Mid-East financial sector development

• Pages: 33-39

Page 33

While Middle Eastern and North African countries have progressed in reforming their financial sectors over the past 30 years, their efforts have been eclipsed by faster reform and growth in other regions, notably East Asia. A new IMF study compares financial sector development in Middle Eastern and North African countries and finds that the role of the state is key in explaining the region's uneven progress in financial sector reforms.

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Sizing up financial sectors in the Middle East and North Africa

Arecent IMF study proposes policies that could improve the financial sector's performance in the Middle East and North Africa region. While the study finds that financial development varies considerably across the region, it is clear that more needs to be done to reinforce the institutional environment and promote nonbank financial sector development. Susan Creane, Rishi Goyal, and Randa Sab discussed their main findings and methodology with Jacqueline Irving of the IMF Survey.

IMF SURVEY: Compared with most other developing country regions, the Middle East and North Africa performed well but ranked far behind East Asia.What accounts for this sharp difference in financial sector development?

CREANE: We based our regional comparisons on available quantitative data, since the kind of information we used in our more comprehensive index is not easily available over time or for other countries. These data show that for the Middle East and North Africa region, credit to the private sector was about 40 percent of GDP in 2002; in contrast, credit to the private sector in East Asia averaged over 100 percent of GDP. Since both theory and empirical research suggest that the availability of financing spurs growth, these numbers alone are striking.

Our analysis also found that the institutional environment is a key driver of financial development. A look at some of the best-known cross-country databases, such as the International Country Risk Guide's ratings or the Heritage Foundation's index of economic freedom, shows that East Asian countries on average score notably above Middle Eastern and North African countries on these variables, including government involvement, protection of property rights, and ease of loan recovery. And, excluding the region's best performers (the Gulf Cooperation Council or GCC countries, Lebanon, and Jordan), the gap is sharply wider.

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