Financial openness is key to sustainable growth of Arab countries
Foreign investors seek opportunities in open, transparent financial markets, says analyst
Financial openness and tackling inflation played a significant role in the shortterm financial development of Arab countries, a new study suggests.
A recent report released by the Arab Monetary Fund examined the impact of economic freedom on the development of the financial sectors of eight countries from 1980 to 2020: Algeria, Egypt, Jordan, Lebanon, Libya, Morocco, Sudan, and Tunisia.
Researchers found that while economic activity and price stability are among the key longterm drivers of fiscal development, in the short term, only financial openness and policies addressing inflation play significant roles. Financial openness refers to the extent to which a country allows the inflow and outflow of international capital into its economy. According to the study, changes in per capita real gross domestic product were not found to have a significant impact.
“The non-significance of the per capita real GDP implies that transitory economic changes may not influence the financial sector,” the AMF said.
Economist Mahmoud Khairy told Arab News: “If financial openness is found to positively impact short-term financial development, policymakers may prioritize measures to further open up financial markets, attract foreign investment, and enhance financial integration with global markets.” Financial globalization encompasses measures related to the allocation of capital abroad, ease of foreign investment into local markets, and absence of restrictions on international transactions.
The research added: “Financial development pertains to strategies and actions enhancing the depth, accessibility, efficiency, and stability of the financial sector.” Khairy noted that increased financial openness may attract foreign investments seeking opportunities in open and transparent financial markets, leading to greater capital inflows and economic growth.
Regarding financial openness, the AMF advised that it is crucial to implement policies focused on overcoming obstacles to international capital flows and establishing relevant legal and institutional frameworks to promote sustainable economic growth.
“Furthermore, it is important to support sectors with high added value through the development of targeted actions and strategies,” it added.
Another important factor of development of financial systems, according to the study, is to ensure price stability through implementing effective monetary policies to mitigate inflationary pressures, thus creating a stable environment for financial systems to function effectively in the long run.
The study by the AMF showed that Jordan demonstrated superior performance among the eight countries analyzed in terms of financial development over all decades.
This was due to the favorable climate characterized by the establishment of proactive financial policies and strong regulatory frameworks and reforms, reflecting its commitment to achieving a sustainable and resilient financial sector.
Lebanon and Egypt experienced acceptable financial development averages, reflecting the resilience of their financial systems to external shocks.
“Lebanon, historically recognized for its robust banking industry, continues to maintain its standing, and Egypt establishes effective reforms aimed at enhancing its financial sector,” the study said.
Algeria and Morocco have witnessed consistent growth in their financial sectors, attributed to economic diversification and reforms in the former, fostering a more sophisticated financial landscape, and the latter’s strategic focus on implementing regulatory reforms.
Conversely, Sudan’s financial development remains comparatively lower due to factors such as political instability, inadequate financial infrastructure, and economic crises, hindering its ability to enact regulatory reforms for a sustainable system.
Similarly, economic and political upheavals in Libya have impacted its financial development, whereas Tunisia’s political stability likely contributes to the clear and sustained progress in this sector. The AMF said: “The average financial openness averages across the countries under study over the considered period, shed some light on the degree to which the considered Arab economies are committed to cross-border financial transactions.”
Jordan exhibited increasing degrees of openness, indicative of its efforts to integrate into the global financial arena, driven by its strategic geographical location, which significantly influences its overall openness.
Egypt’s financial openness witnessed significant increases from the 1980s to the 2000s followed by declines in the 2010s, potentially influenced by policy shifts or economic factors.
On the other side, Libya exhibited volatility, reflecting ongoing financial challenges.
Conversely, Algeria, Morocco, Sudan, and Tunisia demonstrated relatively lower degrees of openness.
“Algeria’s historically conservative position toward international financial integration may explain the persistent low openness levels,” the paper added. Morocco and Tunisia maintain varying yet moderate levels. Despite Sudan experiencing an uptick in fiscal openness during the 2010s due to the removal of sanctions, its overall rating remained weak, highlighting enduring financial hurdles.
The findings unveiled a notable and favorable correlation between monetary openness and financial development over the long term. Additionally, the findings indicate that inflation can exert a substantial and adverse impact on financial development over the long term.
Khairy explained: “If inflation is found to hinder financial development, policymakers may focus on implementing monetary policies aimed at controlling inflation and maintaining price stability.”
“In addition, a parallel study should be conducted to include the oil-rich countries in the GCC to fully examine in detail the interaction between oil revenues and financial openness,” he added.
The relationship observed between financial openness, inflation, and short-term financial development within the study’s scope until 2020 may have shifted post-2020 due to external factors like the COVID-19 pandemic, political instability, technological innovations, and climate change considerations, according to Khairy. “These factors could influence investor confidence, capital flows, financial market stability, and regulatory frameworks, potentially altering the dynamics between financial openness, inflation, and short-term financial development in Arab nations,” he added.
If financial openness is found to positively impact short-term financial development, policymakers may prioritize measures to further open up financial markets. Mahmoud Khairy