## OVERHAULING THE ARAB WORLD’S ECONOMIES

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### Regional context and challenges
- The Middle East and North Africa: two dozen nations spanning 4,000 miles and four time zones from Morocco to the Islamic Republic of Iran, home to about 600 million people.
- Diverse income levels: examples of some of the world’s wealthiest nations—Qatar, the United Arab Emirates, Saudi Arabia—and some of the poorest—Somalia, Sudan, Yemen.
- Recent history: significant change including the Arab Spring uprisings of 2010–11, but persistent structural issues remain—lackluster growth, low female labor force participation, and high youth unemployment.
- Fiscal and macro pressures: many governments increased spending during the COVID-19 pandemic and cost-of-living crisis, often requiring borrowing; higher debt servicing costs reduce fiscal space and increase vulnerability to future shocks, contingent liabilities, and climate stress.
- Demographics and labor market: more than 100 million people are projected to enter the workforce in the next 10 years, posing major job-creation challenges for current growth models.

### Macroeconomic stability and fiscal policy priorities
- Stability is necessary but insufficient: “Stability is the foundation, not the house.”
- Fiscal policy recommendations:
  - Mobilize revenue by withdrawing ineffective exemptions and improving tax equity.
  - Limit spending on untargeted subsidies.
  - Control the public sector wage bill, which is rigid and constrains spending on education, health care, and social protection (example: in Tunisia that kind of spending accounts for four-fifths of revenues).
- Monetary policy guidance:
  - Central banks should be forward-looking with a clear focus on price stability while maintaining financial stability as needed.
  - Policy should adjust to new data, global developments, and the posture of major central banks.
- Social safety nets:
  - Replace generalized price subsidies with targeted support to focus benefits on those most in need.
  - Country examples: Morocco removed fuel subsidies in 2016; Egypt introduced an automatic fuel price index mechanism in 2019; Mauritania substantially reduced untargeted fuel subsidies while progressively increasing cash transfers to the most vulnerable.
  - Digital delivery and quick targeting: Morocco reached informal workers with cash transfers via digital payments during the pandemic; Jordan improved targeting of its cash transfer system.

### Structural reforms and private-sector led growth
- Role of private sector:
  - The private sector generates more than 90 percent of jobs in developing economies and should drive investment, productivity, competitiveness, and workforce training.
  - Governments should create an enabling environment, develop institutions, correct market failures, and provide public goods.
- Labor market and inclusion:
  - Formalization of the labor force requires educational improvements and skills development.
  - Removing legal barriers and discriminatory practices would help bolster female labor force participation.
- State-owned enterprises and governance:
  - Wide presence of state-owned enterprises across sectors creates inefficiencies and distorts productivity.
  - Stronger economic governance and decisive anti-corruption policies are key to faster, more inclusive growth, accountability, and trust.
  - Reforms need government ownership, transparent communication, and two-way dialogue with stakeholders to build buy-in and overcome resistance.

### Climate, resilience, and the energy transition
- Urgency of climate adaptation:
  - Climate change exacerbates water and food needs and could deepen hunger, economic upheaval, conflict, and human displacement.
  - Country impacts and responses:
    - Tunisia’s tourism and fishing sectors face threat from beach erosion.
    - In Mauritania, growth could fall by as much as 1 percentage point as drought intensifies, but expanding access to electricity could cut the losses in half.
  - World Bank simulations for Morocco: investment in water infrastructure would improve resilience to drought, reducing GDP losses by almost 60 percent and capping the rise in public debt.
- Renewable energy and pricing reforms:
  - Examples: Morocco built the world’s largest concentrated solar plant; Egypt pioneered green bonds and accelerated renewable integration over the past decade.
  - Governments should prioritize measures that are beneficial under all plausible climate-change scenarios and build adaptation capacity.
  - For lower-income, fragile, and conflict-affected countries, immediate priorities include disaster preparedness, water resource management, climate-adapted infrastructure, and institutional capacity upgrades.

### Digitalization and technology adoption
- Potential gains:
  - According to the World Bank, GDP per capita in the region could rise by more than 40 percent as digitalization elevates efficiency, inclusion, and resilience.
- Current gaps:
  - Smartphones are widely used, but e-commerce remains nascent and digital adoption disparities persist between low-income and high-income nations.
- Policy enablers:
  - Enhance digital infrastructure, upgrade digital literacy, and develop workforce skills.
  - Reduce adoption costs for small and medium enterprises.
  - Country example: Tunisia’s Startup Act (2018) simplifies administrative procedures to encourage entrepreneurship and innovation in the digital sector.

### Reform sequencing, ownership, and international cooperation
- Change is a journey:
  - Reforms take time; success requires government ownership, transparent communication, stakeholder engagement, and sequencing that delivers early broad gains and quick wins.
  - Be flexible: “Plans are nothing; planning is everything.”
- Regional and global collaboration:
  - Reboot regional partnerships to offset weakening global links; stronger regional trade and investment can improve resilience.
  - The Gulf Cooperation Council (42-year-old) members—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates—have taken steps to support regional investments.
  - Multilateral institutions should upgrade rules to ensure cooperation on global public goods, fair competition, and protection of the most vulnerable.
- Lessons on ownership:
  - “One unavoidable lesson from the past is that nothing that is forced from outside a country can work if there is no buy-in within the country.”
  - Country examples of homegrown programs supported by multilateral engagement: Jordan’s IMF-supported program since 2019 (strong ownership); Morocco’s successful transformation supported by IMF credit facilities.

*Source: Jihad Azour and Taline Koranchelian, F&D, SEPTEMBER 2023*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2023/september/azour-mena.pdf_