Financing for Development to Reach the MDGs: The Experience in the Arab Region

Across the Arab region, progress in achieving the Millennium Development Goals (MDGs) has been uneven. Arab countries with higher income per capita stand with better prospects for achieving the Goals than their low-income counterparts. Overall, progress has been achieved in youth literacy, gender equality and child mortality. However, poverty is still widespread, especially in the rural areas of Djibouti, Mauritania and Yemen. Hunger is a continuous threat in countries such as Somalia, where malaria and tuberculosis are still prevalent, as well as in Comoros, Djibouti, Mauritania and Sudan.
The modest progress recorded by many Arab countries on the MDGs is mainly attributed to the absence of good national policies and to the insufficiency of resources allocated to these programmes, while other nations, such as Iraq, Palestine and Somalia, are hardly making any progress due to armed conflicts.
Domestic resources. Arab countries also rely on domestic resources, mainly taxes and oil revenues, to finance the increasing demand for public services and to enlarge the scope of the social security net. Their Governments dedicate, on average, about 32 per cent of their spending to social programmes and 18 per cent to public services. Some have made remarkable achievements in realizing the MDGs, thanks to targeted government expenditure in the form of subsidies, cash and in-kind transfers to the poor, including the direct provision of public services, such as safe drinking water, sanitation, education, health care and housing.
Public-sector employment has also been used as a tool to redistribute income to the needy and as a means of alleviating unemployment that is directly linked to poverty and social exclusion. These programmes, however, are straining the resources of many low-income Arab countries. In many cases, great inefficiency and poor administration are causes of failure in achieving declared targets. This is especially true for food and energy subsidies that tend to be diverted to those who do not need them.
There are informal channels of social protection that are widely used in the Arab countries, including charitable foundations and non-governmental organizations (NGOs). These institutions have, to a large extent, contributed to the fight against poverty. However, they need to shift from short-term income support tools to the creation of productive and sustainable jobs for the vulnerable people in society.
International development aid. Official development assistance (ODA) is vital to the economic and social development of poor countries, especially when it can be targeted towards the achievement of the MDGs. Aid to the region has not, however, been sufficient since most middle-income Arab countries are not considered a priority in the allocation of international development assistance. On the other hand, this allocation has often been based on the political priorities of donors, which excludes many disadvantaged countries.
Development aid to the region in 2005 totalled about $29 billion, representing some 27 per cent of the net ODA flowing to all developing countries. Historically, Egypt, Jordan, Morocco, Palestine, Sudan and Yemen have been the biggest ODA recipients -- although these figures are blurred by the substantial amounts of ODA dedicated to the reconstruction of Iraq. During most of the 1990s and until 2004, the net annual ODA to the Arab region ranged between $5 billion and $11 billion. Arab intra-regional aid contributed a high percentage of the total.
Intra-regional development aid. The cumulative net ODA provided by Arab donors (individual countries and financial institutions) since 1970 through the end of 2006 amounts to $128 billion. During the period 2000-2006, the average annual net disbursed ODA was estimated at over $2 billion. In 2006, the region's share in the total amount of financial resources committed by Arab donors was about 65 per cent. Approximately 20 per cent of the cumulative ODA committed by Arab financial institutions, estimated at $49 billion, was dedicated to basic education, primary health care and housing, and to short-term balance of payments support. About 54 per cent of the total was spent on basic infrastructure and the rest was dedicated to productive activities, especially in agriculture and mining. The role of the Arab Fund for Economic and Social Development. The overarching objective of the Fund is to support the economic and social development of countries in the region through the provision of concessional loans and financial assistance. Reaching the MDGs through poverty reduction and access to basic social services underpins most of the Arab Fund's operations. Since the beginning of its operations in 1974, the Arab Fund has extended 520 loans, reaching 17 Arab countries, with a total value of about $20 billion. These loans covered a wide range of investment projects in both the public and private sectors. Two thirds of the total value was allocated to major infrastructure projects.
In the last 15 years, the Arab Fund has allocated about 48 per cent of its total infrastructure investment to the energy and electricity sector, 38 per cent to transport and telecommunications, and 14 per cent to water and sewerage systems. Although many of these projects are not directly linked to the fight against poverty, compelling evidence points to the importance of expanding basic services and developing accessible, reliable and affordable infrastructure for poverty reduction and the achievement of the MDGs.
Loans in the social sector represented about 9 per cent of the total committed funds, with great emphasis on human development projects. These include financing education at all levels, as well as technical training. Some projects have directly contributed to poverty alleviation through the establishment of social funds and the implementation of public works, microcredit and employment programmes. The Arab Fund has also extended 846 technical assistance grants, totalling about $460 million, which cover a wide range of economic and social areas that are relevant to the MDGs.
Workers' remittances. They have become a very important financial resource to the Arab countries, surpassing the value of ODA and foreign direct investments. Remittances for recipient Arab countries are estimated at about $24 billion for 2004, accounting for some 15 per cent of workers' remittances to all developing countries. These figures underestimate the true value of remittances since unofficial transfers are believed to represent an important portion of transfers to the region.
Even though the officially reported remittances for the 12 Arab recipient countries are not large in value, they are as significant as a share of gross domestic product for many, such as Lebanon (26%), Jordan (20%), Palestine (16%) and Yemen (9%). They have been a valuable source for investment and consumption. However, remittances are concentrated in middle-income countries; low-income Arab nations, except for Sudan and Yemen, have almost been bypassed. Arab countries are yet to emulate the success of other countries, such as Brazil, Mexico and Turkey, in issuing remittance-backed securities (securitization of future remittances) to raise long-term financial instruments at concessional terms. These funds could be used to finance socially important projects that are relevant to the MDGs.
Debt-reduction initiatives. The initiatives not only mitigate the negative impact of debt overhang on the ability of indebted countries to meet the basic needs of their populations, but also allow securing fresh concessional finance to help achieve some of the MDGs. Two recent initiatives, namely the Heavily Indebted Poor Countries (HIPC) and the Multilateral Debt Relief Initiative (MDRI), are contributing to the reduction of the debt burden of very poor countries around the world. A number of low-income Arab countries have benefited, or are expected to benefit, from these initiatives. For example, Mauritania has received a debt reduction under MDRI for about $900 million in 2006. Comoros, Somalia and Sudan are also expected to benefit from MDRI. Many Arab countries, such as Algeria, Egypt, Iraq, Jordan, Mauritania, Morocco, Somalia, Sudan and Yemen, have all benefited at one point in time under the Paris Club framework.
Other sources of financing. Recent research has emphasized the role of access to financial services in poverty reduction and the achievement of many MDGs, especially in rural areas. In this regard, microfinance was identified as an important tool to lift more people out of poverty and provide them with sustainable sources of income. The experience of the Arab region with microfinance is relatively new, and the potential of learning from other successful experiences is large. In 2000, the number of microfinance programmes in the region was less than 60, with a client base of about 170,000 people. Especially in Egypt, Jordan and Morocco, these programmes were used in micro-enterprise development and in improving the livelihood of the poor by encouraging investment in productive assets.
Today, there is an increasing number of international and regional institutions like the Arab Gulf Programme for United Nations Development Organizations (AGFUND) that are actively involved in setting up microfinance institutions in the Arab countries. However, for the region's microfinance programmes to succeed, local banks must play a leading role with government support. These programmes now face a serious problem of sustainability, given that they are unable to raise sufficient funds and in light of their still limited coverage of the poor. Great progress towards meeting the MDGs has been made, but much greater efforts are needed.