Financial Management in the Arab Region

One expected outcome of transparent and accountable governance under the rule of law is effective financial management of the country's economy, but financial management is also an intrinsic component of governance. Optimal economic policies are crafted so as to be as responsive as possible to civil society while encouraging free and competitive markets in which the productive forces of the private sector may flourish. Sound regulations and macro-economic policies are like the balance wheel of a clock connecting the state in harmony with the private sector and civil society.

Most Arab states have made major commitments to economic reforms that are designed to liberate their markets from financial oppression and other inefficiencies, while preserving the industrial and social gains they made in the 1960s and 1970s, when foreign aid, oil revenues, and other sources of capital were more abundant. Some states have even encouraged or allowed elements of their civil societies to establish chapters in Transparency International, a transnational NGO devoted to reducing financial mismanagement.

Virtually all Arab states have engaged in some reform along five of the six dimensions of financial management discussed below. A few of the wealthy petroleum producers have been spared the problem of managing any significant amount of international debt.

The "extractive" capability of a government to tax its citizens is sometimes taken to be a primary indicator of political development, but it may simply reflect the predatory, exploitative nature of a state. This section includes discussion of governmental procedures to establish a budget and taxes, hence giving a background to governmental financial transactions in a particular country. Of note in this aspect is an essential similarity in the constitutional and legislative processes, across Arab states, with respect to the state budget. Typically the legislative branch is charged with approving the socio-economic plan, and approving government budgets and final accounts. The legislature is not to be adjourned before endorsing the budget, but if it is not approved before the new fiscal year, the previous budget is enacted until such time as the new one is approved.

Many of the Arab states became heavily indebted in the 1970s and 1980s, and some qualified for various forms of international debt relief. The level of debt, as a percentage of GDP, has declined in most states but is still a severe burden for some. The country studies examine the recent evolution of the international debt, debt service ratios, and levels of international reserves required to sustain their imports.

Public audit institutions serve the purpose of establishing and ensuring transparency in financial transactions for both internal and foreign actors. By law, often codified in their national constitutions, most Arab countries have an official public audit institution. A small but growing number of Arab countries sponsor chapters of Transparency International to combat corruption.

Banks, which allocate credit, are the major investors in the region because economic enterprises tend to depend more on credit than on private capital and stock markets. Sound banking sectors also tend to attract outside investors. Central banks, with varying degrees of autonomy from their government ministries of finance and top executive authorities, control monetary policy and thus manage their respective macro-economies. One positive indicator of their performance, presented in each country study, is the inflation rate. Throughout the region, with few exceptions, the prevailing rates have remained low compared to other parts of the world, and they are diminishing.

The central banks also supervise their respective commercial banking systems. In addition to the full service commercial banks, a country’s financial system may include a number of banks specialized in particular sectors, such as agriculture or tourism, and other financial institutions devoted to investment. Commercial banks and other financial institutions may be publicly or privately owned, and in many Arab countries some of the banks are owned by other Arab governments or by private investors, foreign or local. International and Arab banks tend to be increasing their market shares in many Arab countries, reflecting an opening of the respective financial systems. Privately owned, nationally based financial institutions are also growing, notably the Islamic banks. These banks have transformed old Islamic trading practices into novel financial instruments for conducting transactions free of the interest found in conventional Western financial systems.

A number of the Arab governments retain some overall planning authority or ministry of the economy to regulate private as well as public investment. In concert with the national banking structure, these institutions regulate foreign direct investment and other aspects of the national economy.

Capital markets, including local stock markets in most Arab states, help to generate investment and economic growth. While most of the states in question have encouraged the development of stock markets or their equivalents, there are wide variations in the number of companies traded on the exchanges and the vitality of these institutions. In varying degrees, too, governments have used the stock exchanges to sell shares of state-owned enterprises to private investors, though most privatization has taken the form of direct sales or distributions of shares to employees.

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