Financial Openness and Inflation Tackle Short-Term Financial Growth in Arab Countries
In a new study released by the Arab Monetary Fund, researchers examined the impact of economic freedom on the financial sectors of eight Arab countries between 1980 and 2020. These countries include Algeria, Egypt, Jordan, Lebanon, Libya, Morocco, Sudan, and Tunisia.
The study found that while economic activity and price stability are crucial for long-term financial development, in the short term, financial openness and policies addressing inflation play significant roles.
Financial Openness and Its Implications
Financial openness, which refers to the inflow and outflow of international capital into an economy, can have various implications for sustained development. It improves accessibility to finance, facilitates risk diversification, and allows for the allocation of investment portfolios across countries.
Increased financial openness may attract foreign investments seeking opportunities in transparent financial markets, leading to greater capital inflows and economic growth. Conversely, limited financial openness may deter such moves and hinder the flow of money.
The exchange of financial technologies enhances innovation and effectiveness within domestic institutions. However, the relationship between financial sector development and economic openness is complex, influenced by factors such as macroeconomic stability and legal frameworks.
Factors Affecting Financial Development
The study also highlighted the importance of ensuring price stability through effective monetary policies to mitigate inflationary pressures. This creates a stable environment for financial systems to function effectively in the long run.
Jordan demonstrated superior performance in financial development among the countries analyzed, while Lebanon and Egypt experienced acceptable averages. Algeria and Morocco saw consistent growth in their financial sectors, while Sudan’s development remained comparatively lower due to various challenges.
The results showed a notable correlation between financial openness and long-term financial development, emphasizing the importance of policies aimed at overcoming obstacles to international capital flows and establishing relevant legal frameworks.
Post-2020 Considerations
The study acknowledged that external factors like the COVID-19 pandemic, political instability, and technological innovations could impact the dynamics between financial openness, inflation, and short-term financial development in Arab nations post-2020. Ambitious reform agendas are being implemented to increase financial openness and development in the sector.
To fully understand the factors affecting development in Middle Eastern countries, factors such as socio-economic context, structural characteristics of the financial system, and geopolitical dynamics should be considered. A parallel study including oil-rich GCC countries could provide further insights into the interaction between oil revenues and financial openness.