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

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### Global and commodity context
- Oil trading range: $50–$60 a barrel; assumed average prices: US$50.28 a barrel in 2017 and US$50.17 a barrel in 2018.
- Non–fuel commodities: projected to strengthen in 2017 and 2018 relative to 2016 averages.
- Commodity prices: expected to rise slightly, by approximately 1 percent a year between 2019 and 2022.
- Six-month LIBOR on U.S.-dollar deposits: assumed to average 1.4 percent in 2017 and 1.9 percent in 2018.

### Growth prospects and regional outlook
- World Real GDP Growth: 3.2 (2016), 3.6 (2017), 3.7 (2018), 3.7 (2019–22).
- Selected Real GDP Growth (2016; 2017; 2018; 2019–22):
  - Euro Area: 1.8; 2.1; 1.9; 1.6
  - United States: 1.5; 2.2; 2.3; 1.8
  - China: 6.7; 6.8; 6.5; 6.1
  - Russia: –0.2; 1.8; 1.6; 1.5
  - MENAP: 5.0; 2.6; 3.5; 3.7
  - MENAP oil exporters: 5.6; 1.7; 3.0; 2.8
    - of which: non-oil GDP growth: 1.1; 2.6; 2.5; 3.4
  - MENAP oil importers: 3.6; 4.3; 4.4; 5.3
  - CCA: 2.5; 3.6; 3.7; 4.3
  - CCA oil and gas exporters: 2.4; 3.5; 3.7; 4.3
    - of which: non-oil GDP growth: 1.7; 2.4; 3.0; 4.0
  - CCA oil and gas importers: 3.3; 3.9; 3.8; 4.4
- MENAP outlook remains subdued owing to adjustment to low oil prices and regional conflicts.
- GCC region overall growth expected to bottom out in 2017 at 0.5 percent; non-oil growth in the GCC expected to recover to about 2.6 percent in 2017.

### Fiscal and external challenges
- Fiscal impact of oil price decline:
  - Aggregate fiscal deficits for oil exporters jumped from 1.1 percent of GDP in 2014 to 10.6 percent of GDP in 2016.
  - Deficits expected to ease to 5.2 percent of GDP in 2017 due to modest oil price recovery and consolidation efforts.
- External balances:
  - Aggregate current account for MENAP oil exporters 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).
  - Aggregate current account projected to return to a small surplus in 2019.
- Deficit financing:
  - Debt issuance remains the main source of deficit financing in the region.
  - GCC countries issued about $30 billion on international markets in the first half of 2017 (French/English source phrasing retained where provided).
  - Five-year cumulative deficits projected at $320 billion over 2018–22 (French/English phrasing retained where in source).

### Financial conditions and capital flows
- Market sentiment: continued strength and low volatility.
- Capital flows to emerging markets: resilient and recovering after late 2015/early 2016 declines.
- With gradual monetary normalization: US long-term interest rates declined by around 20 basis points and the dollar depreciated, easing some fiscal vulnerabilities across MENAP and CCA.

### Risks to the outlook
- Short-term risks: broadly balanced (upside: stronger recovery; downside: policy missteps, geopolitical tensions).
- Medium-term risks: tilted to the downside, including
  - shift to inward-looking policies in advanced economies;
  - more rapid tightening of global financial conditions (including faster-than-anticipated US monetary normalization and US dollar appreciation);
  - noneconomic risks: geopolitical tensions, domestic political discord, weak governance and corruption, extreme weather, terrorism and security concerns.
- MENAP and CCA are particularly exposed to risks from key trading partners, global trade prospects, tightening global financial conditions, stronger US dollar, and regional security/political tensions.

### Policy messages and recommendations (summary)
- Fiscal:
  - Gradual fiscal consolidation should continue for oil-exporting countries to manage large fiscal and external deficits while preserving macroeconomic stability.
  - MENAP oil exporters should pursue deficit-reduction plans to maintain fiscal sustainability and, where relevant, support exchange rate pegs.
  - Progress is uneven; some countries need additional consolidation measures while protecting social and growth-oriented expenditures.
  - Improve fiscal institutions and frameworks, including medium-term budget frameworks and fiscal transparency.
- Diversification and structural reforms:
  - Pursue diversification to reduce oil reliance and bolster non-oil growth over the medium term.
  - Accelerate structural reforms to take advantage of global recovery and secure higher, more inclusive, resilient growth.
  - Reforms should boost non-oil activity, support job creation, and improve the investment climate to address persistent unemployment.
- Financial and external:
  - Deepen domestic capital markets to ensure adequate funding for non-oil sector development.
  - Continue reforms to attract foreign private capital; ease access for foreign investors to capital markets.
  - Strengthen debt management and adopt asset-liability strategies for borrowing and investment decisions.

### Financing strategies and debt management
- Institutional capacity:
  - Debt management offices established in Kuwait, Oman, and Saudi Arabia; strengthened in Abu Dhabi and Dubai.
- Issuance choices:
  - International issuance can avoid crowding out private credit; domestic issuance can support domestic market development (example: Saudi Arabia).
  - Issuing longer maturity debt can reduce refinancing risks (example: Oman issued a 30-year bond in March 2017).
- Outside GCC:
  - Domestic debt issuance (including some monetization) has been preferred financing strategy where external options limited (Iran, Iraq, Libya, Yemen).
- Recommendation:
  - Borrowing and investment decisions should be part of comprehensive asset-liability management considering macro-financial risks.

### Financial sector resilience and risks
- Overall resilience:
  - Financial sectors broadly resilient; banks in GCC and Algeria remain well capitalized and profitable with capital adequacy ratios generally above regulatory minimums.
- Emerging pressures:
  - Bank profitability weakening in some countries (United Arab Emirates) due to higher impairment costs; compressed interest margins in Oman.
  - NPL shares barely changed in most GCC countries; edged up in Algeria; special mention/rescheduled loans increased in Oman and United Arab Emirates.
  - Banking systems weak in Iraq and Iran; reforms/recapitalization needed.
- Policy actions undertaken:
  - Reintroduced refinancing instruments (Algeria); imposed liquidity requirements (Bahrain); introduced an interbank benchmark rate (Oman); deepened domestic capital markets (Saudi Arabia); enhanced macroprudential frameworks (Bahrain, Qatar, Saudi Arabia); corporate governance framework for Islamic banks (Kuwait); liquidity tools for Islamic banks (Oman); draft central bank and banking laws (Iran, United Arab Emirates).
- Recommendations:
  - Deepen domestic capital markets; leverage fintech innovations to enhance access to finance while managing risks.
  - Monitor non-resident deposits and wholesale funding exposure (UAE, Qatar).

### Structural reforms and diversification (detailed)
- Urgency:
  - Low oil prices increase urgency to shift away from redistributive public spending and energy subsidies.
  - Diversification strategies exist but implementation must be accelerated.
- Labor and education reforms:
  - Reforms to boost productivity, increase formality and female labor participation, and align education/training with employer needs (examples: Saudi Arabia, Iran, Oman).
  - Saudi Arabia: reforms in training and education, better targeting wage subsidies, increasing labor fees on expatriates, refining Nitaqat.
  - Bahrain, Qatar, UAE: visa reforms permitting greater internal mobility of expatriates; Qatar draft law may grant some permanent residency.
  - Iran and Oman: aligning education with employer needs; entrepreneurship courses (Iran); Oman pending labor law modernization.
- Business environment and private sector:
  - Measures: privatization programs (Saudi Arabia: 16 sectors including potential sale of parts of ARAMCO; Oman), PPPs (Algeria, Oman, Qatar, Saudi Arabia, UAE), one-stop business registration windows (Kuwait, Oman, Qatar), expedited customs (Bahrain, Oman), protecting minority investors (Saudi Arabia, UAE), SME initiatives (Algeria, Oman), enhanced access to finance (Bahrain, Oman, UAE).
  - Saudi Arabia: “Removing Obstacles to the Private Sector Program” (capital markets, customs, competition law, commercial mortgage law; insolvency and competition laws near completion).
- Governance:
  - Improve governance, transparency, accountability, and government efficiency to bolster private sector confidence; particular challenges in conflict-affected countries.

### Downside risks and scenarios (including diplomatic rift with Qatar)
- Major downside risk drivers:
  - Oil price volatility and uncertainty (tilted to the downside).
  - Regional conflicts and geopolitical developments (e.g., diplomatic rift with Qatar).
  - Faster-than-anticipated US monetary normalization leading to tighter global financial conditions and US dollar appreciation.
- Box: Economic implications of the diplomatic rift with Qatar (high-level findings)
  - On June 5, 2017, Bahrain, Egypt, Saudi Arabia, and the United Arab Emirates severed ties with Qatar and closed airspace; Saudi Arabia closed its land border with Qatar.
  - About one-sixth of Qatar’s imports are produced in countries imposing trade restrictions; significant portion of other imports transit through Saudi Arabia and the UAE.
  - Trade rerouting through Kuwait and Oman and alternative food sources helped mitigate shortages; inventory of construction materials and alternative imports mitigated concerns for infrastructure projects.
  - Qatar accelerating import diversification, external financing, and domestic food processing.
  - Financial pressures: sovereign rating downgrade raised interbank rates; private sector deposits declined; liabilities to foreign banks fell.
  - Mitigation: liquidity injections by Qatar Central Bank and increased public sector deposits; banks seeking long-term funding.
  - Regional impact so far muted; protracted rift could slow GCC integration, erode confidence, reduce investment and growth, and increase funding costs for Qatar and possibly the GCC.

### MENAP oil exporters: selected economic indicators (group aggregates and projections)
- Real GDP growth (group projection): 4.3 percent in 2017; 4.4 percent in 2018; 5.3 percent during 2019–22.
- Current account balance (group): 5.3 percent of GDP (2016, deficit widened by about 1 percentage point); projected to remain 5.3 percent of GDP in 2017 and narrow to 4.8 percent of GDP in 2018.
- Inflation (group): 7.7 percent in 2016; projected peak of 15.0 percent in 2017; receding to 8.3 percent in 2018.
- Fiscal balance (group): average fiscal deficit expected to edge down from 6.8 percent of GDP in 2016 to 6.6 percent in 2017 and to 5.6 percent in 2018.
- Public debt (group): average gross public debt about 80 percent of GDP at end-2016; Lebanon’s debt close to 149 percent of GDP at end-2016.
- IMF financial support (selected MENAP oil-importing countries): total financial commitment SDR 13.7 billion at end-August 2017; SDR 3.4 billion drawn overall; SDR 1.2 billion drawn over the first half of 2017.

### Country and subgroup highlights
- Algeria: growth expected to slow to 1.5 percent in 2017 and bottom out at 0.8 percent in 2018 before medium-term recovery.
- Iran: growth projected to drop to about 3.5 percent in 2017 as post-sanctions boost to oil output wears off.
- Iraq, Libya, Yemen: outlook dominated by security conditions and oil-producing capacity constraints.
- GCC: oil and non-oil growth revised down since May 2017 REO update.
- MENAP oil importers:
  - Economic activity projected to expand by 4.3 percent in 2017 (above the 3.6 percent outturn for 2016).
  - Growth forecast to reach 4.4 percent in 2018 and average 5.3 percent during 2019–22—insufficient to absorb unemployed and new labor market entrants.

### Fiscal balances and consolidation specifics
- Deficits:
  - Deficits jumped from 1.1 percent of GDP in 2014 to 10.6 percent of GDP in 2016; projected to fall to 5.2 percent of GDP in 2017.
- Country heterogeneity:
  - In 2016, about half of exporters (Iran, Kuwait, Qatar, United Arab Emirates) had deficits below 5 percent of GDP; the other half had deficits well above 10 percent of GDP.
- GCC consolidation measures:
  - Reductions in non-salary current expenditures, cuts to public sector wage bills in GDP terms, cuts to public investment, and increases in non-oil revenue (VAT projected to start being introduced in January 2018; introduction of excise taxes).

### Policy priorities for oil importers and broader region
- For MENAP oil importers:
  - Sustained fiscal consolidation and reforms to address debt vulnerabilities; public debt for most countries pushed above 50 percent of GDP.
  - Debt levels expected to fall by 2022 given anticipated consolidation, including:
    - Carefully targeting current expenditures to protect social spending.
    - Improving efficiency of public investment to mitigate contractionary effects on growth.
  - Structural reforms to accelerate private sector activity:
    - Improve business environment and quality of infrastructure.
    - Labor market and education reforms.
    - Improve productivity and access to finance.
  - Compact with Africa presents an opportunity to address impediments.
- Across exporters and importers:
  - Protect social and growth-oriented expenditures while consolidating.
  - Improve fiscal institutions and frameworks to support sustainable adjustment and confidence in exchange rate arrangements where relevant.

*International Monetary Fund | October 2017 — Regional Economic Outlook: Middle East and Central Asia (selected content on MENAP oil exporters).*

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

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

### Global and Commodity Context
- Oil is currently trading between $50–$60 a barrel and is expected to hover around these levels into the medium term.
- It has been assumed that the price of oil will average US$50.28 a barrel in 2017 and US$50.17 a barrel in 2018.
- Non–fuel commodities are projected to strengthen in 2017 and 2018 relative to their 2016 averages.
- Commodity prices are expected to rise slightly, by approximately 1 percent a year between 2019 and 2022.
- The six-month London interbank offered rate (LIBOR) on U.S.-dollar deposits is assumed to average 1.4 percent in 2017 and 1.9 percent in 2018.

### Growth Prospects and Regional Outlook
- Global Real GDP Growth: World 3.2 (2016), 3.6 (2017), 3.7 (2018), 3.7 (2019–22).
- Selected country/group projections (Real GDP Growth, 2016–22):
  - Euro Area: 1.8; 2.1; 1.9; 1.6
  - United States: 1.5; 2.2; 2.3; 1.8
  - China: 6.7; 6.8; 6.5; 6.1
  - Russia: –0.2; 1.8; 1.6; 1.5
  - MENAP: 5.0; 2.6; 3.5; 3.7
  - MENAP oil exporters: 5.6; 1.7; 3.0; 2.8
    - of which: non-oil GDP growth: 1.1; 2.6; 2.5; 3.4
  - MENAP oil importers: 3.6; 4.3; 4.4; 5.3
  - CCA: 2.5; 3.6; 3.7; 4.3
  - CCA oil and gas exporters: 2.4; 3.5; 3.7; 4.3
    - of which: non-oil GDP growth: 1.7; 2.4; 3.0; 4.0
  - CCA oil and gas importers: 3.3; 3.9; 3.8; 4.4
- Despite a strengthening global recovery, MENAP’s economic outlook remains relatively subdued because of adjustment to low oil prices and regional conflicts.
- Overall growth in the GCC region is expected to bottom out in 2017 at 0.5 percent, as the OPEC-led deal reduces oil output.
- Non-oil growth in the GCC is expected to recover to about 2.6 percent in 2017.

### Fiscal and External Challenges
- Low oil prices have dampened growth and contributed to large fiscal and external deficits across oil exporters.
- Oil exporters are continuing to adjust to these low oil prices, with fiscal consolidation ongoing.
- Fiscal consolidation has dampened growth (referenced in figures and sections on fiscal consolidation and financing).
- Debt issuance remains the main source of deficit financing in the region (noted as a heading in the source).

### Financial Conditions and Capital Flows
- Market sentiment has continued to be strong and volatility low.
- Capital flows to emerging market economies have remained resilient in recent months, continuing recovery after sharp declines in late 2015 and early 2016.
- With a more gradual monetary policy normalization, US long-term interest rates have declined by around 20 basis points and the dollar has depreciated.
- These developments should ease some fiscal vulnerabilities for countries across the MENAP and CCA regions.

### Risks to the Outlook
- Short-term risks are broadly balanced: upside from a stronger-than-expected recovery; downside from policy missteps amid high policy uncertainty and geopolitical tensions.
- Medium-term risks are tilted to the downside and include:
  - A shift toward inward-looking policies in advanced economies.
  - A more rapid tightening of global financial conditions (including faster-than-anticipated normalization of US monetary policy and associated US dollar appreciation).
  - Noneconomic factors: geopolitical tensions, domestic political discord, weak governance and corruption, extreme weather events, terrorism and security concerns.
- MENAP and CCA countries are particularly exposed to risks related to key trading partners, global trade prospects, tightening global financial conditions and a stronger US dollar, and any increase in regional security and political tensions.

### Policy Messages and Recommendations
- Gradual fiscal consolidation should continue for oil-exporting countries to manage large fiscal and external deficits while preserving macroeconomic stability (section heading: "Gradual Fiscal Consolidation Should Continue").
- Diversification efforts should be pursued to reduce reliance on oil and bolster non-oil growth over the medium term (section focus: "Need to Push ahead with Fiscal Consolidation and Diversification").
- Structural reforms need to be accelerated to take advantage of the strengthening global economy and to secure higher, more inclusive, and resilient growth.
- Reforms should aim to boost non-oil activity, support job creation, and improve the investment climate to address persistent unemployment challenges in the region.

*International Monetary Fund | October 2017 — Regional Economic Outlook: Middle East and Central Asia (selected content on MENAP oil exporters)*

### 2.4 percent in 2018 as fiscal consolidation

### 2.4 percent in 2018 as fiscal consolidation

### Growth outlook for oil exporters and region
- Algeria: growth expected to slow to 1.5 percent in 2017 and bottom out at 0.8 percent in 2018, before recovering over the medium term.
- Iran: growth projected to drop to about 3.5 percent this year as the post-sanctions boost to oil output wears off.
- Iraq, Libya, and Yemen: outlook continues to be dominated by security conditions and oil-producing capacity.
- GCC countries: both oil and non-oil growth have been revised down since the May 2017 Regional Economic Outlook: Middle East and Central Asia Update.
- MENAP oil importers:
  - Economic activity projected to expand by 4.3 percent in 2017 (above the 3.6 percent outturn for 2016).
  - Growth forecast to reach 4.4 percent in 2018 and average 5.3 percent during 2019–22.
  - Despite the pickup, this pace will be insufficient to generate enough jobs to absorb current unemployed and millions of job seekers entering the labor market.

### Fiscal balances and consolidation in oil exporters
- Lower oil prices have increased urgency to move away from redistributing oil receipts through public sector spending and energy subsidies.
- MENAP oil exporters should continue pursuing deficit-reduction plans to maintain fiscal sustainability and, where relevant, to support exchange rate pegs.
- Exact fiscal figures:
  - 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 (2017) on the back of a modest recovery in oil prices and significant deficit reduction efforts.
- Progress is uneven across countries; some will need to identify additional fiscal consolidation measures while protecting social and growth-oriented expenditures.
- All countries would benefit from further improving their fiscal institutions and frameworks.

### Risks to the outlook
- Growth risks for MENAP oil exporters remain tilted to the downside.
- Key downside risks:
  - Considerable uncertainty around the oil price outlook; on balance risks from oil price volatility appear tilted to the downside.
  - Downside risks from regional conflicts and geopolitical developments.
  - Global risks: faster-than-expected normalization of monetary policy in the United States; pursuit of inward-looking policies by advanced economies.
- Upside global risks:
  - A stronger and more durable global recovery (including a stronger-than-expected pickup in activity in the euro area and other trading partners) could contribute to higher growth in the region.

### Policy priorities for oil importers and the broader region
- For MENAP oil importers:
  - Sustained fiscal consolidation and reforms are required to address debt vulnerabilities. Public debt for most countries has been pushed to more than 50 percent of GDP.
  - Debt levels are expected to fall by 2022 in most countries given anticipated consolidation, which should include:
    - Carefully targeting current expenditures to protect social spending.
    - Improving the efficiency of public investment to mitigate contractionary effects on growth.
- Structural reforms to accelerate private sector activity and foster a more dynamic, competitive, and inclusive economy, including:
  - Improving the business environment and quality of infrastructure.
  - Labor market and education reforms.
  - Improving productivity and enhancing access to finance.
  - The recently established Compact with Africa presents an opportunity to address impediments.
- Across MENAP oil exporters and importers:
  - Protect social and growth-oriented expenditures while implementing fiscal consolidation.
  - Improve fiscal institutions and frameworks to support sustainable adjustment and confidence in exchange rate arrangements where relevant.

*Source: IMF Regional Economic Outlook: Middle East and Central Asia (excerpt).*

### 2017. En Algérie, la croissance devrait ralentir à

### 2017. En Algérie, la croissance devrait ralentir à

### Perspectives de croissance — région MOANAP et pays clés
- En Algérie, la croissance devrait ralentir à 1,5 % en 2017, puis descendre à 0,8 % en 2018, sous l’effet de la compression projetée des dépenses publiques, avant de se redresser à moyen terme.
- En Iran, la croissance devrait marquer un repli à 3,5 % cette année, car l’impulsion donnée à la production pétrolière après la levée des sanctions perd de son intensité.
- La situation sécuritaire et les contraintes de capacité de production de pétrole continuent de peser sur les perspectives de croissance de l’Iraq, de la Libye et du Yémen.
- Les pays importateurs de pétrole de la région MOANAP devraient afficher un taux de croissance de 4,3 % en 2017, soit un niveau nettement supérieur aux 3,6 % enregistrés en 2016.
- À moyen terme, la croissance des pays importateurs de pétrole de la région MOANAP devrait atteindre 4,4 % en 2018, puis une moyenne de 5,3 % en 2019–22.
- Non-oil growth for oil exporters is expected to recover to about 2.6 percent in 2017–18 (English phrasing retained where in source).

### Prix du pétrole et implications
- Les prix du pétrole se négocient entre $50–$60 a barrel, en hausse par rapport à la moyenne de l’année précédente de $43 a barrel.
- L’accord dirigé par l’OPEC a été étendu en mai 2017 jusqu’au premier trimestre de 2018.
- L’hypothèse pétrolière à moyen terme du FMI reste globalement autour des niveaux actuels, basée sur le marché à terme.

### Solde budgétaire et consolidation fiscale — constat et projections
- Le tassement des cours du pétrole a provoqué un important creusement des déficits budgétaires dans l’ensemble des pays exportateurs de la région MOANAP, de 1,1 % du PIB en 2014 à 10,6 % du PIB en 2016.
- Ce chiffre devrait toutefois descendre à 5,2 % du PIB cette année grâce à un modeste redressement des cours et à un travail considérable de réduction des déficits.
- Cinq années cumulées de déficits budgétaires sont projetées à $320 billion sur 2018–22.
- En 2016, environ la moitié des exportateurs de pétrole de la région (Iran, Kuwait, Qatar, United Arab Emirates) avaient des déficits inférieurs à 5 percent of GDP, tandis que l’autre moitié avait des déficits bien au-dessus de 10 percent of GDP (anglais conservé où dans source).
- Dans la région GCC, les plans de consolidation incluent : réductions supplémentaires des dépenses courantes non salariales, réductions des bills de salaires publics en part du PIB, nouvelles coupes aux dépenses d’investissements publics, et hausse des recettes non pétrolières, notamment introduction de taxes à la valeur ajoutée (projected to start being introduced in January 2018) et taxes d’accise.

### Financement des déficits et dette
- L’émission de dette demeure la principale source de financement des déficits publics.
- Au premier semestre de 2017, les pays du GCC ont émis environ $30 billion sur les marchés internationaux.
- Les pays incapables de consolider suffisamment devront identifier des mesures additionnelles de rééquilibrage budgétaire (exemples cités : Bahrain, Oman).

### Diversification et réformes structurelles
- Les pays exportateurs de pétrole de la région MOANAP ont défini des stratégies ambitieuses de diversification, mais la mise en œuvre doit être accélérée.
- Il est nécessaire d’accélérer l’exécution des réformes structurelles pour :
  - renforcer l’activité du secteur privé;
  - promouvoir une économie plus dynamique, plus compétitive et plus inclusive;
  - améliorer le climat des affaires, notamment en rehaussant la qualité des infrastructures;
  - réformer le marché du travail et l’éducation, améliorer la productivité et l’accès à la finance.
- Le Pacte pour l’Afrique est mentionné comme opportunité pour s’attaquer à certains obstacles.

### Risques pour la région
- Les risques pesant sur la croissance des pays exportateurs de pétrole de la région MOANAP restent de nature baissière.
- Risques identifiés : volatilité des cours du pétrole (globalement baissiers), persistance des conflits régionaux et phénomènes géopolitiques, normalisation plus rapide que prévu de la politique monétaire américaine, politiques de repli sur soi d’économies avancées.
- Risques haussiers mondiaux possibles : probabilité d’une reprise mondiale plus forte et plus durable, reprise plus forte de l’activité dans la zone euro et autres partenaires commerciaux pouvant impulser la croissance dans la région.
- Pour les pays importateurs de pétrole, risques additionnels : tensions sociales, sentiment de saturation face aux réformes, vulnérabilité de l’activité agricole aux aléas climatiques et à l’évolution des prix, éventualité d’un durcissement plus rapide des conditions financières mondiales.

### Indicateurs macroéconomiques clés (sélection, chiffres tels que fournis)
- MOANAP (projections) : PIB réel (croissance annuelle) 2017 = 2,6 ; 2018 = 3,5
- Solde des transactions courantes MOANAP 2017 = -1,9 ; 2018 = -1,6
- Solde budgétaire global MOANAP 2017 = -5,7 ; 2018 = -4,6
- Inflation MOANAP (progression annuelle, %) 2017 = 7,9 ; 2018 = 6,9
- Exportateurs de pétrole MOANAP : PIB réel 2017 = 1,7 ; 2018 = 3,0
- Dont croissance hors pétrole exportateurs 2017 = 1,2 ; 2018 = 2,5
- Solde budgétaire global exportateurs 2017 = -10,6 ; 2018 = -5,2
- Importateurs de pétrole MOANAP : PIB réel 2017 = 4,3 ; 2018 = 4,4
- Solde budgétaire global importateurs 2016 = -6,8 ; 2017 = -6,6 ; 2018 = -5,6
- Inflation importateurs (moyenne annuelle, %) 2017 = 7,7 ; 2018 = 15,0 (valeurs reportées telles que dans le tableau source)

### Recommandations de politique 
- Les pays exportateurs de pétrole doivent poursuivre la mise en œuvre de leurs plans de réduction du déficit budgétaire pour préserver la viabilité des finances publiques et, dans certains cas, soutenir le régime de change.
- Identification de mesures de consolidation additionnelles si nécessaire, tout en protégeant les dépenses sociales et les crédits propices à la croissance.
- Finaliser les réformes des prix de l’énergie et profiter de la période de bas prix pour mettre en place des mécanismes de compensation ciblés (exemples cités : Oman, Saudi Arabia).
- Renforcer les institutions et dispositifs budgétaires : généralisation de cadres budgétaires à moyen terme, fonctionnement d’unités macro-fiscales, meilleure gestion du service de la dette et transparence fiscale (exemple : publication de rapports fiscaux trimestriels par Saudi Arabia).

*Source : Extraits du chapitre "Région MOANAP : Principaux points" — Regional Economic Outlook: Middle East and Central Asia, International Monetary Fund | October 2017.*

### 1. MENAP OIL ExPORTERs: NEEd TO PUsh AhEAd wITh FIsCAL CONsOLIdATION ANd dIvERsIFICATION

### 1. MENAP OIL EXPORTERS: NEED TO PUSH AHEAD WITH FISCAL CONSOLIDATION AND DIVERSIFICATION

### Financing strategies and debt management
- Debt management offices have been established in Kuwait, Oman, and Saudi Arabia, and strengthened in Abu Dhabi and Dubai.
- Issuing internationally can avoid crowding out credit to the private sector; issuing domestically can help support gradual financial market development (for example, Saudi Arabia).
- Risks can be reduced by issuing longer maturity debt (for example, Oman issued a 30-year bond in March 2017), although there are trade-offs with respect to cost.
- Outside of the GCC region, domestic debt issuance (including some monetization of the deficit) has been the preferred financing strategy where external financing options are more limited (Iran, Iraq, Libya, Yemen).
- Borrowing and investment decisions should be made as part of a comprehensive asset-liability management strategy that takes into account macro-financial developments and risks.

### External balances and role of private capital
- The aggregate current account balance for MENAP oil exporters 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 help support fixed exchange rate regimes and structural reforms to attract foreign private capital.
- Improvements have been made easing access for foreign investors to capital markets (such as in Saudi Arabia); adoption of new foreign investment laws has been delayed in some countries (Oman, United Arab Emirates).
- Other reforms to increase competitiveness and boost diversification would contribute to narrowing external deficits.
- 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 so far remained broadly resilient in the face of lower hydrocarbon prices.
- Banks in the GCC region and Algeria remain well capitalized, with capital adequacy ratios generally well above the regulatory minimums, and profitable.
- Pressures exist: bank profitability is weakening in some countries, including because of higher impairment costs (United Arab Emirates) and compressed interest rate margins amid intensified competition for deposits (Oman).
- The share of nonperforming loans has barely changed in most GCC countries but has edged up in Algeria; there has been some increase in special mention loans (Oman) and rescheduled loans (United Arab Emirates).
- Banking systems remain weak in Iraq and Iran; Iraq is developing a strategy to address state-owned banks’ challenges; in Iran, bank reform is underway and 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.
- The modest increase in oil prices and easing of government cash constraints have helped lessen liquidity pressures in some countries—notably Saudi Arabia and the United Arab Emirates—and interbank (and lending) rate spreads have narrowed, limiting the full pass-through of higher policy rates.
- Deposit growth has improved modestly; 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.
- Non-resident deposits and wholesale funding remain an important funding source for banks—especially in the United Arab Emirates and Qatar—exposing them to changes in global liquidity conditions.
- Policymakers have progressed on 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 a new corporate governance framework for Islamic banks (Kuwait), developing liquidity provision tools for Islamic banks (Oman), and drafting new central bank and banking laws (Iran, United Arab Emirates).
- Deepening domestic capital markets is recommended to ensure adequate funding for non-oil sector development.
- Policymakers should consider leveraging rapid technological innovations in the financial sector to enhance access to finance while managing associated risks.

### Structural reforms and diversification
- Low oil prices have increased urgency for oil exporters to shift 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 fiscal consolidation.
- A recent IMF (2016b) study finds that, relative to other countries, productivity in the GCC region tends to contribute little to growth, while labor contributes significantly more.
- The GCC pattern reflects policies favoring employment of 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 the composition of growth more closely matches the global pattern.
- Labor market and education reforms are critical to foster diversification and private sector development.
  - Saudi Arabia is reforming training and education systems, better targeting wage subsidies, increasing labor fees on expatriate workers (to reduce the wage gap between Saudis and expatriates), and refining the employment quota system (Nitaqat) by introducing programs that require all employees in certain sectors to be nationals.
  - Bahrain, Qatar, and the United Arab Emirates have made visa system reforms allowing greater internal mobility of expatriate workers; a new draft law in Qatar would grant some expatriate workers permanent residency.
  - Iran and Oman are aligning education and training with employer needs, including entrepreneurship courses in school curricula (Iran); modernization of labor laws in Oman is pending.
- Increasing formality and labor market participation, especially among women, would benefit productivity and growth across the region; such reforms will likely entail fiscal costs, enhancing the case for growth-friendly fiscal consolidation.
- Steps to improve the business environment include:
  - Algeria fleshing out a strategy to reshape toward private sector–led growth.
  - Iran’s Sixth National Development Plan aims to develop the private sector and reduce oil dependency.
  - GCC countries launching national development strategies with implementation and monitoring via key performance indicators (Saudi Arabia’s Vision 2030 monitoring system; Oman and United Arab Emirates have introduced KPIs; Qatar’s second national development strategy emphasizes monitoring and evaluation).
  - Expanding the private sector via privatization programs (in 16 sectors in Saudi Arabia, including the potential sale of parts of ARAMCO, and in Oman) and public-private partnerships (Algeria, Oman, Qatar, Saudi Arabia, United Arab Emirates).
  - Saudi Arabia’s “Removing Obstacles to the Private Sector Program” implementing measures to develop capital markets, expedite customs clearance, update competition law, and institute a commercial mortgage law; insolvency and competition laws near completion.
  - Other reforms: one-stop windows for business registration and licensing (Kuwait, Oman, Qatar), expedited customs processes (Bahrain, Oman), protecting minority investors (Saudi Arabia, United Arab Emirates), initiatives to foster small and medium enterprises (Algeria, Oman), and enhancing access to finance (Bahrain, Oman, United Arab Emirates).
- Improving governance, transparency, accountability, and government efficiency would bolster private sector confidence; governance and corruption challenges remain particularly in conflict-affected countries.

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

### Box: Economic implications of the diplomatic rift with Qatar (high-level findings)
- On June 5, 2017, Bahrain, Egypt, Saudi Arabia, and the United Arab Emirates severed diplomatic and economic ties with Qatar, closed airspace to Qatar Airways flights, and Saudi Arabia closed its land border with Qatar.
- About one-sixth of Qatar’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 has been re-routed through Kuwait and Oman; alternative food supply sources have been established, mitigating fears of shortages.
- Availability of an inventory of construction materials and alternative import sources mitigated initial concerns about infrastructure project implementation.
- Qatar is accelerating efforts to diversify sources of imports and external financing and to enhance domestic food processing.
- Some financial pressures emerged: the downgrade of Qatar’s sovereign credit rating and outlook raised interbank interest rates, and private sector deposits (both resident and non-resident) have declined; liabilities to foreign banks have fallen.
- The impact on banks’ balance sheets has been mitigated by liquidity injections by the Qatar Central Bank and increased public sector deposits; banks are focusing on securing additional long-term funding.
- Economic impact in the rest of the region appears muted so far; Qatar’s exports to these countries have been broadly maintained, including large volumes of gas supplied to Oman and the United Arab Emirates.
- Initial spillovers to GCC financial markets were benign, with initial effects 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.

*International Monetary Fund | October 2017*

### Box 1.1 (continued)

### Box 1.1 (continued)

### MENAP Oil Exporters: Selected Economic Indicators
- Real GDP growth (projection for the group): 4.3 percent in 2017; 4.4 percent in 2018; 5.3 percent during 2019–22.
- Current account balance (group): 5.3 percent of GDP (2016, deficit widened by about 1 percentage point); projected to remain 5.3 percent of GDP in 2017 and narrow to 4.8 percent of GDP in 2018.
- Inflation (group): 7.7 percent in 2016; projected peak of 15.0 percent in 2017; receding to 8.3 percent in 2018.
- Fiscal balance (group): average fiscal deficit expected to edge down from 6.8 percent of GDP in 2016 to 6.6 percent in 2017 and to 5.6 percent in 2018.
- Public debt (group): average gross public debt about 80 percent of GDP at end-2016; Lebanon’s debt close to 149 percent of GDP at end-2016.
- IMF financial support (to selected MENAP oil-importing countries): total financial commitment SDR 13.7 billion at end-August 2017; SDR 3.4 billion drawn overall; SDR 1.2 billion drawn over the first half of 2017.

### Gradual Recovery and Country Outcomes
- Regional growth outlook and drivers:
  - Growth in MENAP oil importers projected to increase to 4.3 percent in 2017, supported by strengthening domestic demand and a cyclical recovery of the global economy.
  - Medium-term outlook: 4.4 percent in 2018 and 5.3 percent during 2019–22; still insufficient to absorb labor market entrants.
- Selected country projections and developments:
  - Egypt: growth broadly unchanged at 4.3 percent in FY2017; stronger than anticipated due to policies under IMF-supported program; high-frequency indicators suggest pickup.
  - Pakistan: growth projected at 5.3 percent in 2017, underpinned by investment related to the China-Pakistan Economic Corridor and strengthening credit growth.
  - Djibouti: growth expected to lift to 7.0 percent driven by port infrastructure projects and transshipment activity.
  - Morocco: growth expected at 4.8 percent in 2017, supported by favorable agriculture, rebound in services and manufacturing, expanded mining capacity, and higher phosphate prices.
  - Mauritania: projected growth 3.8 percent in 2017 due to large mining and infrastructure investments.
  - Tunisia: growth picking up gradually to 2.3 percent in 2017 amid stronger growth in Europe, reforms, and improved tourism security.
  - Somalia: growth weakening to 2.4 percent in 2017 from 3.2 percent in 2016 due to severe drought.
  - Afghanistan: near-term growth prospects weakened and expected to remain lethargic because of heightened security challenges.
  - Lebanon: sluggish growth in 2017, reflecting spillovers from the protracted conflict in Syria.

### External Sector and Reserves
- 2016 external weakness: current account deficit widened to about 5.3 percent of GDP for MENAP oil importers.
- Country-level pressures: Djibouti and Mauritania posted current account deficits above 10 percent of GDP in 2016.
- Drivers of improvement: higher oil prices, continued imports of capital goods, higher tourist arrivals, remittances, upswing in commodity prices (iron ore, gold, phosphates, cotton), international bond issuance (Egypt), capital inflows (Djibouti, Egypt, Morocco, Tunisia), uptick in exports and remittances, and IMF disbursements.
- Risks: appreciation of real effective exchange rates in some countries could pose challenges to external competitiveness.

### Fiscal Position and Public Debt
- Average fiscal deficit trajectory: 6.8 percent of GDP in 2016 → 6.6 percent in 2017 → 5.6 percent in 2018 (expected).
- Consolidation measures supporting improvement include: containing energy subsidies (Egypt, Tunisia), limiting nonpriority current expenditures (Morocco, Tunisia), fiscal decentralization and PFM strengthening, reducing special tax regimes (Djibouti), removing exemptions from general sales tax and customs duties, tackling tax evasion and broadening tax base (Egypt, Jordan, Sudan, Tunisia), and wage restraint (Djibouti, Egypt).
- Persisting vulnerabilities:
  - Weak domestic revenue mobilization and high current expenditures have pushed public debt for most countries to more than 50 percent of GDP.
  - End-2016 average gross public debt about 80 percent of GDP; Lebanon close to 149 percent of GDP.
  - Other risks: valuation effects from currency depreciation, rising interest payments, buildup of arrears (Somalia, Sudan), state guarantees (Pakistan), and large externally funded infrastructure projects (Djibouti, Mauritania, Pakistan).

### Monetary Policy, Inflation, and Financial Sector
- Inflation profile:
  - Group: 7.7 percent in 2016 → peak 15.0 percent in 2017 → 8.3 percent in 2018 (forecast).
  - Country-specific spikes: Egypt overall inflation close to 30 percent (pass-through from large exchange rate depreciation, reduced fuel subsidies, VAT introduction, higher utilities); Sudan overall inflation above 25 percent (parallel rate depreciation, monetization of fiscal deficit).
  - Other countries: increased inflation in Afghanistan and Somalia; subdued inflation in Morocco and Pakistan; benign inflation in Lebanon due to lagged nominal effective exchange rate appreciation.
- Monetary policy recommendations:
  - Strengthen and modernize monetary policy frameworks to bolster transmission mechanisms, improve communication and transparency, and enhance analytical tools.
  - For recent floaters (Egypt, Tunisia), adoption of a full-fledged inflation-targeting regime over time is desirable.
  - Strengthen central bank independence to anchor inflation expectations.
  - Pay attention to financial dollarization challenges where relevant.
- Financial sector soundness:
  - As of end-2016, banks generally well capitalized, liquid, and relatively profitable.
  - Nonperforming loans declining in Pakistan and Sudan but trending up in Morocco.
  - Banking regulatory reforms progressing; several countries strengthening resolution frameworks and introducing deposit insurance (Pakistan).
  - Correspondent banking constraints continue to affect remittances, deposits, and credit expansion (Djibouti, Somalia, Sudan).
  - Private sector credit growth: rises in Morocco and Pakistan in 2017 due to accommodative policy; edged lower in Jordan after tightening.
  - Need continued monitoring, robust supervision, and appropriately targeted macroprudential policies; be mindful of rapid fintech expansion opportunities and challenges.

### Policy Priorities and Structural Reforms
- Core policy priorities to leverage global upswing and secure resilience:
  - Growth-friendly fiscal consolidation to rebuild buffers while protecting social spending.
  - Boost domestic revenue mobilization and strengthen public financial management to improve transparency and accountability.
  - Improve efficiency of public investment to mitigate contractionary effects on growth.
  - Recalibrate and improve targeting of social assistance (Egypt, Jordan, Morocco) and curb nonpriority current spending (Morocco, Tunisia).
  - Implement a new model for public wage bill management emphasizing diagnostics, complementarities with reforms for inclusive growth, and supportive institutions.
  - Strengthen monetary policy frameworks and central bank independence, consider inflation targeting where appropriate.
  - Accelerate structural reforms to improve the business environment, create jobs, increase inclusiveness, and fully take advantage of global growth momentum.
  - Monitor financial stability risks and apply macroprudential measures as needed.

*International Monetary Fund | October 2017*

### 2. MENAP OIL IMPORTERs: sECURING REsILIENCE ANd INCLUsIvE GROwTh

### 2. MENAP OIL IMPORTERS: SECURING RESILIENCE AND INCLUSIVE GROWTH

### Structural reforms and private sector development
- Implementing a critical mass of reforms is imperative to signal governments’ commitment to reform and help further boost confidence and economic resilience (Dabla-Norris, Ho, and Kyobe 2016; Mitra and others 2016).
- Improving the business environment will be critical to boost private sector–led investment and growth, while enabling the MENAP region to benefit further from the ongoing global recovery (Figure 2.11).
- Enhanced governance and transparency, strengthened accountability, and improved government efficiency would bolster private sector confidence (World Bank 2017).
- Country example: Egypt made strides in improving its business climate in 2017 by enacting industrial and investment laws that streamlined business registration and operations.

### Infrastructure and integration
- In most MENAP oil importers, insufficient and low-quality infrastructure (especially in the energy and transportation sectors) remains a binding constraint to private sector–led growth (Sethi 2015; Estache and others 2013).
- The recently established Compact with Africa presents an opportunity to identify and address these impediments by promoting private investment in Africa with a specific focus on increasing infrastructure development (Box 2.3).
- Reducing infrastructure gaps would allow new productive sectors to develop, generate jobs, and foster integration into global value chains (Chapter 4; Cheng and others 2015).
- Innovative public-private partnerships could be pursued to fund infrastructure projects, although policymakers should remain cognizant of the attendant fiscal risks.

### Labor market, education, and inclusion
- Persistently high unemployment, notably youth unemployment, and low labor force participation—especially by women—call for more labor market flexibility, less reliance on government jobs, and improvements in educational systems to reduce skill mismatches in the private sector (OECD 2016).
- Efforts targeted at removing the persistent gender gaps in education could simultaneously generate more equitable growth and make available a new source of higher-skilled labor.
- Overall objective: improve productivity and unleash the region’s labor potential to reinforce the resilience and inclusiveness of growth (Mitra and others 2016).

### Agriculture and rural development
- Agriculture absorbs more than 80 percent of the labor force in Afghanistan and more than 40 percent in Morocco and Pakistan.
- Reforms to raise agricultural productivity, and therefore rural incomes, could play a major role in alleviating poverty and inequality (Bustos, Garber, and Ponticelli 2016; Farole and Pathikonda 2016).
- Policy measures: increased access to irrigation; training on better farming methods; use of high-yield crop varieties; improved market access; encouraging diversification through labor-intensive agribusiness activities (such as food processing) and fostering greater value-added agricultural production.

### Financial inclusion and capital markets
- Continued focus on expanding access to finance—especially for small and medium enterprises—would help broaden financial inclusion and lower the cost of borrowing (Demirgüç-Kunt and Singer 2017; Naceur and others 2017; Figure 2.12; Chapter 5).
- Developing domestic capital markets in the region would improve access to finance and catalyze entrepreneurship.
- Regular issuance of government debt to establish a yield curve would help diversify financing channels for businesses and facilitate bank liquidity management.

### Risks tilted to the downside
- Regional conflicts and security risks could be protracted or escalate, causing human loss, infrastructure destruction, outward migration, disruption of regional trade routes and cross-border investments, and shrinking tourism.
- The risk of social tensions and reform fatigue may increase if growth remains subdued and unemployment high, undermining fiscal and structural reform momentum.
- Agricultural activity remains vulnerable to weather and price developments (Morocco, Pakistan, Somalia). A decline in commodity prices would lower government revenues and export receipts and widen current account deficits in:
  - Mauritania (iron ore, gold, copper)
  - Morocco (phosphates, wheat, vegetables)
  - Pakistan (cotton)
  - Sudan (oil, gold)
- Global risks: a more rapid tightening of global financial conditions (including due to faster-than-anticipated normalization of monetary policy in the United States) could:
  - push up financing costs (including domestic financing costs)
  - increase fiscal pressures
  - reduce private investment
  - lead to a stronger US dollar, amplifying debt vulnerabilities in countries with a significant share of debt in foreign currency (Pakistan, Tunisia)
- Upside scenario: a stronger-than-expected pickup in activity in the euro area and other trading partners would help lift regional growth.

### The Belt and Road Initiative (Box 2.1)
- BRI aims to strengthen connections with Europe and Africa via Central and Southwest Asia and the Middle East; nearly 70 countries are engaged and the number may reach 100 or more.
- Focus areas: infrastructure development and trade facilitation; financial connectivity and integration; policy coordination; joint research; people-to-people exchange.
- Cumulative investment in the corridors could reach $1 trillion over 10 years.
- Financing mainly through: the Asian Infrastructure Investment Bank, China Development Bank, Export-Import Bank of China, and Silk Road Fund (largely on market terms).
- Major regional projects cited:
  - Investments in Pakistan in the energy sector and rail, road, and port infrastructure totaling $55 billion over the next decade.
  - Railway, highway, and port projects across Kazakhstan to Europe via Russia, and to Iran and Turkey via Kazakhstan and Turkmenistan.
  - A railway to Uzbekistan via the Kyrgyz Republic, a railway to Afghanistan via Uzbekistan, and a railway from an upgraded port in Djibouti to Ethiopia and South Sudan.
  - Oil and gas pipelines connecting China with Central Asia and Azerbaijan, and with Europe via the Black Sea and Turkey.
  - Power, natural resources and mining, manufacturing, and agriculture and agro-processing projects across the region.
- Benefits: construction activity, increased energy supply, improved connectivity, technology transfer, greater trade, diversification, export growth, and employment.
- Challenges and caveats:
  - Project implementation and management across multiple jurisdictions and complex settings.
  - Pressure on fiscal, debt, and external positions, especially in economies with limited fiscal room.
  - Potential crowding out of other development spending.
  - Future budgetary claims for operational and maintenance costs, loan repayments, interest, profit repatriation, and fuel imports.
  - Where projects benefit from tax exemptions, gains to national budgets will be lower.
- Policy guidance: strengthen medium-term fiscal and budgetary frameworks; enhance capacity to assess and manage project costs, financial terms, and risks (including from tax incentives); ensure projects are well designed, commercially viable, transparent, and, where possible, concessional in low-income countries; target spillovers to local employment and inputs; pursue joint projects with international financial institutions for better assessment, monitoring, and concessional financing.

### Somalia: rebuilding after decades-long civil war (Box 2.2)
- Context: end of civil war in the late 2000s and national elections in February 2017—only the second since 1991—present an opportunity to rebuild.
- Somalia’s economy during 2014–16 was sustained by donor grants, remittances, and foreign direct investment (mostly from the Somali diaspora).
- IMF engagement and support:
  - Somalia is one of the largest beneficiaries of IMF technical assistance, delivered through a multi donor trust fund and closely coordinated with partners.
  - Technical assistance yielded tangible results in economic management and macroeconomic and financial data reporting.
  - Significant progress in rebuilding institutional capacity to prepare and monitor an annual budget, implement national currency reform, and strengthen central bank governance.
  - Since resuming engagement in 2013, the IMF concluded two Article IV consultations.
  - A 12-month staff-monitored program (SMP) with the IMF began in May 2016 and has been completed; a new SMP covering May 2017–April 2018 has been approved by IMF management.
  - Although arrears preclude current IMF financial support, successful SMP completion will help pave the way for eventual future debt relief.
- Persistent challenges:
  - Security situation remains fragile, aggravated by high youth unemployment and a drought.
  - Weak fiscal position due to poor fiscal management, weak tax collection, and a heavy external debt burden with no capacity to repay.
  - Nascent central bank and financial sector; widespread counterfeiting has diminished confidence in the national currency.
  - Need for sustained reform efforts to reconstitute institutions and improve economic, financial, and social data.
- Table 2.2.1 selected indicators (2014–16 average):
  - Population, Total (million): 13.9642.0
  - GdP per Capita (current Us$): 426.0632.3
  - Net OdA Received (% of GNI): 22.28.7
  - Life Expectancy at Birth, Total (years): 55.561.5
  - Labor Force Participation Rate, Rotal (% of total population ages 151)²: 54.376.2
  - Labor Force Participation Rate, Female (% of female population ages 151)²: 33.270.0
  - Labor Force Participation Rate, Male (% of male population ages 151)²: 75.982.6
  - Time Required to Register Property (days): 188.0 78.8
  - Notes: GNI = gross national income; OdA = official development assistance. 1 Low-income countries. 2 International Labour Organization modeled estimate.

### The G20 Compact with Africa (Box 2.3)
- Objective: promote private investment in Africa through compacts between African governments, international organizations, and development partners, with a specific focus on increasing infrastructure development.
- Initiative launched under the German presidency by G20 finance ministers and central bank governors in March 2017.
- Compact components:
  - Participating African countries will identify reforms to create a more enabling environment for private investment, improve domestic revenue and finance mobilization, and create space to scale up public investment in infrastructure while ensuring debt sustainability.
  - The G20 and partner countries will promote the initiative and encourage their business sectors to invest in participating African countries, including through investor roundtables and high-level events, and will support provision of related technical assistance.
  - International organizations will provide technical assistance, policy advice, and financial support to help ensure sound macroeconomic, business, and financing frameworks.
  - The G20, partner countries, and international organizations will coordinate more closely on technical assistance; provide greater support for early-stage project preparation for infrastructure; and increase investment by private arms of multilateral and bilateral development institutions.
- Participating African countries completing their compacts: Côte d’Ivoire, Ethiopia, Ghana, Morocco, Rwanda, Senegal, and Tunisia. Others expressing interest or considering joining include Algeria and Egypt.
- IMF role: support launch and implementation, incorporate compact-related reforms into IMF policy dialogue and programs while protecting macroeconomic resilience and public debt sustainability; step up capacity-development efforts through regional technical assistance centers and the Middle East Technical Assistance Center.
- Oversight and monitoring: a G20 investment finance group will help carry forward and oversee the Compact with Africa work program over the medium term; program monitored through in-country dialogue and biannual reports to the G20.

*International Monetary Fund | October 2017*

### Box 2.3. The G20 Compact with Africa Initiative: Boosting Private Investment

### Box 2.3. The G20 Compact with Africa Initiative: Boosting Private Investment

### References
- Bustos, P., G. Garber, and J. Ponticelli. 2016. “Capital Allocation across Sectors: Evidence from a Boom in Agriculture.” Working Paper 414, Banco Central Do Brasil, Brasilia.
- Cabral, R., F. G. Carneiro, and A. V. Mollick. 2016. “Inflation Targeting and Exchange Rate Volatility in Emerging Markets.” Policy Research Working Paper 7712, World Bank, Washington, DC.
- Cheng, K., S. Rehman, D. Seneviratne, and S. Zhang. 2015. “Reaping the Benefits from Global Value Chains.” IMF Working Paper 13/108, International Monetary Fund, Washington, DC.
- Dabla-Norris, E., G. Ho, and A. Kyobe. 2016. “Structural Reforms and Productivity Growth in Emerging Market and Developing Economies.” IMF Working Paper 16/15, International Monetary Fund, Washington, DC.
- Demirgüç-Kunt, A., and D. Singer. 2017. “Financial Inclusion and Inclusive Growth: A Review of Recent Empirical Evidence.” Policy Research Working Paper 8040, World Bank, Washington, DC.
- Estache, A., E. Ianchovichina, R. Bacon, and I. Salamon. 2013. Infrastructure and Employment Creation in the Middle East and North Africa. Washington, DC: World Bank.
- Farole, F., and V. Pathikonda. 2016. “The Capabilities Driving Participation in Global Value Chains.” Policy Research Working Paper 7804, World Bank, Washington, DC.
- International Monetary Fund (IMF). Forthcoming. “Getting Global Economic Integration Right.” Washington, DC.
- Mitra, P., A. Hosny, G. Minasyan, M. Fischer, and G. Abajyan. 2016. “Avoiding the New Mediocre: Raising Long-Term Growth in the Middle East and Central Asia.” Departmental Paper, Middle East and Central Asia Department, International Monetary Fund, Washington, DC.
- Naceur, S. B., R. Blotevogel, M. Fischer, and H. Shi. 2017. “Financial Development and Source of Growth: New Evidence.” IMF Working Paper 17/143, International Monetary Fund, Washington, DC.
- Organisation for Economic Co-operation and Development (OECD). 2016. Youth in the MENA Region: How to Bring Them In. Paris.
- Rother, B., G. Pierre, D. Lombardo, R. Herrala, P. Toffano, E. Roos, A. G. Auclair, and K. Manasseh. 2016. “The Economic Impact of Conflicts and the Refugee Crisis in the Middle East and North Africa.” Staff Discussion Note 16/08, International Monetary Fund, Washington, DC.
- Sahay, R., M. Cihak, P. N’Diaye, A. Barajas, R. Bi, D. Ayala, Y. Gao, A. Kyobe, L. Nguyen, C. Saborowski, K. Svirydzenka, and S. Yousefi. 2015. “Rethinking Financial Deepening: Stability and Growth in Emerging Markets.” IMF Staff Discussion Note 15/08, International Monetary Fund, Washington, DC.
- Sethi, N. 2015. “Power Sector Reforms: Pakistan’s Energy Crisis and Ways Forward.” In Pakistan’s Interminable Energy Crisis: Is There Any Way Out? edited by M. Kugelman. Washington, DC: Wilson Center.
- Tamirisa, N., G. Agou, C. Duenwald, K. Dybczak, T. Kass-Hanna, T. Mirzoev, B. Nandwa, and G. Pierre. Forthcoming. “Protecting and Promoting Inclusive Growth and Fiscal Sustainability through the Public Wage Bill in the Middle East and Central Asia Region.” International Monetary Fund, Washington, DC.
- World Bank. 2016. World Development Indicators. World Bank, Washington, DC (accessed June 2017).
- ———. 2017. Doing Business Indicators. World Bank, Washington, DC (accessed June 2017).

*International Monetary Fund | October 2017*

### 3. Caucasus and Central Asia: No Room for Complacency

### 3. Caucasus and Central Asia: No Room for Complacency

### Growth Prospects
- Oil-exporting countries:
  - Growth picked up from a post-1998 low of 2.4 percent last year to 3.5 percent in 2017 and 3.7 percent in 2018.
  - Kazakhstan: construction, transportation, and agriculture strengthened in late 2016; further improvement expected with advances in Kashagan oil field operations and continuation of structural reforms.
  - Azerbaijan: economic contraction extended into Q1 2017 at a slower pace due in part to lower oil production under the OPEC-led agreement and ongoing financial vulnerabilities; economy projected to resume growing in 2018 but recovery will be gradual and limited by fiscal consolidation.
  - Turkmenistan: growth supported by strong agriculture and services in the prior year; projected to remain stable in the short term owing to rising natural gas exports to China, expansionary credit policies, and industrial policies to promote exports and substitute imports.
  - Medium-term: growth among CCA oil exporters anticipated to pick up slowly given relatively subdued external conditions, underscoring need to reduce dependence on hydrocarbons.
- Oil-importing countries:
  - Growth was 3.3 percent last year, some 0.5 percentage point below the 2015 outturn.
  - Slowdown reflected reduced remittances and commodity exports and weak domestic demand, especially in Armenia and Georgia.
  - Offsets: Tajikistan strong growth due to fiscal expansion supporting industrial and construction activities; Kyrgyz Republic stronger growth thanks to higher gold production and stronger industrial and services activities.
  - As remittances pick up with recovery in Russia and external demand improves, growth in oil importers projected to strengthen to almost 4 percent this year and next.
  - Country-specific: Georgia’s projected acceleration in growth stronger than anticipated in May 2017 REO update; Armenia activity expected to pick up in 2017 reflecting higher projected copper prices and stronger remittances; Kyrgyz Republic and Tajikistan growth expected to moderate due to gold stabilization and significant financial sector distress, respectively.
  - Medium-term: activity in oil importers expected to remain on a path to recovery, assuming growth dividends from structural reforms gradually materialize.

### Financial Sector Weaknesses
- Major vulnerabilities and interventions:
  - Azerbaijan: largest state-owned bank undergoing voluntary debt restructuring worth some 9 percent of GDP; several small banks attempting to raise fresh capital.
  - Kazakhstan: two largest banks merged; authorities provided support to the financial sector equivalent to about 4 percent of GDP this year.
  - Tajikistan: authorities intervened in two major banks, providing support totaling some 6 percent of GDP.
- Effects:
  - Deterioration in asset quality and bank profitability and large share of underperforming loans have adversely affected lending.
- More resilient systems:
  - Armenia: after merger of three banks in 2016 and capital injections to meet new regulations, financial soundness indicators improved (better profitability and lower NPLs).
  - Georgia: two largest banks acquired smaller banks; NPLs increased only marginally; banks report adequate capital and liquidity.
  - Kyrgyz Republic: dollarization has declined; capitalization adequate though NPLs remain high.
  - Turkmenistan: credit growth strong in support of development efforts, posing future credit quality risk.
- Policy focus recommended:
  - Enable accurate assessment of banks’ health.
  - Develop effective bank resolution frameworks.
  - Enhance prudential regulation and supervision.
  - Resolve governance issues.
- Additional note:
  - Oil prices, anticipated to remain subdued, have historically been closely tied to the region’s credit cycle and could persistently drag on activity, underscoring need for resilient financial sectors to channel savings to productive investment.

### Fiscal Consolidation
- Recent trends:
  - Fiscal balances deteriorated in many CCA countries as policymakers accommodated lower budget revenues amid falling commodity prices and remittances; with notable exceptions of Azerbaijan and Kazakhstan, overall fiscal balances worsened in 2016 relative to 2015.
  - Overall balances projected to improve in many countries this year and next due to higher revenues in some and lower public expenditures in others, aided by unwinding of previous public investment booms.
- Oil exporters:
  - Overall fiscal deficits anticipated to widen by some 1.6 percentage points of GDP on average this year relative to 2016, largely reflecting one-time fiscal transfers to financial sectors in Azerbaijan and Kazakhstan.
  - Over the medium term, oil exporters’ fiscal deficits projected to decline further to 0.4 percent of GDP on average.
  - Deficit financing relied on asset drawdowns (Kazakhstan, Turkmenistan) and foreign debt issuance (Azerbaijan, Kazakhstan).
- Oil importers:
  - Higher deficits from fiscal accommodation—and financial sector support in Tajikistan—mostly financed through foreign debt issuance and other foreign financing (except Tajikistan, which issued debt domestically).
  - Overall deficits for this group projected to decline to 4.2 percent in 2017 and 3.7 percent in 2018.
  - Fiscal deficits projected to gradually decline to 1.9 percent of GDP on average by 2022, supported by revenue mobilization and strengthened expenditure management in Armenia and wage bill reform in the Kyrgyz Republic.
- Non-oil fiscal deficits:
  - Non-oil fiscal deficits are projected to increase to 17.6 percent of non-oil GDP this year from 13.9 percent in 2016, but decline to 10.9 percent of non-oil GDP in 2022.
- Policy recommendations:
  - Continue fiscal consolidation but calibrate pace and composition to avoid undermining medium-term growth.
  - Strengthen efficiency of public spending by selecting projects with highest productivity and potential growth impact and streamline public sector wage bills (including limiting staff numbers and bonuses and implementing civil service reforms), while preserving critical social expenditure.
  - Mobilize additional revenues, including reducing tax exemptions and strengthening collections.
  - Anchor fiscal consolidation in strong and credible multiyear frameworks.
  - Promote transparency and accountability in use of public funds.

### External Balances
- Recent outcomes:
  - Regional current account deficit reached 6.4 percent of GDP in 2016, some 2.8 percentage points more than in 2015.
  - Current account balances deteriorated in almost all oil exporters due to lower oil prices; improved in most oil importers.
  - Armenia: current account deficit marginally improved to 2.3 percent of GDP, partly due to a new copper mine and rebound in exports to Russia.
  - Kyrgyz Republic: current account deficit narrowed by about 6 percentage points of GDP due to strong gold exports, low fuel import prices, and remittance pickup.
  - Tajikistan: current account deficit narrowed by some 2 percentage points of GDP as exports somewhat recovered and imports contracted only moderately despite decline in remittances.
- Exchange rate adjustment:
  - Azerbaijan and Kazakhstan allowed currencies to move more freely.
  - Uzbekistan announced unification of official and parallel exchange rates—the som losing about half of its value against the US dollar at the official exchange rate—and liberalized some foreign currency transactions.
  - All three currencies have depreciated in real effective terms relative to pre-oil-price-drop periods.
  - Turkmen manat significantly appreciated in real effective terms over past several years despite a 2015 step devaluation.
  - Among oil importers: Armenia real effective exchange rates moved laterally since 2015; Georgia real effective exchange rate remained below preshock levels; Tajikistan’s somoni depreciation brought REER below historical averages; Kyrgyz Republic’s 2015–16 depreciation largely reversed.
- Projections:
  - Current account balances of most CCA countries projected to improve gradually in 2017 and beyond due to gradual improvement in external conditions and country-specific factors.
  - Kazakhstan: oil exports projected to increase as Kashagan becomes fully operational, though return to current account surplus not expected in near term.
  - Turkmenistan: external deficits projected to remain sizable over medium term amid significant public investment, low hydrocarbon prices, and large import content of domestic spending despite growing hydrocarbon exports and export-promotion/import-substitution policies.
  - Oil importers: current account deficits will increase in 2017 and decline gradually through 2022 reflecting pickup in imports partially offsetting remittance recovery.
- Structural implication:
  - High reliance on commodity exports and remittances underscores need for continued diversification across the region.

### Monetary Policy Frameworks
- Inflation:
  - CCA regional inflation after peaking at double digits during 2016 is projected to moderate to 8.9 percent in 2017, driven by easing price pressures in Kazakhstan.
  - In most other countries, inflation anticipated to pick up in 2017 but remain subdued, especially among oil importers.
  - Examples:
    - Georgia: inflation projected to accelerate from excise tax increases, lagged exchange rate effects, and higher commodity prices, converging in 2018 to central bank target of 3 percent.
    - Armenia: higher food prices project modest upward pressure but inflation will remain in line with official medium-term target range of 4±1.5 percent.
    - Turkmenistan: higher import prices, rapid public sector wage growth, and expansionary credit policies have put upward pressure on inflation.
    - Uzbekistan: inflation projected to accelerate into double digits given recent high money growth and rapid depreciation of the som.
  - Regional inflation projected to decline gradually to 5.9 percent by 2022.
- Policy rates and transmission:
  - Restrictive monetary policies have started to unwind in many countries as exchange rates stabilize and activity recovers slowly.
  - Exceptions where policy rates increased in response to rising inflation: Azerbaijan, Georgia, and Tajikistan.
    - National Bank of Tajikistan raised its policy rate twice to reach 16 percent in 2017, significantly increased sales of NBT bills, and raised reserve requirements.
    - Azerbaijan central bank sharply raised policy rate in late 2016 from 7 percent to 15 percent, where it has remained.
  - Rapid policy rate cuts occurred in Kazakhstan (among oil exporters), and in Armenia and the Kyrgyz Republic (among oil importers).
  - In some cases, policy rate changes had limited impact on bank lending and deposit rates, indicating weaknesses in monetary transmission.
- Recommendations:
  - Develop strong and credible monetary policy frameworks: establish clear objectives, enhance central bank communication, and improve transmission mechanism and analytical toolkit.
  - Maintain foreign exchange reserve buffers given exposure to external shocks and widespread dollarization; limit direct market interventions to disorderly conditions.
  - Pace monetary easing consistent with inflation developments to preserve price stability mandate and support financial development and dedollarization.
  - Improve liquidity management and develop local currency yield curves (examples: Central Bank of Armenia improving liquidity forecasting and management; National Bank of Georgia publishing forecast for policy rate path; Kyrgyz Republic narrowing policy rate corridor toward inflation-targeting framework).

### Structural Reforms for Strong, Sustainable, and Inclusive Growth
- Rationale:
  - Despite nascent recovery, structural reforms urgently needed to promote economic diversification and private sector job creation for strong, sustainable, and inclusive growth.
  - Recent slowdown and subdued outlook suggest further significant income and employment gains could be elusive without reforms.
  - Youth unemployment reductions have stalled or reversed in some countries, highlighting need for reforms.
- Priority areas (implied in text):
  - Economic diversification away from hydrocarbons and remittance dependence.
  - Policies to support private sector job creation.
  - Implementation and continuation of structural reform agendas to secure medium-term gains given subdued external conditions.

*International Monetary Fund | October 2017*

### 1. Oil exporters2. Oil importers

### 1. Oil exporters2. Oil importers

### Structural reforms and private sector development
- Kazakhstan: launched the 100 Concrete Steps and 3rd Modernization Initiative aiming to address gaps in public administration, the business environment, competitiveness, and commodity dependence; planned reduction of the role of the state through privatizations, with the first wave expected in 2018.
- Armenia: established the Center for Strategic Initiatives in January 2017 to foster public-private partnerships and attract foreign direct investment; reforms in the energy sector and the tax system have proceeded successfully; other reforms underway to tackle corruption, improve competition and the business climate, and attract foreign direct investment.
- Georgia: planning to introduce a public-private partnership law and strengthen monitoring of contingent liabilities arising from these partnerships and from state-owned enterprises.
- Tajikistan: structural fiscal reforms should aim to improve service delivery, enhance the business climate, and reduce fiscal risks.
- Turkmenistan: the new seven-year development plan creates an opportunity to broaden and deepen market-oriented reforms.
- Uzbekistan: announced a comprehensive economic and social reform package, including a reform of the foreign exchange system.
- Regional emphasis: accelerating implementation of structural reforms in support of private sector development is critical to achieving greater diversification, attracting productive investments, and creating jobs; reforms to strengthen governance, transparency and accountability, and property rights are necessary to fully benefit from China’s Belt and Road Initiative and the strengthening global economy.

### Risks: short term balanced, medium term tilted to the downside
- Short-term outlook: continued strengthening of the global economy, trade, and some commodity prices, plus several upside regional risks, imply a balanced risk outlook for the CCA region.
- Upside examples:
  - Georgia: growth could surprise on the upside from stronger-than-expected returns from trade integration and deeper economic ties with China.
  - Kyrgyz Republic: upside from deeper economic ties with China, projects financed by the Russian-Kyrgyz Development Fund, and stronger-than-expected Eurasian Economic Union impacts.
  - Kazakhstan: upside from structural reforms, enhanced regional cooperation, deeper relations with Uzbekistan, and a stronger recovery in Russia.
- Medium-term downside risks:
  - Inward-looking policies in advanced economies could adversely affect global trade and commodity prices.
  - Monetary policy normalization in advanced economies, notably in the United States, could trigger a rapid tightening in global financial conditions, leading to exchange rate volatility and depreciation, increasing public debt across the CCA and exacerbating financial sector vulnerabilities.
  - A pickup in domestic economic activity could delay structural reforms, risking the loss of the opportunity provided by the strengthening global economy and integration initiatives.
  - Failure to promptly resolve financial sector vulnerabilities, especially where banks cannot support growth or diversification, could produce mediocre economic performance and hurt living standards.

### Financial sector vulnerabilities: diagnosis and priorities (Box 3.1)
- General finding: recent external shocks exposed shortcomings in regulation and supervision, loan loss recognition, and governance across the CCA; addressing these requires stronger commitment to enhance regulation and supervision, improve bank resolution frameworks, and strengthen governance to limit short-term fiscal risks and enhance long-term growth.
- Evidence: when banking sector vulnerabilities amplify downturns they can generate strong fiscal pressures and trigger crises with severe, long-lasting consequences (Figure 3.1.1 references to banking vs nonbanking recessions and implications for Real GDP and Primary Balance).
- Country differences:
  - Armenia, Georgia, and the Kyrgyz Republic: have acted to strengthen regulation and supervision, significantly increasing resilience.
  - Azerbaijan, Kazakhstan, and Tajikistan: progress slower; policy responses focused on keeping financial sectors operational; comprehensive programs for enhancing financial stability only recently announced.
- Key immediate priorities for policymakers:
  - Assessing banking sector health:
    - Bring reporting of nonperforming loans (NPLs), including off-balance-sheet items, in line with international best practice.
    - Undertake independent asset quality reviews to assess bank viability, provisioning, and capitalization needs—this need is especially acute in Azerbaijan and Kazakhstan where NPL measurements do not include assets transferred to special purpose vehicles, and asset quality reviews have not yet been implemented.
    - Use reviews to formulate proactive NPL strategies and facilitate timely interventions where shareholders/managers fail to raise capital.
  - Improving bank resolution frameworks:
    - Ensure state support is provided only for viable banks and under strict, time-bound conditions with close oversight and corrective actions that avoid forbearance.
    - Require clear restructuring plans with management replacement and reduced or eliminated shareholder participation if necessary.
    - For insolvent institutions, allow orderly liquidation while protecting retail customers through deposit insurance programs.
    - Resolution authorities should have political and operational independence, sound governance, adequate resources, transparent processes, rigorous evaluation and accountability, and protection against liability for actions/omissions taken in good faith.
    - Urgent in Azerbaijan, Kazakhstan, and Tajikistan given increased fiscal pressures from discretionary support.
  - Enhancing prudential regulation and supervision:
    - Strengthen consolidated supervision and macroprudential frameworks and continue steps to reduce dollarization risks.
    - Examples from Georgia and Armenia: stricter rules on banks’ open positions in foreign currency, more restrictive liquidity requirements on foreign currency, higher risk weights and stricter limits on foreign-currency-denominated loans to mitigate risk of large exchange rate depreciations.
  - Strengthening corporate governance:
    - Address weak governance and opaque bank ownership, political interference, and corruption that facilitate related-party lending and excessive risk taking.
    - Promote transparency, clear executive and board responsibilities, limit public sector influence over bank administration and operation, and establish independent risk management, compliance, and internal control units.

### Growth-friendly fiscal consolidation: priorities (Box 3.2)
- Context: large and persistent external shocks in 2014–15 led most CCA countries to allow fiscal deficits to increase, containing shocks’ impact on output and jobs but in some instances sharply raising public debt and adding fiscal cost through financial sector support.
- Objective: restore sound public finances and rebuild buffers over the medium term in a growth-friendly way while maintaining scope for productive public investment; consolidate while pursuing structural reforms to support a transition to a more diversified, job-creating growth model.
- Key considerations for fiscal policymakers:
  - Enhancing revenue:
    - Broaden direct and indirect tax bases, reduce widespread tax exemptions to raise revenues and improve tax-burden distribution.
    - Improve revenue administration and enforcement, including taxing higher-net-worth individuals more effectively.
    - Note: many CCA countries (including Armenia, Georgia, Kazakhstan, the Kyrgyz Republic, and Tajikistan) are already pursuing policies to increase tax revenues but need more ambitious fiscal targets and reforms.
  - Strengthening expenditure policy:
    - Focus consolidation on creating space for growth-enhancing investment and on fairer, more targeted social safety nets by curtailing government wage bills, inefficient/regressive subsidies, and poorly targeted social benefits.
    - Most countries (except Tajikistan and Uzbekistan) plan some curtailment of current expenditures; Georgia and the Kyrgyz Republic plan sizable cuts in the public sector wage bill.
    - Energy subsidies remain large in the Kyrgyz Republic, Turkmenistan, and Uzbekistan—further reform would create space for better-targeted social spending.
    - Implement reforms to boost the efficiency and productivity of public investment before considering large investment increases.
  - Anchoring fiscal consolidation:
    - Well-designed fiscal rules can support consolidation but must be tailored to political economy settings to avoid circumvention (e.g., shifting spending to public sector units outside government perimeter).
    - Improve public financial management, including medium-term budgeting, to anchor consolidation plans.

### Selected quantitative indicators and projections (CCA: Selected Economic Indicators)
- Projections table entries (as presented):
  - Real GDP Growth8.35.33.12.53.63.7
    - Armenia7.63.63.30.23.52.9
    - Azerbaijan11.32.70.6–3.1–1.01.3
    - Georgia5.94.62.92.74.04.2
    - Kazakhstan8.04.31.21.13.32.8
    - Kyrgyz Republic4.54.03.53.83.53.8
    - Tajikistan7.96.76.06.94.54.0
    - Turkmenistan11.310.36.56.26.56.3
    - Uzbekistan7.08.18.07.86.06.0
  - Consumer Price Inflation9.25.96.410.58.97.8
    - Armenia4.23.03.7–1.41.93.5
    - Azerbaijan6.41.44.012.412.08.0
    - Georgia5.53.14.02.16.03.0
    - Kazakhstan8.56.76.714.67.36.5
    - Kyrgyz Republic8.77.56.50.43.85.1
    - Tajikistan13.96.15.85.98.98.0
    - Turkmenistan5.56.07.43.66.06.2
    - Uzbekistan14.99.18.58.013.012.7
  - General Gov. Overall Fiscal Balance3.12.3–3.5–2.2–3.4–1.0
    - Armenia1–3.2–1.9–4.8–5.6–3.3–2.7
    - Azerbaijan17.52.7–4.8–1.1–0.30.7
    - Georgia–2.9–2.9–3.8–4.1–3.8–3.8
    - Kazakhstan3.22.4–6.3–4.1–6.6–2.0
    - Kyrgyz Republic–4.51.0–1.2–4.5–3.0–2.4
    - Tajikistan–2.70.0–1.9–10.6–6.5–5.4
    - Turkmenistan24.30.9–0.7–1.3–1.1–0.1
    - Uzbekistan3.44.32.82.70.30.7
  - Current Account Balance0.82.3–3.6–6.4–4.9–4.2
    - Armenia–8.9–7.6–2.6–2.3–3.6–3.2
    - Azerbaijan8.813.3–0.4–3.61.92.5
    - Georgia–11.0–10.7–12.0–13.3–11.9–10.7
    - Kazakhstan–0.92.8–2.8–6.4–5.3–3.8
    - Kyrgyz Republic–1.3–16.0–16.0–9.7–11.6–12.0
    - Tajikistan–4.5–2.8–6.0–3.8–6.3–6.2
    - Turkmenistan–7.7–6.4–14.0–21.0–15.4–14.3
    - Uzbekistan4.91.70.70.70.90.3
- Figure references:
  - Figure 3.8. Diverging Monetary Policy Actions (Monetary policy rates) — sources: IMF, International Financial Statistics; and IMF staff calculations. Note: Country abbreviations are ISO country codes.
  - Figure 3.9. Persistent Labor Market Deficiencies (Average, percent of youth unemployment rate) — source: International Labour Organization estimates. Note: CCA = Caucasus and Central Asia; EM = emerging market economy; LIDC = low-income developing country.
  - Figure 3.1.1. Implications of Banking Recessions in Emerging Markets — Source: IMF 2015. Note: definitions and T (years) correspondences provided in figure.

### Trade openness and diversification implications
- Illustrative calculations (text): achieving greater trade openness, coupled with increased global value chain (GVC) participation, export diversification, or product quality could raise the level of income by some 5–10 percent within the following five to ten years.
- Comparative advantage:
  - Oil importers: better placed to take advantage of improved global trade outlook given better integration into GVCs and more diversified export bases; however, they can still improve export quality.
  - Oil exporters: should focus on economic diversification to produce and export a broader range of goods and services.
- Policy actions suggested: deepen access to export markets through trade agreements and leverage new integration opportunities such as China’s Belt and Road Initiative and the Compact with Africa.

*Prepared from IMF content in "Regional Economic Outlook: Middle East and Central Asia", October 2017.*

### Box 2.3 in Chapter 2). Structural reforms to foster

### Box 2.3. Structural reforms to foster investment and job creation, as well as targeted fiscal policies to mitigate adjustment costs

### Trade Helps Boost Growth
- A large body of evidence confirms the substantial and robust positive effect of trade on growth and income.
- Empirical analysis covered 131 countries, 20 of which were from the MENAP or CCA regions.
- Findings from the region-tailored analysis:
  - Investment in infrastructure, foreign direct investment (FDI), and overall openness to trade (as measured by the sum of exports and imports relative to GDP) all help increase growth in real per capita terms.
  - Export diversification, the quality of exports, and participation in GVCs, in particular the share of domestic value added in exports, all appear to be important for growth.
  - There is a negative relationship between growth and the initial level of per capita GDP, suggesting convergence of per capita GDP over time.
  - The positive impact of labor force education on growth found in advanced and emerging market economies becomes ambiguous once low-income countries with very low levels of completed postsecondary education are included.
- Policy implication: Structural reforms to foster investment and job creation, as well as targeted fiscal policies to mitigate adjustment costs, may be needed to relieve any negative consequences of increased openness and to ensure the resulting boost to growth is as inclusive as possible.

### Trade Openness Has Declined in Recent Years
- Trade openness declined significantly across the MENAP and CCA regions, consistent with international trends:
  - Contributing factors: overall weakness in international economic activity (particularly investment), the waning pace of trade liberalization, the decline in commodity prices including for oil, and slower growth of GVCs.
- Subregional and oil-status distinctions:
  - Decline in oil importers has been relatively faster in the MENAP than in the CCA region, reflecting regional conflicts and geopolitical tensions.
  - For both MENAP and CCA oil exporters, weakness in trade openness largely explained by stagnant or declining oil and gas exports and lower prices.
  - Excluding oil, trade openness has increased slightly in MENAP oil exporters; trade openness in CCA oil exporters has been broadly stable.
  - MENAP oil importers: slower export growth than the average emerging market and developing economy explains the trend.
  - CCA oil importers: export growth has been relatively fast, but import compression driven by a decline in remittances has driven the overall decline in openness.
- Services in exports:
  - Services represented, on average, 44 percent of total exports in MENAP and CCA oil importers in 2015 but less than 15 percent in oil exporters.
  - In MENAP oil importers, tourism represents 51 percent of the total services exported.
  - Services remain too low, particularly in oil-exporting countries, and numerous restrictions persist (entry, ownership, operations, opaque allocation of new licenses).
- Trade network integration:
  - MENAP and CCA regions are relatively weakly integrated into the global trade network in both export flows and number of trading partners.
  - MENAP oil exporters dominate global trade importance in the region due to oil exports, mainly to Asian countries and the United States.
  - CCA oil exporters export mainly to major European countries.
  - MENAP oil importers export primarily to large European markets and the United States; CCA oil importers export mainly to Russia and nearby European countries.
  - China has emerged as a major trading partner, with virtually every MENAP and CCA country exporting to China.
  - On average, MENAP countries export to about 70 percent of potential trading partners, while CCA countries export to about 50 percent of potential markets.
  - Trade penetration (export value per trading partner) is relatively weak in both MENAP and CCA countries, indicating scope to enhance export quality and domestic value added.

### Export Diversification and Product Quality Remain Generally Low
- Export diversification:
  - Export diversification in both MENAP and CCA countries underperforms relative to emerging market and developing economies.
  - Oil exporters are the least diversified in the region and therefore likely to face higher output volatility.
  - Levels of diversification among oil importers approach the emerging market and developing economy average, with MENAP countries faring better.
  - In CCA oil importers, diversification progress stalled in recent years, in part because FDI slowed.
- Export quality:
  - With few exceptions, most MENAP and CCA countries produce lower-quality exports than other emerging market and developing economies.
  - Only Jordan and Tunisia have export quality that exceeds the emerging market and developing economy average.
  - Some oil importers improved export quality recently, mostly in apparel (Egypt, Jordan, Pakistan) and manufacturing (Armenia, Georgia, Jordan, Morocco, Tunisia).
  - The quality of oil exports remains relatively low and has deteriorated in Algeria and Azerbaijan.
- Economic complexity:
  - Export complexity among oil exporters in the region is low compared with that of oil importers.
  - Complexity among oil importers is higher for MENAP than for CCA oil importers, reflecting supply chain links with euro area manufacturing firms.

### The Potential of Global Value Chains Could Be Better Exploited
- GVC participation:
  - Both regions’ level of integration in GVCs does not currently allow their full potential to be exploited.
  - Oil importers are generally better integrated into GVCs than oil exporters.
  - Backward integration (share of foreign value added imported and used in production of exports) is relatively high in Jordan, Lebanon, and Tunisia (MENAP) and in the Kyrgyz Republic (CCA) compared with emerging market and developing economies.
  - Forward integration (share of value added to be used in a destination country’s production) is above the emerging market and developing economy average in Egypt, Mauritania, and Morocco (MENAP) and in Armenia (CCA).
  - In oil exporters, backward integration is particularly low, indicating imports are mainly finished products; forward integration is relatively high primarily because of high exports of crude oil that trading partners process into refined products.
- Trends over time:
  - Most MENAP oil importers improved both backward and forward GVC participation, partly due to diversification (light manufacturing in Jordan, Morocco, Tunisia).
  - CCA oil importers made progress mainly in backward integration, partly by strengthening their role as a transport hub for Chinese products to Russia and the rest of the CCA; their forward integration has fallen.
- Opportunity:
  - Additional progress in GVC integration, particularly for oil importers in both regions, may be possible in the context of the Belt and Road Initiative.

*Prepared by Alexei Kireyev (lead author), Maxym Kryshko, Boaz Nandwa, and Magali Pinat, with research assistance by James Aylward and Samira Kalla.*

### Chapter 2). The Belt and Road Initiative is likely

### mcd-printer-without - Chapter 2). The Belt and Road Initiative is likely

### The Trade Environment Needs Upgrading
- Geopolitical tensions and conflicts have negatively affected trade in MENAP and CCA through disruption of economic activity and infrastructure and by causing death or displacement of labor in Afghanistan, Iraq, Libya, Somalia, Syria, and Yemen.
- Spillovers from conflicts reduced cross-border trade, tourism, and increased refugee inflows in neighboring countries (Jordan, Lebanon, Pakistan).
- Specific trade-route disruptions cited:
  - Conflict in Syria disrupted Iraq’s main trading link to the Mediterranean.
  - Conflict in Iraq affected Jordan’s export route to Iran.
- Elevated uncertainty and rising insecurity have weakened FDI inflows, hindering export diversification and GVC opportunities.
- The diplomatic rift between Qatar and other MENAP countries is also affecting trade and financial flows.
- Business climate problems contribute to low trade integration:
  - Procedures for trading across borders had been comparable to or better than the EMdE average, but the trading environment appears to have deteriorated in MENAP countries in recent years while improving in CCA countries (Figure 4.7).
  - Need for structural reforms to improve efficiency and reduce costs associated with compliance procedures and domestic transportation.
- Foreign exchange restrictions further hinder trade expansion:
  - Empirical evidence (Wei and Zhang 2007) indicates that a one standard deviation increase in controls on trade payments or foreign exchange transactions reduces trade by the same amount as tariff increases of 11 to 14 percentage points.
- Exchange rate movements matter historically:
  - Some studies find that a 10 percent real effective depreciation is associated with a rise in real net exports of, on average, 1.5 percent of GDP, with substantial cross-country variation.
  - Increased participation in GVCs has reduced the relevance of exchange rate movements for trade flows.
- Use of trade agreements is uneven:
  - Only MENAP oil importers are notably active in bilateral and regional trade agreements; most other countries in the regions have a substantially lower number of trade agreements than the EMdE average (Figure 4.8).
  - WTO Trade Facilitation Agreement (in force early 2017) could cut customs-related costs of merchandise trade by 14 percent for developing economies and could lead to a $1 trillion annual increase in global trade if implemented.
- Recent trade-accession and bilateral developments:
  - Eight MENAP countries (Algeria, Iran, Iraq, Libya, Lebanon, Somalia, Sudan, Syria) and two CCA countries (Azerbaijan, Uzbekistan) have been negotiating WTO accession, most since the 1990s, with slow progress.
  - Several MENAP countries and Georgia concluded association agreements with the European Union; Georgia signed a free trade agreement with China.
  - Armenia and Azerbaijan and Iraq signed cooperation/partnership agreements with the EU.
  - Morocco and Tunisia joined the Compact with Africa, which could enhance market access.

### Participation in Global Value Chains and Integration Patterns
- The Belt and Road Initiative is likely to increase backward integration further.
- Foreign investment triggered by the Compact with Africa may support further progress in forward integration for MENAP oil importers.
- Most oil exporters in both MENAP and CCA reduced their backward integration in GVCs but improved forward integration, reflecting efforts to increase oil processing and refining and increase value added.
- Figure 4.6 indicators (averages 2009–13) show measures of:
  - Backward Integration: share of foreign value added in countries’ exports (percent)
  - Forward Integration: share of gross exports to be used in destination country’s exports (percent)
  - Note: Data sources include Eora MRIO and IMF staff calculations; countries validated with UN Comtrade intermediate product exports data.

### Conclusion and Policy Options
- Trade reforms could raise income levels by 5–10 percent within five to ten years.
- Simulation based on econometric analysis in Annex 4.1:
  - A sustained increase in trade openness equal to the best historical period-over-period improvement observed in the region could add 1 percentage point to the average growth rate over the following five-year period (Figure 4.9).
  - If greater trade openness is supported by enhanced diversification, improved export quality, or more active participation in GVCs, the impact would be higher.
  - The growth increase is conditional on an increase in the given trade measure equal to the best historical period-over-period improvement observed in the region in the last 20 years:
    - For trade openness: 7.7 percentage points (pps)
    - For global value chain: 4 pps
    - For diversification: 2.4 pps
    - For quality: 1.5 pps
- Estimated contributions of trade measures to 2018–22 expected annual growth (used as a proxy for long-term growth) are presented by country group (MENAP oil exporters, MENAP oil importers, CCA oil exporters, CCA oil importers) in Figure 4.9.
- Policy priorities:
  - Increase trade openness, participation in global value chains, export diversification, and product quality.
  - Oil importers generally better placed to benefit from improved global growth momentum; CCA oil importers should reverse their decline in forward integration in GVCs.
  - Oil exporters need to increase export diversification and improve export quality.
  - Further trade liberalization and structural reforms to diversify into job-creating sectors and upgrade export quality by improving access to finance, education, and technologies.
  - Fiscal policies should mitigate transitional costs of greater openness (absorb potential loss of budget revenue from lower trade taxes and support needed public investment in infrastructure).
  - Broader structural reforms to improve the business and investment environment to support export and growth increases.

### Box 4.1 — The Trade and Inclusiveness Nexus (Empirical Results and Policy Implications)
- Empirical analysis for 106 countries (including 11 from MENAP and CCA) over 1980–2013 finds:
  - Trade openness does not seem to directly affect inclusiveness as measured by the Gini inequality index.
  - Other variables such as financial deepening, education, and employment shares are more important determinants of inequality.
- Key regression results (Table 4.1.1; dependent variables: Market Gini and Net Gini):
  - Trade Openness (t−1): Market Gini coefficient 20.00140 (0.00869); Net Gini coefficient 0.00605 (0.00884)
  - Financial Openness (t−1): 0.000441 (0.000288) for Market Gini; 0.000274 (0.000261) for Net Gini
  - Financial deepening (t−1): 0.0276*** (0.0102) for Market Gini; 0.00851 (0.00618) for Net Gini
  - Education (t−1): −0.736* (0.398) for Market Gini; −0.725** (0.349) for Net Gini
  - Government spending (t−1): 0.112 (0.222) for Market Gini; 0.0921 (0.166) for Net Gini
  - Agriculture Employment share (t−1): −0.124*** (0.0388) for Market Gini; −0.0830** (0.0353) for Net Gini
  - Industry Employment share (t−1): −0.199*** (0.0712) for Market Gini; −0.0841 (0.0602) for Net Gini
  - Constant: 55.82*** (3.592) for Market Gini; 43.88*** (3.019) for Net Gini
  - Observations: 435; R-squared: 0.237 (Market Gini), 0.161 (Net Gini); Number of countries: 106
  - Panel fixed effects regressions with time and country fixed effects and robust standard errors clustered at the country level.
  - Significance: * p < 0.1; ** p < 0.05; *** p < 0.01.
- Policy implications for inclusiveness:
  - Public policies can manage adverse side effects of trade for specific workers and communities; transitional costs can be substantial.
  - Fiscal redistribution policies can be effective in offsetting job losses, especially in the industrial sector.
  - Recommended domestic policies:
    - Active labor market policies: job search assistance, training programs, carefully designed wage insurance to enable mobility across firms, industries, and regions.
    - Passive labor policies: unemployment insurance, employment protection to help adjustment.
    - Complementary policies in education, housing, credit, infrastructure to facilitate mobility and place-based measures for harder-hit regions.
    - Reforms to the business environment to support private sector development.
- Box authors: Alexei Kireyev, Maxym Kryshko, Boaz Nandwa, Magali Pinat; research assistance by James Aylward and Samira Kalla.

### Box 4.2 — Leveraging Trade Agreements for Growth
- Multilateral level:
  - Many MENAP countries (Algeria, Iran, Iraq, Libya, Lebanon, Somalia, Sudan, Syria) and some CCA countries (Azerbaijan, Turkmenistan, Uzbekistan) are not WTO members.
  - Several countries joined the WTO recently (Afghanistan, Kazakhstan, Tajikistan, Yemen); Kazakhstan and Tajikistan have started to benefit, Afghanistan and Yemen less so.
  - Study (Kireyev 2016) of countries that recently joined the WTO (10 from MENAP and CCA included) finds accession impacts: neutral in 63 percent of cases, positive in 24 percent, negative in 13 percent (Figure 4.2.1).
  - New WTO members that implemented required trade reforms achieved substantial positive results in openness, diversification, growth, inflation control, fiscal deficit containment, and FDI attraction.
- Regional level:
  - Number of preferential trade agreements (PTAs) involving MENAP and CCA countries rose from about 50 in 1990 to about 300 in 2017.
  - Scope of PTAs expanded beyond tariff reductions to include customs regulations, export taxes, countervailing measures, technical barriers to trade.
  - PTAs involving MENAP and CCA remain relatively shallow and cover basic trade areas; most fall short of “deep” agreements that effectively integrate countries into GVCs and attract FDI.
  - Eurasian Economic Union is an exception (includes Armenia, Kazakhstan, Kyrgyz Republic).
  - Deep and Comprehensive Free Trade Area negotiations between Morocco, Tunisia, and the EU could yield potential long-term GDP gains up to 1.6 percent for Morocco and 7.4 percent for Tunisia, associated with expanded exports and improved trade balances for MENAP oil-importing countries, with small negative effects on other countries in the region due to trade redirection to the EU (EC 2013).

*International Monetary Fund | October 2017*

### Annex 4.1. Trade

### Annex 4.1. Trade

### Baseline regression specification
- Baseline regression:
  ∆ y_{i,t} = α1 y_{i,t−1} + α2 Controls_{i,t} + α3 TC_{i,t} + δ_t + γ_i + ε_{i,t}
- Definitions:
  - ∆ y_{i,t}: growth of real GDP per capita at time t for country i.
  - y_{i,t−1}: log of real GDP per capita.
  - Controls_{i,t}: set of control variables (logs of terms of trade, level of education, proxy for public infrastructure development, ratio of FDI to GDP).
  - TC_{i,t}: set of trade characteristics (included sequentially).
  - δ_t and γ_i: time and country fixed effects.
- Data: nonoverlapping five-year period averages for 131 countries covering 1960 to 2013.
- All regressions include period dummies that indicate a declining trend in global growth since 1960.

### Estimation methodology and validation
- Estimator: system generalized method of moments (GMM) combining levels and differences specifications to handle unobserved country effects and endogeneity.
- Specification checks:
  - Hansen test of over-identifying restrictions.
  - Incremental Hansen test of over-identifying restrictions.
  - Test for serial correlation of the error terms (AR(2)).
- When the number of instruments is close to or larger than the number of countries, a restricted sample of control variables is used to reduce the number of explanatory variables.
- Limitations: using lags of variables as instruments in trade-growth context acknowledged in literature; results should be interpreted with caution.

### Main empirical findings (controls and interpretation)
- Initial GDP per capita:
  - Coefficient is negative and statistically significant, suggesting GDP per capita convergence across countries over time.
- Labor force education:
  - Coefficient is not statistically significant in the full wide sample (a common finding); note that it is positive and statistically significant when a smaller sample of 82 countries (more restricted to advanced and emerging market economies) is used.
- Infrastructure:
  - Coefficients associated with infrastructure are positive and statistically significant.
- Inflows of FDI/GDP:
  - Coefficients are positive and statistically significant.
- Volatility of terms of trade:
  - Coefficient not statistically significant in the full sample, possibly due to use of five-year period averages reducing volatility of GDP per capita growth.
- Trade characteristics:
  - Trade openness and other trade-related measures are included sequentially; see Table 4.1 for estimated coefficients across specifications.

### Table 4.1 — Selected regression estimates and statistics
- Panel columns correspond to specifications (1) through (6). Reported estimates (coefficient with robust standard error in parentheses).

- Initial GDP per Capita:
  - (1) 25.014*** (0.892)
  - (2) 24.618*** (0.827)
  - (3) 25.061*** (0.697)
  - (4) 25.664*** (0.909)
  - (5) 25.741*** (1.344)
  - (6) 25.730*** (1.516)

- Labor Force Education:
  - (1) 0.357 (0.468)
  - (2) 0.104 (0.594)
  - (3) 0.429 (0.474)
  - (4) −0.358 (0.486)
  - (5) −0.580 (0.498)
  - (6) −0.436 (0.346)

- Infrastructure:
  - (1) 2.241*** (0.640)
  - (2) 2.087*** (0.540)
  - (3) 2.458*** (0.411)
  - (4) 2.574*** (0.697)
  - (5) 3.285*** (1.086)
  - (6) 2.908** (1.414)

- Inflows of FDI/GDP:
  - (1) 0.667** (0.297)
  - (2) 0.761* (0.434)
  - (3) 1.313** (0.635)
  - (4) 1.102* (0.593)

- Terms of Trade:
  - (1) −7.435 (6.520)
  - (2) −20.0830 (10.75)
  - (3) 3.335 (10.17)

- Trade Openness:
  - (1) 2.446*** (0.781)
  - (2) 1.919*** (0.633)
  - (3) 1.996*** (0.620)
  - (4) 2.796*** (0.924)
  - (5) 2.240 (1.549)
  - (6) 2.122 (1.471)

- Export diversification:
  - (4) 4.249** (1.839)

- Export Quality:
  - (5) 5.034* (2.892)

- Participation in GVC:
  - (4) 9.170** (4.075)

- Backward Integration:
  - (5) 6.642 (7.586)
  - (6) 9.771 (6.924)

- Forward Integration:
  - (5) 11.72** (5.356)

- Domestic Value Added:
  - (6) 48.01* (24.90)

- Constant:
  - (1) 30.66*** (6.340)
  - (2) 20.39*** (7.321)
  - (3) 15.01 (10.13)
  - (4) 68.21** (30.83)
  - (5) 35.92 (53.80)
  - (6) 19.05 (49.75)

- Sample and instruments:
  - Number of Observations: (1) 1,030; (2) 1,021; (3) 1,037; (4) 641; (5) 641; (6) 641
  - Number of Countries: (1) 131; (2) 123; (3) 129; (4) 131; (5) 131; (6) 131
  - Number of Instruments: (1) 118; (2) 123; (3) 123; (4) 83; (5) 52; (6) 52
  - Period dummies: yes (all specifications)

- Validation test p-values:
  - Full Hansen Test:
    - (1) 0.293
    - (2) 0.240
    - (3) 0.246
    - (4) 0.197
    - (5) 0.112
    - (6) 0.153
  - Incremental Hansen Test:
    - (1) 0.805
    - (2) 0.632
    - (3) 0.398
    - (4) 0.365
    - (5) 0.105
    - (6) 0.108
  - p-value of AR(2) statistic:
    - (1) 0.236
    - (2) 0.470
    - (3) 0.392
    - (4) 0.511
    - (5) 0.495
    - (6) 0.557

### Interpretation and implications
- Trade openness displays a positive and often statistically significant association with growth in GDP per capita across multiple specifications.
- Infrastructure and FDI inflows show robust positive associations with growth.
- Findings are consistent with existing empirical literature on trade and growth, with caveats on instrument validity and sensitivity to sample composition.

*Source: IMF staff calculations.*

### 1. Internet Penetration

### mcd-printer-without - 1. Internet Penetration

### Internet and Mobile Penetration / Technology Migration
- Charts in the source compare Internet penetration (percent of population) and technology migration (percent of connections across 2G, 3G, 4G) for a broad set of MENAP and CCA countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates, Algeria, Iran, Iraq, Djibouti, Egypt, Jordan, Lebanon, Mauritania, Morocco, Tunisia, Pakistan, Sudan, Somalia, Armenia, Kyrgz Rep., Georgia, Tajikistan, Azerbaijan, Kazakhstan, Turkmenistan, Uzbekistan).
- Mobile phone penetration exceeds the number of bank accounts in many countries in the MENAP and CCA regions (referenced in the text and Figures).
- Example numerical highlights from international comparisons and country cases in the source:
  - At the end of 2016, only seven countries in the MENAP region (Algeria, Egypt, Oman, Morocco, Qatar, Tunisia, United Arab Emirates) and four countries in the CCA region (Azerbaijan, Georgia, Kazakhstan, Uzbekistan) were reported to have cybercriminal and cybersecurity legislation in place (ITU 2017).
  - M-Pesa model in Kenya deployed mobile technology to reach 80 percent of households within four years (World Bank 2016).
  - Market share of digital-first, mobile-only banks and alternative finance providers in the United Kingdom jumped from 4 percent in 2012 to 12 percent in 2014.
  - In April 2016, the Council of Arab Central Bank Governors adopted an Arab Day of Financial Inclusion.

### Fintech: Value Proposition and Channels for MENAP and CCA
- Fintech benefits and channels highlighted:
  - Inclusive growth and economic diversification through financial inclusion via mobile payments, marketplace lending (peer-to-peer lending), online trade finance, big data analytics, and distributed ledger technology (DLT).
  - Cross-border trade and remittances: virtual currencies, blockchain-based DLT, and P2P platforms may provide more efficient, transparent, and cost-effective cross-border payment mechanisms and could ease challenges from loss of correspondent banking relationships.
  - Financial stability and integrity: fintech can reduce banks’ operating costs, facilitate analysis of large datasets for risk management and fraud detection, and assist AML/CFT implementation through data-driven technologies.
  - Fiscal and monetary operations: digitization can improve government revenue collection and payments and enhance monetary policy transmission (examples: Oman promoting government e-payments; Kazakhstan plans to issue government bonds using DLT and mobile phone technology).

### Risks, Binding Constraints, and Financial Stability Implications
- Demand-side constraints:
  - The “trust gap” and financial literacy are major constraints to fintech start-ups and consumer uptake; trust is cited as one of the main obstacles alongside visibility and customer education (WAMDA 2016).
- Cybersecurity and operational risks:
  - Cyberattacks can cause operational disruptions, financial loss, reputational damage, and systemic risk; increased digital connectivity expands entry points for cyber hackers.
  - The number of attacks on banks in the region is reported to have increased (Symantec 2017), while overall cyber risk preparedness remains weak in many countries.
  - Cyberattacks pose systemic risk and preventing them should be a top priority for regulators; comprehensive cybersecurity frameworks are needed to address prevention, detection, information sharing, monitoring, and recovery.
- Financial stability concerns:
  - Fintech can accentuate credit, liquidity, concentration, operational, macro-financial, procyclicality, shadow banking, and financial integrity risks.
  - Risks may be magnified by the speed of fintech growth, new forms of interconnectedness, dependency and concentration in third-party service providers (cloud computing, data services), emergence of systemically important fintech firms, and disruptions from large technology companies.
  - Supervisory capacity should be strengthened; regulators and central banks should prioritize monitoring macro-financial risks, managing operational risks from third-party providers, and maintaining soundness of financial institutions and payments systems as nonfinancial companies play larger roles.

### Policy Recommendations and Priorities to Unlock Fintech Potential
- Legal, regulatory, and supervisory reforms:
  - Review legal, regulatory, supervisory, and licensing frameworks to ensure clarity for digital financial products and adequate coverage of evolving risks.
  - Use regulatory sandboxes to better understand fintech risks and design appropriate regulations.
  - Shift regulations from being entity based to activity based (He and others 2017).
  - Include telecommunication regulators in the collaboration framework.
  - Sustain reforms to achieve compliance with international regulatory standards and couple them with enhanced surveillance.
  - Strengthen supervisory capacity to remain relevant and effective.
- Cybersecurity and resilience:
  - Develop and implement comprehensive cybersecurity frameworks covering prevention, detection, information sharing, monitoring, and recovery plans.
  - Prioritize prevention of cyberattacks as they pose systemic risk.
- ICT infrastructure and interoperability:
  - Increase penetration of Internet and mobile telecommunication facilities, improve speed, reduce costs, and ensure interoperability of mobile payment systems to enable businesses to leverage fintech applications.
- Business environment and capital access:
  - Ease restrictions on foreign investment to increase availability of capital and facilitate scaling up through entry of established fintech companies.
  - Review constraints on private equity and venture capital and pursue broader capital market reforms.
- Consumer protection and financial literacy:
  - Promote financial literacy to facilitate uptake and usage of digital financial services.
  - Underpin financial literacy programs with consumer protection frameworks and consider new legal rules to clarify rights and obligations in the evolving financial landscape.

### International Experience and Lessons
- Key drivers of successful fintech ecosystems include enabling regulations and policies, incubators and accelerators, close engagement with industry participants, clarity of directives, availability of seed and growth capital (including openness to foreign investment), quality of Internet and mobile infrastructure, availability of local talent, market structure, and degree of financial development.
- Country examples and takeaways:
  - United States: broad fintech coverage across segments, underpinned by high-quality infrastructure and abundant talent and capital; regulatory fragmentation creates uncertainty; cybersecurity measures are advanced but breaches have occurred.
  - United Kingdom: high growth in P2P platforms, online payments, and challenger banks supported by regulatory initiatives (Project Innovate, regulatory sandbox); prudential oversight enabled credit growth while containing risks; the WannaCry attack highlighted persistent vulnerabilities.
  - China: fintech growth driven by e-commerce, rapid online/mobile penetration, and large underserved populations; regulatory responses to P2P challenges and data breaches; more rigorous cybersecurity laws introduced after global incidents.
  - Sub-Saharan Africa (Kenya, West Africa): M-Pesa example reached 80 percent of households within four years; functional/activity-based regulation permitted nonbanks (including mobile network operators) to provide mobile money services; cross-border fintech for remittances deployed successfully.

*International Monetary Fund | October 2017*

### References

### References

### Key references cited
- Asian Development Bank (ADB). 2014. “Making Mobile Financial Services Work for Central and West Asian Countries.” Technical Consultant Report, Manilla.
- British Private Equity and Venture Capital Association (BVCA). 2013. “Guide to Private Equity & Venture Capital in the Middle East & Africa.” London.
- Erbenova, M., Y. Liu, N. Kyriakos-Saad, A. López-Mejía, G. Gasha, E. Mathias, M. Norat, F. Fernando, and Y. Almeida. 2016. “Recent Trends in Correspondent Banking Relations: A Case for Policy Action.” IMF Staff Discussion Note 16/16, International Monetary Fund, Washington, DC.
- Ernst and Young. 2016a. “The Rise of FinTech in China: Redefining Financial Services.” London.
- Ernst and Young. 2016b. “UK Fintech on the Cutting Edge: An Evaluation of the International Fintech Sector.” Commissioned by HM Treasury. London.
- Financial Stability Board (FSB). 2017. “Financial Stability Implications from Fintech: Supervisory and Regulatory Issues That Merit Authorities Attention.” Basel.
- GSMA Intelligence. 2016. “The Mobile Economy Middle East and North Africa 2016.” London.
- He, D., R. Leckow, V. Haksar, T. Mancini-Griffoli, N. Jenkinson, M. Kashima, T. Khiaonarong, C. Rochon, and H. Tourpe. 2017. “Fintech and Financial Services: Initial Considerations.” IMF Staff Discussion Note 17/05, International Monetary Fund, Washington, DC.
- International Monetary Fund (IMF). 2017. “Recent Trends in Correspondent Banking Relationships—Further Considerations.” Washington, DC.
- International Telecommunication Union (ITU). 2017. Global Cybersecurity Index. Geneva.
- KPMG. 2017. “The Pulse of Fintech, Q2 2017.” KPMG International, Zurich.
- Lukonga, I. Forthcoming. “Fintech, Inclusive Growth, and Cyber Risks: A Focus on the MENA and CCA.” IMF Working Paper, International Monetary Fund, Washington, DC.
- Lukonga I, N. Mwase and M. Souisi. 2016. “Oil Prices, Macro Financial Linkages and Financial Stability Risks in the MENA and CCA.” Unpublished, International Monetary Fund, Washington, DC.
- Lukonga, I., S. Naceur, G. Hadjian, and A. Al-Hassan. 2014. “Access to Finance for Small and Medium-Sized Enterprises in the MENAP and CCA Regions. Regional Economic Outlook: Middle East and Central Asia. Washington, DC: International Monetary Fund, October.
- Symantec. 2017. “2017 Internet Security Threat Report.” Vol. 22. Mountain View, CA.
- WAMDA. 2016. “State of Fintech in MENA: Unbundling the Financial Services Industry.” Dubai.
- World Bank. 2014. Global Survey on Consumer Protection and Financial Literacy. Oversight Frameworks and Practices in 114 Economies. Washington, DC: World Bank.
- World Bank. 2017a. World Development Report. Reaping the Digital Dividends. Washington, DC.
- World Bank. 2017b. Doing Business 2017: Equal Opportunity for All. Washington, DC.

### Regional definitions, data coverage, and key assumptions (from the Statistical Appendix)
- MCD countries and territories listed: Afghanistan, Algeria, Armenia, Azerbaijan, Bahrain, Djibouti, Egypt, Georgia, Iran, Iraq, Jordan, Kazakhstan, Kuwait, the Kyrgyz Republic, Lebanon, Libya, Mauritania, Morocco, Oman, Pakistan, Qatar, Saudi Arabia, Somalia, Sudan, Syria, Tajikistan, Tunisia, Turkmenistan, the United Arab Emirates, Uzbekistan, the West Bank and Gaza, and Yemen.
- Statistical appendix tables contain data for 31 MCD countries. Data revisions reflect changes in methodology and/or revisions provided by country authorities.
- Assumptions adopted for projections in the Regional Economic Outlook: Middle East and Central Asia:
  - Established policies of national authorities will be maintained.
  - The price of oil will average US$50.28 a barrel in 2017 and US$50.17 a barrel in 2018.
  - The six-month London interbank offered rate (LIBOR) on US-dollar deposits will average 1.4 percent in 2017 and 1.9 percent in 2018.
  - The 2017 and 2018 data in the figures and tables are projections based on statistical information available through early September 2017.
- Data notes and conventions:
  - Data for 2011 for Sudan exclude South Sudan after July 9; data for 2012 onward pertain to the current Sudan.
  - All data for Syria are excluded for 2011 onward.
  - All data refer to calendar years, except for specific fiscal-year countries:
    - Afghanistan (March 21 to March 20 until 2011, and December 21 to December 20 thereafter),
    - Iran (March 21 to March 20),
    - Qatar (April to March) for fiscal balances,
    - Egypt and Pakistan (July to June) except inflation.
  - Somalia data are included in MENAP group aggregates (noted as “What’s new”).
  - Data in Tables 7 and 8 relate to the calendar year for all aggregates and countries, except for Iran, for which the Iranian calendar year (beginning on March 21) is used.
  - Data for the West Bank and Gaza are included in all tables except in 3–6, 8, 10, 13, and 14; West Bank and Gaza is not a member of the IMF and is not included in any of the aggregates.
  - In Tables 3, 6, 13, and 14, “oil” includes gas.
- REO aggregates construction rules:
  - Domestic economy aggregates (Tables 1, 3, 7–8, and 10–17), whether growth rates or ratios, are weighted by GDP valued at purchasing power parities (PPPs) as a share of total MCD or group GDP.
  - Country group aggregates for the growth rates of broad money (Table 9) are weighted by GDP converted to US dollars at market exchange rates (both GDP and exchange rates are averaged over the preceding three years) as a share of MCD or group GDP.
  - Aggregates relating to the external economy in nominal terms (Tables 18–20 and 22) are sums of individual country data.
  - Aggregates relating to the external economy as a percentage of GDP (Tables 21 and 23) are weighted by GDP in US dollars as a share of MCD or group GDP in US dollars.
  - Some aggregates in Tables 2 and 6 are sums of the individual country data.
- Table conventions:
  - In tables, ellipsis points (. . .) indicate “not available,” and 0 or 0.0 indicates “zero” or “negligible.”
  - Minor discrepancies between sums of constituent figures and totals are due to rounding.
  - Footnote: Simple average prices of UK Brent, Dubai, and West Texas Intermediate crude oil.

*Source: mcd-printer-without - References (PDF chapter/section).*

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_Source: https://www.imf.org/-/media/files/publications/reo/mcd-cca/2017/october/menap/mcd-printer-without.pdf_