By Lucie Béraud-Sudreau, Research Fellow for Defence Economics and Procurement
Assessing defence expenditure in the Middle East and North Africa (MENA) region is a challenging enterprise, given that primary data is scarce and secondary sources are of varying quality. Indeed, some states in this region, such as Qatar and the United Arab Emirates, provide only limited information on budgets and public spending. Others, such as Saudi Arabia, release a headline figure for defence spending, but this figure is likely to not include all military-related expenditure.
The IISS estimates that, since the Arab Spring, MENA states have significantly increased their military outlays (Figure 1), from εUS$121 billion in 2010, to εUS$146bn in 2011 and up to εUS$200bn in 2014. Budgets rose by 20.3% between 2010 and 2011, and have averaged year-on-year increases of 11% between 2011 and 2014 (Table 1).
The estimate for 2015 however, indicates that MENA states’ growth in defence spending has reversed, with a year-on-year decline of 3.2% (ε194 US$bn in 2015, down from ε200 US$bn in 2014). Was 2015 an outlier in an upward long-term trend line, or did last year signal the beginning of a new era of declining defence budgets across the region?
Defence spending is determined by both economic and strategic considerations. Over the past five years, these were aligned for most MENA states. Concerns about internal stability, military interventions in regional civil wars in Libya, Syria and Yemen, and strategic rivalry with Iran, prompted key defence spenders to raise their military outlays. At the same time, high oil prices (between US$100 and US$110 per barrel [p/b] during 2011–14) meant that oil exporters in the region had few economic constraints on such high defence expenditure. These states on average accounted for 80% of total MENA defence spending between 2011 and 2015, and their economic capacity to raise defence expenditure drove the overall increase in regional totals.
But as the estimated decline in total MENA defence spending in 2015 indicates, the sharp drop in oil prices from mid- to late-2014 onwards meant that strategic and economic considerations began to diverge. Under these new economic conditions, oil-exporting states now appear to be recalibrating their defence spending. Indeed, more than two years of persistently low oil prices have taken their toll on government budget revenues in the region.
International Monetary Fund (IMF) forecasts show that economic growth has slowed in major oil-exporter states. The fiscal breakeven oil price for MENA was on average US$111.5 p/b in 2015, and US$107.2 p/b in 2016, way above the average market price of US$42 p/b between January and October 2016. As a result, fiscal deficits have surged in the region. Indeed, as oil accounted for over 80% of fiscal revenues in all GCC states but the UAE (69.9%) between 2011 and 2014, most states have had to cut government expenditure – and these austerity measures have weighed down growth. According to the World Bank, more than US$20bn of projects may be cancelled in Saudi Arabia in 2016.
A new trajectory for defence spending?
These new economic and fiscal constraints on oil-exporter states in the region are likely to usher in a new era for defence spending. Should oil prices remain low – IMF forecasts suggest that prices will remain at around US$50 p/b in 2017 and below US$60 by 2021 – defence budgets could continue to drop. It will be difficult for oil-exporter states to diversify their economic base sufficiently to generate additional revenue, at least in the short term, even though some efforts in this direction have already been undertaken, as exemplified by Saudi Arabia’s Vision 2030 programme. Diversification measures notably include developing local defence-industrial bases, so that defence spending also contributes to the domestic economy.
Energy prices thus contribute to determine regional defence spending. The constraints generated by lower oil prices may trump strategic considerations that, all things being equal, would call for increased defence spending. Although the November OPEC agreement may lead to an oil price hike in 2017, it is projected that defence spending in the Middle East will have decreased in 2016 (Figure 2). While defence and security spending is Saudi Arabia’s most significant government expenditure item, accounting for 25% of total public spending, its 2016 official budget shows a nominal cut of 31% in defence spending. Its infrastructure and economic resource development budgets suffered larger cuts still, shrinking by 39% and 46% respectively.
The region referred to as the Middle East and North Africa in this analysis is comprised of 20 countries: Algeria, Bahrain, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Libya, Mauritania, Morocco, Oman, Palestinian Territories, Qatar, Saudi Arabia, Syria, Tunisia, the UAE and Yemen.
Regional defence spending totals presented here include defence spending estimates for states even where official information was unavailable, in order to enable comparisons over time, except for war-torn countries (Libya, Palestinian Territories, Syria and Yemen).
This is part of a series of posts for the 2016 Manama Voices blog, which provides analysis and commentary from IISS experts throughout the IISS Manama Dialogue, to be held in Bahrain on 9–11 December 2016.
For full coverage of the proceedings visit the IISS Manama Dialogue 2016 website. All participants will be encouraged to use #IISSMD2016 to share their insights on social media.