual cost: SYP 600 Unlikely given the severe impact on households of subsidized bread
In 2021, subsidized bread price will increase at 3% monthly
average rate Price = SYP 150 in December 2021
Less burden on households, hence more likely
22V. MONETARY POVERTY AND UNMET NEEDS45
Despite the lack of recent estimates for many countries of the region (es-
pecially those torn by conflict and increasingly deteriorating socio-econom-
ic conditions, such as Lebanon, Libya, Syria and Yemen), poverty is ex-
pected to have risen in 2020 due to the compound effect of pre-existing
difficult socio-economic conditions combined with the fallout of COVID-19
such as job and income losses, decreasing economic growth rate and high-
er inflationary pressure.
According to World Bank estimates, poverty rate46 in Armenia has increased
by 7 percentages points in 2020 compared with the previous year – reach-
ing a rate of 51.7 percent. The impact of COVID-19 outbreak is expected to
persist in 2021 as forecasts point to an only slight decrease in poverty rate
(48.3 percent); but will eventually decrease towards 2023 – although more
than four in ten people are expected to be poor towards the forecast ho-
rizon.
Socio-economic conditions remain dire also in Iran and Iraq: the imple-
mentation of social protection measures in response to the crisis only par-
tially compensated for income losses and higher inflationary pressure af-
fecting mainly low-income household. Poverty rates in both countries
increased during 2020, reaching 14 percent in Iran and 52.4 percent in Iraq.
In Lebanon slowdown in economic growth and decline in real purchasing
power following the severe depreciation of the currency since October 2019
have increased poverty rates, putting additional strains not only to Syrian
refugees but also on the Lebanese population. According to ESCWA’s esti-
mates, poverty rate jumped from 28 per cent in 2019 to 55 percent in May
WFP/Barkin Bulbul
2020 due to COVID-19 fallout. Poverty and vulnerability rates could have
increased further since then following rising inflation and the impact of the
Beirut Port explosion, which have affected incomes, food availability and
prices47.
23Poverty rate in State of Palestine reached 28.9 percent in 2020 and is expected not to improve following the recent conflict in Gaza. The food
security status in Gaza has been deteriorating due to the sustained blockade and increase in unemployment and poverty. Prior to the esca-
lation in May 2021, the impact of COVID-19 saw an increase in food insecurity from 1.7 million in 2018 to 2 million people across Palestine in
early 2021.
The number of poor in Tunisia and Turkey have increased in 2020 (reaching 20.1 and 12.2 percent, respectively) and it is expected to remain
stable in 2021 and the years to come. It is worth mentioning the estimated poverty rate for Turkey in 2021 is the highest rate since 2012. Had
the government not acted swiftly to mitigate the fallout of the pandemic through the implementation of fiscal support packages and tempo-
rary measures to support employment in sectors hit hardest by the pandemic48, the increase in poverty would have been three times higher.
Figure 10: Upper middle-income poverty rate (USD 5.5 in 2011 PPP)
60
48.3
50
40
Poverty rate (%)
29
30
19.2
20
12.1
10
WFP/Hussam Al Saleh
0
Armenia Palestine Tunisia Turkey
2020 2021 2022 2023
Source: World Bank Macro Poverty Outlook, April 2021.
24REFERENCES:
1. For Syria, H1 2021 covers the first 5 months of 2021, as June data was not available during the report writing.
2. No data available for Yemen and no recent data available for Algeria, Syria, Libya, Iraq, and Tunisia.
3. World Bank: Turkey Economic Monitor, World Bank, April 2021.
4. No data available for Syria and no forecasts for 2021 available for Yemen.
5. This indicator is useful for countries such as I) Yemen (where data on inflation rates is not available) and II) Syria, Libya, and Iraq (where recent data on inflation rates is not available).
6. For Syria, H1 2021 covers the first 5 months of 2021, as June data was not available during the report writing.
7. Key food commodities include cereals, vegetable oil, dairy, meat, and sugar. The FAO “Global Food Price Index” increased by 26 percent during H1 2021 compared to H1 2020. Source: FAO.
8. Food security quarterly review in Yemen, Link.
9. Although the components of the food basket vary across these countries, they represent what is equivalent to 2,100 kcal per capita per month.
10. Most countries in the region peg their currencies to USD, despite the prevalence of a parallel market that could deviate from this pegged/official rate. Accordingly, fluctuations in the official rate,
if any, are very limited, in contrary with the parallel rates.
11. The official rate in Lebanon (LBP 1507.5/USD) is the average sell and buy rate and has been fixed since ever despite the sharp depreciation in the parallel market and despite the introduction of
other different exchange rates.
12. There is no parallel market rate in Armenia, Egypt, Jordan, Palestine, and Turkey. For these countries, the food basket cost in USD is the same in both columns of table 4.
13. Import dependency ratio of a particular food item= imports * 100 * (production + imports - exports).
14. H1 2021 covers the first 5 months of the year, latest available at the time of writing the report.
15. Conditional food assistance or e-voucher covering only food expenditure are considered for this analysis.
16. The transfer values are per beneficiary/capita per month in local currency units.
17. In Lebanon, WFP is also providing multipurpose cash transfers equivalent to 400,000 LBP which is considerably higher than the cost of food basket. The 100,00 LBP is the transfer value linked to
food vouchers.
18. WFP Syria Co. applies a mixed modality (hybrid) ration; General Food Assistance and cash-based Transfers (per HH of 5). To calculate the (food) transfer value in Syria, we monetized the in-kind
food rations using WFP field monitored prices (SYP 12,487/capita/month in the first 5 months of 2021) and added to cash-based transfer (SYP 9,800/capita/month). Syria CO provides other differ-
ent CBT programmed (e.g. out of school children, livelihood programmes), yet, we included only the hybrid ration as it is the most relevant to our scope of analysis.
19. Transfer values examined represent the per capita value WFP beneficiaries receive on monthly basis. The below lists the transfer values analyzed in case of multiple programs in place based on
CBT:
• Iraq: a cash-based assistance provided to refugee population.
• Jordan: a cash-based assistance targeting extremely vulnerable Syrians.
• Turkey: e-vouchers for Syrian refugees outside camps.
• Yemen: the average of YER 7,500 and YER 6,500 (commodity voucher and cash).
20. Revenues from communications services in 2020 offset negative or mild growth rates in the other sector. In Egypt, Communications grew by 15.2 percent; in Turkey, Communications grew by 19
percent.
21. The significant increase forecast for Libya in 2021 assumes the compound effect of the recovery in oil production (reaching 1.1 million barrels per day) and political stability.
22. WFP Palestine - Gaza Emergency Food Security Assessment Following the escalation of hostilities and unrest in the State of Palestine in May 2021, June 2021.
23. Turkstat.
2524. No data for 2021 available yet; however, these countries recorded a drop in tourism revenues by, 74 and 63 percent, respectively in 2020 against 2019 and the trend might be still negative for the
current year.
25. Not seasonally adjusted. This section only covers Algeria, Armenia, Egypt, Iran, Jordan, Lebanon, Tunisia and Turkey (the average reported refers to these countries). No data available for the re-
maining countries of the RBC region.
26. OEC Lebanon Country Profile, latest data available dates to 2019.
27. OEC Algeria and Iran Country Profiles, latest data available dates back to 2019.
28. OEC Armenia Country Profile, latest data available dates to 2019.
29. WTO COVID-19: Measures affecting trade in goods.
30. Developments in Turkey›s External Merchandise Trade in the First Quarter of 2021.
31. France is the main source of remittances for Tunisia and Algeria; whilst GCC countries, especially Saudi Arabia, are the main source of remittances for Egypt, Yemen, and Jordan. Saudi Arabia
together with USA and Canada are the main source countries for remittances to Lebanon. Russia is the main source for Armenia, while Jordan is the main source of remittances for Palestine.
Source: Bilateral migration matrix, 2017 (latest data available).
32. The World Bank estimated a 20 percent decline in remittances inflow in the MENA region back in April 2020.
33. These figures are based on latest data released by the World Bank in May 2021. Data for Syria and Yemen are based on October 2020 release – latest available for these two countries. Source:
World Bank Migration and Remittances data.
34. AUC: What explains the increase in remittances during the COVID-19 crisis?, November 2020.
35. This section is based on the most recent unemployment data released by national governmental bodies monitoring unemployment.
36. Palestine Economic Policy Research Institute (MAS): Comprehensive Response to Socio-Economic Impacts of the COVID-19 Pandemic in Palestine under Occupation, 2021.
37. More information on job losses in Palestine is available in the latest Rapid Damage and Needs Assessment issued by the World Bank, UN, and EU, June 2021, Link.
38. In Libya, intensifying conflict and blockades on oil ports worsened further the situation.
39. Post tax official rate is a 163 percent tax applied to the sale of foreign currencies.
40. Figures in the table show 64 percent decrease instead of 67 percent, however, this is related to rounding.
41. Figures in the table show 15 percent decrease instead of 13 percent, however, this is related to rounding.
42. Fiscal consolidation describes government policy intended to reduce deficits and the accumulation of debt.
43. More details about the methodology used for each country are available through this WFP internal link.
44. In Lebanon, a resignation of the prime minister in July the 15th of 2021 was followed with an increase in the price of the large bundle of bread to LBP 4,250. Political uncertainty and rapid curren-
cy depreciation are expected to push further bread prices up. For Syria, another partial removal of bread subsidy took place in July. The price of subsidized bundle of bread went up to SYP 200.
The new price is close to the partial scenario, but still way lower than the price in full removal scenario.
45. This section is based on estimates provided by the World Bank Macro Poverty Outlook issued in April 2021.
46. Poverty rate used for this analysis is the upper middle-income with a threshold of USD 5.5 in 2011 PPP.
47. ESCWA: Poverty in Lebanon – Solidarity is Vital to Address the Impact of Multiple Overlapping Shocks, 2020.
48. Measures implemented include grant package for tradesmen and small businesses and loan deferrals for farmers, a Credit Guarantee Fund-backed lending scheme for SMEs, and an increase for
bonus pensions. Reductions in the withholding tax on TL bank deposits, and some sector-specific VAT rate cuts. Source: IMF Policy Response to COVID.
26For any questions or comments, please reach out to RBC VAM team at rbc_vam_team@wfp.org, you can address in the e-mail: Cinzia Monetta Omneya Mansour Market & Food Security Analyst Regional Economist
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