Consulting Report Series <COVID-19: The Vaccinated World 2021 Risks and Opportunities in MENA>

Connor Coleman, Jeanine Schriemer & Daniel Rak


Introduction

Across the Middle East and North Africa (MENA), governmental responses to the COVID-19 pandemic have varied extensively. Moreover, the impact and extent of the first and second wave has not been uniform across the region. As such, the sub-regions of the MENA - the Gulf Cooperation Council (GCC), Levant, and North Africa - have experienced the pandemic differently. For example, while Lebanon, in combination with its turbulent domestic political climate, has struggled immensely, Israel's situation is now often viewed positively due to its rigorous vaccination campaign. Moreover, Iran has been amongst the hardest hit in the region, while its neighbours across the Persian Gulf have been able to control the virus to a significant degree. Finally, as hopes for economic recovery across the world are high due to the arrival of the vaccines, there is no systematic access to these vaccines across the MENA region.


In order to illustrate the inconsistent economic situations and predictions for recovery, governmental responses to the virus, as well as access to vaccines, this report will compare Israel, Saudi Arabia, the United Arab Emirates (UAE), Egypt, and Turkey.


Israel

While Israel managed the first wave in spring 2020 relatively well, cases rose extensively in the fall. Nonetheless, the government has implemented a wide range of measures, including three nation-wide lockdowns. While daily infections are currently soaring, hopes are high as vaccination is progressing quickly. In fact, Israel is widely praised for its effective vaccination programme. Israel is currently the leading country in the world in terms of vaccination doses administered per 100 people, with more than 2 million people vaccinated mostly above the age of 45. Thus, the country has already vaccinated twenty percent of its population. Finally, it is noteworthy that Israel has agreed to exchange citizens’ data with Pfizer in exchange for vaccinations. This data includes age, gender, medical history, and side effects and efficacy.


Hygiene Measures

Restaurants - Closed during lockdowns, open for deliveries.


Retail - Closed during lockdowns, open for deliveries; Pharmacies and food stores are open.


Non-essential services - Closed during lockdowns, open for deliveries.


Leisure facilities - Closed during lockdowns, including gyms, pools and limited access to beaches, enforced by the police.


Schools - Closure of all educational establishments during lockdowns.


Public gatherings

- In October 2020 there was a ban on public gatherings, including protests, following demonstrations against Prime Minister Netanyahu.

- During lockdowns, people are only allowed to leave their homes for a distance of no more than one kilometer. Additionally, gatherings are restricted to five people indoors and up to ten people outdoors. Possible to attend public areas for health and fitness activities.


Curfew - Although a nightly curfew was planned in the beginning of December 2020, it was off the table after legal challenges.


Masks - Mandatory to wear a mask while in public settings, at work, and schools, enforced by police.

Economic Relief Measures & Stimulus Package

The impact of the hygiene measures on economic activity has been broad. In order to mitigate these effects, the Israeli government has adopted a package of NIS 80 billion (6.1% of 2020 GDP, US$24.4 billion). This package includes health expenses (NIS 11 billion), and supports the social safety net (NIS 20 billion) as it funds a relaxation in the requirements for unemployment benefits and grants for self-employed workers. Additionally, this package provides NIS 41 billion in liquidity assistance through loans and support for companies. On June 2, the package was expanded with NIS 20 billion (1.5% of 2020 GDP). A second package was announced on July 29, worth NIS 80 billion. The second package consists of 50 billion in budgetary measures and 30 billion in loans and guarantees. In total, all approved economic relief measures amount to NIS 183 billion for 2020, and around NIS 72 billion for 2021.


Furthermore, the Israeli government has embarked on various monetary policies. Most noteworthy is its bond purchasing programme of NIS 85 billion.


Sector/Industry Assessment

Despite these economic relief measures, the economy has taken a significant hit. According to the OECD, “the crisis threatens to aggravate Israel’s underlying challenges of high poverty, large income gaps and wide productivity disparity between its vibrant high-tech sector and lagging sheltered sectors.” Additionally, the labour market has been weakened, with more than a million people temporarily laid-off. While the economic outlook is still uncertain, it is possible that a faster-than-projected economic recovery takes place because of Israel’s rapid vaccination programme.


The tourism industry has been heavily affected by the pandemic. In September 2020, tourism had already decreased by 76% compared to the previous year. As a result, Israel has lost NIS 12.1 billion (US$3.6 billion). For Israel, the opening of the tourism industry is vital to economic recovery and the unemployment problem. In the foreseeable future, it is expected that investments will be made in infrastructure, in order to connect people to jobs. The Tel Aviv municipality is leveraging curfews and confinements to accelerate infrastructure projects, including street and building renovations and the ongoing upper and underground sections of the urban rail train. Furthermore, growth in the high-tech industry will likely continue thanks to the increased usage of digital communication, fintech, biotech, and soaring demand for cyber security solutions.


Ethno-Social Discrepancies

The uptick in cases is significant in the two largest minorities in Israel - the Orthodox Jewish and Israeli-Arab populations, with fivefold and sevenfold more cases than the general population. Consequently there are ongoing tensions between these minorities amidst a growing criticism by the secular majority, regardless of political sentiment. Simultaneously, the Palestinians do not have a wide access to vaccines received in Israel, an issue that harms the possibilities for a mutual Israeli-Palestinian recovery scheme that would be economically beneficial, following the large amounts of Palestinians who work on Israeli territory.


Netanyahu, COVID-19 and Elections: a Two-Sided Political Gain

Israeli Prime Minister Benjamin Netanyahu is criticized for issuing the 3rd country-wide lockdown, given ongoing protests and media channels accusing the PM of utilizing the confinement for successfully postponing his trial. Netanyahu on the other hand claimed in his last speech that the confinement is necessary for controlling crowds and controlling the ongoing vaccination operations, with full optimism and hope for a vaccinated country by the end of March. Amidst this reality, an upcoming 4th election is likely to be won by Netanyahu given the successful diplomatic achievements in the Middle East and the abundance of vaccines given strong ties with US Pharma companies and relations with the UK.


Saudi Arabia

Saudi Arabia has been hit by two crises: the COVID-19 pandemic and the sharp and rapid decline in oil prices. Additionally, before these two crises hit, Saudi Arabia already faced high levels of unemployment, and youth unemployment in particular. The country has implemented a range of measures in order to stop the spread of the virus. Daily infections have been dropping consistently since the peak in June 2020. Finally, Saudi Arabia has designed a registration system for free vaccination and became the first Arab country to start its vaccination program on December 17th. Although the names of the companies with which Saudi Arabia has signed deals for vaccines have not been publicly disclosed, Saudi Arabia is one of the Gulf Cooperation Council (GCC) countries participating in a Chinese vaccine trial.


Hygiene Measures

Restaurants - Closed during the lockdown, open for delivery.


Retail - Closed during the lockdown, pharmacies and food stores remained open.


Non-essential services - Closed during the lockdown.


Leisure facilities - Closed during the lockdown, includes public parks and gardens.


Schools - Closure of schools and universities during lockdown.


Public gatherings - Gatherings with more than fifty people will be fined. This includes both family and non-family visits, as well as public gatherings.


Curfew

- In March, a nation-wide curfew was imposed between 7 pm and 6 am.

- In major cities, a 24 hour curfew was imposed from April 6.


Masks - Wearing a face mask is mandatory in public, enforced by the police.


Economic Relief Measures & Stimulus Package

As mentioned previously, it is important to take into account that Saudi Arabia is designing policies for two simultaneous crises. In order to support the private sector, the government announced a support package of SAR 70 billion (US$18.6 billion or 2.8% of GDP) in March 2020. This package includes the temporary suspension of tax payments, fees, and other dues. In April 2020, the unemployment insurance fund (SANED) was authorized to support wages up to SAR 9 billion (0.4% of GDP) to private sector companies who did not terminate contracts with Saudi employees. This measure was extended in June. Additional relief measures for the private sector were announced in April, such as temporary electricity subsidies (SAR 0.9 billion).


In order to further reduce dependency on oil revenue, the government announced the removal of “cost-of-living allowances” for public sector workers as of June 1, while also increasing VAT from 5% to 15% as of July 1. Furthermore, an increase in custom duties on imported goods came into effect on June 20.


In terms of monetary policies, the Saudi Central Bank (SAMA) has reduced its policy rates twice in March 2020. It has decreased the reverse repo to 0.5% and repo rates to 1%. Additionally, SAMA announced a SAR 50 billion (US$13.3 billion, 2% of GDP) package in March to support the private sector once again. This package mainly targeted SMEs through the funding of banks. In turn, these banks allowed the private sector deferral of payments on existing loans and an expansion of lending. Finally, SAMA is injecting SAR 50 billion into the banking sector.


Sector/Industry Assessment & Saudi Vision 2030

Over the past few years, Saudi Arabia has actively tried to diversify its economy away from oil and pursue its forward-looking Vision 2030, in part due to rising unemployment levels in the country. An integral part of this vision is the expansion of the private sector. Nonetheless, over the past year, due to the collapse in oil prices and the pandemic, there has been a significant drop in private sector activity. Saudi Arabia needs around US$ 80 per barrel to balance its budget, but oil prices now stand at US$ 45 per barrel. As the economic diversification programme is costly, the pandemic and drop in oil prices will most certainly complicate the diversification efforts. Growth is still expected to continue over 2021 and 2022 when oil prices are likely to somewhat recover. However, it should be emphasized that the drop in oil revenue underlines the need to diversify, as it indicates the volatility of oil prices.


Taking into account the announced economic relief measures, it is clear that the private sector has been significantly hit. Yet, this is also the sector where there is the most opportunity for growth in the future, because of the economic support packages and the necessity of this sector for a diversified economy. In the foreseeable future, further privatization of state companies are likely to raise funds for economic diversification.


Furthermore, the tourism and cultural sectors are also important aspects of the Vision 2030. While the tourism sector has also been badly hit by the pandemic, there are hopes for recovery in 2021. In the coming years, we can therefore expect a further expansion in the tourism and cultural sectors, as they are needed to drive economic diversification.


The United Arab Emirates (UAE)

Like Saudi Arabia, the UAE is affected by both the pandemic and the decline in oil prices. While the economy of the UAE is more diversified than Saudi Arabia, growth is still predicted to decline by more than six percent for 2020. The UAE started vaccinating its population right after Saudi Arabia, and currently holds 2nd place in the world in terms of how many people it has vaccinated. Additionally, the UAE has participated in the Chinese vaccine trial. The Sinopharm vaccine has been tested on 31,00 volunteers in the UAE, and has been found to be around 86% effective.


Hygiene Measures

Restaurants - Closure of dine-in restaurants.


Retail - Closed; Pharmacies and food stores remain open.


Non-essential services - Closed.


Leisure facilities - Closed, includes gyms and various tourist attractions.


Schools - Closure of nurseries, schools, and universities.


Public gatherings - Both public and private gatherings are forbidden.


Curfew - Nightly curfew from 8pm to 6am, lifted in June.


Masks - Wearing a face mask is mandatory in public, enforced by the police.


Economic Relief Measures & Stimulus Package

In order to fight the economic downturn, the UAE has announced various fiscal measures, amounting to AED 32 billion (US$8.7 billion or 2.8% of GDP). These include AED 16 billion (US$4.4 billion) to support the private sector, through a reduction in government fees, labor and other charges. This has been approved on the federal level. Moreover, AED 1.5 billion (US$0.4 billion) has been put aside by the government of Dubai to reduce government fees, and expand water and electricity subsidies. The government of Abu Dhabi announced AED 9 billion (US$2.5 billion) for the Ghadan-21 fiscal stimulus programme. This programme provides water and electricity subsidies, credit guarantees, and liquidity support for SMEs. In July and October, the government of Dubai announced two other, albeit smaller, packages to support the local economy. In total, Dubai’s stimulus measures for 2020 amounted to AED 6.8 billion (US$1.85 billion).


On the monetary level, the Central Bank of the UAE (CBUAE) has reduced its policy interest rate twice by a total of 125 basis points in 2020. Additionally, CBUAE announced a package of AED 256 billion (US$70 billion or 20% of GDP) in order to facilitate banks’ lending. This package has been extended to June 2021.


Sector/Industry Assessment

While the UAE’s economy is more diversified in comparison to Saudi Arabia, it still suffers from lower oil prices. Additionally, the UAE’s economic growth has declined significantly because of the pandemic. Dubai, the financial hub of the UAE, has been hit especially hard. Mostly the tourism, real estate, and trade sectors have been impacted. Dubai’s economy has been estimated to shrink about 11% in 2020, compared to the UAE’s overall 6.3% reduction. Economists predict medium-term uncertainty in non-oil revenue, as a full recovery is dependent on tourism and trade.


Nonetheless, if oil prices are to increase, growth is expected over 2021 and 2022. Additionally, improved business sentiment is likely due to the postponed Dubai Expo that will now take place in 2021. Furthermore, growth is also expected in the trade and technology industries, due to the UAE-Israel normalization deal and cooperation within these industries.


Egypt

Egypt’s first case of COVID-19 was identified on 14 February 2020. Since then, the Egyptian government has implemented a range of measures to facilitate testing and limit the spread of the virus. The pandemic and the subsequent fall in global trade and international travel has had a significant impact on the Egyptian economy due to declining tourism receipts, worker remittances, payments from Suez Canal transit, as well as a broad slowdown in domestic economic activity. Egypt has signed deals for vaccine provision with negotiations ongoing, and Egyptian authorities intend to begin its vaccination programme towards the end of January 2021.


Hygiene Measures

Restaurants - Full or partial closure with reduced capacity and operating hours.


Retail - Full or partial closure with reduced capacity and operating hours.


Non-essential services - Full or partial closure with reduced capacity and operating hours.


Leisure facilities - Full or partial closure with reduced capacity and operating hours.


Schools - Virtual learning until at least 20 February 2021.


Public gatherings - Indoor weddings, funerals, festivals and other mass gatherings banned, and communal prayers at mosques restricted.


Curfew - In place for individuals during lockdown and business curfew ongoing.


Masks - Mandatory in public places punishable by fines or prosecution.


Economic Relief Measures & Stimulus Package

The Egyptian government moved quickly to try to mitigate the economic impact of COVID-19. Authorities attempted to strike a balance between the preservation of public health and the prevention of a complete collapse in the working population’s income. The Central Bank of Egypt (CBE) cut interest rates by 3 percentage points from 12.75% to 9.75% in order to improve domestic liquidity, it removed ATM withdrawal fees, non-performing loan and late payment fines, and it directed banks to open credit lines for companies to finance salary and working capital needs. The CBE also launched a EGP£20 billion programme to directly purchase securities on the Egyptian stock exchange, thus increasing liquidity in the stock market by US$1.2 billion. Moreover, in June 2020, the IMF approved an unconditional loan of US$2.77 billion for Egypt under its Rapid Financing Instrument programme, and an additional US$5.2 billion under its Stand-By Arrangement framework to help support Egypt’s COVID-19 measures.


The government made available US$6.4 billion (1.6% GDP) to stimulate the economy, with EGP£63 billion earmarked to cover urgent obligations in key sectors including the health system and social safety net, tourism, exports, and industry. This stimulus package included payment holidays on mortgages, leasing contracts, car payments and credit card debt, tax relief (for income tax, VAT, sales tax, real estate tax, customs duty and stamp duty) and easier access to credit to help households smooth consumption. The government also offered preferential interest rates of 8% for SMEs in key sectors. In addition, Egyptian authorities granted immediate financing for the import of key commodities, citizen support facilities in the form of a monthly cash subsidy for affected workers (EGP£3 billion) and an increased tax exemption limit (EGP£15,000) with a reduced tax bracket of 2.5%. The government also increased spending on public works programmes by around EGP£3 billion and reduced electricity tariffs by 9%. Moreover, the government introduced a number of other measures such as a new pandemic social contribution scheme or ‘COVID tax’ on salaries and pensions with monthly net income above EGP£2,000, so as to increase transfers to support SMEs.


The damage caused by the pandemic was exacerbated by inadequate social protection provision. This is particularly acute given Egypt’s substantial informal sector, which constitutes some 30-40% of the economy. COVID-19 restrictions crippled this sector, and due to a lack of formal contractual arrangements, most of its working population lacked access to insurance or a social safety net. Although Egyptian authorities have expanded social protection programmes Takaful and Karama by adding 10 million new beneficiaries, the government’s support programmes for informal workers have been inadequate, only reaching around 5.4% of households. In addition, despite an allocation of EGP£8 billion to the health sector for provision of medical supplies, bonuses and a 75% allowance over wages for medical staff, Egypt’s health infrastructure is very weak and often unable to deliver basic services. This has meant inequitable access to key medical services, e.g. diagnosis and testing, and poor provision of PPE for doctors, as well as high prices from poorly regulated private healthcare providers. Egyptian authorities intend to increase investment in health during FY 2020/21.


Sector/Industry Assessment

Prior to COVID-19, Egypt had been on a positive growth trajectory, registering a growth rate of 5.6% in FY 2018/19. Moreover, 3 years of structural reform as per Egypt’s IMF programme had improved key macroeconomic indicators. Egypt’s foreign exchange reserves were also robust, driven by labour remittances of US$36.8 billion, all-time-high tourism revenues of US$13 billion and Suez Canal receipts to the sum of US$5.9 billion. In terms of composition, Egypt’s services sector represents 50.5% of GDP and employs 49% of the working population. The secondary sector accounts for 35.6% GDP and employs 28% of the workforce. Agriculture contributes 11% GDP and employs 23% of the population, and accounts for 20% of total exports and foreign exchange earnings.


Given that income from the Suez Canal, remittances and tourism are determined wholly by exogenous demand, COVID-19 quickly made clear that Egypt’s reliance on these sectors had left its economy extremely vulnerable. With weaker demand in the global market grinding international trade to a halt, Suez Canal revenues were impaired given that a large share of globally traded goods passed through the Canal. There was a similar decline in remittances due to a loss of jobs abroad and downsized investment projects in the Gulf, and thus less demand for the region’s 4.5 million Egyptian migrant labourers. The tourism sector has been hit especially hard due to the dramatic collapse in air traffic and international tourism. Prior to COVID-19, Egyptian tourism had only just recovered from its post-revolution slump. At the height of the pandemic, the industry was losing over US$1 billion in revenues per month. This is because international flights were banned and 70-80% of bookings were cancelled. The effect of this was felt broadly given tourism’s high interconnectedness with the rest of the economy. For instance, tourism accounts for 12% of GDP and some 1 in 9 jobs depend directly or indirectly on the tourism industry. It has strong links with the hospitality, food and beverages sectors, which employ over 700,000 workers, i.e. 3.1% of the workforce. Around half of all tourism expenditure is spent on accommodation, food and beverages, Egypt’s huge informal sector, particularly artisanal and handicraft products, is also highly dependent on tourism. Given the importance of tourism to the Egyptian economy, authorities earmarked EGP£50 billion in special support for the sector as part of Egypt’s Tourism Financial Support Initiative. This programme offered lower interest (8%) loans to maintain hotels, transport fleets and to finance corporate expenses, a EGP£3 billion Ministry of Finance guarantee on low-interest loans, tax relief for cash-strapped SMEs which make up the majority of the sector, and prohibitions on employee dismissal. Moreover, due to the strategic importance of air transportation, the government issued a supportive loan to EgyptAir’s holding company with a grace period of 2 years or upon achieving 75-80% of 2019 revenues.


The secondary sector has also been severely impacted. The disruption of global supply chains adversely impacted Egypt’s production and Egyptian exports fell due to a general collapse in foreign demand. Domestic demand also collapsed due to a fall in local purchasing power and changes in consumer behaviour. As a result, many of Egypt’s factories operate at less than 50% capacity and the secondary sector as a whole was expected to shrink by up to 50%. The only industry that escaped this trend was food processing, which benefited from an increase in domestic demand in order to substitute for a decline in imports. By contrast, durables, consumer goods and textiles have all suffered. Among Egypt’s 350-400 labour intensive garment and clothing factories, which provide a key source of income for Egyptian women, around 80% of orders were cancelled. On the whole, impaired cash flows make it difficult for industry to continue operations and to maintain working capital. To support the industry, Egyptian authorities have set aside EGP£100 billion via the Industrial and Agribusiness Initiative for private companies in the secondary sector. This will enable firms to finance their working capital, machinery and increased production capacity needs.


As a result of COVID-19 restrictions, Egypt has seen a sharp increase in the consumption of online ICT services as Egyptians have been using digital platforms to work, study and shop, particularly given business curfews and closures in the wholesale and retail sector. Egypt has seen a significant surge in internet usage, with an 87% increase in home internet consumption and a 131% increase in web browsing. The ICT sector is an increasingly important component of the Egyptian economy, accounting for 4% of GDP in FY 2018/19, an increase of 14.3% on the previous year. The government has signaled its intention to invest heavily in ICT infrastructure to accommodate digital transformation, including investments to improve internet speed.


Turkey

Information concerning COVID-19 has not been widely transparent in Turkey. It reported its first case on 11 March and first death on 15 March. By April, COVID-19 was confirmed to have spread all over the country. While Turkey has adopted a range of containment measures to address the pandemic, it has only recently started reporting both symptomatic and non-symptomatic cases. The pandemic hit Turkey in the context of an already fragile macroeconomic situation and a tense geopolitical environment in the Eastern Mediterranean. Turkey has signed various agreements to obtain vaccines and began to roll out its vaccination programme in the second week of January 2021.


Hygiene Measures

Restaurants- Closed (except for pick-up) during lockdowns, with tests to scan risk groups e.g. waiters, cashiers.


Retail - Closed or restricted opening hours (except for essential goods) with tests to scan risk groups, e.g. cashiers.


Non-essential services - Closed during lockdowns.


Leisure facilities - Closed during lockdowns.


Schools - Closed in person, mostly virtual classes during lockdowns, and educational establishments require sanitary compliance certificates to operate.


Public gatherings - Outside gatherings and physical exercise in town centres were prohibited, and nationwide ban on prayer gatherings in mosques.


Curfew - Age and health-based stay-at-home orders and curfew applied to all citizens except healthcare and security workers.


Masks - Mandatory wearing of masks in all public areas since September 2020.


Economic Relief Measures & Stimulus Package

In an effort to ease the burden of COVID-19 on the economy, Turkish authorities employed an array of monetary and fiscal relief measures throughout 2020. By October 2020, Turkish authorities had made available a discretionary fiscal support package of around TL 573.7 billion (12.8% GDP) of which TL 123 billion (2.7% GDP) are on-budget measures.


In a bid to guarantee an uninterrupted flow of credit to the corporate sector, the Central Bank of the Republic of Turkey (CBRT) cut its policy rate by around 300 basis points to supply liquidity as required via its intraday and standing overnight facilities. This, however, was subsequently reversed due to pressure on the lira, and the policy rate now stands at 17%. CBRT also sought to reduce banks’ foreign exchange reserve requirements by 500 basis points to free up lending capacity. In addition, CBRT raised the upper limit for funding via Open Market Transactions, increased its outright purchases of sovereign bonds, and broadened the pool of assets for use as collateral in its transactions (e.g. mortgage-covered bonds and asset-backed securities originated by Turkish banks). Moreover, CBRT increased the limit of its bilateral swap agreement with Qatar from US$5 billion to US$15 billion equivalent. Furthermore, the Banking Regulation and Supervision Authority (BDDK) revised a new asset ratio to encourage domestic lending to support the real economy via long-term funding.


On the fiscal front, Turkey launched its 21-point “Economic Stability Shield” stimulus package worth US$15.4 billion in March 2020. Of this sum, around US$3.8 billion was earmarked to double the Credit Guarantee Fund (KGF) from TL250 billion to TL 500 billion. This would provide an effective quasi-State guarantee on loans for firms and households borrowing from Turkish banks. The remaining US$11.6 billion was deployed through a range of fiscal measures. Turkish authorities have postponed credit card payments, and public deposit banks Ziraat Bank, Halkbank and Vakifbank launched a new retail loan campaign for house purchases and consumer spending. Halkbank has also postponed debt payments for firms with impaired cash flows. Moreover, the government extended the non-performing loan classification ratio from 90 to 180 days. To support Turkey’s fiscal measures, the World Bank approved a US$100 million loan.


To support SMEs in need of liquidity, the Small and Medium Industry Development Organization (KOSGEB) extended support to non-industrial SMEs to facilitate their access to credit to the sum of TL3 million per applicant enterprise annually. Similarly, the Banks’ Association of Turkey (TBB) offered 12-month loans at 9.5% interest per annum without any principal or interest payments for 3 months. Moreover, authorities have provided financing support to exporters to maintain capacity and postponed rent payments to public authorities and suspended bankruptcy proceedings. For strategically important firms (e.g. Turkish Airlines), Turkish authorities have offered direct support, and for other affected entities the Turkey Wealth Fund (TVF) has been allowed to buy stakes in distressed firms.


In terms of tax relief, Turkish authorities have extended personal and corporate income tax filing deadlines and deferred VAT and social security contribution payments for approximately 2 million citizens. Turkey has also reduced taxes for pensioners and citizens with chronic illnesses, as well as for affected industries (e.g. tourism, with the VAT rate for domestic flights reduced from 18% to 1% and the levying of accommodation tax suspended through 2021).


In order to support the labour market, Turkish authorities have sought to increase employment protection and income support. This has included a temporary ban on termination of employment contracts (with the exception of those non-compliant with rules of ethics and goodwill) and a short-term allowance equivalent of up to 60% of daily gross average earnings paid directly to furloughed employees from the state unemployment fund. In addition, the minimum pension was increased to TL 1,500 and a cash assistance of TL 1,000 was paid to families in need. Authorities also provided around TL 3.7 billion of monthly grants and TL 1.3 billion of monthly rent subsidy to tradesmen through 2021.


Sector/Industry Assessment

Turkey’s economy is largely based on services activities, which account for around 55.9% of GDP. This is followed by industry at 27.7% and agriculture at 6.43%. The services sector, however, has been hit the hardest by the COVID-19 pandemic, with confidence in services dropping by some 50%. Tourism, a key driver of the Turkish economy, is one of the most vulnerable sectors. More than 16% of service sector GDP depends on travel and tourism activities. This sector provides employment for 2.6 million people (9.4% of total employment). Restrictions on travel to prevent the spread of COVID-19 led to a sharp contraction in demand for tourism, with almost all activity in this sector coming to a complete halt, with the number of foreign tourists dropping by 99.3% and hotel occupancy rates plunging to 3%. This is particularly significant given tourism’s strong linkages with other parts of the economy, such as food and accommodation, which also contracted sharply by 62.5%. Moreover, given that 77% of tourists travel to Turkey by air, the air transportation sector has also been severely affected by the pandemic, with Turkey’s two main airlines Turkish Airlines and Pegasus sustaining significant losses as a result of the collapse in international air travel. As previously noted, however, due to the strategic importance of the air transportation sector, the Turkish government is providing direct support to rescue the airlines as well as key airport management and operation companies.


LIke tourism, the construction industry is a critical component of the Turkish economy, accounting for around 5.4% GDP, with real estate activities accounting for some 6.7% GDP. These sectors have suffered a significant contraction as a result of a sharp increase in project and contract cancellations, delays, and interruptions due to supply chain disruption, as well as lower consumer demand for Turkish real estate. Indeed, the fall in demand for property in Turkey is problematic for the construction sector given that it may complicate the repayment of foreign currency debt to foreign banks by construction companies, therefore risking bankruptcies and further collapse in real estate prices.


There has been a significant collapse in the retail sector, with confidence dropping by around 26% as the forced closure (or reduced operating capacity) of stores, shopping malls and other retailers has had an adverse effect on wholesale and retail trade. Some retailers have been able to contain losses, however, by remaining open to sell essential goods. Similarly, the sport and entertainment sectors have suffered as a result of the closure of theatres, sports clubs and the suspension of sports events and therefore reduced proceeds from ticket sales and commercial advertisement campaigns. In response to the closure of stores, however, online retail and e-commerce activity has increased enormously and recorded significant growth during the crisis. This has led many retail stores to shift their operations towards e-stores. Indeed, ICT was the only service sector that did not contract and recorded an increase in turnover during the crisis.


The real sectors of Turkey have also been adversely affected due to a collapse in demand for Turkish manufactures, with the largest and most export intensive industries most adversely affected. This drop in total exports has driven by the EU and MENA regions, which are key trading and supply chain partners of Turkey. In particular, machinery, metal products and automobiles have seen a significant fall in domestic and foreign demand, with vehicle exports falling by 77%, and exports to the EU, the main export destination for Turkish vehicles, falling by 81%. In addition, Turkey’s leather, apparel and textiles manufacturing also experienced a sharp fall in demand. The textile industry, however, has been able to recover somewhat as Turkey is one of the largest manufacturers of non-woven fabrics and hygiene articles, i.e. masks and protective clothing. Similarly, though Turkey has also seen an increase in demand for health services, it has fared well enough to be able to pivot those healthcare firms with increased production capacities towards the export of ethyl alcohol, disposable medical masks, disinfectant products and ventilators. The government has also sought to provide greater support to the health and pharmaceutical sectors through the recruitment of 32,000 new health personnel and the creation of a TL 4.5 billion fund to provide healthcare employees with high-level performance salaries, as well as support for pharmaceutical companies aiming to develop a domestic vaccine and other experimental medications.



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APRA _COVID-19_ The Vaccinated World 202
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