## 2. MENAP Oil-Importing Countries: Managing Vulnerabilities When the Economic Outlook Is Uncertain

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### Regional growth and structural constraints
- Growth in oil importers of the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) region is projected to remain relatively modest, constrained by persistent structural rigidities.
- Elevated public debt in many countries limits fiscal space for critical social and infrastructure spending and leaves economies vulnerable to less favorable financial conditions.
- Outlook risks: mounting global trade tensions and financial market uncertainty; rising social tensions as unemployment remains high and socioeconomic conditions worsen.
- Reform priorities to support medium-term growth:
  - improve competitiveness,
  - boost private investment,
  - generate jobs.
- Increased regional integration will also help support medium-term growth.

### How to balance near-term vulnerabilities and medium-term challenges
- Near-term and medium-term growth outlook:
  - Real GDP growth in MENAP oil importers is projected to remain moderate in 2019, reflecting the weaker external environment as well as domestic factors.
  - Although growth is expected to pick up slightly over the medium term, it remains constrained by persistent structural rigidities and is too low to effectively reduce unemployment as demographic pressures rise.
- Labor market and social indicators:
  - Youth unemployment: 24.4 percent in 2018.
  - Female unemployment: 18.9 percent in 2018.
  - Female labor force participation: 26 percent in 2018.
- Fiscal and debt pressures:
  - Public debt has increased significantly over the past decade, constraining policy options.
  - Near-term risks from elevated debt levels are worsened by a less favorable growth outlook and more volatile global financial conditions, particularly as a large amount of foreign currency debt matures over the next years.
- Policy trade-off:
  - Policymakers face a trade-off between rebuilding buffers to strengthen resilience to near-term risks, as debt dynamics become less favorable, and addressing growth challenges.

### Modest and uneven growth — projections and key country notes
- Regional headline projections:
  - Real GDP growth in MENAP oil importers is expected to slow from 4.2 percent in 2018 to 3.6 percent in 2019, before rebounding to 4.3 percent during 2020–23.
- Country-specific drag:
  - Pakistan: growth expected to slow from 5.2 percent in 2018 to 2.9 percent in 2019 due to large macroeconomic imbalances and ongoing policy adjustment challenges.
- Growth constraints:
  - Low private investment and delays in reforms to address persistent structural impediments to private sector development.
- Revisions:
  - Regional growth for 2019 was projected at 4.0 percent in the October 2018 Regional Economic Outlook, compared with the current projection of 3.6 percent.
- Downside risks:
  - Global trade tensions raising prospect of investors’ increased risk aversion toward emerging markets.
  - Large shares of exports to China, the European Union, and the United States expose countries (for example, Jordan, Mauritania, Morocco, Pakistan, and Tunisia) to downside risks from weaker growth.
  - Heavy reliance on tourism exposes some countries (Egypt, Jordan) to risks from slower global growth.

### Low-income MENAP oil importers: vulnerabilities and constraints (Box 2.1)
- Countries under stress from persistent conflict and poverty: Afghanistan, Somalia, Sudan, Syria, West Bank and Gaza.
- Security-related vulnerabilities can pose greater risk than the global slowdown because trade is a smaller portion of GDP.
- Remittances are significant for some low-income countries (for example, Somalia), increasing exposure to global developments.
- Fiscal policy constraints:
  - Weak revenue mobilization despite some improvements in tax collection.
  - Heavy reliance on external assistance.
  - Spending on basic public services limits scope for social safety nets and infrastructure investment.
- Financial sector and credit:
  - Financial sector at a very early stage of development.
  - Credit to the private sector is very low; financial sector lacks capacity to extend credit and finance investment, compounded by high risk premiums during conflict.
- Demographic and social pressures:
  - Higher population growth, capacity constraints, and security concerns heighten risk of social tensions.
  - Displacement of populations stresses neighboring countries absorbing refugees (for example, Jordan and Lebanon).

### External vulnerabilities and recent trends
- Current account trajectory:
  - The regional current account deficit is expected to decline from 6.5 percent of GDP in 2018 to 5.9 and 5.2 percent in 2019 and 2020.
- Growth, external balances, and trade:
  - Regional export growth is expected to slow to 7 percent in 2019 and 6.5 percent in 2020 largely due to weaker demand in key trading partners.
  - Exports: strong in Egypt (continued recovery from an earlier shock in tourism and new production of natural gas); pick up in Jordan (tourism and improved access to markets from the opening of key borders and trade agreements with the European Union) and Mauritania (higher iron ore and gold exports); projected to slow elsewhere.
  - Remittances provide a buffer for current account deficits in many countries (Morocco, Pakistan, Somalia) but face downside risk from a slowdown in remittance-originating countries (mostly in Europe or the Gulf Cooperation Council).
  - Lower oil prices help improve oil importers’ terms of trade; durability uncertain given likely oil price volatility amid geopolitical tensions.
- MENAP Region: Selected Economic Indicators (Projections) — MENAP aggregates and indicators as presented:
  - MENAP Real GDP (annual growth): Average 4.6; 2016 5.2; 2017 2.2; 2018 1.8; 2019 1.5; 2020 3.2.
  - MENAP Current Account Balance: Average 8.2; 2016 –3.9; 2017 –0.6; 2018 2.3; 2019 –0.9; 2020 –0.7.
  - MENAP oil exporters Real GDP (annual growth): Average 4.8; 2016 5.9; 2017 1.3; 2018 0.6; 2019 0.4; 2020 2.8.
  - MENAP oil importers Real GDP (annual growth): Average 4.3; 2016 3.7; 2017 4.1; 2018 4.2; 2019 3.6; 2020 4.0.
  - MENAP oil importers Current Account Balance: Average –2.2; 2016 –5.6; 2017 –6.7; 2018 –6.5; 2019 –6.1; 2020 –5.3.

### Elevated public debt, fiscal risks, and policy trade-offs
- Public debt dynamics:
  - Public debt ratios have increased considerably over the past decade, rising by 20 percent of GDP on average since 2008.
  - Most MENAP oil-importing countries are well above the emerging market threshold for public debt, exceeding 80 percent of GDP in Egypt, Jordan, Lebanon, and Sudan.
- Fiscal consequences:
  - Increased borrowing has led to higher interest expenditures, constraining fiscal space and crowding out other high-priority spending.
  - Many countries have large foreign currency debt—some $27 billion—set to mature in the next two years, increasing exposure to slower growth prospects and financial market volatility.
  - High public debt limits fiscal options to offset weaker external demand and leaves little fiscal space to upgrade infrastructure, invest in health and education, and build a sustainable safety net.

Policy recommendations (fiscal)
- Intensify fiscal consolidation to rebuild buffers, calibrated to focus on growth-friendly fiscal adjustment.
- Improve the efficiency of public spending by rationalizing recurrent expenditures to preserve space for capital and social spending.
- Replace universal subsidies with targeted social transfers (examples: fuel subsidies in Sudan and Tunisia; cross-electricity subsidies in Jordan).
- Restructure state-owned enterprises (Egypt, Pakistan) to improve spending efficiency.
- In countries with low tax collection (Afghanistan, Pakistan, Sudan) improve revenue mobilization by eliminating distortionary exemptions; taxing richer segments (for example, introducing property and wealth taxes); broadening the tax base; and reducing informality.
- Improve public institutions, budget transparency, and anti-corruption measures; expand use of technology to increase tax compliance and governance while developing institutional capacity and addressing privacy and cybersecurity concerns.

### Monetary policy, inflation, and financial resilience
- Inflation and monetary stance:
  - Regional inflation is projected to pick up slightly to 11.3 percent in 2019, primarily due to higher inflation in Egypt (fuel subsidy reform) and Pakistan (weaker exchange rate).
  - On the whole, inflation is expected to remain broadly stable, helped by declining energy prices, with most countries in the region projected at single-digit inflation (below 3 percent for Afghanistan, Jordan, Lebanon, and Morocco).
  - Monetary authorities have largely maintained a broadly neutral policy stance, except for tighter stances in Egypt, Pakistan, and Tunisia.
- Exchange rate and policy scope:
  - Limited exchange rate flexibility (pegs/currency boards in Djibouti, Jordan, Lebanon) constrains monetary policy scope and increases reliance on fiscal policy.
  - Countries with more flexible exchange rates are better able to absorb external shocks; large discrete exchange rate adjustments are more disruptive than gradual flexibility.
- Financial sector resilience:
  - To enhance resilience: continue strengthening banking sectors (regulatory and supervisory frameworks, insolvency regimes) and strengthen frameworks against money laundering and the financing of terrorism (noted need in Sudan, Tunisia) to preserve correspondent banking relationships.

### Structural reforms to lift medium-term growth and inclusion
- Rationale:
  - Limited fiscal and monetary space heightens importance of structural reforms to improve medium-term growth, enable private sector job creation, and enhance inclusion.
- Improve access to credit:
  - Banking credit to the private sector is low; banks tend to serve large established firms while SME, mortgage, and consumer lending are limited.
  - Legal and institutional deficiencies (property rights, contract enforcement, credit information, insolvency, collateral enforcement) and cumbersome property registration impede mortgage market development and SME lending.
- Improve business environment and governance:
  - Some countries have passed legislation easing business operation (Egypt, Jordan, Morocco, Tunisia).
  - Reducing corruption through legislative reform (Afghanistan, Egypt, Mauritania, Tunisia) can reduce revenue leakage and improve public spending quality.
- Skills and labor market reforms:
  - Skills shortages, low educational attainment, and poor learning outcomes constrain productivity and employment.
  - Recommendations include more efficient education spending aligned to workforce needs and labor market flexibility reforms (for example, addressing expensive employee contributions in Jordan).
- Product market and state enterprise reforms:
  - Administered prices, electricity and fuel subsidies (Jordan, Lebanon, Sudan, Tunisia), and inefficient state-owned enterprises (Pakistan, Tunisia) suppress competition and divert resources to less productive sectors.
- Regional integration:
  - IMF analysis suggests greater Maghreb integration would create a regional market of almost 100 million people with an average income of about $4,000 per capita in nominal terms and could raise growth in each Maghreb country by 1 percentage point on average over the long term.

*Source: Middle East and Central Asia Department, REO Update, April 2019. Prepared by Matthew Gaertner and Atif Chaudry (lead authors) and Gohar Abajyan.*

### 2. MENAP Oil-Importing Countries: Managing

### 2. MENAP Oil-Importing Countries: Managing Vulnerabilities When the Economic Outlook Is Uncertain

### Regional growth and structural constraints
- Growth in oil importers of the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) region is projected to remain relatively modest, constrained by persistent structural rigidities.
- Elevated public debt in many countries limits fiscal space for critical social and infrastructure spending and leaves economies vulnerable to less favorable financial conditions.
- The outlook is clouded by mounting global trade tensions and financial market uncertainty.
- Social tensions are rising in many countries as unemployment remains high and socioeconomic conditions worsen.
- Continued growth-friendly fiscal consolidation is needed to rebuild buffers and enhance resilience, along with intensified structural and governance reforms to:
  - improve competitiveness,
  - boost private investment,
  - generate jobs.
- Increased regional integration will also help support medium-term growth.

### How to balance near-term vulnerabilities and medium-term challenges
- Real GDP growth in MENAP oil importers is projected to remain moderate in 2019, reflecting the weaker external environment as well as domestic factors.
- Although growth is expected to pick up slightly over the medium term, it remains constrained by persistent structural rigidities in many countries and is too low to effectively reduce unemployment as demographic pressures rise.
- Unemployment statistics:
  - Youth unemployment: 24.4 percent in 2018.
  - Female unemployment: 18.9 percent in 2018.
  - Female labor force participation: 26 percent in 2018.
- Social tensions have been building in many countries as fiscal consolidation efforts, together with limited progress on structural reforms, have weighed on socioeconomic conditions.
- Public debt has increased significantly over the past decade, constraining policy options.
- Near term risks from elevated debt levels are worsened by a less favorable growth outlook and more volatile global financial conditions, particularly as a large amount of foreign currency debt matures over the next years.
- Policymakers increasingly face a trade-off between rebuilding buffers to strengthen resilience to near-term risks, as debt dynamics become less favorable, and addressing growth challenges.

### Modest and uneven growth — projections and key country notes
- Regional headline projections:
  - Real GDP growth in MENAP oil importers is expected to slow from 4.2 percent in 2018 to 3.6 percent in 2019, before rebounding to 4.3 percent during 2020–23.
- Country-specific drag:
  - Weaker growth in Pakistan is pulling down the regional aggregate for 2019.
  - Pakistan growth expected to slow from 5.2 percent in 2018 to 2.9 percent in 2019 due to large macroeconomic imbalances and ongoing policy adjustment challenges.
- Growth constraints:
  - Low private investment and delays in reforms to address persistent structural impediments to private sector development.
- Revisions:
  - Regional growth for 2019 was projected at 4.0 percent in the October 2018 Regional Economic Outlook, compared with the current projection of 3.6 percent.
- Downside risks:
  - Global trade tensions raise the prospect of investors’ increased risk aversion toward emerging markets.
  - Large shares of exports to China, the European Union, and the United States expose countries (for example, Jordan, Mauritania, Morocco, Pakistan, and Tunisia) to downside risks from weaker growth.
  - Heavy reliance on tourism exposes some countries (Egypt, Jordan) to risks from slower global growth.

### Other sources of downside risk
- Uncertainty related to ongoing conflicts and security concerns (Afghanistan, Jordan, Lebanon, Somalia, Syria) poses a downside risk to the outlook.
- Security concerns, weaker-than-anticipated public investment, and large external imbalances (Lebanon, Pakistan, Sudan) are expected to weigh on the medium-term growth outlook.

### Box 2.1 — Low-income MENAP oil importers: vulnerabilities and constraints
- Low-income MENAP oil importers remain under stress from persistent conflict and poverty (Afghanistan, Somalia, Sudan, Syria, West Bank and Gaza).
- Security-related vulnerabilities pose an even greater risk to some of these countries than the global slowdown, as trade accounts for a comparatively smaller portion of total GDP for these countries than in the other MENAP oil importers.
- Remittances comprise a significant portion of GDP for some low-income countries (for example, Somalia), which exacerbates risks from global developments.
- Fiscal policy constraints:
  - Fiscal policy remains constrained by weak revenue mobilization, despite some improvements in tax collection.
  - Countries rely heavily on external assistance.
  - The need to spend on basic public services limits the scope for expenditures on social safety nets and infrastructure investment.
- Financial sector and credit:
  - The financial sector remains at a very early stage of development.
  - Credit to the private sector is very low because the financial sector lacks the capacity to extend credit and finance investment, further compounded by high risk premiums during conflict.
- Demographic and social pressures:
  - These vulnerabilities, coupled with higher population growth, capacity constraints, and security concerns, pose an even greater risk of social tensions.
  - The displacement of populations puts stress on neighboring countries faced with the challenge of absorbing refugees from conflict areas (for example, Jordan and Lebanon).

### External vulnerabilities and recent trends
- The regional current account deficit is expected to decline from 6.5 percent of GDP in 2018 to

*Prepared by Matthew Gaertner and Atif Chaudry (lead authors) and Gohar Abajyan.*

### 5.9 and 5.2 percent in 2019 and 2020,

### menap-chapter2 - 5.9 and 5.2 percent in 2019 and 2020

### Growth, external balances, and trade
- Regional export growth is expected to slow to 7 percent in 2019 and 6.5 percent in 2020 largely due to weaker demand in key trading partners.
- Exports: strong in Egypt (continued recovery from an earlier shock in tourism and new production of natural gas); pick up in Jordan (tourism and improved access to markets from the opening of key borders and trade agreements with the European Union) and Mauritania (higher iron ore and gold exports); projected to slow elsewhere in the region.
- Remittances provide a buffer for current account deficits in many countries (Morocco, Pakistan, Somalia) but face downside risk from a slowdown in remittance-originating countries (mostly in Europe or the Gulf Cooperation Council).
- Lower oil prices help improve oil importers’ terms of trade; however, durability of the terms-of-trade improvement is uncertain given likely oil price volatility amid continued geopolitical tensions.
- From the MENAP Region: Selected Economic Indicators table (Projections)
  - MENAP Real GDP (annual growth): Average 4.6; 2016 5.2; 2017 2.2; 2018 1.8; 2019 1.5; 2020 3.2.
  - MENAP Current Account Balance: Average 8.2; 2016 –3.9; 2017 –0.6; 2018 2.3; 2019 –0.9; 2020 –0.7.
  - MENAP oil exporters Real GDP (annual growth): Average 4.8; 2016 5.9; 2017 1.3; 2018 0.6; 2019 0.4; 2020 2.8.
  - MENAP oil importers Real GDP (annual growth): Average 4.3; 2016 3.7; 2017 4.1; 2018 4.2; 2019 3.6; 2020 4.0.
  - MENAP oil importers Current Account Balance: Average –2.2; 2016 –5.6; 2017 –6.7; 2018 –6.5; 2019 –6.1; 2020 –5.3.

### Elevated public debt, fiscal risks, and policy trade-offs
- Public debt ratios have increased considerably over the past decade, rising by 20 percent of GDP on average since 2008.
- Most MENAP oil-importing countries are well above the emerging market threshold for public debt, exceeding 80 percent of GDP in Egypt, Jordan, Lebanon, and Sudan.
- Increased borrowing has led to higher interest expenditures, constraining fiscal space and crowding out other high-priority spending.
- Many countries have large foreign currency debt—some $27 billion—set to mature in the next two years, increasing exposure to slower growth prospects and financial market volatility.
- High public debt limits options for fiscal policy to offset weaker external demand and leaves little fiscal space to upgrade infrastructure, invest in health and education, and build a sustainable safety net.

Policy recommendations (fiscal)
- Intensify fiscal consolidation to rebuild buffers, calibrated to focus on growth-friendly fiscal adjustment.
- Improve the efficiency of public spending by rationalizing recurrent expenditures to preserve space for capital and social spending.
- Replace universal subsidies with targeted social transfers (examples: fuel subsidies in Sudan and Tunisia; cross-electricity subsidies in Jordan).
- Restructure state-owned enterprises (Egypt, Pakistan) to improve spending efficiency.
- In countries with low tax collection (Afghanistan, Pakistan, Sudan) improve revenue mobilization by eliminating distortionary exemptions; taxing richer segments (for example, introducing property and wealth taxes); broadening the tax base; and reducing informality.
- Improve public institutions, budget transparency, and anti-corruption measures; expand use of technology to increase tax compliance and governance while developing institutional capacity and addressing privacy and cybersecurity concerns.

### Monetary policy, inflation, and financial resilience
- Regional inflation is projected to pick up slightly to 11.3 percent in 2019, primarily due to higher inflation in Egypt (fuel subsidy reform) and Pakistan (weaker exchange rate).
- On the whole, inflation is expected to remain broadly stable, helped by declining energy prices, with most countries in the region projected at single-digit inflation (below 3 percent for Afghanistan, Jordan, Lebanon, and Morocco).
- Monetary authorities have largely maintained a broadly neutral policy stance, except for tighter stances in Egypt, Pakistan, and Tunisia.
- Limited exchange rate flexibility (pegs/currency boards in Djibouti, Jordan, Lebanon) constrains monetary policy scope and increases reliance on fiscal policy.
- Countries with more flexible exchange rates are better able to absorb external shocks; large discrete exchange rate adjustments are more disruptive than gradual flexibility.
- To enhance resilience: continue strengthening banking sectors (regulatory and supervisory frameworks, insolvency regimes) and strengthen frameworks against money laundering and the financing of terrorism (noted need in Sudan, Tunisia) to preserve correspondent banking relationships.

### Structural reforms to lift medium-term growth and inclusion
- Limited fiscal and monetary space heightens the importance of structural reforms to improve medium-term growth, enable private sector job creation, and enhance inclusion.
- Private investment remains comparatively low; improving infrastructure and education, strengthening governance and institutions, and expanding access to credit are key.
- Improving access to credit:
  - Banking credit to the private sector is low in MENAP oil importers; banks tend to serve large established firms while SME, mortgage, and consumer lending are limited.
  - Legal and institutional deficiencies (property rights, contract enforcement, credit information, insolvency, collateral enforcement) and cumbersome property registration impede mortgage market development and SME lending.
- Improving the business environment and governance:
  - Some countries have passed legislation easing business operation (Egypt, Jordan, Morocco, Tunisia).
  - Reducing corruption through legislative reform (Afghanistan, Egypt, Mauritania, Tunisia) can reduce revenue leakage and improve public spending quality.
- Skilled labor force and labor market reforms:
  - Skills shortages, low educational attainment, and poor learning outcomes constrain productivity and employment.
  - More efficient education spending aligned to workforce needs and labor market flexibility reforms (for example, addressing expensive employee contributions in Jordan) would boost productivity and employment.
- Product market reforms and competition:
  - Administered prices, electricity and fuel subsidies (Jordan, Lebanon, Sudan, Tunisia), and inefficient state-owned enterprises (Pakistan, Tunisia) suppress competition and divert resources to less productive sectors.
- Regional integration:
  - IMF analysis suggests greater Maghreb integration would create a regional market of almost 100 million people with an average income of about $4,000 per capita in nominal terms and could raise growth in each Maghreb country by 1 percentage point on average over the long term.

*Source: Middle East and Central Asia Department, REO Update, April 2019.*

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_Source: https://www.imf.org/-/media/files/publications/reo/mcd-cca/2019/april/english/menap-chapter2.pdf_