MENA Forum Report: The Case for Co-operation Beyond De-escalation

Introduction

The de-escalation of tensions in the Middle East and North Africa (MENA) has brought a welcome pause in hostilities among regional countries. It has opened a window of opportunity for states to begin working together to address pressing, shared issues. The region faces many challenges, such as impinging climate change, rising unemployment, growing indebtedness, and increasing food insecurity and water scarcity. Moreover, there is a deep socio-economic divide between the countries of the region, which may come to pose a threat to regional stability.

This report argues that rapprochement between Saudi Arabia and Iran has created a time-limited opening for regional states to cooperate with each other in three key areas: geopolitics and security, economics, and energy. As such, it is an opportunity to close the gaps between countries of the region and, in doing so, not only strengthen MENA’s overall resilience to external shocks, but also shore up its long-term stability.

The report is divided into three sections: geopolitics and security, economics, and energy. Each section considers the contours of, and prospects for, regional co-operation in its area, and although the analysis and conclusion in each case differ, there is a common thread, which argues that the moment for advancing beyond de-escalation, strengthening economic resilience, and building new collaborative energy systems is now.

Part 1 argues that shifts in the global configuration of power have created an opportunity for the region to exercise more agency, to assume greater responsibility for its stability and security, and to play a larger role in global affairs. However, it also argues that unless deeper foundations of cooperation are laid, there is a risk that the progress made to date will be fragile, and may not endure.

Part 2 focuses on the regional economy and highlights the growing gulf between economies of the region. It asserts that the Gulf Cooperation Council (GCC) countries – buoyed by high oil prices and a pressing need to diversify their economies – are well positioned to provide financial support to, and increase the economic resilience of, middle- and lower-income countries; however, it argues that they are only likely to do so if they can be certain of high investment returns or that recipient countries will implement IMF reforms. It also highlights how these economies face significant challenges in accessing capital markets, and therefore have become more dependent upon GCC investment. In return, they are obliged to meet conditions set by GCC lenders.

Part 3 of the report makes a strong case that, if regional states are to safeguard their energy security and meet renewable energy targets and climate change commitments, then they must collaborate on energy systems. Part 3 argues that complex new energy systems, which draw upon the region’s abundant natural resources – including solar and wind – will only be effective if they are developed, deployed and operated via region-wide interconnections. In other words, cooperation is essential if the MENA region is to transition successfully from a hydrocarbon to a renewable energy system. And rapprochement between Saudi Arabia and Iran is a good place to start.

Part 1: Geopolitics

The shift towards multipolarity in the global order has made space for middle powers to rise in importance and influence. MENA countries are responding to global power shifts by pursuing de-escalation and greater cooperation intra-regionally, and by seeking a greater role in international affairs. Driven by national priority and perception of risk rather than regional good, de-escalatory measures are fragile and may not last.

The global configuration of power is undergoing significant change. New dynamics have created space for middle powers to "rise" in importance and influence, while also pushing states to redesign their existing international partnerships and consider new ones. Middle East and North Africa (MENA) countries have begun to play a larger role in global geopolitical affairs, deepen and broaden relationships with a range of international partners, and pursue de-escalation among themselves. The shift is motivated by several significant factors: rising great power competition between the United States (US) and China, the reprioritisation of US interests towards the Indo-Pacific, the growing Iranian threat to regional economic prosperity, the increasing likelihood of unilateral Israeli action against Iran, and the need to diversify partnerships as part of plans to achieve economic sustainability. However, underpinning all of these is the prioritisation of national interest. This is the new driving force behind policy making and action and will determine the depth and longevity of the region’s current push towards de-escalation.

At the epicentre of the new balance of power

Where ideology was once the binding force in bilateral and multilateral alliances on the world stage, there is a new emphasis on pragmatic, national-interest-focused policies that prioritise the development, stability, and prosperity of individual countries. The post-Cold War unipolar structure of the global order is moving towards multipolarity – where numerous powers vie for and exert influence on international affairs. The widening gap between the Global North and the Global South – on issues such as the impact of climate change, emissions reduction targets and effort, energy security and economic growth – is encouraging countries to pursue relationships with like-minded states despite the consequences for their relationships with "great" western powers. This approach not only allows for, but encourages, diversified partnerships to achieve this.

"National interest is the driving force behind policy making and will determine the depth and longevity of de-escalation."

MENA sits squarely at the centre of this new balance of power, both geographically and politically. It was cast into the spotlight following Russia’s invasion of Ukraine, with global energy markets looking to the region's major oil producing countries to boost production to replace sanctioned Russian barrels and stabilise international prices. But what was viewed by the West and the US as a reasonable and morally justified request was seen differently by the oil producers. For them, the economic importance of oil revenues and a growing sentiment across the world’s middle powers that sanctions are an extraterritorial measure overly deployed by the US, in violation of international law, were key considerations. The region continued oil market coordination with Russia within OPEC+ (which pumps approximately 40% of the world’s crude1), consistently responding to market signals by cutting output to put a floor under prices.

The episode demonstrates how the focus on national priorities is testing and reshaping historical partnerships, with middle powers becoming more assertive, and therefore more important, players in global politics. It is a trend that can also be seen in the "non-aligned" approach of MENA states to Russia’s invasion of Ukraine; most supported the UN resolution condemning Moscow’s actions but have refrained from implementing Western sanctions. Russia and the US play distinct and discrete roles in the region, and individual MENA states have sought to maintain working relations with both, using their ability to do so to elevate their country’s role in global diplomacy. For example, Saudi Arabia and the United Arab Emirates (UAE) brokered several prisoner swaps and releases in 2022 linked to the conflict.2 In early August 2023, the Kingdom hosted talks between international parties to discuss Kyiv’s 10-point peace plan to resolve the Russo–Ukrainian war. While no firm outcomes were reached, China’s continued participation in the discussions – Beijing had refused to participate similar talks in Copenhagen just weeks before3 – was hailed as a diplomatic success for the Kingdom. It also reveals how the region is acting as a bridge in an increasingly fragmented global political order.

"The focus on national priorities is testing and reshaping historical partnerships, with middle powers becoming more assertive players in global politics."

Warming ties between MENA states and China comes as Beijing grows its presence and involvement in regional affairs, leading some to fear that it is seeking to usurp the US in its traditional role as strategic partner of choice. Indeed, as part of an eastern pivot that began during the presidency of Barack Obama, the US has advocated for regional countries to take on greater responsibility for their own security, enabling Washington to focus its attentions on the Indo-Pacific, and more recently, Eastern Europe. The US response to Iranian-sponsored attacks against Saudi energy facilities in 2019 and the UAE in 2022 – deemed inadequate by both the Kingdom and the Emirates – coupled with the superpower’s withdrawal from Afghanistan, were warning signals to Middle Eastern capitals that Washington was more focused on other matters. This raised concerns across the region about US’ reliability. This sense was compounded by the Biden administration’s continued refusal to include the issue of Iranian support for destabilising proxy groups across the region in its efforts to renew or redraft the Joint Comprehensive Plan of Action (JCPOA), known as the Iran nuclear deal.

Re-evaluating relationships with middle powers and each other

As the US has steadily redrawn the parameters of its relationship with the Middle East, MENA states have responded by stepping out from underneath Washington’s umbrella and charting their own course, pursuing transactional relationships with players such as China, India, and Russia to build insurance policies and create leverage for use in future scenarios. For example, in August 2023 Saudi Arabia, the UAE, and Egypt were invited to join the BRICS (Brazil, Russia, India, China) bloc, further strengthening economic, developmental, and political ties with non-Western partners.4 These growing relationships are also driven by objectives set out in the region’s respective development plans; for example, the UAE has long aimed to become a strategic logistics hub, and in pursuing this ambition it has also become a key node in China’s Belt and Road Initiative. Chinese investment in Emirati ports, airports, and transport networks has served the objectives of both countries: approximately 60% of China’s trade with the region now transits the UAE.

New members of BRICS. Flags of the six new members joining BRICS.

Foreign ministers of Saudi Arabia, China, and Iran in Beijing on 6th April 2023 after talks to resume diplomatic, security, and trade relations : Ding Lin/Xinhua via AP Photo

In the perceived absence of a strong and reliable security guarantor, MENA states have also adjusted their approaches towards each other on issues such as regional security, investment and financial aid, and trade relations. The region has turned inward, seeking to mend rifts and stabilise relations, beginning with the Al Ula summit in January 2021, at which Saudi Arabia led the way in ending the GCC boycott against Qatar. Separately, both Abu Dhabi and Riyadh have responded positively to outreach from Ankara, strengthening ties pre- and post the re-election of President Recep Tayyip Erdoğan, especially economically.5

But perhaps the most recognised and lauded development in regional affairs was the March 10, 2023, announcement that Riyadh and Tehran intended to resume diplomatic ties.6 Brokered by China but enabled by long-running talks between the two capitals mediated by Oman and Iraq, the agreement has set expectations in some quarters about the potential for broader regional de-escalation and relative peace.

The Saudi–Iran détente is the latest in a string of similar measures: the UAE began its own independent outreach to Tehran in 2019 following attacks against tankers off the coast of Fujairah in a bid to reduce tensions. It also led a campaign – supported by Jordan – to normalise the region’s relations with Damascus after the international community’s failure to make progress on a political agreement in Syria increasingly threatened regional stability; MENA states continue to bear the brunt of the Syrian refugee crisis and are also target markets for the country’s booming Captagon drug trade.

These diplomatic recalibrations indicate a desire to minimise the risk of instability and its potential knock-on effects across the region, particularly as GCC states pursue major economic transformation and expansion plans. MENA states are also increasingly adopting new forms of cooperation with partners outside their geographic sphere. This includes through “minilaterals” – voluntary arrangements usually between three to four countries that are unique in that participants are not bound by geography or ideology but a shared desire to achieve results on a particular issue or issues. Minilaterals are an attractive proposition for countries seeking to make rapid progress, especially on matters where there may be differences of opinion on collective actions and solutions.

However, moves by MENA states towards de-escalation have been taken in response to international developments, not to get ahead of them. In other words, MENA governments have not proactively sought cooperation as an independent choice; rather, their hands have been forced by the decisions and actions of other world powers. The dialling down of tensions stems from recognition that the region is fractured and unstable, and that without the guarantees or oversight of a global superpower the risk of insecurity is high. In this context, states are motivated by national interest – as each seeks to ensure its stability and prosperity in what is becoming an increasingly uncertain era of geopolitical tension and change.

For this reason, the recent series of de-escalatory measures is not indicative of a wider trend towards regional collaboration. Where interests between MENA countries align, there is, and will continue to be, clear desire and intent to cooperate. However, cooperation among states within the region will continue to ebb and flow depending on the national interests of its many members and the risks posed to each, sometimes by each other.

Indeed, some moves to dial down tensions have already hit obstacles and are stalling or slowing. For example, normalisation between Damascus and regional states has decelerated after Bashar Al Assad’s failure to meet his obligations agreed at the pre-May Arab League meeting, during which Syria’s membership suspension was lifted.7 Similarly, while Saudi–Iran “rapprochement” is moving forward, it has not eradicated all sources of tension; instead, the US is considering increasing its military presence in the waters around the Gulf to deter Iranian attacks on commercial shipping.8 In parallel, the Kingdom’s request for security guarantees from Washington calls into question whether Iran will follow through on its commitments, and if Beijing can, or is willing to, hold Tehran to its end of the bargain.

"The recent series of de-escalatory measures should be recognised as reactionary, and therefore fragile and potentially short-lived."

Cooperation based on mutual benefit

As MENA states navigate the increasingly multipolar geopolitical order, they have been pushed into recalibrating their relationships intra-regionally and externally. It is evident that the primary objective of each is to secure its own interests first, prioritising domestic stability, development, and prosperity. Cooperation between regional states – be it multilateral, minilateral, or bilateral – is being driven by mutually convenient benefit. In this light, the recent series of de-escalatory measures should be recognised as reactionary, and therefore fragile and potentially short-lived. The foundations beneath have been laid – but have not yet had time to set.

Part 2: Economy

As regional growth slows amid global uncertainty and tightening financial conditions, MENA’s economic performance is one of stark contrast – a tale of two regions. While low- and middle-income countries struggle with macroeconomic vulnerabilities, large financing needs, and challenges in accessing markets, the GCC countries continue to enjoy robust growth, large surpluses, and advancements of economic diversification policies.

The GCC’s financial footprint in the region is growing under a new investment strategy that gives non-GCC countries an opportunity to overcome their fiscal and economic challenges and address their development needs. To take advantage of it, they must level the playing field by accelerating structural reforms.

A tale of economically diverging regions

Despite global shocks, the Middle East and North Africa (MENA) region saw a higher-than-expected 5.3% real GDP growth rate in 2022, up from 4.3% in the previous year. This was supported by strong domestic demand and a return of tourism and trade as part of the post-pandemic economic recovery, and the spike in oil and gas prices following Russia’s invasion of Ukraine. High prices for crude and liquefied natural gas (LNG) in 2022 – Brent averaged US$100 per barrel9 and LNG prices reached a peak of US$70.50 per one million British Thermal Units (MBtu)10 – benefitted producers, which derive as much as 56.4% of their GDP from hydrocarbons.11

However, closer examination of the region’s performance reveals a divergence – a tale of two regions. On one track are the high-income oil exporters, mostly Gulf Cooperation Council (GCC) countries. Reaping the benefits of 2022’s oil windfall, GCC economies enjoy robust fiscal and external positions and are advancing economic diversification policies under their respective national transformation programmes. On another track are middle to low-income MENA economies, whose post-pandemic recovery has been disrupted by the war in Ukraine. The spike in commodity prices and tightening of financial conditions have led to the loss of foreign capital, currency depreciations, rising borrowing costs, and food insecurity; these challenges have been aggravated by slow or stalling economic reforms.

Growing debt levels, fiscal challenges

MENA states have a history of responding to socio-economic shocks by running fiscal deficits, rather than implementing austerity and reforms. The expansionary fiscal policies introduced in response to the Arab uprisings in 2011, then the Covid-19 crisis in 2020, were enabled by unsustainable levels of borrowing at a time of easy access to credit and when GCC states were more willing to offer bailouts.12

But times have changed. The global economic outlook is darkening, regional growth is slowing, and the economic and investment policies of MENA’s more advanced economies are less forgiving. This leaves non-GCC countries in a difficult position. Public debt levels are particularly high – for example, in Egypt the debt-to-GDP ratio has crossed 92.9%;13 in Tunisia, 80%14 – and interest rates are rising, making the cost of servicing debt greater. There is a growing risk that countries will default – as Lebanon did in 2020 – and this is discouraging investment in the region, hindering economic growth.

Adding to these immediate difficulties, MENA oil importers also face uphill struggles in maintaining fiscal discipline given their dependence on hydrocarbon imports. Volatility in oil and gas prices expose exporting and importing economies to fiscal risks: exporters are over-reliant on oil revenues to fund state budgets – hydrocarbon revenues accounted for 95% of the Libyan government’s budget in 202215 and 85% in Iraq.16 Moreover, government moves to finance public and private sectors – via guarantees, cash injections into loss-making State-Owned Enterprises (SOEs), and compensation given to private partners for underperforming projects17 – accounted for nearly 8% of the region’s GDP in 2018.18 Oversized public sectors place further pressure on state budgets and crowd out the private sector – yet public service delivery is often poor.

Cited in the IMF report: Regional Economic Outlook - Middle East & Central Asia, October 2022

These domestic challenges heighten the vulnerability of non-GCC MENA economies to external shocks, such as those which occurred with Russia’s invasion of Ukraine. In the wake of those events, MENA governments were forced to increase subsidies in response to soaring domestic retail prices, driven by the increase in commodities prices.19 The International Monetary Fund (IMF) estimates that additional food and energy subsidies have cost as much as 1% of GDP and between 1.7% and 3% of GDP respectively, in Iraq and Tunisia.20 While subsidy hikes increase fiscal deficits, they are integral to the social contract, and any reform measures would likely face resistance. At the same time, countries also experienced a fall in foreign direct investment (FDI) as increasingly risk-averse investors pulled out capital from the region amid unprecedented rate hikes and tighter borrowing conditions in the United States (US) and Europe. Egypt experienced foreign capital outflows of US$20 billion during the first half of 2022 as investors withdrew from portfolio investments due to concerns over the impact of Russia's invasion of Ukraine on Egypt's already fragile economy.21 This has put pressure on exchange rates, leading to higher costs of borrowing and lower sovereign Eurobond issuances,22 completely depriving Egypt – and Tunisia – of access to global capital markets.23

Cited in the IMF report: Regional Economic Outlook - Middle East & Central Asia, October 2022

Until the global economic outlook improves, and without meaningful advancements on economic reforms, MENA economies will find it very difficult to address their debt challenges, shore up their fiscal positions, and rebalance their economies. As such, their ability to address pressing socio-economic challenges such as youth unemployment – which stands at around 30% across the region24– is completely hamstrung. Historically, GCC countries have stepped in to assist countries falling behind, providing bank deposits, loans, and grants, in addition to FDI. For example, between 2003 and 2015 a total of 76% of Lebanon’s FDI came from the GCC.25 Jordan has been similarly reliant on GCC funding; in 2011 Arab Gulf states joined efforts to provide US$5 billion in aid, and again in 2018 with another US$2.5 billion aid package.26 In 2022 Arab Gulf states deposited around US$13 billion in Egypt’s central bank to support foreign currency reserves and maintain solvency.27 However, as states increasingly prioritise their own interests (see Part 1) this approach has been replaced by one focused on returns – to maintain the GCC’s strong economic performance to date and diversify investment ties with the region.

Strong economic performance and evolving investment strategies

In stark contrast to the rest of the region, GCC countries continue to enjoy robust economic growth. They have dominated global growth tables since the end of the global pandemic in 2021, with Kuwait (8.2%), Saudi Arabia (8.7%) and United Arab Emirates (UAE) (7.4%) overshadowing Jordan (2.7%) and Morocco (1.1%) in IMF data for 2022.28 Although IMF forecasts indicate that GCC economies are poised to achieve lower growth rates in 2023 (2.9%), they will continue to surpass other advanced economies, such as the US (1.8%)29 and United Kingdom (0.4%).30 The GCC region has also experienced moderate inflation rates compared to other regions in the world due to subsidies and price caps on specific products, a robust US dollar that alleviates import costs, and restrained rent prices due to increased supply. For example, inflation in the GCC rose from 0.7% in July 2021 to 3.6% in July 2023; in the European Union (EU) it increased from 2.5% in July 2021 to 9.8% in July 202231 and 6.1% in July 2023.32

The economic success of the Gulf Arab region has been driven by high oil prices – the price per barrel has averaged US$100 over the past year33 – which have enabled significant investments and growth in their non-oil economies. Oil revenues for GCC countries amounted to more than US$570 billion in 2022 (Saudi: US$311 billion, the UAE: US$119 billion, Kuwait: US$98 billion,34 and Oman: US$42.9 billion).35 Revenues from the oil industry have provided substantial income for government budgets, and GCC governments have invested heavily in infrastructure development, including airports, seaports, roads, and urban facilities, and made progress on advancing economic diversification programmes, developing sectors such as finance, tourism, real estate, and technology, and enacting labour market, banking sector, and taxation reforms to enhance the business environment. This in turn has helped attract foreign investment and promote economic growth. FDI inflows to the Gulf grew by two thirds in 2021 from low pandemic levels to US$44 billion.36

In parallel, GCC states’ sovereign wealth funds (SWFs) have begun playing a pivotal role in managing and investing substantial state wealth, diversifying income sources, and ensuring long-term returns. Abu Dhabi Investment Authority (ADIA) assets are estimated at US$853 billion; Saudi Arabia’s Public Investment Fund (PIF) is thought to manage assets of around US$775 billion; and the Qatar Investment Authority (QIA) oversees an estimated US$475 billion.37

"GCC investment strategies have evolved significantly. Each now prioritises a more calculated approach, setting prerequisites and meticulously vetting projects to ensure they deliver better returns."

Crucially, the SWFs reduce the dependency of GCC economies on oil and gas revenues by diversifying their investments across geographies and sectors. In the Middle East, the SWFs contribute towards economic development, enhance trade relationships, and promote regional stability; they often invest in strategic sectors such as real estate, banking, telecommunications, transportation, infrastructure, agriculture, and technology. But the investment strategies of GCC states have evolved significantly from past practices of providing unconditional financial aid to emerging economies based on diplomatic or strategic ties. Each now prioritises a more calculated approach, setting prerequisites and meticulously vetting projects to ensure they deliver a return on investments.

Source: Sovereign Wealth Fund Institute
Cited in: "The New Wave of Dealmaking by Gulf Sovereign Wealth Funds." Middle East Institute, July 2023.

Support conditional on reforms, focused on returns

The GCC’s change in approach from delivering unconditional financial aid to MENA countries to focusing on strategic investments that deliver financial returns reflects their aim to secure and grow their wealth – in full recognition of the eventual shift away from hydrocarbons – while still influencing regional development and underpinning stability.

While GCC countries are well positioned to offer MENA countries financial assistance, this will no longer be condition-free. GCC countries now offer support in at least three ways. First, they deposit funds into a country’s central bank, retaining the ability to withdraw their deposit at their discretion; this gives them greater financial control as well as more political leverage. Second, investment funds now employ more robust due diligence methodologies, basing investment decisions on the rate of return rather than political or social objectives; consequently, GCC investments are more directed towards strategic sectors and national champions – given their greater value – rather than traditional industries such as tourism and real estate. Third, GCC countries pledge financial support complementary to IMF loan packages, on the condition that recipient countries implement agreed upon IMF reform programmes.

The GCC states are in a strong financial position and have a unique opportunity to address structural deficiencies across MENA. The way in which they invest their substantial financial reserves – and the conditions they attach in doing so – can encourage the region’s middle- and low-income countries to implement reforms with long-term benefits for their economies and, by extension, the region.

GCC states now expect recipient governments to institute meaningful reform programmes, benchmarked against IMF requirements, to secure financial support and investments. In other words, they use their leverage to encourage countries to "do their part" and accelerate structural reforms to gain access to much-needed capital. Concomitantly, middle- and low-income MENA countries need to attract GCC financial support and investments to shore up their economies and advance their development, and so must demonstrate a willingness to implement IMF reforms, no matter how painful.

Jordan has experienced notable success in this regard, making progress on implementing its economic reform programme supported by the IMF’s Extended Fund Facility.38 In response, there has been an uptick in interest from GCC states looking to make strategic investments that both underpin Jordan’s economy and deliver high returns – a move away from the bailout model of the past.

Investments from GCC member states in the Hashemite Kingdom are estimated to be worth US$40 billion,39 covering services and industrial sectors.40 The PIF’s takeover of Jordanian banks’ shares in the Saudi–Jordan Investment Fund (established in 2017) demonstrates the SWF’s growing interest in the Jordanian market and its new focus on developing strategic economic partnerships that offer substantial financial reward.41 The fund is, as of the first quarter of 2023,42 looking to invest in infrastructure, healthcare, and tourism in Jordan.

The Hashemite Kingdom still faces economic challenges, such as addressing systemic inefficiencies including an over bloated bureaucracy, constrained capacity and complex decision-making processes. Yet, it is in a strong position to capitalise on the GCC's new approach to regional investments, having made good progress on implementing reforms.

However, the governments of other middle- and low-income countries will need to exercise considerable political will if they are to attract the GCC investment they need. Domestic factors will continue to present hurdles and frustrate their efforts to implement key reforms, including, among others, changing subsidy programmes; increasing competitiveness to encourage private sector participation; reforming labour laws to create greater employment opportunities, including for women, and reducing the role of the military in the economy.

The IMF requires Egypt to reduce the influence of the military in its economy – by selling stakes in military-owned companies – to allow private sector growth and therefore increase competitiveness. Since 2013, the military has become the dominant actor across both strategic and non-strategic industries, ranging from construction and manufacturing to real estate, tourism, and consumer goods production – benefitting from little to no government oversight or regulatory control and therefore crowding out private companies. However, President Abdul Fatah Al Sisi depends on the military to ensure stability and secure his presidency and, therefore, cannot afford to marginalise its interests.

As a result, President Sisi has been reluctant to introduce reforms that would satisfy the IMF and, indeed, the GCC. Seeking higher investment returns, GCC countries have been disappointed at the number and commercial appeal of the SOE shares on offer, as the Egyptian government is unwilling to cede control of its strategic, and most profitable, SOEs.43 In February 2023, Saudi Arabia suspended talks with Egyptian authorities over PIF’s acquisition of the government-owned United Bank of Egypt after the two sides disagreed about the valuation of the asset. The Kingdom's firm stance on the valuation is an example of the prioritisation it is giving to carefully evaluating investment opportunities.44

A unique opportunity

The GCC’s new approach to supporting its neighbours is an opportunity for MENA’s middle- and low-income countries to introduce structural reforms, expand the role of the private sector, and build more inclusive and resilient growth models. GCC states will use their leverage to push regional neighbours to improve economic conditions to ensure their investments are low risk and high reward. In turn, middle- and low-income MENA countries will have to demonstrate progress on implementing reforms to attract much-needed capital. Failure to take advantage of this window of opportunity will result in its closure – and it will be some time before it opens again.

“The GCC’s new approach to supporting its neighbours is an opportunity for MENA’s middle- and low-income countries to introduce structural reforms, expand the role of the private sector, and build more inclusive and resilient growth models."

Part 3: Energy

Increasingly complex energy systems are creating a pressing need for regional collaboration in MENA. As climate change and economic concerns drive the energy transition forward; overhaul energy infrastructure; and disrupt energy models; financial, technological, and resource sharing becomes both necessary and inevitable to adapt to the changes. However, if collaboration is not inclusive, advancements will be incremental and benefits uneven.

Energy systems in flux

In the Middle East and North Africa (MENA) region, energy systems are becoming increasingly complex. The region’s extreme vulnerability to the impacts of climate change has prompted governments to commit to decarbonising energy systems and rolling out climate mitigation and adaptation measures to ensure the region’s future is sustainable. At the same time, countries around the region are diversifying energy mixes for domestic power generation either to free up hydrocarbons for export or reduce the fossil fuel imports bill. Both trends are playing a major role in moving the energy transition forward. Within the power sector – where the bulk of the energy transition is taking place – they have created a set of important and interlinked challenges for conventional, centralised energy models based on balancing load demand and supply from conventional sources.

The first set of challenges relates to the ability of existing infrastructure to meet rising energy demand caused in part by climate change. High temperatures – which can exceed 50 degrees Celsius in some cities – and drought are increasing both water and energy demand for cooling and are negatively impacting the performance of both conventional and renewable power plants. This, and the region’s reliance on energy-intensive desalination for water production, is increasing the frequency of black outs, even in countries with significant power generation reserve margins such as Egypt and Kuwait.

The second set of challenges stems from the transition from fossil fuels to renewable energy sources, which is creating complications for energy infrastructure, especially in terms of balancing supply and demand. Investments in renewable energy deployment are occurring at a faster pace than in electricity grid development and demand-side management. Of the committed projects in the MENA power sector in 2022 to 2026 – valued at US$102 billion, or 30% of all energy investments – the bulk are in renewable energy and natural gas generation; investments in grid expansion and modernisation account for only 8–12%.45 Underinvestment in the grid, especially in transmission and distribution networks – which in MENA is chronically low – adds to the challenges of integrating variable renewable energy into the system; utilising variable renewable energy carries its own risks, such as curtailment46 and non-reliability.47

Down the line, plans to accelerate installed renewable energy capacity in tandem with initiatives to achieve net-zero targets, such as the electrification of transport, will add to the challenges and complexity of energy management and grid stability. Government-mandated targets range from 15% in Kuwait to 50% in Saudi Arabia to 52% in Morocco by 2030.48 Morocco and Jordan are frontrunners, achieving 37% and 20% of total installed capacity from renewable sources, respectively, in 2020. Countries like Saudi Arabia and Egypt currently have a low share of renewable energy in their respective power mixes but have committed to substantial capacities within their project pipelines. Meanwhile, the electric vehicle (EV) industry is gaining traction in many MENA countries with the aid of government support for the establishment of manufacturing and assembly factories. Distributed energy systems such as rooftop solar photovoltaics and mini grids, which transform the consumer into a producer of energy, are becoming more common too and will require a different governance framework; the solar power distribution market is expected to grow at a compound annual growth rate of 6.5% until 2028.49

Increasing deployment of renewable energy systems in MENA: Ute Grabowsky/Photothek via Getty Images

Growing need for collaboration

As energy systems become more complex, MENA countries will be prompted to increase regional collaboration to safeguard their energy security and meet renewable energy targets and climate change commitments. The region’s ambitious renewable energy targets can only be achieved through collaboration. Likewise, many of the challenges arising within the power sector require innovative and integrative solutions that are best achieved through financial, technological, and resource sharing; for example, integrating renewables successfully into the grid requires a more flexible system that includes interconnections, forecasting and integration centres, and the development of energy storage solutions and more efficient demand side management.

“As energy systems become more complex, MENA countries will be prompted to increase regional collaboration to safeguard their energy security and meet renewable energy targets and climate change commitments.”

One of the biggest drivers of regional collaboration is financial. Many of the region’s economies face chronically low prospects in attracting both foreign direct investments and climate funding to pay the high price tag of decarbonisation. A look at the investments of one of the region’s forerunners in this area, Morocco, showcases just how much cash is needed. The country requires in excess of US$30.6 billion in energy, industry, and transport to meet its 2030 target for greenhouse gas reductions.50 It also needs US$38.8 billion for climate change mitigation measures, of which US$21.5 billion is conditional on international support through climate financing.51 Of the 12 climate funds active in the MENA region, the total volume of climate financing it has secured is among the lowest globally: the region is estimated to receive US$3.6 to $4.9 billion climate finance flows per year;52 this compares to US$83 billion delivered in 2020 alone to developing countries globally, a figure that is expected to reach US$100 billion per year in 2023.53

For low- and middle-income countries in MENA, the expansion of low-carbon projects within their borders funded by wealthier neighbours will help to reduce barriers to market entry and attract further foreign direct investment and foster local job creation. High-income countries will benefit economically from their investments, and all participants will see wider economic growth and development benefits. For example, technology and knowledge transfer and collaboration on research and development will foster innovation and entrepreneurship – two areas that are viewed as vital pillars of sustainable economies in a fast-changing world, while the region overall will benefit from the improvements to environment and climate resulting from less carbon-intensive energy systems.

Energy access will be another driver of collaboration. The MENA region has abundant renewable energy sources but some, such as hydropower and geothermal energy, which are important for baseload power generation, are unevenly distributed across geographic locations. Extending renewable energy infrastructure across borders from areas of abundant resources and better prospects for project bankability to low energy access areas low-income or conflict countries will increase the share of renewable energy and improve energy access overall. Collaboration will also be needed to access the technology and knowledge to develop and optimise the use of these resources. For example, to develop geothermal, which has a lot of potential to power desalination plants and provide district cooling, the region can call on the extensive drilling experience of the petroleum-producing countries.54

“Yet, the biggest driver – and potentially the most challenging area of collaboration – is in the development of a regional integrated electricity grid to achieve net-zero targets.”

Yet, the biggest driver – and potentially the most challenging area of collaboration – is in the development of a regional integrated electricity grid to achieve net-zero targets. Several MENA countries have joined 130 others across the globe in pledging to reach net-zero – setting deadlines in 2050–60; other countries in the region are expected to follow suit. A cross-border grid interconnection will be necessary to reap the benefits of the geographic diversity of renewable energy resources; to ensure that electricity generated from variable renewable energy is not curtailed; and to ensure there is a balance between the load and demand.

Moreover, as power demand grows, the interconnection will halt the capital-intensive race to add power generation capacity and reserve margins. It will provide additional revenues to countries with significant power generation capacity while providing reliable power to the many countries in the region facing power supply shortages and disruptions, especially in post-conflict states and during peak periods.

Contours of future energy cooperation

The technical and financial requirements of increasingly complex energy systems require regional collaboration on multiple fronts: in electricity grid interconnections and exchange markets and cross-border renewable energy investments, and in knowledge and technology sharing. To what extent collaboration occurs and what the benefits will be, however, remains an open question. If collaboration is between small groups of countries and is exclusive rather than inclusive, advancements will be incremental and benefits uneven – with some groups enhancing energy security and others recording bigger energy crises.

Any form of collaboration will need to be supported by joint research and development programmes on energy technologies, as well as partnerships to scale up and commercialise low-carbon energy technologies. Additionally, governance and data sharing frameworks need to be put in place; these are easier planned than implemented and so may create bottlenecks and deal-breakers. However, frameworks are key to addressing management, ownership, and sovereignty over energy resources and infrastructure, while data protection directives will be critical to ensure transparency, as well as privacy, and to reduce security risks. Building the required frameworks and infrastructures will take time, yet energy collaboration is vital to accommodate the complexities of the energy systems of the future, to meet ambitious climate targets, and to create a more resilient region.

Conclusion

The Middle East and North Africa (MENA) region is at a critical juncture. The shifting sands of the global order, economically, politically, and in terms of energy sources and systems, have created a unique opportunity for the region to assume greater responsibility for its stability, security, and prosperity. By utilising the advantages afforded to each country – be that political strength, capital, or energy resources – the MENA region can cooperate to drive its own development and prosperity, build resilience to future shocks, and contribute to global stability. However, this opportunity is time-sensitive; the region must capitalise on the current momentum and lay the foundations for long-term, region-wide collaboration if it is to successfully address longstanding challenges for mutual gain.

“By utilising the advantages afforded to each country – be that political strength, capital, or energy resources – the MENA region can cooperate to drive its own development and prosperity, build resilience to future shocks, and contribute to global stability.”

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Part 1: Geopolitics

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Part 2: Economy

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Part 3: Energy

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Education, government action needed to boost media literacy in Arab countries

The prevalence of misinformation online has heightened attention on media literacy, or society’s ability to critically assess news and information. Media literacy’s benefits for society are widespread; it can help an audience decipher truth from deception, thus making it less susceptible to harmful content. A media literate citizen is less likely to be misled by a fake news report, and thus less likely to share it with others. In the Middle East and North Africa, most states lack strategies to improve media literacy and combat fake news, even as social media use steadily rises throughout the region. Regional governments can help protect their citizens from disinformation by developing national media literacy policies that prioritise education and digital literacy.

Media literacy, if adopted and taught from early childhood, has been shown to increase young people’s resilience to misinformation and misleading content. From a media policy perspective, government proposals typically fall into two categories. The first category focuses on the role of information providers, relying on them to censor content and better manage the algorithms that decide what users see on social media. The second focuses on the role of the audience; by improving media awareness, this policy approach encourages people to critically analyse content.

MENA region falling behind in media literacy

Governments and social media platforms have used short-term approaches to combat fake news, including the use of fact-checking and content verification tools. For example, Europe has seen a growth in fact-checking outlets – either linked to established news organisations or operated independently as part of a civil society entity or NGO. However, these approaches focus primarily on platform competency and do not have a long-term impact on media literacy.

Improving media literacy will help enable citizens to decipher between information and misinformation. Consumers cannot always rely on platforms to censor information appropriately; for example, after billionaire Elon Musk acquired Twitter last year, he fired the social media platform’s media censors and ended several programs aimed at countering misinformation. While platforms like Twitter play an important role in combating misinformation, a media literate audience can often identify misinformation without having to rely on a platform’s censors. This is especially important given the rise of hate speech and other harmful content across social media platforms.

Most Arab states lack official policies regarding media and information literacy despite acknowledging the issue of fake news and the dangers it poses. Studies have shown low media literacy levels in the MENA region, particularly amongst youth. A recent from the American University of Beirut, which surveyed 2,554 young people across Jordan, Lebanon and the UAE, found participants were “digitally savvy and adept at using digital technologies but not necessarily media literate”. It also found that most of the participants “overwhelmingly trust online content” and disagree with the notion that the internet poses threats to privacy or helps individuals gain influence or political power.

In a consumer survey (below) commissioned by Think Research and Advisory suggests that people in North Africa and the Levant region expect a 30% increase in news consumption via Twitter in 2023 North Africa expects to see a 41.6% increase in news consumption via social media (Twitter, Instagram, WhatsApp and TikTok) in 2023, with an expected decline in consumption from Facebook. Gulf Cooperation Council (GCC) countries expect to see a 35.8% increase in news consumption via the same social media platforms in 2023. These trends suggest a fast-moving media environment that warrants making media literacy a key priority for the region.

Non-government initiatives to improve media literacy

Despite the lack of government action, there are several non-government initiatives in the MENA region focused on improving an audience’s ability to analyse news and information in changing digital environments. One example is the Media and Information Literacy (MIL) program in Jordan and Palestine, where students are receiving media training in school. Another example is The Day, an e-learning platform that offers some free media literacy modules to educators in the Middle East. The Day’s media literacy program is being used at regional educational institutions including GEMS Dubai American Academy, Robert College of Istanbul, and the Asamiah International School in Jordan.

However, these initiatives require government support and funding to thrive and have a long-term impact. Reports published by United Nations Alliance of Civilizations (UNAOC) have shown that implementing media literacy curriculum in schools, especially in primary and middle school, can help students critically analyse news coverage while combating hate speech and prejudice. The MENA region requires more institutional support and funding for media literacy education. The United Kingdom model offers one potential pathway; the country’s Department for Digital, Culture, Media & Sport launched a Media Literacy Taskforce Fund to award grant funding to projects piloting new methods of providing media literacy techniques for citizens.

Social media highlights media literacy’s importance

MENA’s desire for more local and innovative media approaches will shape the region’s media landscape this year. Younger generations appear to be driving changes in media consumption, with an increased interest in TikTok and platforms including Twitter and Facebook.

Based on the survey conducted by Think, MENA audience’s readership of local newspaper publications is expected to increase by 12.1% this year, with respondents in the Levant and North Africa expecting to double consumption of local news in the coming year. Innovative approaches to media content are being prioritised, with audiences showing more interest in consuming news from podcasts. Media consumption via podcasts is expected to increase by more than double over the next year across the MENA region.

Below is a table comparing survey responses from different parts of the region, in terms of trust toward news channels as well as consumption habits.

Levant and North Africa consumers

GCC consumers

Trust:

Tend to trust international news networks slightly more than local news or news on social media.

Trust:

Tend to trust local news slightly more than international news or news on social media

Media consumption habits:

While current levels of news consumption via Twitter are not known, audiences expect to increase consumption on the platform by 30% over the next year.

North Africa expects to see a 41.6% increase in consumption of news via social media (Twitter, Instagram, WhatsApp, and TikTok), with a reported decline in consumption from Facebook.

Media consumption habits:

GCC expects to see a 35.8% increase in news consumption via social media (Twitter, Facebook, Instagram, WhatsApp, and TikTok) in 2023.

They are expected to increase consumption of local news by an average of 12.1%.

GCC audiences expect to increase consumption of international news by an average of 17.5%.

Consumption of media from podcasts is expected to increase by more than double over the next year across the MENA region.

Significant growth – 50% - is also expected in consumption of news via international newspaper publications by next year .

 

Changing habits requires media literacy action.

Results from Think’s survey demonstrate that MENA countries risk falling further behind on media literacy as audiences begin to consume more news from social media platforms. By investing in programmes that boost media literacy and prioritise education from a young age, regional governments can ensure their citizens are better equipped to identify misinformation and disinformation. Media literacy can also benefit society more broadly by encouraging citizens to engage more critically with news and information. A more literate society is a more resilient society.

Based on a survey commissioned by Think Research and Advisory in the MENA* region over a sample of 1600 respondents** surveyed online in December 2022.

*Countries surveyed: Lebanon, Jordan, Saudi Arabia, Qatar, Kuwait, UAE, Oman, Bahrain, Egypt, Tunisia, Algeria, Morocco

**Sample audience representative of internet consuming population

[1] The Rise of Fact-Checking Sites in Europe (ox.ac.uk)


Agritech offers path to food security in Middle East and North Africa

Middle East and North Africa (MENA) countries are increasingly using agriculture technology to address food security challenges. Pre-existing pressures, such as water scarcity, lack of agricultural land, population growth, political instability, and regional conflict have been further exacerbated by global challenges, with the war in Ukraine, the fallout of the COVID-19 pandemic, and global inflation all contributing to soaring food costs. Innovations in “agritech” can help transform the region into one with greater food system resilience and more sustainable water usage. Saudi Arabia and the United Arab Emirates (UAE) are spearheading the sector’s regional development, making sizable investments in ventures that leverage big data and innovative farming techniques to help reduce reliance on food imports. Improvements in digital infrastructure and access to finance can help the region take advantage of agritech while encouraging intra-regional investment.

As most of the world grapples with pressing food security challenges, the MENA region faces a unique situation. Taken as a whole, the region has the lowest level of food self-sufficiency, is the world’s largest food importer and boasts the biggest water deficit. Syria and Yemen ranked in the bottom three countries globally in the 2022 Global Food Security Index (GFSI). Excluding Gulf Cooperation Council (GCC) countries, year-over-year trends in the region through 2020 show a worsening trajectory.

Source: World Bank

Regional countries are thus in an increasingly difficult position as a global recession looms and as climate change exacerbates local challenges. This has helped lead to a push to reduce high reliance on imports and food subsidization, particularly in the capital-rich GCC, where an average of 90% of food products are imported. Imports and subsidies could be reduced by strengthening trade links and supply chains, and encouraging local agricultural production. However, producing more food locally would be costly due to limited access to water—some 85% of fresh water in the region is already used for agriculture. For this reason, policymakers are increasingly looking toward agritech to address food insecurity.

Agritech takes off in MENA, led by Saudi and UAE

The agritech sector focuses on developing technologies to boost agricultural productivity. This includes developing new seeds and fertilizers, using artificial intelligence (AI) and robotics to increase crop yields, and using drones to monitor and manage crops. Major advancements in AI and greatly expanded computing capacity have laid the groundwork for agritech to help ensure resilient food systems. Agritech companies have seen substantial growth globally and have begun to take hold in the MENA region. The volume of agritech investments in the MENA region saw a compound annual growth rate of 122% between 2018 and 2021, with funding in the sector rapidly increasing since 20208. The sector is set to continue to grow steadily, with aggregated funding across the MENA region having jumped to $250 million in 2022 from $97 million in 2021. While agritech venture capital in MENA is still relatively small compared with other regions, investments in the region as a share of global agritech investments increased to 4% in 2022 from 1% in 2021.

Saudi Arabia and the UAE, which have made improving food security a core tenant of their national food security strategies, lead the development of agritech in the region. In Riyadh, the government uses a mix of private and public partnerships to invest in agritech innovations, in line with the Kingdom’s Vision 2030 plan. For instance, Wa’ed, the venture capital arm of Saudi Aramco, invested $18.5 million in Saudi agritech startup Red Sea Farms, which uses technology to grow produce in harsh, water-scarce environments. Additionally, Natufia Labs, which developed the world’s first “smart” indoor garden, relocated to Saudi Arabia from Estonia in 2021, citing the Kingdom’s focus on science and technology and its desire to invest in innovative technologies.

In the UAE, the government is making significant investments in agritech companies as it looks to reduce imports through vertical farming, hydroponics, and patented technology that helps track harvests. The Abu Dhabi Investment Office (ADIO) set up a $200 million fund to invest in a range of early-stage companies over the coming years, with a large increase in investment in 2022.

Agritech companies have adapted to the needs of individual nations, seeing growth across the region. In Egypt, companies are using the ubiquity of smartphones to aid farmers, launching apps that provide a variety of agriculture services. For example, some apps enable direct access to microfinance and aid to puchase agriculture products, while others connect farmers with storage facilities to help aggregate crop storage and reduce costs. This more low-tech approach is finding success across the region.

Challenges and Opportunities

The agritech sector still faces barriers to access. For many MENA countries, these include insufficient access to digital technology and data, a lack of financial resources and supporting infrastructure, and few policies that promote agritech innovation. There has been significant technological progress in recent decades, though many countries still lag behind. For instance, the UAE and Kuwait have higher access to digital technology than countries such as Yemen and Lebanon, thereby inhibiting equitable and widespread innovation. Over time, humanitarian aid and FDI can help reduce the gap. For example, Saudi Arabia has been a key supporter of the United Nations’ International Fund for Agricultural Development (IFAD), having contributed over two-thirds of its total development assistance from MENA countries.

Agritech companies also rely on data for success. Data, such as information generated throughout supply chains, can help drive data-backed strategies for efficient crop growth, allowing farmers to maximize their resource usage. For agritech startups to be successful, governments need to invest in data collection and sharing, and develop policies that ensure data privacy and security while allowing for its commercial use. However, agricultural data is often not available in the MENA region, either because it is not collected in a systematic way, or due to restrictions—often government regulation—and security concerns.

Finally, access to financing is a major barrier to agritech development. Many of the region’s startups are small and lack the financial resources to fund their own research and development. Additionally, many startups are not yet profitable and need funding to scale up their operations.  Regional governments can play an important role in providing financial resources to these startups, either by enacting policy changes to support startups or through direct grants and investments.

The innovative agriculture approaches taking place across the region, while still in a nascent stage, have paved the way for major advances in ensuring food security. Agritech has already helped reduce imports and enable more sustainable water usage. This important sector can steadily reach fruition so long as governments continue to invest in technology, enact policies that support innovation, and encourage collaboration between regional countries across the income scale. Technology may not be the sole answer to food insecurity, but as part of a comprehensive blueprint it can be a key contributor to more resilient food systems.

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India,Saudi Arabia and the UAE: Cooperation for Global Gain

India and Gulf Arab states Saudi Arabia and the UAE are major players in the global energy scene, the first as a consumer and the second two as producers. As countries around the globe look to combat the effects of climate change – in large part by implementing the energy transition – India’s relationships with these Gulf states will become increasingly important to the world’s ability to achieve its climate targets. Amidst seismic shifts in the geopolitical order, all three states are increasingly asserting more independent foreign and economic policies. They share a desire to play a greater role in global affairs on their own terms, a mutually beneficial economic relationship, and a common need to establish clean energy alternatives. This creates an opportunity for these countries to work together to balance economic growth objectives and their respective energy futures with the global climate agenda – to the benefit of all countries.

India, Saudi Arabia, and the UAE all rely on fossil fuels for economic stability and development while also facing harsh consequences from warming temperatures. All three are increasingly aware of the need to diversify away from this dependence—India because of unpredictable costs and social and environmental imperatives, and the Gulf states due to the economic consequences of future waning demand for hydrocarbons. However, immediate needs for economic stability and growth will keep oil and gas at the forefront for all three states in the decades ahead, contrasting with global efforts to move away from fossil fuels.

Energy has been the bedrock of a deepening relationship between India and the Gulf Arab states in recent years. India is the world’s third largest importer and consumer of oil, with imports comprising 85% of its 5mbpd needs. Before Russia’s February 2022 invasion of Ukraine, over 60% of Indian oil imports comprised crudes from the Middle East, and 35% from GCC countries. Saudi Arabia agreed in 2019 to help India establish emergency oil reserves to protect against future price volatility and supply disruptions. The UAE has also contributed to India’s strategic petroleum reserve (SPR), building the country’s first SPR facility in Mangaluru, on the Arabian Sea. In tandem, both Gulf states are pursuing investments in Indian downstream oil and gas projects – including the mega West Coast Refinery, slated to add 60mmtpa of refining capacity – that will be vital for India to meet its future energy requirements.

In this way, India’s respective relationships with Saudi Arabia and the UAE are strategically significant, and cooperation and collaboration have grown beyond energy. India established formal strategic partnerships with Saudi Arabia in 2010 and with the UAE in 2017, and Saudi Arabia and India formed in 2019 a Strategic Partnership Council to steer the Indo-Saudi relationship, with sub-committees specifically focusing on deepening cooperation across politics, security, society and culture as well as the economy and investments. Recent changes to the global balance of power have pushed these countries even closer together. All three are focused on pursuing pragmatic policies that will enable them to achieve economic objectives alongside geopolitical influence and independence, taking advantage of increased polarisation between the U.S. and China, Russia, and Iran. The Gulf’s traditionally close ties to Pakistan are no longer a barrier to greater engagement with India, and the Gulf states will continue to advocate reducing tensions between New Delhi and Islamabad, drawing on their strong relations with both countries. The three states’ similar outlooks and ambitions make them natural partners, particularly as they each seek to step out from underneath the umbrella of Western policy directives.

This gradual alignment has manifested itself in greater economic cooperation. The UAE is India’s third-largest trading partner and Saudi Arabia is its fourth. The UAE and India’s Comprehensive Economic Partnership Agreement (CEPA) came into force on May 1, 2022, with bilateral trade increasing 14% in the period from May 2022 to March 2023. This new impetus has also resulted in the resumption of free trade agreement negotiations between India and the broader Gulf Cooperation Council (GCC) countries, focusing on energy and food security.

For Saudi and the UAE, India is a market growing in volume and importance, particularly as governments and companies around the world face pressure to reduce fossil fuel use. Indian Prime Minister Narendra Modi told delegates at India Energy Week in February 2023 that India’s oil demand share may rise to 11% of the global market in the coming years, up from 5%. As such, India is one of just a few countries globally planning for fossil fuels to comprise a larger percentage of their energy mix in the future – despite calls for the opposite.

Eager to monetise their hydrocarbon resources before global demand tails off, Saudi Arabia and the UAE each recently announced plans to boost oil production. Saudi Aramco stated in March 2020 that it would increase output capacity to 13mbpd by 2027, and in November 2022, the Abu Dhabi National Oil Company (ADNOC) brought forward to 2027 its plans to reach its 5mbpd production capacity. Both Gulf states will look to shore up market share in India, given its demand projections.

India’s energy needs are intrinsically linked to its economic transformation. As the world’s fastest growing economy, India is estimated by the IMF to become the third largest by 2027 in part due to its plans to become the “factory of the world” through its “Make in India” programme. As countries and companies shift away from dependence on China – for political and business confidence reasons – and China itself moves toward consumption-led growth, India is poised to become a global manufacturing centre.

India’s ambitious economic goals will require significant investment in infrastructure development, including energy infrastructure to distribute the higher volumes of energy required to power India’s growing economy. India is projected to experience the largest increase in energy demand of any country over the next two decades as the country seeks to meet the needs of its growing 1.4 billion population and insert itself into the global supply chain.

But India’s growing energy demand comes at a cost. Approximately 80% of current demand is being met by coal, oil, and solid biomass. As a result, India has the highest growth rate in carbon emissions and accounts for 7.5% of the world’s emissions. It is also home to 14 of the 20 most polluted cities in the world. With temperatures across Asia rising twice as fast as the global average, India is highly vulnerable to the effects of climate change: UNICEF estimates that 17 out of 20 people in India are exposed to extreme weather conditions and disasters such as floods, droughts, and cyclones.

As this year’s G20 president, India has a platform from which to advocate policies – economic, energy-related, and political – that serve the interests of New Delhi, Riyadh, and Abu Dhabi. The South Asian giant is prioritising the positions of developing and under-developed countries, particularly with regard to energy security, energy justice, and ensuring a sustainable energy transition.

Oil price fluctuations in 2022 have forced India to create a strategy to protect itself from global price shifts, and ensuring energy is accessible and affordable is India’s primary energy agenda focus. This means expanding renewable energy capacity and distribution infrastructure while continuing fossil fuel use for the foreseeable future, despite the environmental consequences and impact on India’s contribution to global emissions. India currently provides fossil fuel subsidies valued nine times higher than those for renewable energy. It plans to focus on developing its domestic hydrocarbons production, largely due to a forecast 500% increase in gas demand given Indian targets for gas to fulfil 15% of the energy mix by 2030, up from 6% now. India also intends to expand its domestic coal capacity, with projected growth of 17% by 2031-2032.

India has announced a net zero target year of 2070, but progress has been slow. There is no roadmap detailing how India intends to reach its goal  and its National Determined Contribution (NDC) targets, submitted in August 2022 in accordance with the Paris Climate Agreement, only reflect achievable results under existing climate action. Despite having one of the fastest growing renewable energy capacities in the world, India must make further emissions cuts by 2030 to meet its obligations under the 1.5-degree pathway. The International Energy Agency (IEA) has estimated that to reach net zero by 2070, an average of $160 billion per year is needed across India’s energy economy between now and 2030.

Benefitting from recent oil windfalls, Gulf states could invest in India’s new energy infrastructure for the post-oil era. By doing so, Gulf states can ensure new revenue streams while remaining relevant to one of the world’s largest economies and helping it meet its climate objectives.

The UAE is currently leading the investment charge, exploring new partnerships to take advantage of India’s plans to add 500GW of clean energy over the next seven years. UAE-based entities holding stakes in Indian renewable energy companies include the renewable energy company Masdar, the Abu Dhabi Investment Authority (ADIA), the Mubadala Investment Company, and Abu Dhabi’s International Holding Co.. The UAE and India are also reportedly close to agreeing a renewable energy interconnection project linking the two countries’ grids under One Sun, One World, One Grid (OSOWOG), an initiative launched by India, France, and the United Kingdom in 2021.

For its part, Saudi Arabia is considering the commercial viability of connecting the UAE emirate of Fujairah with the Indian coastal state of Gujarat via deep sea cables to create an electricity grid between India and the Gulf countries, at a cost of $15 billion to $18 billion. Saudi state investment has been slower than investment from neighbouring UAE. However, the Kingdom’s sovereign wealth fund, PIF, is developing an India strategy specifically looking at India’s renewable energy infrastructure investment potential, in line with Riyadh’s Vision 2030 priority areas.

India’s transformation presents an opportunity: the Gulf states can diversify their revenue streams in line with their respective economic plans by investing in the fastest growing economy in the world, and benefit from knowledge sharing and technological development as all three countries take advantage of their natural potential for large-scale renewable energy projects. In return, India can harness its clean energy potential with Gulf financial backing, positively impacting global climate goals. As IEA Executive Director Dr. Fatih Birol and Amitabh Kant, CEO of NITI Aayog (National Institution for Transforming India), wrote in a commentary for The Times of India, “India’s climate adaptation and mitigation ambitions are not just transformational for India but for the entire planet”. The Gulf can – and should – play a role in that process.


Energy Interconnectivity Projects to Receive Boost from Regional Rapprochement

As regional political dynamics shift, joint Arab energy projects stand to gain. Prior to the reintegration of Syria into the Arab fold and the landmark China-brokered resumption of diplomatic ties between Iran and Saudi Arabia, Arab states spent years working on joint electricity grid and energy projects linking Gulf states, Jordan and Egypt with Iraq and Lebanon in what was then seen as a rare window for mutually beneficial cooperation. With recent region-wide reconciliation and a demonstrated desire for greater economic collaboration, these interconnectivity projects are likely to receive an immediate boost despite structural and political challenges that had previously slowed their implementation.

Mutually Beneficial Deals

Recent planned inter-Arab energy projects centred on Lebanon and Iraq, the subjects of intense competition between Iran and Arab states. Both states suffer chronic economic and energy crises. Iraq, despite ranking as the second-largest oil producer in OPEC, witnesses severe electricity blackouts due to a shortfall in electricity generation compounded by 8% growth in annual electricity demand. In Lebanon, the national electricity grid currently provides citizens with 4 hours of electricity per day.

In a deal reached in 2021 and signed in July 2022, Egypt agreed to provide Lebanon – via the disused Arab Pipeline - with 650 million cubic meters of natural gas annually at prices 30% below market rates. This would generate an additional 450 MW for Lebanon. However, it is uncertain whether the deal will proceed on these terms as it would make better economic sense for Egypt to sell the allocated gas to Europe at a higher rate. A separate agreement reached between Jordan and Lebanon in 2021 would see Jordan provide Lebanon with 250 MW of electricity from its national grid via Syria. Both deals were brokered by the US and are to be at least partly financed by the World Bank.

Other deals include a July 2022 interconnectivity agreement between the Saudi Electricity Company and the Iraqi Ministry of Electricity entailing the construction of a 435 km-long grid connection linking Arar, Saudi Arabia to Yusufiya, near Baghdad to carry 1 GW of Saudi electricity to Iraq by 2024. In October 2022, Iraq and Jordan broke ground on a 330-km power-line linking Jordan with the Iraqi border town of Al Qaim in Anbar to provide 400MW of Jordanian electricity to Iraq by the end of 2023. A project between Kuwait and Iraq through the Gulf Cooperation Council Interconnection Authority (GCCIA) would see Kuwait provide 500MW of electricity to Basra by the end of 2023, with the potential to increase future Gulf electricity supplies to Iraq to up to 2 GW.

Obstacles Preventing Progress Thus Far

Despite mutual desire, economic need and international support for these agreements, domestic political and institutional challenges have hindered their implementation thus far.

In Lebanon, the government amended electricity tariffs and in 2023 launched a call for applicants for an electricity regulatory body in response to demands from the international community for a regulator. However, as of April the country still does not have a president, has not formed its electricity regulator – which lacks any real mandate in reality - and has failed to audit Electricity du Liban, the state-owned electricity utility. The latter two reforms are conditions set by the World Bank in order for Lebanon to secure a $300 million loan for the purchase of Egyptian gas and Jordanian electricity. French diplomats in February estimated that Lebanon requires “two years” to meet reform requirements. Meanwhile, Egypt’s deepening currency crisis may impact its decision to sell gas to Lebanon at preferential prices.

Iraq’s contentious government coalition-building in late 2022 revealed deep divisions among Shia political elite, raising questions about the impact of such divides on economic projects. Concerns over the inefficiency and transparency of the energy sector continue to plague Iraq, as its grid overhaul and energy generation projects have been met with delays and rising costs. Negotiations over electricity tariffs between Arab states – namely Iraq and Kuwait - have also slowed progress.

Despite the reopening of Gulf embassies in Damascus and Syria’s reintegration into the Arab fold with its expected attendance at the May 2023 Arab League summit in Saudi Arabia, competition for influence in Syria between Tehran and Arab states continues. Pro-Iran factions within Syrian state institutions are sceptical of—if not hostile to—the prospect of Syrian economic reliance on Arab states that a few years ago supported regime change in Damascus. Attempts at Arab-Syria economic, trade, and security cooperation during the past five years were frustrated by these factions, along with Hezbollah. However, elements within the Bashar Al Assad regime may use the inter-Arab energy projects’ implementation as bargaining chips for greater resources and international recognition as the regime looks to cement power and rebuild from the civil war and the 2023 earthquake. But while US diplomats have given multiple assurances that Egyptian gas and Jordanian electricity will be exempt from sanctions, growing domestic political opposition in Congress to Caesar Act exemptions has sown doubt in Cairo, Amman and Damascus that the promised sanctions waiver will hold.

Potential Impact – All Parties Stand to Gain

If implemented, the immediate impact of the energy connectivity deals’ is clear: economic relief for Lebanon and Iraq. For Lebanon, the Egypt and Jordan deals’ combined 700 MW would double the Lebanese grid’s electricity generation to eight hours per day and reduce Lebanese citizens’ reliance on expensive diesel-run generators. Gulf and Jordanian electricity would act as a stopgap for Iraq to help meet some of its higher electricity demand during summer months - when it requires an additional 10-12 GW at times of peak loads - as the country moves forward with domestic electricity generation and grid overhaul projects.

Another near-term impact would be increased Iraqi, Lebanese and Syrian co-dependence on Arab states and Arab energy at the expense of Iran. Iraq currently relies on neighbouring Iran for 1.2GW and 5 million cubic meters of natural gas daily - roughly one-third of its energy needs - leaving Baghdad dependent on Tehran’s energy policies and political calculus. Iran has frequently halted energy supplies to Iraq, most recently in the summer of 2022 over delayed Iraqi payments held up by 2018 US sanctions. In 2021 it stopped energy supplies due to cold weather, cutting off 6.5GW of Iraq’s electricity supplies at once. Gulf Arab and Jordanian electricity would offer Baghdad a more reliable energy source.

The energy deals could also serve as a pillar of Arab outreach to Syria. With reintegration in full swing, the long-discussed energy deals are a logical first step towards putting diplomacy into action. Both Lebanon deals would provide Syria with natural gas and electricity exempt from US Caesar Act sanctions. With 18% of its pre-war electricity production off-line, the supplies of gas and electricity would allow Syria to immediately add hours to its strict electricity rationing program which currently provides residents with as little as three hours of electricity per day.

With the infrastructure of the 1,200km Arab Gas Pipeline running from Egypt to Lebanon through Syria and Jordanian electricity grid connections with southern Syria already in place, the two Lebanon deals could be implemented relatively swiftly. The projects could help to convince pro-Iran elements within the Al Assad regime that economic ties with Arab states are both beneficial and the most effective route to bypassing crippling US sanctions. Arab diplomats are already looking at the potential implementation of the deals as a stepping-stone to wider economic cooperation and are actively lobbying Washington to expand the promised sanctions waiver to include post-war reconstruction and rebuilding of earthquake-hit areas in northern and western Syria. Concessions from the Assad regime in return are, however, lacking – a point of concern for Western policymakers as they observe Gulf outreach to Damascus.

Ushering in a New Era of Cooperation

The winds of change brought by de-escalatory measures and warming relations between Gulf states and Iran, Syria and the Arab world, Turkey and Egypt are breathing new life into Arab energy interconnectivity projects.

Tehran’s adherence to its commitment to non-interference would remove much of the political and financial incentive for non-state actors and insiders to block the deals. A reactivation of trade and investment deals may shift Iranian perceptions of Saudi Arabia solely as a regional rival and mollify Tehran’s opposition to greater Arab economic involvement in Iraq, Syria and Lebanon, long viewed by Iran as its spheres of influence. Gulf states can leverage their ties with Washington to push America to follow through on promised Caesar Act exemptions and add their weight to the international community’s pressure on Lebanon to complete energy sector reforms.

In line with the regional trend towards greater economic cooperation, increased Arab energy connectivity offers an immediate and logical way to boost economic ties and address shared challenges. With the legal frameworks, tariffs, multilateral agreements, support of the international community and much of the infrastructure in place, inter-Arab energy and electricity projects offer a mutually beneficial first step in regional leaders’ move towards greater multilateral cooperation. By providing needed energy and economic relief to Lebanon, Syria and Iraq, epicentres of Arab-Iranian rivalry post-2003 US invasion of Iraq, the projects’ implementation would serve as a fitting coda to two decades of competition and as the dawn of a new era of cooperation rises.


With Tourism Set to Boom, Saudi Arabia Must Upskill its Workforce

Saudi Arabia is poised to benefit from a surge in tourism in the coming years as it opens its borders to foreign visitors eager to tour its planned smart cities and discover historical sites in its vast desert. The Kingdom’s budding tourism industry depends in large part on whether authorities can expand and train the labor force to keep up with its giga- and mega-projects’ ambitious goals. The government has made notable progress expanding the workforce, particularly by increasing female participation. The development of well-designed technical and vocational training programs can help Saudi Arabia launch its economy into the future, underpinned by bourgeoning tourism.

The Kingdom has announced mega- and giga-projects worth at least $950 billion since launching its Vision 2030 economic diversification plan in 2016. The primary objective of the projects, with around $60 billion already disbursed, is to increase Saudi’s competitiveness in tourism, construction, infrastructure, and other non-oil sectors. Run by the Public Investment Fund (PIF), the Vision 2030 program also aims to enhance the Kingdom’s economic resilience through investments in local strategic sectors and the diversification of the fund’s global assets.

Another key ambition is to transform PIF, whose assets are expected to reach $1.86 trillion by 2030, into one of the largest sovereign wealth funds in the world and consolidate its position in shaping the global economy. The mega- and giga-projects play a major role in achieving that goal. In 2022, Saudi witnessed significant progress in the launch and implementation of giga-projects, with a particular focus on the tourism sector. These investments are expected to boost non-oil economic activities and generate job opportunities for the Kingdom’s growing labor force.

Giga-projects drive Saudi’s budding tourism sector

Tourism plays an important role in Saudi’s transformation plans through Vision 2030. Prior to its launch, tourism in Saudi Arabia was limited to religious visits and pilgrimages. Figure One below demonstrates just how critical tourism is with regard to job creation and GDP contribution. Saudi Arabia’s goal is to triple tourism sector employment to 1.6 million people and triple its contribution to GDP to 10% by 2030.

Figure One highlights five key giga-projects launched under Vision 2030 with expected completion dates. The first phase of Neom, a planned smart gigacity in the country’s northwest, is expected to be completed in 2030. It gained momentum in 2022 as the NEOM Bay Airport launched international flights, and construction commenced on The Line, a planned car-free linear city within Neom. Korean companies Samsung and Hyundai were jointly awarded a tunnel construction project worth $1.1 billion for 12.5 kilometers of the total 28 kilometers of planned tunnels in The Line, and construction started in November. The Neom project is the Kingdom’s largest, estimated to cost $500 billion with phase one valued at $320 billion—half of which will be financed by PIF. The project is expected to create at least 463,500 jobs.

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Neom includes four main mega-projects: The Line, Sindalah, Trojena, and Oxagon, all unveiled since 2016. The Line is expected to create 380,000 jobs and add $48 billion to the Saudi GDP. The project aims to have one million residents by 2030 and nine million by 2045 – and hopes to welcome five million tourists by 2030. Sindalah, announced in late 2022, is Neom’s first luxury island destination and is expected to welcome tourists in 2024. The island is projected to create 3,500 jobs for the tourism and hospitality sector and welcome 2,400 visitors a day by 2028.

Trojena, a year-round outdoor skiing and adventure sports destination located in mountainous terrain along the Gulf of Aqaba, won the bid for the 2029 Asian Winter Games. With completion expected in 2026, Saudi hopes Trojena will welcome 700,000 tourists by 2030 and create 10,000 jobs, adding around $800 million to Saudi GDP. Oxagon, a floating industrial city to be built on 100% clean energy, is projected to create 70,000 jobs and begin receiving residents by 2024.

A growing labor force, with a focus on specialization

Vision 2030’s success will depend in part on the growth and development of Saudi Arabia’s labor market to ensure the sustainability of its investments. The Kingdom is committed to investing in its workforce through two parallel tracks: growing its workforce and upskilling its population.

The Kingdom’s labor force participation rate increased from around 54% in 2016 to 61.5% in the third quarter of 2022–its highest ever. The inclusion of women in the workforce is also a critical element to the success of giga-project investments. Due to the easing of Saudi social restrictions on women and an active policy to increase female participation in the workplace, women now make up about 37% of the Saudi national workforce–exceeding Vision 2030’s 30% target. A Morgan Stanley report also indicates that about 60% of Saudi women who are not yet employed hope to join the workforce in the next two years.

The government has implemented stricter measures to increase Saudi participation across all industries, part of its “Saudization” policy requiring companies operating in the Kingdom to employ Saudis on a quota basis. This policy, which has been active since 1985, is a critical driver in developing a skilled labor force. The government has coupled Saudization with training programs and initiatives, seeking a labour force transformation as the population is set to increase to 50-60 million by 2030.

With most projects expected to be completed within seven years, Saudi Arabia has been training and developing Saudi workers to specialize in the fields of tourism, leisure, and hospitality. Some 94% of high school students attend four-year college programs, compared to 56% in OECD countries. Still, the government recognizes the importance of developing technical and vocational skills that are not typically part of four-year college education programs. Towards this end, Saudi Arabia in 2021 launched the Vision 2030 Human Capability Program, which aims to upgrade the capabilities of the Saudi labor force through training, development, and skill-building initiatives.

The Ministry of Tourism has also implemented several training initiatives, education programs, and startup and business accelerators in the fields of tourism, hospitality, and leisure. These programs include the Tourism Trailblazers initiative, which aims to equip 100,000 Saudis with key vocational skills in tourism and hospitality and has partnered with leading global training institutions from France, Spain, Switzerland, Australia, Italy, and the United Kingdom. Further, the World Trade Organization, which set up its first Middle East regional office in Riyadh, in 2023 signed an agreement with the Kingdom to set up training programs and initiatives, including online courses and quality certification programs. These skill-based training initiatives will help support giga-projects’ execution while contributing to economic resilience and innovation post-2030.

Conclusion

Saudi Arabia’s tourism sector is expected to witness major growth, underpinned by large investments financed through the PIF. These giga- and mega-projects come with significant labor demand, and the Kingdom must develop the capacity and capability of the Saudi labor force through well-designed technical and vocational training programs as more new projects are launched in the coming years. The success and sustainability of those investments hinge in large part on ensuring labor force programs are appropriately designed and implemented in a timely fashion.


6 Trends Shaping the MENA Region in 2023

Public sentiment polling data drawn from 12 MENA countries highlights regional attitudes to inflation, energy volatility, and physical security.

INTRODUCTION

Middle East and North Africa (MENA) countries face a multitude of challenges in 2023 that enhance the need for collective action and greater cooperation. The substantial windfall from oil and gas revenue due to the war in Ukraine presents an exceptional opportunity to invest in the region’s future as global financial conditions become increasingly squeezed. The International Monetary Fund (IMF) estimates the region’s oil and gas exporters will realize additional cumulative oil revenues of $1.3 trillion over the next four years. These significant resources can be invested to accelerate the region’s economic transformation, strengthen resilience in the face of future shocks, generate prosperity, and advance overall development.

The year 2022 witnessed a newfound regional dynamic driven primarily by private sector investments and active diplomacy. Think Research and Advisory expects this dynamic to accelerate in 2023 as more capital is invested in the region and barriers to economic opportunities are removed, and as MENA countries take on a larger, more active role in global affairs.

At the tail-end end of 2022, Think Research & Advisory commissioned a survey across 12 regional countries aimed at measuring public expectations for the coming year. The survey found that while MENA populations generally expect to spend more on food, fuel, and electricity, they also broadly expect their sense of physical security to improve over the next 12 months.

1. A NEWFOUND REGIONAL DYNAMIC

Regional governments displayed newfound confidence in 2022. This was driven in part by high oil prices and the return of energy security to the global agenda, but also by a growing belief in the region that MENA has come to occupy a pivotal role in global affairs. This confidence gave rise to policies supportive of the region, such as the Middle East Green Initiative, as governments increasingly asserted their national and regional interests.

The new dynamic played out on the world stage, as Europe grappled with the challenge of sourcing new oil supplies amid OPEC+ production cuts. It also took place as Egypt hosted the COP27 Climate Change Conference, ahead of the UAE’s hosting of the gathering in late 2023. During COP27, the Arab Coordination Group announced $10 billion in funds to address the global food security crisis, mitigate the effects of climate change, and strengthen climate resilience. Further, Qatar’s successful hosting of the World Cup not only captured Arab sentiment the world over, but it also demonstrated to other regions of the world that they too could step forward and host international tournaments. In 2022, the Middle East made a clear statement of intent about its togetherness and global reach.

As MENA braces for continued challenges in 2023, there is a growing sentiment that regional countries can work together to secure economic and social stability for the benefit of all countries and citizens. This goal is not new, but as dynamic young leaders take the stage in the region, it has renewed relevance. Achieving regional self-reliance and strengthening resilience are critical first steps towards managing complex shifts in the distribution of global power - as well as shoring up regional stability at a time of global economic uncertainty.

Key takeaway: Intraregional relations are expected to advance positively in the areas of energy, technology, climate, economics, and security. Resource-rich Gulf Cooperation Council (GCC) countries , led by Saudi Arabia and the UAE, will continue to invest nationally and regionally, drawing on lessons learned from previous oil booms. It is expected that new investments will be better placed to support diversification and economic transformation, thereby enhancing economic resilience and advancing prosperity.

2. GCC TO TAKE PROACTIVE ROLE IN GLOBAL AFFAIRS, BALANCE GREAT POWER TENSIONS 

GCC countries have taken a nuanced approach to Russia’s invasion of Ukraine - balancing the interests and objectives of the U.S., China and Russia - but crucially, leveraging their relationships with each to make the region a pivotal player in the shifting global geopolitical landscape. All GCC countries voted in favour of a UN General Assembly resolution in March 2022 demanding Russia withdraw its forces from Ukraine. The GCC has also pursued a series of soft power initiatives supplementing this position.

The U.S., China and Russia will continue to play important, distinct roles in the region, regardless of the tensions between themselves. The U.S. will remain a primary security partner, but is moving towards regional capacity-building with an increased reliance on technology as it draws down its physical military presence. China will not seek to fulfill any strategic security gap that emerges from Washington’s shift, with Beijing focusing instead on enhancing economic ties—demonstrated by President Xi Jinping’s visit to Saudi Arabia in late 2022. For its part, Russia will continue to pursue bilateral ties with GCC countries given the significance of oil to their respective economies. Moscow will also remain engaged in Syria and across North Africa, important theatres for the broader region’s security and economic stability.

GCC countries’ ability to sit across the widening political chasm post-Russia's invasion of Ukraine has led to greater diplomatic involvement on the international stage. Qatar played the role of mediator during the 2021 U.S. withdrawal from Afghanistan, and this trend has continued with Saudi Arabia’s instrumental part in negotiating the release of British hostages from Ukraine in 2022. The Kingdom, alongside the UAE, also coordinated a prisoner exchange that saw American basketball star Brittany Griner return home from Russia before Christmas.

The Gulf region has also become increasingly active in creative foreign policy arenas: sports and cultural diplomacy; knowledge exchanges; investment; and skills and technology transfers across key and developing sectors in their economic diversification programmes. This is a trend that is likely to continue.

Key takeaway: 2023 will see GCC countries combine their balanced, pragmatic, and creative approach to foreign policy with a more proactive diplomatic presence in global affairs.  Despite, or because of, the growing multipolarity in international geopolitics, Gulf countries will continue to carve out an integral role for themselves as key interlocutors between the U.S., China, and Russia. The region more broadly will build on its major soft power successes in 2022 to raise its profile as a centre for innovation, forward thinking, and social entrepreneurialism.

3. ECONOMIC OUTLOOK STRONG FOR ENERGY-RICH STATES, CHALLENGING FOR EMERGING COUNTRIES

Economic activity in MENA countries remained generally strong in 2022, but international developments and worsening global economic and financial conditions had varying impacts on the region’s economies. Windfall oil and gas revenue due to Russia’s war in Ukraine resulted in large external and fiscal surpluses, allowing energy-rich countries to expand investments in non-hydrocarbon activities, launch ambitious state-driven development plans, and register robust growth while containing inflation. However, rising commodity prices intensified food security concerns in the region’s emerging economies given their high dependence on energy and food imports. Soaring prices resulted in higher living costs and weakened purchasing power, with inflation reaching double digit levels and governments increasing social spending to maintain social stability.

The projected slowdown in the world economy, broadening inflation and high interest rates, together with a prolonged energy crisis and significantly tighter global financial conditions, are expected to pose momentous challenges for MENA countries in 2023, including a deceleration in the region’s overall economic activity. Prospects are, however, mixed. Energy-rich countries will continue to benefit from considerable oil and gas revenues in 2023. Policymakers will need to maintain momentum on pro-business and economic modernization reforms and ensure that financial resources are invested to expand non-hydrocarbon economic activities. The region’s emerging economies will need to navigate an increasingly complex environment. Policymakers will have to control inflation, ensure food security and protect the vulnerable, while sustaining growth and maintaining macroeconomic stability. High interest rates and squeezed financial conditions will increase debt service costs and tighten access to international financial markets, adding pressure to already-strained budgets and financial stability. Meanwhile, the region’s fragile low-income countries will continue to rely on foreign aid and humanitarian assistance to secure basic needs.

There are some bright spots for the region’s economies in 2023. Travel and tourism are expected to fully recover, providing a needed boost for countries such as Egypt and Jordan. Moreover, energy-rich countries are pledging large financial investments in MENA’s emerging economies.

Key takeaway: Energy-rich countries in the region will continue to benefit from surplus revenue, offering them the opportunity to spearhead diversification through investments and continued economic modernization programs. For the region’s emerging economies, 2023 will pose numerous economic and financial challenges that could heighten their reliance on regional and international support and further underscore the need to address long-standing structural issues.

4. CLIMATE COOPERATION SET TO INCREASE AS GLOBAL WARMING BITES

MENA countries are experiencing the impact of climate change, with water increasingly scarce and frequent irregularities in weather patterns. Flash floods are recurrent in the Gulf, and high-intensity sandstorms are more frequent across the region, particularly in Iraq. According to the World Bank, sandstorms create annual losses of $13 billion across the region.

The region is the most water-scarce in the world, with access getting worse by the day. Water scarcity in fragile countries such as Yemen, has exacerbated conflicts and led to the emergence of water disputes. Due to Yemen’s geographic position, instability could spill out further into the region and threaten the security of the Bab Al Mandab strait. Despite the high stakes, the MENA region is one of the smallest recipients of climate financing globally.

MENA’s acute climate challenges have led to increased regional pledges and initiatives.  Saudi Arabia’s Middle East Green Initiative, along with Iran-GCC and Iran-Iraq sandstorm diplomacy, and Egypt and the UAE’s hosting of COP27 and COP28 are some examples, as Middle East countries help lead the global change to a renewable and low-carbon driven energy future.

Key takeaway: Climate security has emerged as a major threat to economic, national and regional security in the MENA region. Regional cooperation to address climate concerns will increase in 2023. Climate finance initiatives are set to grow, while the region’s hosting of COP27 and COP28 will further galvanize public and private sector funds. While environmental security will help catalyse wider regional cooperation, progress could be impeded by competing interests on hard-line security issues.

5. OIL VOLATILITY EXPECTED TO CONTINUE AND ENERGY SYSTEM TO BIFURCATE

Oil prices soared in 2022, driven by Russia’s invasion of Ukraine, the global economic rebound after COVID-19, supply chain disruptions, and continued underinvestment in the hydrocarbon sector. These factors will continue to shape the oil market in 2023, but global macro-economic uncertainties will increase oil price volatility.

The outlook for global oil demand is uncertain, given that indicators point to stalled global growth. Economic headwinds will tighten global monetary policy, while high inflation will slow economic activity and dampen oil demand. As such, oil prices will swing in 2023, causing consternation for policymakers and creating economic hardship in low-income populations.

In 2022, developed economies were compelled to reconsider hydrocarbons’ contribution to their short- and medium-term energy mix. Nevertheless, oil price volatility in 2023 will hasten North America and Europe’s bid to transition away from hydrocarbons and reduce their dependency on oil and gas markets. There is a clear economic, environmental and political imperative for reducing this dependency, especially given Europe’s move away from Russian oil and gas. However, at COP27, oil producing countries reaffirmed hydrocarbons’ centrality to the future global energy mix – albeit at lower levels – while making a clear commitment to increase hydrocarbon production capacity.

2023 will be a pivotal year as the global energy system begins to bifurcate between hydrocarbon-based countries and energy economies based on renewable and low-carbon energy sources. Oil producers are betting that oil will remain in the global energy mix for longer and that prices will remain high in 2023, enabling their domestic diversification. This is driven by many factors despite the uncertainties. The oil industry’s underinvestment hinders its ability to meet any significant rebound in demand. Additionally, geopolitical risks around the Arab Gulf amid heightened tensions between Iran and its regional and global adversaries could create upward volatility in oil prices as maritime and energy security is threatened.

Key takeaway: Oil prices will remain volatile in 2023, giving rise to challenges for all policymakers. However, we expect energy-rich countries will continue to enjoy the benefits of an oil windfall. This will allow hydrocarbon producers to leverage their revenue surpluses to drive domestic investments alongside economic growth and diversification. The windfall will also strengthen Gulf countries’ position in the global economy. However, a bifurcation of the global energy market between hydrocarbon producers and energy economies driven by renewable and low-carbon energy is occurring, which will cause shifts in global trading alliances.

 

6. IRAN’S DESTABILIZING ACTIVITIES TO CONTINUE AS GCC AND ALLIES BOOST SECURITY COOPERATION

The failure to revive the Joint Comprehensive Plan of Action (JCPOA), or the “Iran nuclear deal”, in 2022 has brought the Islamic Republic of Iran (IRI) closer to becoming a threshold nuclear state. As the U.S. continues to shift its attention towards China and increases focus on Russia, MENA will build on its own nascent efforts to counter Iranian influence and destabilizing activity through regional mechanisms, such as the GCC+3, as well as through new international partnerships.

Baghdad will continue to play a key role in mediating bilateral talks between Saudi Arabia and Iran, although progress will be limited; de-escalation will remain the primary objective, given that the Kingdom, and the wider region, would be the most likely target of any Iranian attack. Separately, the France-backed Baghdad mediation process will also pursue de-escalation with Iran, as opposed to efforts to counter Iranian influence.

In parallel, Russia’s use of Iranian materiel in its war against Ukraine has heightened the global perception of the Iranian threat, particularly in Europe. Regional countries such as Saudi Arabia and the UAE will therefore enhance their security and defense engagement with players such as the UK and the EU – for whom the Iranian threat now feels much closer to home.

Meanwhile, widespread protests across Iran have captured the attention of governments and publics around the world. International support – at least vocally - for the protestors will encourage Tehran to both repress domestic uprisings and demonstrate its resolve. It will capitalise on the international community’s focus on Ukraine to reassert itself through its proxy forces in Syria, Yemen, Gaza and Lebanon.

Key Takeaway:  Iran is likely to intensify its destabilising activities in 2023. Regional countries will work together with global allies to prevent Iranian attacks in key maritime arenas such as the Bab Al Mandab strait and the Strait of Hormuz to minimize risk to energy markets. Iran's persistence in causing instability in the region will result in its continued isolation from the international community and yet the regime will not seek to change course. Moreover, faced with protests and widespread discontent across the country, the Iranian government is under pressure but will continue to bear down on protestors as a means to assert its authority.

 

POPULATION OUTLOOK FOR 2023: A SURVEY

Think Research and Advisory commissioned a survey across twelve MENA countries to uncover public sentiment and expectations for the coming year.Think’s aim was to measure changes in perceived expectations over three key areas: inflation, energy volatility and physical security.

Expected grocery spending

Findings show that populations region-wide expect to spend more on groceries over the coming year. Respondents in North Africa expect on average to spend $175 more on their monthly grocery bill 12 months from now, an increase of nearly 32% from 2022 to 2023. This compares to a 26% increase expected by the population surveyed in the Levant region, and a 17% increase expected by GCC residents.

 

Expected sense of physical security

All countries surveyed expect their sense of physical security to improve over the next 12 months.  The populations of the Levant and North Africa regions were most optimistic about their security improving this year, with 10% and 7% expected increases, respectively. The countries that had the largest percent changes in their expected sense of physical security over the next year are Algeria, Lebanon and Morocco (13.53%, 13.33%, 10.65% increases respectively).

Expected gas and electricity expenditure

Respondents in the Levant region expect to spend on average $83 more on their monthly gas and electricity bill 12 months from now, an increase of nearly 41.23% from 2022 to 2023. This compares to a 39.24% increase expected by respondents in North Africa, and a 23.52% increase expected by GCC residents.

Expected fuel spending

Respondents in North Africa expect to spend on average $83 more on their monthly fuel expenses 12 months from now, an increase of nearly 36.27% from 2022 to 2023. This compares to a 34.79% increase expected by the population surveyed in the Levant region, and a 31.26% increase expected by GCC residents.

 

 

1Based on a survey commissioned by Think Research and Advisory in the MENA* region over a sample of 1600 respondents** surveyed online in December 2022. 

*Countries surveyed: Lebanon, Jordan, Saudi Arabia, Qatar, Kuwait, UAE, Oman, Bahrain, Egypt, Tunisia, Algeria, Morocco 

**Sample audience representative of internet consuming population


APPENDIX 


COP27 and Beyond: Africa’s Gas Dilemma

INTRODUCTION

As world leaders gather in Sharm al Sheikh for the COP 27 climate summit - Africa’s COP - attention is focused squarely on the continent’s energy future. With discussions on climate financing at the forefront of the agenda, so are the seemingly contradictory policies of Western governments, namely those in Europe. As the developed world reiterates commitments to climate goals over the medium to long term, it is simultaneously grappling with the immediate crisis of meeting its energy demand following Russia’s invasion of Ukraine. Africa’s gas potential is clearly in Europe’s sights - even as the bloc’s leaders push for an accelerated energy transition. Africa is faced with a choice: provide gas for Europe now - with short-term economic gain for Africa - or focus funding on the development of renewable energy sources, with long-term energy security, economic growth and stability, and global climate goals in mind.

Europe’s outreach to Africa as part of its strategy to replace natural gas imports from Russia comes with considerable risks that could ultimately delay African countries’ transition to renewable energy. While the proposal could help Europe achieve energy security over the short to medium term, encouraging investment in natural gas risks actively delaying and even undoing efforts made by African states to deploy clean energy programmes, unless the EU facilitates financing for both. Such efforts also risk heightening further the continent’s vulnerability to climate change, which has already had a devastating effect on Africa’s populations.

European leaders have urged their African counterparts to accelerate their transition to clean energy, though financing costs remain prohibitive as green projects carry high risks. However, wealthy nations have failed to deliver on a long-held pledge to provide poorer countries with annual climate financing of $100 billion per year by 2020.1 Further, following Russia’s invasion of Ukraine, G7 leaders agreed in June to back public financing for natural gas projects,2 including installation of 20 floating liquefied natural gas (FLNG) terminals to receive new volumes of natural gas and convert it to heating fuel for Europe.3 EU countries now need to secure LNG supplies in an already tight market.

Countries including resource-rich African nations are now more likely to find financing for the development of hydrocarbon resources (which had previously become hard to secure) as Europe seeks to fulfil its natural gas demand. Financing such projects would fast-track resource development and aid economic development in Africa.

In fact, it would also align with the sentiment expressed in a technical document prepared by the African Union for an energy ministerial held in June via video-link. The document noted that in the short- to medium-term, fossil fuels, especially natural gas, will have to play a crucial role in expanding modern energy access and accelerating the uptake of renewables.4

While investment in Africa’s hydrocarbons – and the natural gas sector – could be beneficial in the near term, it could also carry considerable risk if resources are developed solely with the goal of meeting European demand. European demand is likely to be short to medium term as EU customers are unwilling to sign typical 15-25 year contracts, given that EU energy policy limits the role of natural gas in the energy mix. Further, gas and renewables projects are likely to compete for the same pools of finance -- a prospect that would prove detrimental to the advancement of clean energies.

As long as security of demand is met, natural gas sales provide investors with guaranteed rewards across the supply chain. Conversely, investors in renewable projects are rewarded only if they are engaged in power generation. The financial benefits are less if they are vested in funding grids and energy storage systems in developing markets which are essential pieces of infrastructure for reaching consumers. In other words, investors will be more incentivised to develop gas over renewables projects.

While there might be compelling motivation for gas-rich African countries to develop and export natural gas to Europe, it is important to highlight that doing so will likely be accompanied with time-sensitive risks that could leave states with stranded assets as the world moves to greener forms of energy. Additionally, it carries the risk of undermining advances in developing and expanding clean energy supplies throughout Africa by locking economies into long-term gas infrastructure and contracts. Thus, potential costs for Africa would be extremely high in terms of its development and in relation to climate change risks.

Clean energies help with climate change mitigation and adaptation while presenting opportunities to develop infrastructure compatible with the complex new energy systems and economic models of the future. Renewables also provide affordable, sustainable and reliable electricity, which is at the core of commercial and industrial expansion and economic diversification. Additionally, technologies applied on-premises or through community and mini-grid models reduce risks of supply disruptions, such as those experienced by hydrocarbon producers in Africa due to conflict, terrorism or instability.

With global investors increasingly focused on low-carbon technologies, clean energy projects could attract much-needed financing to Africa. This would be possible if solid and country-specific frameworks are developed, with financial and technical support from international financial institutions to de-risk counterparties and implement bankable projects.

This paper comprises three sections:

  1. An examination of the current state of play in global gas markets following Russia’s invasion of Ukraine, with Europe moving to diversify and supplement supplies while accelerating its energy transition.
  2. Considerations surrounding Africa’s gas potential and challenges, as well as the interplay between African gas development and European energy demand.
  3. Exploration of the impact of climate change on the African continent and how boosting development of clean energies would help Africa achieve economic and energy resilience while contributing to national, regional and global greenhouse gas emissions goals.

EUROPE SEEKS ALTERNATIVES TO RUSSIAN GAS

Russia’s invasion of Ukraine has caused a major dislocation in energy markets. It is not the first time that Moscow’s policy towards Kyiv has left the EU scrambling to find natural gas supplies from alternative sources.5 However, in previous instances, compromises were reached, and Russian gas flowed uninterrupted to customers throughout Europe.

The US and EU’s response to Russia’s aggression,6 which include a series of measures aimed at curtailing Moscow’s oil and gas revenues, has created a structural fault in the European hydrocarbon energy system. Given that the Ukraine war is likely to continue for some time, EU states now face the challenge of replacing Russian gas supplies indefinitely. Despite having spent decades trying to better manage EU dependency on Russian gas, almost all European states, most notably Germany, failed to do so.7 Short-term policies and expediency proved to be a more attractive option than committing major investment to long-term contracts with LNG suppliers and constructing regasification terminals across the continent.

Economic, political and climate challenges have made reducing hydrocarbons in Europe’s energy mix an even more pressing issue which will surely accelerate its journey towards the energy transition. However, the EU’s decision in July to keep some specific uses of natural gas in its taxonomy of sustainable energy sources8 means that its shelf-life as a transition fuel has been extended. Moreover, the EU must source replacement gas from other suppliers to fill the deficit left by Russia, at a time when market conditions have pushed prices to unprecedented levels.9

Efforts to negotiate short- or medium-term contracts with other LNG suppliers such as Qatar have proven difficult. Doha’s insistence on security of demand, which it has already secured with its Asian customers, has made it challenging for European countries such as Germany to negotiate shorter-term contracts,10 especially taking into consideration that the volumes needed are simply not there. As a result, Europe is now turning its attention to natural gas prospects on the African continent to help plug the supply gap over the short to medium term.11

AFRICA’S VAST GAS RESERVES AND POTENTIAL

With 17.55 trillion cubic metres (tcm) in gas reserves, Africa holds approximately 9% of global gas reserves,12 and currently accounts for 6% of the world’s total natural gas production. Nigeria, Algeria, and Egypt constitute 85% of the continent’s gas production and are among the top twenty natural gas producers in the world.13 However, African reserves remain largely unexplored, despite significant discoveries in Senegal, Mauritania, Mozambique, as well as Tanzania accounting for almost 40% of global new gas discoveries in the last decade.14 The continent’s potential is well-documented but remains unrealised due to multiple inhibiting factors, including governance issues, high costs and risks related to the political, security and legislative environment.

STATISTA NATURAL GAS RESERVES CHART

Figure 1: Statista Natural Gas Reserves Chart

 

While African governments may view gas as fuel for meeting domestic power generation demand to enable security and socioeconomic growth, population growth and rapid industrialisation will boost domestic demand across Africa. The continent’s estimated growth forecast of 30% by 2040 is significantly higher than expected global demand growth of 10%.15 Increases in domestic demand have already led states to redirect volumes back home from abroad. For example, Algeria’s capacity to export is somewhat compromised as its market consumes some 60% of gas output,16 predominantly in the residential sector and in gas-powered plants which provide the country’s electricity.17 However, African oil- and gas-producing states are heavily reliant on export revenues and their leaders are confronted with the dilemma of either meeting local demand or generating national income.

AFRICA NATURAL GAS PRODUCTION (from Climate Tracker)

Figure 2: Africa Natural Gas Production (from Climate Tracker)

At the same time, Europe’s desire for African gas has increased following Russia’s invasion of Ukraine. Italy has held exploratory discussions with Congo and Angola and is seeking to ramp up imports from Egypt, while the Italian energy group ENI hopes to expedite LNG production at its floating gas facility in Mozambique before the end of 2022.18 Germany is in discussions with Senegal about future supplies, the EU signed an MoU with Egypt and Israel regarding future imports, and the European Commission dispatched its Deputy Director-General for Energy to Nigeria for talks on increasing gas provision from the West African country.19 With gas prices soaring, the prospect of securing higher revenues over the long-term is already causing exporting countries in Africa to adjust their priorities. For example, in 2022, Egypt made plans to divert 15% of gas used for domestic electricity generation to exports to boost its struggling economy.20

The loss of Russian gas from European markets presents Africa with an opportunity for its “gas moment”. The European Commission’s REPowerEU package,21 published in May, outlines its plans to wean Europe off Russian gas before 2030. Its measures include diversifying suppliers, securing a short-term injection of gas and growing its renewable energy industry. Africa’s gas potential, therefore, looks appealing to EU leaders as it could help satiate Europe’s short- to medium-term gas requirement while revitalising Africa’s natural gas industry and boosting its economies.

Europe needs to replace just over 100bcm/yr of Russian gas by 2030 in order to meet its Fit for 55 and REPowerEU objectives.22 Several measures have been proposed to achieve this, one of which is obtaining an additional 50bcm of LNG imports and 10+bcm of pipeline gas.23 Under REPowerEU, Europe also aims to reduce gas consumption by 52% by 2030 in parallel with substituting hydrocarbons for clean energy sources.24 This timeframe leaves new gas suppliers only eight years to come onstream; projects typically require several years' lead-time before production can begin, and a lifespan of at least 20-25 years to achieve economic viability. Ensuring security of demand, therefore, is critical for investors and operators.

PRODUCTION TRENDS AND CHALLENGES IN AFRICA

Existing suppliers such as Nigeria, Angola and Algeria, or those on the cusp of beginning production, could feasibly increase output in the near-term, provided they receive sufficient financing. But short-term contracts may not benefit African states, which would need to allocate and invest substantial public financial resources to de-risk projects in order to secure partial funding and market share. In parallel, the EU has signed an agreement with the US for an additional 50bcm of LNG per year until at least 2030.25 Despite the REPowerEU package specifically mentioning untapped potential in sub-Saharan Africa,26 Europe may not actually need significant new volumes of African gas, especially if the US delivers on its contractual obligations and the EU implements other elements of its energy strategy.27 Europe is working with a short-term fix mindset, whereas Africa needs long-term financial and energy sustainability. Since it is not clear how long the hydrocarbon market will last, there is a significant risk of leaving African producers with stranded assets.

This uncertainty adds to the numerous challenges already facing Africa’s oil and gas industry, including political instability, significant security risks, high project costs, and a lack of infrastructure. These have lowered the continent’s appeal as an investment destination in the past and may deter major investors once again.

Figure 3: Africa Map Pinning LNG Projects
AFRICAN GAS HELD BACK BY SECURITY CHALLENGES, INSTABILITY

Libya provides an example of an African state whose considerable gas potential has been held back by political instability. The country has suffered from civil war, militia violence and foreign intervention for over a decade, and now has two rival governments and faces factional competition over hydrocarbons facilities and revenues.

In 2021, TotalEnergies halted the construction of its $20bn Mozambique LNG project, citing an Islamist insurgency in the country,28 and resulting in delaying 12.9 million tonnes per annum (Mtpa) of gas coming onto global markets while postponing the possibility of adding a further 10mtpa during the project’s next phase. TotalEnergies’ force majeure declaration has also had an impact on ENI’s Rovuma LNG project, which will share the same site and some of the same facilities. The Italian major has postponed reaching its Final Investment Decision (FID) until TotalEnergies lifts its force majeure, putting on hold another 15.2mtpa of LNG.29

On average,African oil and gas assets are 15-20% more expensive to develop and operate than in other parts of the world.30 Political and security challenges have harmed project development, slowed the building of infrastructure, and added a premium to project financials. As a result, Africa suffers from limited national and regional pipeline infrastructure and has limited connectivity with Europe. This has hindered African gas development, domestic distribution and export potential to date.

Efforts to improve Africa’s pipeline infrastructure have made little progress given the challenging operating environment. The planned Trans-Sahara Gas Pipeline (TSGP), which runs over 4000km from Nigeria to Algeria and Morocco, has been hampered by long-running security issues, including intercommunal conflict, the threat of Boko Haram in Nigeria, and extremist activity in Niger and Algeria. It also comes with a prohibitively high price tag of approximately $13bn,31 underscoring the project’s financing challenges. Despite Algeria, Niger, and Nigeria’s signing in July of an MoU reaffirming commitment to delivering the project, widespread theft, corruption and governance issues in those countries will continue to challenge its development.32 The pipeline is designed to carry 30bcm/year upon completion, but no progress of note has been made on its development since its inception 40 years ago.

Similar challenges have prevented progress on an offshore Nigeria-Morocco gas pipeline, although recent statements indicate the parties hope to reach FID next year.33 The pipeline was conceptualised in 2016but movement on its development has only picked up now that gas demand and prices arehigh. A September 2022 MoU reiterated stakeholders’ commitment to the project’s feasibility study.34 Further, the Islamic Development Bank and the OPEC Fund for International Development - along with the Nigerian and Moroccan governments - recently contributed $14.3m to the second phase of the Front-End Engineering Design (FEED) project.

Designed to cross 13 African countries over 5600km with an estimated development cost of $20m-$25bln, the Nigeria-Morocco gas link would be the world’s longest offshore pipeline. It would supply landlocked Niger, Burkina Faso and Mali en route to delivering gas to Morocco for connection into the Maghreb Europe Gas Pipeline (MEGP) and on to the European gas network.35 However, construction will take at least eight years,36 by which point the EU will likely have already diversified its gas supplies, reduced consumption and accelerated the development of renewable energy sources. This suggests Europe may not have a need for MEGP gas by the time it comes onstream.

Compounding such challenges is the fact that African gas reserves are estimated to be 70%-80% more carbon-intensive than other assets around the world. Over 30% of Africa’s gas production is associated gas, meaning it is a by-product of crude production and therefore directly linked to the oil industry.37 As investors reduce their exposure to oil projects and global investment in hydrocarbons shrinks, African projects are expected to become even more costly—and therefore, even less competitive. Energy companies will prioritise lower-emission basins with greater short-term potential, meaning African exploration and production projects will become less attractive. The risk of stranded assets therefore rises, and much of the continent’s extensive gas reserves will remain undeveloped.

Africa’s current greenhouse gas (GHG) emissions are low, comprising only 3% of global emissions. In a recent report, the IEA argued that if Africa were to exploit all its gas resources, its contribution to global emissions would only rise by 0.5% - to 3.5% - by 2050.38 The report stated that Africa could achieve universal energy access by 2030 with $25bn/yr in investment — the equivalent of just 1% of funds that pour into the global energy sector annually.39

Statistic: Carbon dioxide emissions from energy worldwide from 1965 to 2021, by region (in million metric tons of carbon dioxide) | Statista

Figure 4: Carbon Emissions (Statista)
Find more statistics at Statista

AFRICA’S CLIMATE CHANGE RISKS STRENGTHEN CASE FOR RENEWABLES

While Africa’s emissions constitute the smallest share of global GHG emissions, compared to 23% for China and 19% for the United States,40 the continent is the most vulnerable to climate change in all scenarios where global warming exceeds 1.5 degrees Celsius.41 Climate change is a threat and vulnerability multiplier, and the continent is already feeling its impacts through extreme weather, food and water insecurity, and associated economic and fiscal costs. Climate change increases fiscal sustainability risks especially in highly indebted countries such as those in Africa.

Failure to mitigate the impact of climate change will reverse progress in poverty alleviation and economic growth, thereby impeding development. By 2030, 10% of Africa’s population, or 180 million of the most vulnerable, will be exposed to drought, floods and extreme heat.42 The cost to the economy will also be significant, potentially wiping out almost 10%-13% of the continent’s43 gross domestic product (GDP),44 with the lowest-income nations experiencing the largest fiscal deficit.

The total cost of climate adaptation and mitigation, including losses and damages, is estimated at $2.8 trillion within this decade. In Africa, climate financing needs are highest in Southern and Eastern African countries,45 and investment in adaptation measures alone would cost 2-3% of the continent‘s GDP.46

AFRICA’S PATH TO RENEWABLES

Renewable energy is critical to help mitigate the impact of climate change and compensate for current energy models that have failed to provide equitable electricity access and inclusive economic growth.

Clean energy presents an opportunity to provide the African continent, despite its wide disparities, with a just and secure energy provision. Emphasizing clean technologies would allow African states to expand commercial and industrial sectors in Africa through reliable and affordable energy supplies and attract investment to grow their economies and create new employment opportunities. Building inclusive energy systems that place people at the centre of policymaking, and account for the needs of the complex power systems and economies of the future, will help transform African economies.

As global electricity access increases, large disparities have emerged in the pace and pattern of electrification. The world is not on track to ensure access for all to sustainable, affordable, and modern energy by 2030.47 For Africa, the disparities are clear. North Africa is fully electrified, but the share of electrification in Sub-Saharan Africa was only 46% in 2021.48

Despite Africa’s urban communities enjoying widespread access to electricity, with overall access doubling from 2013-22 (supplying 75% of households), 35% of households in rural areas remain without electricity.49 As such, some 600 million people on the continent do not have electricity, making up two-thirds of people lacking such access globally. The rate of electrification slowed during the COVID-19 pandemic, pushing 40% of African countries into financial distress and reversing progress in increasing electricity access.50 On the economic front, 83% of African countries are dependent on commodity exports.51 However, despite the benefits that export-led growth has delivered, notably during commodity super-cycles, it has not always resulted in more inclusive development. Overreliance on commodities and poor economic diversification has led other business sectors to produce low value-added goods and achieve low productivity levels. Expanding Africa’s service and industrial sectors is essential for diversifying the continent’s economies, increasing productivity and creating jobs,52 but these sectors require reliable, affordable and sustainable access to energy.

A glimpse into the energy sector shows that the dominant model is utility-scale, centralised and heavily reliant on fossil fuel-powered plants. These systems have failed to meet the energy needs of the population because the provision of electricity has been carried out only by public monopolies with limited private sector and local community engagement and has favoured urban populations and large industrial consumers. However, renewable energy can be deployed through numerous models, including community solar photovoltaic and mini-grid models that would engage a multitude of stakeholders and emphasize the needs of the local community.

Whereas gas production and supply are vulnerable to conflict, criminality, insurgency or logistical disruption, renewable energy deployment options, such as mini or micro-grids and on-premise generation, significantly reduce these risks and increase security of supply.

Clean energy is an important climate mitigation-adaptation measure that enables the construction of new, modernised infrastructure, potentially attracting investment to the continent as financiers move away from long-term fossil fuel investments. In the past decade, investments in renewable energy in Africa comprised only 2.4% of global renewable energy investments.53 There were large disparities between countries, with Egypt and Morocco recording more investment than other African nations. Although insignificant on a global scale, the current share of investments constitutes three-fold growth from a decade earlier, and the potential for further growth is substantive. A solid framework centred around the energy transition could increase investment in Africa, driving GDP growth to 7.5% in the first decade and 6.4% in the following decades through 2050.54 Such a framework entails: 1) increasing public spending in renewable energy and mostly power grids and flexibility systems that are more difficult to secure private investments for compared to generation, 2) building an enabling business environment and investment climate to engage the private sector, 3) adopting policies and regulations in favour of low-carbon technologies, 4) providing fiscal incentives, and 5) building and strengthening relevant institutions.

The versatility of renewable energy requires country-specific models and accounting for integration systems. There is not a single solution for all African countries, but energy policymaking and implementation should account for the complex energy systems and economic models of the future. Africa’s countries vary in terms of clean energy sources, renewable energy technology, deployment models and infrastructure requirements. They also differ in terms of required storage and flexibility systems, depending on the level of integration of variable renewable energy into the grid.

Hydropower and geothermal power could help meet baseload demand, but these renewables sources are not available at a large scale in all African countries. Ethiopia has 658.6MW of hydropower in its Gilgel Gibe III plant, and Uganda is home to the 183.2MW Isimba hydropower plant. Meanwhile in West Africa, Ghana has the 400 MW Bui plant, Guinea hosts the commissioned 240MW Kaléta plant, and Cote D’Ivoire has its 275MW Soubré plant. In Central Africa, hydropower constitutes 65% of power generation capacity.55 But this generation capacity and potential future expansions in hydropower are at risk due to climate change-induceddrought and flooding. Developing other renewable energy sources and creating storage capacity is essential for the future.

In addition to hydropower plants, East Africa holds geothermal power, specifically in Kenya. Kenya is at the forefront of clean energy, having achieved over 80% of power generation through renewables.56 The country possesses the world’s lowest-cost geothermal powerplant with a combined installed capacity of 558.4MW, and Africa’s largest wind power plant of 310MW in Lake Turkana. However, the region is highly dependent on biomass due to low electricity and clean cooking access.

North African countries make up the continent’s biggest energy market. But they also hold Africa’s lowest share of renewable energy in the power mix, with natural gas being the dominant source of power generation. Regional power demand is increasing at an unsustainable rate, prompting a focus on alternatives, especially among oil and gas producers seeking to free up gas for export. Solar and wind farms have dominated renewable energy projects in the region and are expected to experience significant growth, with ambitious targets pledged by governments. Among North African countries, Morocco is leading in renewable energy deployment with a major focus on concentrated solar power (CSP) in the Ouarzazate farms, which benefit from molten salt storage. Egypt is increasing focus on solar photovoltaic with the landmark 1.5GW Benban mega-project.

In Nigeria, Africa’s largest economy and a major oil and gas producer, only 55% of the population has basic electricity access. In 2019, only 15% of West Africa’s population had access to modern clean cooking fuels, even though gas is produced in the region and forms the dominant source of power generation. Most of the population still relies on traditional biomass for cooking. Meanwhile, Central Africa has the continent’s lowest access to energy, with 32% access to electricity and 17% access to clean cooking fuels.57 The Democratic Republic of Congo is second to Nigeria in hosting the largest population without electricity access.

Figure 5: Cumulative Investment Needs for African Power Generation

 

Beyond providing access to basic energy needs, growing the economy and meeting future sector digitisation and electrification requires sustainable energy models. These models will need to be country-specific, as African countries vary in their renewable resource potential and attractiveness to investors.

Innovative financing and technical packages are needed to scale-up renewables, including building bankable projects and de-risking off-takers. The support of international financial institutions is key in this regard. Scaling-up renewable energy investments in Africa requires stepped-up financial commitments from the international community, but other measures are also needed.

Blended finance, grants for strategic projects and efficient public-private partnerships are at the core of securing financing for the capital-intensive clean energy industry. Additionally, technical support for the counterparty is critical to achieving bankable projects. Most countries would require assistance with de-risking renewable energy projects and building a bankable counterparty.

Energy infrastructure projects should undergo socio-environmental impact assessments that would identify strategies to mitigate any potential risks on livelihoods and the environment. Building energy infrastructure that contributes to sustainable and economic development goals reduces potential impacts on human security, economic turmoil and instability. The alternative is depriving entire populations of benefiting from the industries of the future.

CONCLUSION

On the surface, exploiting Africa’s natural gas potential would appear to provide quick wins for both Europe and Africa. But it would fail to help deliver long-term energy security, economic prosperity and stability for Africa. The European Union’s need to make up for lost Russian gas supplies has pushed it to engage with African governments, but the bloc’s objectives are short-term and conflict with African project timelines and development goals. Africa faces the risk of having stranded assets and locking itself into long-term infrastructure financing commitments that would undermine advances in developing and expanding clean energy provision across the continent.

One way to remedy such risks is to further invest in clean energy as it presents an opportunity to provide Africa with a just and secure energy provision, despite the continent’s wide disparities. Emphasizing clean technologies would allow African states to expand their commercial and industrial sectors through reliable and affordable energy supply. It would also help attract investment, create much-needed employment and grow Africa’s economies. Renewables would provide affordable, sustainable and reliable electricity, which is at the core of industrial expansion and economic diversification.

Transforming African economies requires building inclusive energy systems that place people at the centre of policymaking and account for the needs of the complex power systems and economies of the future. The EU, along with development and climate financing institutions, can look to prioritise meeting long-term, net-zero objectives and support the development of clean energy across the African continent. Funding green energy technology would not only assist in climate change mitigation and adaptation but would also allow Africa to develop infrastructure that serves its economies and populations as the world pushes towards a post-hydrocarbon future.


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57. IRENA (2022). ”Renewable Energy Market Analysis: Africa and its Regions”.


Shooting for the Stars: Saudi Aims for Global Role with Space Investments

Saudi Arabia is seeking to become a global player in the space industry, making historic investments in research and satellite technology that will help enhance its relations with spacefaring nations. As the industry expands to include new countries and private companies, Saudi Arabia sees space exploration as part of its shift to a sustainable, technology-driven economy that will spur foreign investment and boost economic prospects for its citizens. Riyadh’s signing in July 2022 of a NASA-led exploration agreement for the moon and mars is the latest evidence of the Kingdom’s commitment to exploration and investment in the cosmos.

The space industry has transformed drastically since exploration’s early days, when investment in satellite and rocket technology was driven largely by Cold War competition between the United States and the Soviet Union. Today, more than 70 countries have active space programs, and private companies, including U.S. contractor Lockheed Martin and billionaire Elon Musk’s SpaceX, have accelerated investment in space technology. The industry writ-large has an estimated value of $424 billion, and is expected to reach $1 trillion in annual revenue by 2040, according to Citigroup analysts. Much of the revenue will come from private companies operating satellites, which enable navigation systems, weather forecasts, phone services and even ATM withdrawals.

The entrance of new public and private players into the industry has changed the face of what is known as “space diplomacy”. Space exploration and engagement offers countries opportunities to cooperate on science and technology, creating synergies between their nations and building people-to-people relationships. It also provides an avenue through which countries can continue to work together in times of disagreement. As the world becomes more reliant on satellite technology with more frequent rocket launches, diplomacy will serve a key role in managing competition and boosting cooperation in the cosmos.

Like other Arab nations including the United Arab Emirates, Saudi Arabia has sought to accelerate development of its space industry and strike space partnerships with the United States and other countries. In 2020, Saudi Arabia announced a $2.1 billion investment to develop its space industry by 2030. The Kingdom has since sought to make space exploration a key feature of its bilateral economic relationships. During a meeting of the Joint Saudi-Italian Committee in June 2022, the parties signed a five-year agreement to promote the exchange of space information, technologies and expertise. The next month, at the Saudi-Kazakhstan Investment Meeting, the two countries discussed how Astana can assist in the development of the Kingdom’s space exploration program.

Most notably, during U.S. President Joe Biden’s visit to Saudi Arabia in July, the Saudi Space Commission signed NASA’s Artemis Accords, a U.S.-led venture that aims to send humans to the moon again by 2025. Saudi Arabia was the 21st country to sign the agreement, and the fourth in the Middle East, after the UAE, Bahrain and Israel. By joining the accords, Riyadh joins an elite group of technology-driven, manufacturing economies, including South Korea, Japan and Singapore. Space diplomacy with these nations can unlock new opportunities in the industry and beyond.

Saudi Arabia became the 21st nation to sign the Artemis Accords, on July 14, 2022. (Source: NASA)

As the Kingdom diversifies its economy away from oil under its Vision 2030 plan, space exploration can help shift Saudi-U.S. trade away from energy and defense and toward more creative sectors. In that sense, the Artemis Accords, one of 18 agreements signed during Biden’s visit to KSA, symbolizes Riyadh’s desire to have a broader economic relationship with Washington. It can also help Saudi Arabia to break ahead of the pack in a region where space investment deals are accelerating.

The UAE, which launched its first satellite in 2009 with cooperation from a South Korean manufacturer, has followed an ambitious roadmap for space exploration and research. In 2021, the UAE’s Hope probe went into Mars’ orbit, making the Emirates the fifth nation and first Arab country to successfully circle the planet. Israel also leads an ambitious space program, planning, producing and launching its own satellites into orbit.

With regional competition in the space industry set to increase, HRH Crown Prince Mohammed Bin Salman AlSaud announced a plan to increase sector spending to 2.5% of GDP by 2040, up from 0.5% in 2020. The Kingdom also launched an astronaut program in September 2022, with plans to send two astronauts to the ISS aboard a SpaceX capsule.

Earlier this month, Saudi Arabia’s Council of Ministers established the Supreme Space Council, which will oversee the country’s space programs, approve planning and implement the national strategy. The establishment of this council, the significant increase in spending, coupled with investments in space personnel will help Saudi Arabia compete in the industry while pushing toward the centre of space diplomacy.

The benefits of investment in strategic sectors like space exploration can take years if not decades to realize. By continuing to strike space agreements with new and established partners, Riyadh can help accelerate development of its space program.


The Middle East Proving Resilient as Food Security Pressures Mount

War between Russia and Ukraine, two of the world’s biggest grain producers, has disrupted critical Black Sea supply routes with potentially devastating effects on food-insecure countries in the Middle East. With the conflict showing little sign of relenting, the United Nations and regional governments have struck deals to try to keep grain flowing and taken measures to support import-reliant populations. These measures include pledges by Gulf Arab leaders to strengthen food security and agreements by Egypt to diversify its wheat supply with new purchases from Europe. But it is not yet clear if those efforts will succeed in averting a regional food crisis as prices of oil and other important staples continue to soar.

Since Russia invaded Ukraine on Feb. 24, Ukrainian ports have come under siege with both countries accusing each other of laying mines in the Black Sea. This has posed an unacceptable risk for vessel operators seeking to load wheat, barley and sunflower seed oil from Ukraine’s ports, forcing shipping companies to halt operations. As a result, commodity prices worldwide have soared, and supply chains already under pressure due to the COVID-19 pandemic have faced further shocks. According to the Food and Agricultural Organization (FAO), Russian and Ukrainian supplies account for around a third of the world’s wheat production, a quarter of barley output and 75% of sunflower oil supply.

The Middle East relies heavily on imports for food security and has relatively little agricultural output, due in large part to its water scarcity and limited arable land. The region has historically purchased large amounts of wheat, sunflower seed oil and other staples from Russia and Ukraine. Lebanon, Egypt, Libya, Oman, Saudi Arabia, Yemen, Tunisia, Jordan and Morocco purchase at least 30% of their wheat supply from Ukraine and Russia, according to the FAO.

Impact of Russia’s war in Ukraine on key trade routes in the region

Impact of Russia’s war in Ukraine on key trade routes in the region

Some regional countries are more import-reliant than others, with wider exposure to ongoing global inflationary pressures. Others are facing deep droughts that have heightened demand for imports. Yemen, Syria, Lebanon, Egypt and the broader North Africa region would likely be hit hardest by continued disruptions to Russian and Ukrainian grain supplies. Egypt is the world’s largest importer of wheat, bringing in between 12 and 13 million tonnes per year. The country has become increasingly reliant on imports to feed its 105 million population, which is growing at 1.9% per year. Before the war, the country sourced over 70% of its wheat supply from the Black Sea. Separately, Yemen, where over a third of the population faces emergency levels of food insecurity, secures nearly 45% of its wheat imports from Russia and Ukraine.

The war has brought the topic of food security to the forefront of the global agenda. U.S. President Joe Biden hosted a food security summit in September 2022 at the United Nations General Assembly, where he announced $2.9 billion in global food aid. This came after Biden, while visiting Saudi Arabia in July 2022, announced $1 billion in new food security assistance to the Middle East and North Africa. Further, during the Group of Seven (G7) summit in June, member countries jointly committed $5 billion to improve global food security, saying the funding would fight hunger in 47 countries.

Regional countries have also taken their own steps to address food insecurity. During President Biden’s July 2022 visit to Riyadh, GCC leaders pledged more than $3 billion over two years to fund projects that align with global infrastructure and investment with the United States. Biden highlighted the importance of protecting freedom of navigation through Middle East waterways, allowing for the flow of commerce and resources throughout the region. President Biden also said Washington had established a new naval task force to partner with Middle East countries to help secure the Red Sea, a passageway whose security has drawn increased scrutiny amid the Black Sea supply disruptions.

Egypt in July secured $500 million in funding from the World Bank to boost food security amid shortages due to the pandemic and Ukraine war, a package that will primarily support the country’s wheat purchases. Cairo is also looking for different wheat suppliers to reduce its reliance on Russian and Ukrainian grain. In June, Egypt made its largest purchase of wheat in ten years, buying supplies from France, Bulgaria and Romania. Also in June, Cairo agreed to purchase 180,000 tonnes of wheat from India. Cairo relies heavily on wheat to produce subsidized bread available to over two-thirds of its population.

There have also been multilateral efforts to address food security in the region. The Jeddah-based Islamic Development Bank Group, a development finance institution whose membership includes 57 countries, in July announced a $10.54 billion package for food security. The program aims to strengthen members’ resilience to food security disruptions, and includes up to $3.2 billion for emergency food and agricultural supply interventions.

The United Nations and others have also sought to help secure trade passageways in the Black Sea. These efforts resulted in a July 24 agreement between Kyiv and Moscow, brokered by Turkey and the United Nations, that led to the resumption of some grain exports from Ukrainian ports. The four-month agreement was embraced as a positive step to alleviate global food security pressures. However, the deal, which requires renewal on Nov. 19, looks increasingly shaky. On Oct. 29, Russia said it had suspended participation in the deal over what it said were Ukrainian attacks on its fleet in Russian-occupied Crimea. Ukraine rejected this as a false pretext to terminate the pact. Following intervention by Turkey, Moscow on Nov. 2 resumed its participation in the deal, saying it had received assurances Kyiv would not use the Black Sea corridor for attacks on Russian interests.  The back-and-forth highlights the difficulty of striking safe passage agreements in a rapidly-evolving warzone.

Regional governments and businesses will continue to closely monitor the security situation in the Black Sea as they seek to protect grain supplies. They will closely watch whether the United Nations and others manage to secure a renewal of the grain passage deal by the Nov. 19 deadline. The pact’s survival or demise may well serve as a litmus test on the viability of diplomatic efforts to avoid global hunger during a war.


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