## 6-chapter-1

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### Oil price outlook and production
- The oil price outlook has been revised downward since the May 2017 Regional Economic Outlook.
- IMF’s medium-term oil price assumption, based on the futures market, remains broadly around current levels.
- Libya’s oil output increased to 1 million barrels a day (mbd) in the middle of 2017, up from some 0.4 mbd last year.
- In Iraq, oil production increased considerably in 2016 and has stayed flat this year to date.

### Growth prospects
- Fiscal consolidation, oil production, and regional conflicts are the key determinants of growth in MENAP oil-exporting countries.
- Spillovers from the low oil price environment continue to weigh on non-oil growth, which is expected to remain below historical averages.
- GCC overall growth is projected to bottom out at about 0.5 percent in 2017 as the OPEC-led deal reduces oil output.
- Non-oil growth for GCC members is expected to recover to about 2.6 percent in 2017–18 as fiscal consolidation generally slows.
- GCC non-oil growth is projected to be 3.4 percent in 2022, about half of the 6.7 percent of 2000–15.
- Among non-GCC oil exporters:
  - Algeria’s growth is expected to bottom out at 0.8 percent next year and recover to 2.4 percent by 2022.
  - Iran revised its 2016 GDP growth from 6.5 percent to 12.5 percent due to methodological changes and an upward revision of non-oil growth; Iran’s growth is projected to drop to 3.5 percent this year.
- Yemen’s economy is expected to contract again this year.
- Over the medium term, growth among MENAP oil exporters in conflict is projected to slow as recent increases in oil production limit scope for further gains.

### Fiscal consolidation: status and projections
- Deficits jumped from 1.1 percent of GDP in 2014 to 10.6 percent of GDP in 2016.
- Deficits are expected to ease to 5.2 percent of GDP this year on the back of a modest recovery in oil prices and significant deficit-reduction efforts.
- Five-year cumulative budget deficits are projected to be $320 billion over 2018–22.
- Non-oil primary balances improved by 11.5 percent between 2014 and 2016, but are expected to improve only by 5.3 percent between 2016 and 2018.
- About half of MENAP oil exporters (Iran, Kuwait, Qatar, United Arab Emirates) had fiscal deficits of less than 5 percent of GDP in 2016; the other half had deficits well above 10 percent of GDP.
- Countries with low deficits typically have substantial buffers (Kuwait, Qatar, United Arab Emirates) or are less dependent on oil revenues (Iran), and are planning gradual fiscal adjustment.
- Algeria and Saudi Arabia have announced ambitious consolidation plans but could adjust more gradually in the short term to limit adverse growth impacts.
- Some countries need to do more to put debt on a downward path (Bahrain, Oman).
- Iraq’s fiscal plans, underpinned by an IMF Stand-By Arrangement, target a balanced budget and debt reduction over the medium term.
- None of the MENAP oil exporters are accumulating sufficient resources to protect the economic well-being of future generations once hydrocarbon resources are exhausted.
- GCC fiscal consolidation measures include:
  - reductions in non-wage recurrent spending,
  - reductions in public wage bills as a share of GDP,
  - additional cuts to capital expenditures,
  - higher non-oil revenues—particularly the introduction of value-added taxes (projected to start being introduced in January 2018) and excise taxes.
- Policymakers are urged to finalize energy price reforms while taking advantage of low oil prices.

### Fiscal framework and institutions
- Substantial progress in establishing medium-term budgetary frameworks in Algeria, Kuwait, Qatar, Saudi Arabia, and the United Arab Emirates (federal and emirate levels).
- Macro-fiscal units now operational in Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.
- Iraq has progressed in identifying and addressing arrears and state guarantees.
- Technical assistance from the IMF is helping countries in these areas.
- Saudi Arabia has started publishing quarterly fiscal reports, significantly increasing fiscal transparency.
- A new model for public wage bill management is needed to boost inclusive growth and fiscal sustainability (Tamirisa and others, forthcoming).
- Strengthening public financial management, transparency, and accountability could generate additional fiscal space.

### Deficit financing and debt issuance
- MENAP oil-exporting countries continue to issue debt to meet budget financing needs.
- In the first half of 2017, GCC countries issued some $30 billion in international markets.
- Issuing internationally avoids crowding out private sector credit, while domestic issuance can support gradual financial market development (example: Saudi Arabia).
- Greater reliance on domestic financing would reduce consequences of deteriorating international market conditions.
- Countries have sometimes tapped international markets to rebuild buffers.
- Borrowing and investment decisions should be part of a comprehensive asset-liability management strategy.
- Debt management offices have been established in Kuwait, Oman, and Saudi Arabia and strengthened in Abu Dhabi and Dubai.
- Risks can be reduced by issuing longer maturity debt (example: Oman issued a 30-year bond in March 2017), though trade-offs with cost exist.
- Outside the GCC, domestic debt issuance (including some monetization of the deficit) has been the preferred financing strategy (Iran, Iraq, Libya, Yemen).

### External position and private capital
- Current account balance swung from a surplus of $228 billion in 2014 (8.8 percent of GDP) to a deficit of $77 billion in 2016 (3.6 percent of GDP).
- The aggregate current account balance is projected to return to a small surplus in 2019.
- Countries with persistent deficits, low financial buffers, and limited exchange rate flexibility face external financing challenges.
- Continued fiscal consolidation is important to support fixed exchange rate regimes.
- Structural reforms are needed to attract foreign private capital and narrow external deficits.
- Improvements include easing access for foreign investors to capital markets (such as in Saudi Arabia), though adoption of new foreign investment laws has been delayed in some countries (Oman, United Arab Emirates).
- Depending on cyclical conditions, tighter monetary policy can support external adjustment in countries without exchange rate pegs by attracting additional portfolio flows.

### Financial sector resilience and risks
- Financial sectors have remained broadly resilient despite lower hydrocarbon prices.
- Banks in the GCC region and Algeria remain well capitalized, with capital adequacy ratios generally well above regulatory minimums, and profitable.
- Bank profitability has weakened in some countries due to higher impairment costs (United Arab Emirates) and compressed interest margins amid intensified competition for deposits (Oman).
- Share of nonperforming loans has barely changed in most GCC countries but has edged up in Algeria; special mention loans increased in Oman and rescheduled loans in the United Arab Emirates.
- Banking systems remain weak in Iraq and Iran; Iraq is developing a strategy to address challenges in state-owned banks; Iran’s bank reform will require recapitalization and restructuring.
- Most GCC central banks have hiked domestic policy rates in tandem with the US Federal Reserve, increasing interbank and lending rates.
- Modest increase in oil prices and easing of government cash constraints have lessened liquidity pressures in some countries—notably Saudi Arabia and the United Arab Emirates—narrowing interbank and lending rate spreads.
- Non-resident deposits and wholesale funding remain important funding sources—especially in the United Arab Emirates and Qatar—exposing banks to changes in global liquidity conditions.
- Following last year’s broad-based deceleration, private sector credit growth has stabilized in the GCC region and Algeria but remains substantially slower compared with the pre-oil shock period.
- Policymakers have enhanced liquidity and prudential frameworks, including:
  - reintroducing refinancing instruments (Algeria),
  - imposing liquidity requirements (Bahrain),
  - introducing an interbank benchmark rate (Oman),
  - deepening domestic capital markets (Saudi Arabia),
  - enhancing macroprudential frameworks (Bahrain, Qatar, Saudi Arabia),
  - introducing corporate governance for Islamic banks (Kuwait),
  - developing liquidity provision tools for Islamic banks (Oman),
  - drafting new central bank and banking laws (Iran, United Arab Emirates).
- Low oil prices combined with US interest rate increases will continue to pressure bank asset quality and banks’ ability to supply credit.
- Deepening domestic capital markets is recommended to ensure adequate funding for non-oil sector development.
- Policymakers should consider leveraging financial technology to enhance access to finance while managing associated risks.

### Structural reforms and diversification
- Lower oil prices make it more urgent to move away from redistributing oil receipts through public spending and energy subsidies.
- MENAP oil exporters have outlined ambitious diversification strategies, but medium-term growth prospects remain below historical averages amid ongoing fiscal consolidation.
- There is a need to speed up implementation of structural reforms, leveraging the cyclical upturn in global growth.
- The existing development model has provided disappointing productivity gains; productivity is the key long-term driver of living standards.
- An IMF (2016b) study finds that in the GCC region productivity contributes little to growth, while labor contributes significantly more—reflecting policies favoring low-wage foreign workers in the private sector and high wages for nationals in the public sector.
- The productivity-investment link is largely absent in the GCC region, unlike in Algeria and Iran where composition of growth conforms more closely to global patterns.
- Labor market and education reforms are important to foster diversification and private sector development.
- Example policy actions: Saudi Arabia is reforming training and education systems, better targeting wage subsidies, and increasing labor fees on expatriates.

### Labor market reforms and skills
- Policymakers aim to reduce the wage gap between Saudis and expatriates and refine the employment quota system (Nitaqat) by introducing programs that require all employees in certain sectors to be nationals.
- Attracting skilled expatriate workers remains key to maintaining competitiveness; labor market reforms should aim to increase productivity and incentives for nationals to work in the private sector.
- Bahrain, Qatar, and the United Arab Emirates have reformed visa systems to allow greater internal mobility of expatriate workers; a new draft law in Qatar would grant some expatriate workers permanent residency.
- Iran and Oman are taking steps to better align education and training with employer needs, including introduction of entrepreneurship courses in school curricula (Iran).
- Oman’s anticipated modernization of labor laws is still pending.
- Increasing formality and labor market participation, especially among women, would benefit productivity and growth across the region.
- Improvements to labor market functioning and education systems will likely entail fiscal costs, strengthening the case for growth-friendly fiscal consolidation.

### Business environment, private sector, and implementation of development strategies
- Algeria: government started fleshing out a broad strategy to reshape the economic model toward private sector–led growth.
- Iran: The Sixth National Development Plan aims to develop the private sector and reduce oil dependency.
- GCC countries: launched national development strategies and are proceeding to implementation; embedding these strategies into sound medium-term macroeconomic frameworks is a key task.
- Saudi Arabia: formulating specific policies to implement Vision 2030, with monitoring built around key performance indicators.
- Oman and United Arab Emirates: have introduced key performance indicators; Qatar’s second national development strategy emphasizes robust monitoring and evaluation.
- Private sector role expanded through privatization programs (in 16 sectors in Saudi Arabia, including the potential sale of parts of ARAMCO, and in Oman) and development of public-private partnerships (Algeria, Oman, Qatar, Saudi Arabia, United Arab Emirates).
- Saudi Arabia launched the “Removing Obstacles to the Private Sector Program” with implemented measures to:
  - develop capital markets,
  - expedite customs clearance,
  - update competition law,
  - institute a commercial mortgage law.
- Other near-complete measures: insolvency and competition laws.
- Progress in other countries includes:
  - setting up one-stop windows for business registration and licensing (Kuwait, Oman, Qatar),
  - expediting customs processes (Bahrain, Oman),
  - protecting minority investors (Saudi Arabia, United Arab Emirates),
  - initiatives to foster small and medium enterprises (Algeria, Oman),
  - enhancing access to finance (Bahrain, Oman, United Arab Emirates).
- Further efforts to improve governance and transparency, strengthen accountability, and increase government efficiency would bolster private sector confidence.

### Downside risks to growth prospects
- Growth risks for MENAP oil exporters remain tilted to the downside.
- Considerable uncertainty surrounds the oil price outlook; on balance, risks from oil price volatility appear more on the downside given substantial fiscal and current account deficits.
- Downside risks also include regional conflicts and geopolitical developments (including the diplomatic rift between Qatar and other countries).
- Global risks: a possible shift toward inward-looking policies in advanced economies could affect global growth and drive oil prices lower.
- Faster-than-anticipated normalization of monetary policy in the United States could:
  - lead to a more rapid tightening of global financial conditions,
  - cause a sharp US dollar appreciation,
  - increase the cost and reduce the availability of international financing, especially for lower-rated countries,
  - strengthen the case for fiscal consolidation.
- Global upside risk: a stronger and more durable global recovery would contribute to higher growth in the region.

### Box 1.1 — Economic implications of the diplomatic rift with Qatar
- On June 5, 2017, Bahrain, Egypt, Saudi Arabia, and the United Arab Emirates severed diplomatic and economic ties with Qatar; they closed their airspace to Qatar Airways flights, and Qatar’s land border with Saudi Arabia was closed.
- Some banks curtailed transactions with clients linked to Qatar.
- Economic impacts on Qatar:
  - About one-sixth of the country’s imports are produced in countries imposing trade restrictions; a significant portion of other imports transit through Saudi Arabia and the United Arab Emirates.
  - Some trade re-routed through Kuwait and Oman; alternative food supply sources established.
  - Availability of inventory of construction materials and alternative import sources mitigated concerns about infrastructure project implementation.
  - Qatar is accelerating efforts to diversify import sources and external financing, and to enhance domestic food processing.
- Financial developments:
  - Sovereign credit rating downgrade raised interbank interest rates; private sector deposits have declined.
  - Liabilities to foreign banks have fallen.
  - Impact on banks mitigated by liquidity injections by the Qatar Central Bank and increased public sector deposits.
  - Banks focusing on securing additional long-term funding.
- Regional impact:
  - Economic impact in the rest of the region appears muted so far; Qatar’s exports to these countries broadly maintained, including gas supplied to Oman and the United Arab Emirates.
  - Reactions in GCC financial markets have been benign with initial spillovers rapidly dissipating.
  - A protracted rift could slow GCC integration, erode confidence, reduce investment and growth, and increase funding costs in Qatar and possibly the rest of the GCC.

### Selected economic indicators for MENAP oil exporters (extract)
- Real GDP Growth (Annual change, percent)
  - Average 2011–13: 5.1
  - 2014: 2.6
  - 2015: 2.1
  - 2016: 5.6
  - 2017: 1.7
  - 2018: 3.0
- Consumer Price Inflation (Year average, percent)
  - Average 2011–13: 7.5
  - 2014: 5.8
  - 2015: 5.4
  - 2016: 4.7
  - 2017: 4.4
  - 2018: 6.1
- General Government Overall Fiscal Balance (Percent of GDP)
  - Average 2011–13: 6.2
  - 2014: –1.1
  - 2015: –9.3
  - 2016: –10.6
  - 2017: –5.2
  - 2018: –4.1
- Current Account Balance (Percent of GDP)
  - Average 2011–13: 12.9
  - 2014: 8.8
  - 2015: –3.5
  - 2016: –3.6
  - 2017: –0.4
  - 2018: –0.2

- Country-level selected entries (Real GDP Growth; Consumer Price Inflation; General Gov. Overall Fiscal Balance; Current Account Balance):
  - Algeria: Real GDP Growth 3.7, 3.8, 3.7, 3.3, 1.5, 0.8; Consumer Price Inflation 3.8, 2.9, 4.8, 6.4, 5.5, 4.4; Fiscal Balance 3.7, –8.0, –15.7, –13.7, –3.5, –1.2; Current Account Balance 12.5, –4.4, –16.5, –16.5, –13.0, –10.8.
  - Bahrain: Real GDP Growth 5.1, 4.4, 2.9, 3.0, 2.5, 1.7; Consumer Price Inflation 1.7, 2.7, 1.8, 2.8, 0.9, 3.5; Fiscal Balance –0.9, –1.6, –18.4, –17.8, –13.2, –11.9; Current Account Balance 6.4, 4.6, –2.4, –4.7, –4.6, –4.2.
  - Iran: Real GDP Growth 3.3, 3.2, –1.6, 12.5, 3.5, 3.8; Consumer Price Inflation 18.2, 15.6, 11.9, 9.0, 10.5, 10.1; Fiscal Balance 1.6, –1.1, –1.8, –2.6, –2.2, –2.2; Current Account Balance 5.0, 3.2, 2.4, 4.1, 5.1, 5.9.
  - Iraq: Real GDP Growth . . . , 0.7, 4.8, 11.0, –0.4, 2.9; Consumer Price Inflation 15.3, 2.2, 1.4, 0.4, 2.0, 2.0; Fiscal Balance . . . , –5.4, –12.3, –14.1, –5.1, –4.7; Current Account Balance . . . , 2.6, –6.5, –8.7, –6.3, –6.7.
  - Kuwait: Real GDP Growth 5.1, 0.6, 2.1, 2.5, –2.1, 4.1; Consumer Price Inflation 3.2, 3.1, 3.7, 3.5, 2.5, 2.7; Fiscal Balance 28.8, 22.3, 5.8, 0.3, 1.5, 1.5; Current Account Balance 33.3, 33.4, 3.5, –4.5, –0.6, –1.4.
  - Libya: Real GDP Growth 4.3, –5, 3.0, –10.3, –3.0, 55.1, 31.2; Consumer Price Inflation 5.1, 2.4, 9.8, 27.1, 32.8, 32.1; Fiscal Balance 11.7, –73.8, –126.6, –102.7, –43.0, –23.3; Current Account Balance 23.7, –78.4, –52.6, –22.4, 1.8, 9.8.
  - Oman: Real GDP Growth 3.8, 2.5, 4.2, 3.0, 0.0, 3.7; Consumer Price Inflation 2.7, 1.0, 0.1, 1.1, 3.2, 3.2; Fiscal Balance 8.6, –1.1, –15.7, –21.6, –13.0, –11.4; Current Account Balance 8.7, 5.8, –15.5, –18.6, –14.3, –13.2.
  - Qatar: Real GDP Growth 11.7, 4.0, 3.6, 2.2, 2.5, 3.1; Consumer Price Inflation 4.4, 3.4, 1.8, 2.7, 0.9, 4.8; Fiscal Balance 10.3, 15.3, 5.6, –3.9, –1.0, 0.5; Current Account Balance 20.8, 24.0, 8.4, –4.9, 2.3, 1.0.
  - Saudi Arabia: Real GDP Growth 4.2, 3.7, 4.1, 1.7, 0.1, 1.1; Consumer Price Inflation 2.2, 2.7, 2.2, 3.5, –0.2, 5.0; Fiscal Balance 8.0, –3.4, –15.8, –17.2, –8.6, –7.2; Current Account Balance 16.8, 9.8, –8.7, –4.3, 0.6, 0.4.
  - United Arab Emirates: Real GDP Growth 4.9, 3.3, 3.8, 3.0, 1.3, 3.4; Consumer Price Inflation 4.2, 2.3, 4.1, 1.8, 2.1, 2.9; Fiscal Balance 7.7, 1.9, –3.4, –4.1, –3.7, –2.2; Current Account Balance 10.3, 13.3, 4.7, 2.4, 2.1, 2.1.
  - Yemen (note 1): Real GDP Growth 3.1, –0.2, –28.1, –9.8, –2.0, 8.5 (2018 projection based on hypothetical assumption that conflict ends in early 2018); Consumer Price Inflation 11.5, 8.2, 39.4, 5.0, 20.0, 29.5; Fiscal Balance –3.0, –4.1, –10.6, –13.5, –9.9, –6.6; Current Account Balance 0.0, –1.7, –5.5, –5.6, –2.3, –2.4.

- Notes:
  - Variables reported on a fiscal year basis for Iran (March 21–March 20).
  - 2018 projection for Yemen is based on hypothetical assumption that conflict ends in early 2018.
  - Central government for certain fiscal figures (notes 2 and 3); consolidated accounts for UAE (note 4).

*International Monetary Fund | October 2017 — Regional Economic Outlook: Middle East and Central Asia (Chapter excerpt).*

### 2018. However, despite the extended agreement,

### 1. MENAP Oil Exporters: Need to Push ahead with Fiscal Consolidation and Diversification

### Oil price outlook and production
- The oil price outlook has been revised downward since the May 2017 Regional Economic Outlook.
- IMF’s medium-term oil price assumption, based on the futures market, remains broadly around current levels.
- Libya’s oil output increased to 1 million barrels a day (mbd) in the middle of 2017, up from some 0.4 mbd last year.
- In Iraq, oil production increased considerably in 2016 and has stayed flat this year to date.
- Figure references: Figure 1.1 (Oil Prices and Production) and Figure 1.2 (Oil Price Assumptions, APSP).

### Growth prospects
- Fiscal consolidation, oil production, and regional conflicts are the key determinants of growth in MENAP oil-exporting countries.
- Spillovers from the low oil price environment continue to weigh on non-oil growth, which is expected to remain below historical averages.
- GCC overall growth is projected to bottom out at about 0.5 percent in 2017 as the OPEC-led deal reduces oil output.
- Non-oil growth for GCC members is expected to recover to about 2.6 percent in 2017–18 as fiscal consolidation generally slows.
- GCC non-oil growth is projected to be 3.4 percent in 2022, about half of the 6.7 percent of 2000–15.
- Among non-GCC oil exporters:
  - Algeria’s growth is expected to bottom out at 0.8 percent next year and recover to 2.4 percent by 2022.
  - Iran revised its 2016 GDP growth from 6.5 percent to 12.5 percent due to methodological changes and an upward revision of non-oil growth; Iran’s growth is projected to drop to 3.5 percent this year.
- Yemen’s economy is expected to contract again this year.
- Over the medium term, growth among MENAP oil exporters in conflict is projected to slow as recent increases in oil production limit scope for further gains.

### Fiscal consolidation: status and projections
- Deficits jumped from 1.1 percent of GDP in 2014 to 10.6 percent of GDP in 2016.
- Deficits are expected to ease to 5.2 percent of GDP this year on the back of a modest recovery in oil prices and significant deficit-reduction efforts.
- Five-year cumulative budget deficits are projected to be $320 billion over 2018–22.
- Non-oil primary balances improved by 11.5 percent between 2014 and 2016, but are expected to improve only by 5.3 percent between 2016 and 2018.
- About half of MENAP oil exporters (Iran, Kuwait, Qatar, United Arab Emirates) had fiscal deficits of less than 5 percent of GDP in 2016; the other half had deficits well above 10 percent of GDP.
- Countries with low deficits typically have substantial buffers (Kuwait, Qatar, United Arab Emirates) or are less dependent on oil revenues (Iran), and are planning gradual fiscal adjustment.
- Algeria and Saudi Arabia have announced ambitious consolidation plans but could adjust more gradually in the short term to limit adverse growth impacts.
- Some countries need to do more to put debt on a downward path (Bahrain, Oman).
- Iraq’s fiscal plans, underpinned by an IMF Stand-By Arrangement, target a balanced budget and debt reduction over the medium term.
- None of the MENAP oil exporters are accumulating sufficient resources to protect the economic well-being of future generations once hydrocarbon resources are exhausted.
- GCC fiscal consolidation measures include reductions in non-wage recurrent spending, reductions in public wage bills as a share of GDP, additional cuts to capital expenditures, and higher non-oil revenues—particularly the introduction of value-added taxes (projected to start being introduced in January 2018) and excise taxes.
- Policymakers are urged to finalize energy price reforms while taking advantage of low oil prices.

### Fiscal framework and institutions
- Substantial progress in establishing medium-term budgetary frameworks in Algeria, Kuwait, Qatar, Saudi Arabia, and the United Arab Emirates (federal and emirate levels).
- Macro-fiscal units now operational in Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.
- Iraq has progressed in identifying and addressing arrears and state guarantees.
- Technical assistance from the IMF is helping countries in these areas.
- Saudi Arabia has started publishing quarterly fiscal reports, significantly increasing fiscal transparency.
- A new model for public wage bill management is needed to boost inclusive growth and fiscal sustainability (Tamirisa and others, forthcoming).
- Strengthening public financial management, transparency, and accountability could generate additional fiscal space.

### Deficit financing and debt issuance
- MENAP oil-exporting countries continue to issue debt to meet budget financing needs.
- In the first half of 2017, GCC countries issued some $30 billion in international markets.
- Issuing internationally avoids crowding out private sector credit, while domestic issuance can support gradual financial market development (example: Saudi Arabia).
- Greater reliance on domestic financing would reduce consequences of deteriorating international market conditions.
- Countries have sometimes tapped international markets to rebuild buffers.
- Borrowing and investment decisions should be part of a comprehensive asset-liability management strategy.
- Debt management offices have been established in Kuwait, Oman, and Saudi Arabia and strengthened in Abu Dhabi and Dubai.
- Risks can be reduced by issuing longer maturity debt (example: Oman issued a 30-year bond in March 2017), though trade-offs with cost exist.
- Outside the GCC, domestic debt issuance (including some monetization of the deficit) has been the preferred financing strategy (Iran, Iraq, Libya, Yemen).

### External position and private capital
- Current account balance swung from a surplus of $228 billion in 2014 (8.8 percent of GDP) to a deficit of $77 billion in 2016 (3.6 percent of GDP).
- The aggregate current account balance is projected to return to a small surplus in 2019.
- Countries with persistent deficits, low financial buffers, and limited exchange rate flexibility face external financing challenges.
- Continued fiscal consolidation is important to support fixed exchange rate regimes.
- Structural reforms are needed to attract foreign private capital and narrow external deficits.
- Improvements include easing access for foreign investors to capital markets (such as in Saudi Arabia), though adoption of new foreign investment laws has been delayed in some countries (Oman, United Arab Emirates).
- Depending on cyclical conditions, tighter monetary policy can support external adjustment in countries without exchange rate pegs by attracting additional portfolio flows.

### Financial sector resilience and risks
- Financial sectors have remained broadly resilient despite lower hydrocarbon prices.
- Banks in the GCC region and Algeria remain well capitalized, with capital adequacy ratios generally well above regulatory minimums, and profitable.
- Bank profitability has weakened in some countries due to higher impairment costs (United Arab Emirates) and compressed interest margins amid intensified competition for deposits (Oman).
- Share of nonperforming loans has barely changed in most GCC countries but has edged up in Algeria; special mention loans increased in Oman and rescheduled loans in the United Arab Emirates.
- Banking systems remain weak in Iraq and Iran; Iraq is developing a strategy to address challenges in state-owned banks; Iran’s bank reform will require recapitalization and restructuring.
- Most GCC central banks have hiked domestic policy rates in tandem with the US Federal Reserve, increasing interbank and lending rates.
- Modest increase in oil prices and easing of government cash constraints have lessened liquidity pressures in some countries—notably Saudi Arabia and the United Arab Emirates—narrowing interbank and lending rate spreads.
- Non-resident deposits and wholesale funding remain important funding sources—especially in the United Arab Emirates and Qatar—exposing banks to changes in global liquidity conditions.
- Following last year’s broad-based deceleration, private sector credit growth has stabilized in the GCC region and Algeria but remains substantially slower compared with the pre-oil shock period.
- Policymakers have enhanced liquidity and prudential frameworks: reintroducing refinancing instruments (Algeria), imposing liquidity requirements (Bahrain), introducing an interbank benchmark rate (Oman), deepening domestic capital markets (Saudi Arabia), enhancing macroprudential frameworks (Bahrain, Qatar, Saudi Arabia), introducing corporate governance for Islamic banks (Kuwait), developing liquidity provision tools for Islamic banks (Oman), and drafting new central bank and banking laws (Iran, United Arab Emirates).
- Low oil prices combined with US interest rate increases will continue to pressure bank asset quality and banks’ ability to supply credit.
- Deepening domestic capital markets is recommended to ensure adequate funding for non-oil sector development.
- Policymakers should consider leveraging financial technology to enhance access to finance while managing associated risks.

### Structural reforms and diversification
- Lower oil prices make it more urgent to move away from redistributing oil receipts through public spending and energy subsidies.
- MENAP oil exporters have outlined ambitious diversification strategies, but medium-term growth prospects remain below historical averages amid ongoing fiscal consolidation.
- There is a need to speed up implementation of structural reforms, leveraging the cyclical upturn in global growth.
- The existing development model has provided disappointing productivity gains; productivity is the key long-term driver of living standards.
- An IMF (2016b) study finds that in the GCC region productivity contributes little to growth, while labor contributes significantly more—reflecting policies favoring low-wage foreign workers in the private sector and high wages for nationals in the public sector.
- The productivity-investment link is largely absent in the GCC region, unlike in Algeria and Iran where composition of growth conforms more closely to global patterns.
- Labor market and education reforms are important to foster diversification and private sector development.
- Example policy actions: Saudi Arabia is reforming training and education systems, better targeting wage subsidies, and increasing labor fees on expatriates.

*Source: Regional Economic Outlook: Middle East and Central Asia, International Monetary Fund | October 2017 (chapter content provided).*

### Chapter 4 discusses in more detail the growth implications of

### Chapter 4 discusses in more detail the growth implications of successful diversification strategies that boost trade

### Labor market reforms and skills
- Policymakers aim to reduce the wage gap between Saudis and expatriates and refine the employment quota system (Nitaqat) by introducing programs that require all employees in certain sectors to be nationals.
- Attracting skilled expatriate workers remains key to maintaining competitiveness; labor market reforms should aim to increase productivity and incentives for nationals to work in the private sector.
- Bahrain, Qatar, and the United Arab Emirates have reformed visa systems to allow greater internal mobility of expatriate workers; a new draft law in Qatar would grant some expatriate workers permanent residency.
- Iran and Oman are taking steps to better align education and training with employer needs, including introduction of entrepreneurship courses in school curricula (Iran).
- Oman’s anticipated modernization of labor laws is still pending.
- Increasing formality and labor market participation, especially among women, would benefit productivity and growth across the region.
- Improvements to labor market functioning and education systems will likely entail fiscal costs, strengthening the case for growth-friendly fiscal consolidation.

### Business environment, private sector, and implementation of development strategies
- Algeria: government started fleshing out a broad strategy to reshape the economic model toward private sector–led growth.
- Iran: The Sixth National Development Plan aims to develop the private sector and reduce oil dependency.
- GCC countries: launched national development strategies and are proceeding to implementation; embedding these strategies into sound medium-term macroeconomic frameworks is a key task.
- Saudi Arabia: formulating specific policies to implement Vision 2030, with monitoring built around key performance indicators.
- Oman and United Arab Emirates: have introduced key performance indicators; Qatar’s second national development strategy emphasizes robust monitoring and evaluation.
- Private sector role expanded through privatization programs (in 16 sectors in Saudi Arabia, including the potential sale of parts of ARAMCO, and in Oman) and development of public-private partnerships (Algeria, Oman, Qatar, Saudi Arabia, United Arab Emirates).
- Saudi Arabia launched the “Removing Obstacles to the Private Sector Program” with implemented measures to:
  - develop capital markets,
  - expedite customs clearance,
  - update competition law,
  - institute a commercial mortgage law.
- Other near-complete measures: insolvency and competition laws.
- Progress in other countries includes:
  - setting up one-stop windows for business registration and licensing (Kuwait, Oman, Qatar),
  - expediting customs processes (Bahrain, Oman),
  - protecting minority investors (Saudi Arabia, United Arab Emirates),
  - initiatives to foster small and medium enterprises (Algeria, Oman),
  - enhancing access to finance (Bahrain, Oman, United Arab Emirates).
- Further efforts to improve governance and transparency, strengthen accountability, and increase government efficiency would bolster private sector confidence.

### Growth accounting and drivers
- Figure 1.11 presents average contributions to growth by Labor, Capital, and Total factor productivity for countries including Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates, Iran, Algeria, and Rest of the world.
- Growth episodes cover 1970–2014. A high-growth episode denotes growth greater than 4 percent per year for at least five consecutive years; otherwise, the period is considered a non-high-growth episode.

### Downside risks to growth prospects
- Growth risks for MENAP oil exporters remain tilted to the downside.
- Considerable uncertainty surrounds the oil price outlook; on balance, risks from oil price volatility appear more on the downside given substantial fiscal and current account deficits.
- Downside risks also include regional conflicts and geopolitical developments (including the diplomatic rift between Qatar and other countries).
- Global risks: a possible shift toward inward-looking policies in advanced economies could affect global growth and drive oil prices lower.
- Faster-than-anticipated normalization of monetary policy in the United States could:
  - lead to a more rapid tightening of global financial conditions,
  - cause a sharp US dollar appreciation,
  - increase the cost and reduce the availability of international financing, especially for lower-rated countries,
  - strengthen the case for fiscal consolidation.
- Global upside risk: a stronger and more durable global recovery would contribute to higher growth in the region.

### Box 1.1 — Economic implications of the diplomatic rift with Qatar
- On June 5, 2017, Bahrain, Egypt, Saudi Arabia, and the United Arab Emirates severed diplomatic and economic ties with Qatar; they closed their airspace to Qatar Airways flights, and Qatar’s land border with Saudi Arabia was closed.
- Some banks curtailed transactions with clients linked to Qatar.
- Economic impacts on Qatar:
  - About one-sixth of the country’s imports are produced in countries imposing trade restrictions; a significant portion of other imports transit through Saudi Arabia and the United Arab Emirates.
  - Some trade re-routed through Kuwait and Oman; alternative food supply sources established.
  - Availability of inventory of construction materials and alternative import sources mitigated concerns about infrastructure project implementation.
  - Qatar is accelerating efforts to diversify import sources and external financing, and to enhance domestic food processing.
- Financial developments:
  - Sovereign credit rating downgrade raised interbank interest rates; private sector deposits have declined.
  - Liabilities to foreign banks have fallen.
  - Impact on banks mitigated by liquidity injections by the Qatar Central Bank and increased public sector deposits.
  - Banks focusing on securing additional long-term funding.
- Regional impact:
  - Economic impact in the rest of the region appears muted so far; Qatar’s exports to these countries broadly maintained, including gas supplied to Oman and the United Arab Emirates.
  - Reactions in GCC financial markets have been benign with initial spillovers rapidly dissipating.
  - A protracted rift could slow GCC integration, erode confidence, reduce investment and growth, and increase funding costs in Qatar and possibly the rest of the GCC.

### Selected economic indicators for MENAP oil exporters (extract)
- Real GDP Growth (Annual change, percent)
  - Average 2011–13: 5.1
  - 2014: 2.6
  - 2015: 2.1
  - 2016: 5.6
  - 2017: 1.7
  - 2018: 3.0
- Consumer Price Inflation (Year average, percent)
  - Average 2011–13: 7.5
  - 2014: 5.8
  - 2015: 5.4
  - 2016: 4.7
  - 2017: 4.4
  - 2018: 6.1
- General Government Overall Fiscal Balance (Percent of GDP)
  - Average 2011–13: 6.2
  - 2014: –1.1
  - 2015: –9.3
  - 2016: –10.6
  - 2017: –5.2
  - 2018: –4.1
- Current Account Balance (Percent of GDP)
  - Average 2011–13: 12.9
  - 2014: 8.8
  - 2015: –3.5
  - 2016: –3.6
  - 2017: –0.4
  - 2018: –0.2
- Country-level selected entries (Real GDP Growth, Consumer Price Inflation, General Gov. Overall Fiscal Balance, Current Account Balance) include:
  - Algeria: Real GDP Growth 3.7, 3.8, 3.7, 3.3, 1.5, 0.8; Consumer Price Inflation 3.8, 2.9, 4.8, 6.4, 5.5, 4.4; Fiscal Balance 3.7, –8.0, –15.7, –13.7, –3.5, –1.2; Current Account Balance 12.5, –4.4, –16.5, –16.5, –13.0, –10.8.
  - Bahrain: Real GDP Growth 5.1, 4.4, 2.9, 3.0, 2.5, 1.7; Consumer Price Inflation 1.7, 2.7, 1.8, 2.8, 0.9, 3.5; Fiscal Balance –0.9, –1.6, –18.4, –17.8, –13.2, –11.9; Current Account Balance 6.4, 4.6, –2.4, –4.7, –4.6, –4.2.
  - Iran: Real GDP Growth 3.3, 3.2, –1.6, 12.5, 3.5, 3.8; Consumer Price Inflation 18.2, 15.6, 11.9, 9.0, 10.5, 10.1; Fiscal Balance 1.6, –1.1, –1.8, –2.6, –2.2, –2.2; Current Account Balance 5.0, 3.2, 2.4, 4.1, 5.1, 5.9.
  - Iraq: Real GDP Growth . . . , 0.7, 4.8, 11.0, –0.4, 2.9; Consumer Price Inflation 15.3, 2.2, 1.4, 0.4, 2.0, 2.0; Fiscal Balance . . . , –5.4, –12.3, –14.1, –5.1, –4.7; Current Account Balance . . . , 2.6, –6.5, –8.7, –6.3, –6.7.
  - Kuwait: Real GDP Growth 5.1, 0.6, 2.1, 2.5, –2.1, 4.1; Consumer Price Inflation 3.2, 3.1, 3.7, 3.5, 2.5, 2.7; Fiscal Balance 28.8, 22.3, 5.8, 0.3, 1.5, 1.5; Current Account Balance 33.3, 33.4, 3.5, –4.5, –0.6, –1.4.
  - Libya: Real GDP Growth 4.3, –5, 3.0, –10.3, –3.0, 55.1, 31.2; Consumer Price Inflation 5.1, 2.4, 9.8, 27.1, 32.8, 32.1; Fiscal Balance 11.7, –73.8, –126.6, –102.7, –43.0, –23.3; Current Account Balance 23.7, –78.4, –52.6, –22.4, 1.8, 9.8.
  - Oman: Real GDP Growth 3.8, 2.5, 4.2, 3.0, 0.0, 3.7; Consumer Price Inflation 2.7, 1.0, 0.1, 1.1, 3.2, 3.2; Fiscal Balance 8.6, –1.1, –15.7, –21.6, –13.0, –11.4; Current Account Balance 8.7, 5.8, –15.5, –18.6, –14.3, –13.2.
  - Qatar: Real GDP Growth 11.7, 4.0, 3.6, 2.2, 2.5, 3.1; Consumer Price Inflation 4.4, 3.4, 1.8, 2.7, 0.9, 4.8; Fiscal Balance 10.3, 15.3, 5.6, –3.9, –1.0, 0.5; Current Account Balance 20.8, 24.0, 8.4, –4.9, 2.3, 1.0.
  - Saudi Arabia: Real GDP Growth 4.2, 3.7, 4.1, 1.7, 0.1, 1.1; Consumer Price Inflation 2.2, 2.7, 2.2, 3.5, –0.2, 5.0; Fiscal Balance 8.0, –3.4, –15.8, –17.2, –8.6, –7.2; Current Account Balance 16.8, 9.8, –8.7, –4.3, 0.6, 0.4.
  - United Arab Emirates: Real GDP Growth 4.9, 3.3, 3.8, 3.0, 1.3, 3.4; Consumer Price Inflation 4.2, 2.3, 4.1, 1.8, 2.1, 2.9; Fiscal Balance 7.7, 1.9, –3.4, –4.1, –3.7, –2.2; Current Account Balance 10.3, 13.3, 4.7, 2.4, 2.1, 2.1.
  - Yemen (note 1): Real GDP Growth 3.1, –0.2, –28.1, –9.8, –2.0, 8.5 (2018 projection based on hypothetical assumption that conflict ends in early 2018); Consumer Price Inflation 11.5, 8.2, 39.4, 5.0, 20.0, 29.5; Fiscal Balance –3.0, –4.1, –10.6, –13.5, –9.9, –6.6; Current Account Balance 0.0, –1.7, –5.5, –5.6, –2.3, –2.4.
- Sources: National authorities; and IMF staff estimates and projections.
- Notes:
  - Variables reported on a fiscal year basis for Iran (March 21–March 20).
  - 2018 projection for Yemen is based on hypothetical assumption that conflict ends in early 2018.
  - Central government for certain fiscal figures (notes 2 and 3); consolidated accounts for UAE (note 4).

*International Monetary Fund | October 2017 — Regional Economic Outlook: Middle East and Central Asia (Chapter excerpt)*

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_Source: https://www.imf.org/-/media/files/publications/reo/mcd-cca/2017/october/menap/6-chapter-1.pdf_