## 2. MENAP Oil-Importing Countries: Addressing Fiscal Challenges amid Social Pressures

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### Overview and near-term outlook
- Current account deficits in individual countries are likely to stay broadly constant.
- Inflation is forecast to stabilize over the medium term as level effects (particularly those from exchange rate depreciation) fade.
- Although some structural reform progress has been made (Egypt, Mauritania), the business climate lags comparators, reflected in weak FDI.

### Social conditions and risks
- Social and political tensions remain prominent across the region; examples cited include Sudan, West Bank and Gaza, Tunisia, Afghanistan, Somalia, and Syria.
- Unemployment and demographic vulnerabilities:
  - Unemployment averages 11 percent throughout the region versus 7 percent across other emerging market and developing economies.
  - More than 18 percent of women were without jobs in 2018.
  - Nearly 23 percent of young people were without jobs in 2018.
- Social unrest is measurable and elevated (see Figure 2.2: index of reported unrest, average 2014–present = 100, 12-month rolling average).

### Fiscal constraints and debt burden
- Public debt levels are very high in many countries:
  - Exceeding 85 percent of GDP on average.
  - More than 150 percent of GDP in Lebanon and Sudan.
- Gross financing needs are particularly high in Egypt, Lebanon, Mauritania, and Pakistan—amounting to several multiples of public revenues (see Figure 2.3).
- Interest expenditures have risen sharply in many countries:
  - Interest expenditures in MENAP oil importers average 50 percent of capital investment, or more than triple social spending.
  - Primary fiscal balances will likely remain negative in all but one of 11 oil-importing countries during 2019.
- Weak domestic demand in Jordan, Lebanon, Sudan, and Tunisia limits scope for countercyclical fiscal expansion despite the need.

### What has driven high debt ratios
- Debt accumulation is primarily the result of persistent trends rather than a sudden spike (except perhaps Sudan).
- Key contributors to rising debt ratios:
  - Sustained declines in growth (important role identified; shown in Figure 2.6).
  - Rises in primary deficits, particularly after the Arab uprisings in 2011 (affecting Egypt, Jordan, Morocco, Tunisia).
  - Increased country-specific interest rate spreads that accelerate debt growth once debt ratios started rising.
- Changes in global interest rates contributed relatively little to debt dynamics.
- Exchange rate depreciation and inflation dynamics have materially affected debt ratios in specific cases:
  - Tunisia: exchange rate depreciation in 2015–18 contributed to a higher debt ratio.
  - Egypt: debt ratio increased in 2017 following exchange rate depreciation.
  - Sudan: monetization of deficits generated inflation that eroded the debt ratio but devaluation raised the domestic value of foreign currency debts.

### Quantified regional debt dynamics (annualized, cross-country average)
- Table 2.2: Annualized contributions to changes in debt ratios for MENAP oil importers (percentage of GDP, per year)
  - 2003–10 vs 2011–18
  - Change in debt ratio: –2.8 (2003–10), 4.0 (2011–18)
  - Primary deficit: 0.5 (2003–10), 2.5 (2011–18)
  - Growth: –3.8 (2003–10), –1.6 (2011–18)
  - Other factors (inc. spreads): 0.5 (2003–10), 3.1 (2011–18)

### Ensuring debt sustainability — policy approaches
- Two complementary approaches to reduce debt ratios:
  - Lowering primary deficits.
  - Raising growth.
- Minimize growth costs of consolidation by focusing on composition of adjustments:
  - Rebalance spending away from inefficient current expenditures toward growth-enhancing investments.
  - Avoid cutting capital spending to the point that it undermines future growth.
  - Reduce large public sector wage bills where applicable (Morocco, Tunisia).
  - Continue reforms to eliminate regressive energy subsidies (progress noted in Egypt, Jordan, Morocco, Tunisia), recognizing temporary setbacks in 2018.
- Revenue-side measures:
  - Broaden tax bases and remove exemptions (noted scope in Jordan, Pakistan).
  - Example: Tunisia’s revenue package raised revenues by more than 2 percent of GDP.
  - Alternative consolidation choices (e.g., forgoing civil service wage hikes and cutting subsidies) could achieve similar deficit reduction with smaller growth costs.
- Strengthen fiscal institutions and debt management:
  - Establish transparency and credible medium-term frameworks.
  - Develop a medium-term debt management strategy to navigate market risks and exploit opportunities such as lower global interest rates.
- Reduce exposure to external shocks:
  - Countries with energy subsidies or fixed domestic prices (Lebanon, Mauritania, Sudan, Tunisia) are particularly vulnerable to global oil price fluctuations.
  - In contrast, countries with near-complete cost recovery are less vulnerable (Egypt, Jordan, Morocco).
- Recognize limits of inflation/monetization strategies:
  - In countries with large domestic-currency debts, inflation is not a viable long-term strategy because rising nominal interest rates will offset nominal debt reductions.

### Delivering higher and more inclusive growth — structural reforms
- Key reform priorities to boost growth and reduce public debt:
  - Privatize and improve governance of state-owned enterprises (SOEs) to reduce public debt stock and crowding out of private investment (priority in Egypt and Tunisia).
  - Improve public-sector governance, transparency, and monitoring of off-balance-sheet contingent liabilities (including SOE debt).
  - Tackle corruption through greater transparency and stronger fiscal institutions.
  - Address limited access to finance (Jordan, Mauritania) and poor infrastructure (Lebanon, Tunisia).
  - Raise female labor force participation via public investments in high-quality education and health services (especially in Egypt, Mauritania, Morocco, and Tunisia).
- External and international support where needed:
  - Concessional financing and direct budgetary support (examples cited: Jordan, Mauritania; IMF programs in Egypt, Jordan, Tunisia).
  - Technical assistance planned in 2020 to include: managing fiscal risks of SOEs and public–private partnerships; expenditure rationalization; tax administration; deepening and strengthening bank supervision; laws and institutions to combat money laundering and terrorist financing.
- Social inclusion:
  - To reduce the risk of disruptive unrest (notably observed in Sudan), governments could consider raising social spending—which remains low—to protect the most vulnerable and respond to societal demands for improved governance and opportunities.

### Conclusion and policy message
- MENAP oil-importing countries face twin threats of slow growth and fiscal unsustainability driven by persistent weak growth, larger primary deficits, and increased spreads.
- Governments cannot delay implementing a mix of growth-friendly fiscal consolidation and structural reforms to rebuild buffers, restore debt sustainability, and promote more inclusive growth.

### Country focus — Egypt: Stabilization Program and Outcomes
- By mid-2016, an unsustainable macroeconomic policy mix left Egypt with low growth, elevated and rising public debt, and a mounting balance of payments problem with severe shortages of foreign exchange and an overvalued exchange rate.
- IMF arrangement under its Extended Fund Facility supported a significant policy adjustment anchored by:
  - liberalization of the foreign exchange market;
  - fiscal consolidation to ensure public debt sustainability;
  - phasing out of costly and poorly targeted fuel subsidies.
- Fiscal savings were used in part to ease the burden on the most vulnerable through expansion of cash transfer programs:
  - from 200,000 to 2.3 million households, covering about 10 million people.
- Authorities’ strong ownership and decisive up-front policy actions were critical in stabilizing the economy. Outcomes include:
  - growth has accelerated to among the highest in the region;
  - current account and fiscal deficits have narrowed;
  - international reserves have risen;
  - public debt, inflation, and unemployment have declined.

### Growth, Jobs, and Structural Challenges (Egypt)
- Sustainable long-term growth and job creation require macroeconomic stabilization as a precondition.
- Egypt needs to generate at least 700,000 jobs a year to absorb new entrants to the labor market expected from its fast-growing population.
- Recent acceleration in growth has been driven, in part, by the rebound in tourism and natural gas production.
- To sustain momentum, focus is shifting to long-standing structural impediments, including:
  - reforms to industrial land allocation;
  - competition and public procurement reforms;
  - improved governance.
- The transition to a transparent, market-driven economy will require broadening and deepening reforms to create an enabling environment for private sector development, including continued efforts to improve the business climate, tackle corruption, and reduce the role of the state.

### Regional Indicators (MENAP and Related Groupings)
- Excerpts from MENAP Region: Selected Economic Indicators, 2000–20 (Percent of GDP, unless otherwise indicated):
  - MENAP
    - Real GDP (annual growth)4.65.32.11.60.52.7
    - of which non-oil growth5.72.72.91.82.03.0
    - Current Account Balance 8.2 23.920.5 2.9 20.321.4
    - Overall Fiscal Balance2.9 29.525.623.224.725.1
    - Inflation (year average; percent) 6.55.47.09.37.99.1
  - MENAP oil exporters
    - Real GDP (annual growth)4.76.11.20.2 21.3 2.1
    - of which non-oil growth6.22.12.30.41.12.6
    - Current Account Balance 11.6 23.2 1.86.21.70.1
    - Overall Fiscal Balance5.7 210.425.221.923.924.5
    - Inflation (year average; percent) 6.94.43.68.77.08.2
  - MENAP oil exporters excl. conflict countries and Iran
    - Real GDP (annual growth)5.34.3 20.4 1.61.32.8
    - of which non-oil growth7.11.81.61.92.73.0
    - Current Account Balance 13.7 24.7 1.36.82.81.0
    - Overall Fiscal Balance7.0 211.325.421.223.323.9
    - Inflation (year average; percent) 3.52.40.92.2 20.3 2.1
  - Of which: Gulf Cooperation Council (GCC)
    - Real GDP (annual growth)4.82.3 20.3 2.00.72.5
    - of which non-oil growth6.71.91.91.92.42.8
    - Current Account Balance 15.3 22.8 2.88.55.33.1
    - Overall Fiscal Balance8.6 210.725.621.822.423.3
    - Inflation (year average; percent) 2.72.10.22.1 20.7 2.0
  - MENAP oil importers
    - Real GDP (annual growth)4.33.74.04.33.63.7
    - Current Account Balance 22.225.626.726.525.925.2
    - Overall Fiscal Balance 25.727.326.826.927.026.5
    - Inflation (year average; percent) 6.07.514.410.49.710.7
  - MENA
    - Real GDP (annual growth)4.65.41.81.10.12.7
    - of which non-oil growth5.82.42.61.31.93.1
    - Current Account Balance 8.8 24.220.2 3.80.1 21.3
    - Overall Fiscal Balance3.5 210.125.622.924.424.9
    - Inflation (year average; percent) 6.35.77.410.18.18.6
  - Arab World
    - Real GDP (annual growth)4.93.81.32.41.93.3
    - of which non-oil growth6.22.22.22.53.13.4
    - Current Account Balance 9.8 25.620.9 3.70.6 20.9
    - Overall Fiscal Balance4.0 211.426.422.924.424.9
    - Inflation (year average; percent) 3.94.96.96.03.34.8
- Notes: MENAP oil exporters: Algeria, Bahrain, Iran, Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia, the United Arab Emirates, and Yemen. MENAP oil importers: Afghanistan, Djibouti, Egypt, Jordan, Lebanon, Mauritania, Morocco, Pakistan, Somalia, Sudan, Syria, and Tunisia.

*Prepared by Matthew Gaertner. International Monetary Fund | October 2019 — Chapter 2 (MENAP Oil-Importing Countries).*

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

### 2. MENAP Oil-Importing Countries: Addressing Fiscal Challenges amid Social Pressures

### Overview and near-term outlook
- Current account deficits in individual countries are likely to stay broadly constant.
- Inflation is forecast to stabilize over the medium term as level effects (particularly those from exchange rate depreciation) fade.
- Although some structural reform progress has been made (Egypt, Mauritania), the business climate lags comparators, reflected in weak FDI.

### Social conditions and risks
- Social and political tensions remain prominent across the region; examples cited include Sudan, West Bank and Gaza, Tunisia, Afghanistan, Somalia, and Syria.
- Unemployment and demographic vulnerabilities:
  - Unemployment averages 11 percent throughout the region versus 7 percent across other emerging market and developing economies.
  - More than 18 percent of women were without jobs in 2018.
  - Nearly 23 percent of young people were without jobs in 2018.
- Social unrest is measurable and elevated (see Figure 2.2: index of reported unrest, average 2014–present = 100, 12-month rolling average).

### Fiscal constraints and debt burden
- Public debt levels are very high in many countries:
  - Exceeding 85 percent of GDP on average.
  - More than 150 percent of GDP in Lebanon and Sudan.
- Gross financing needs are particularly high in Egypt, Lebanon, Mauritania, and Pakistan—amounting to several multiples of public revenues (see Figure 2.3).
- Interest expenditures have risen sharply in many countries:
  - Interest expenditures in MENAP oil importers average 50 percent of capital investment, or more than triple social spending.
  - Primary fiscal balances will likely remain negative in all but one of 11 oil-importing countries during 2019.
- Weak domestic demand in Jordan, Lebanon, Sudan, and Tunisia limits scope for countercyclical fiscal expansion despite the need.

### What has driven high debt ratios
- Debt accumulation is primarily the result of persistent trends rather than a sudden spike (except perhaps Sudan).
- Key contributors to rising debt ratios:
  - Sustained declines in growth (important role identified; shown in Figure 2.6).
  - Rises in primary deficits, particularly after the Arab uprisings in 2011 (affecting Egypt, Jordan, Morocco, Tunisia).
  - Increased country-specific interest rate spreads that accelerate debt growth once debt ratios started rising.
- Changes in global interest rates contributed relatively little to debt dynamics.
- Exchange rate depreciation and inflation dynamics have materially affected debt ratios in specific cases:
  - Tunisia: exchange rate depreciation in 2015–18 contributed to a higher debt ratio.
  - Egypt: debt ratio increased in 2017 following exchange rate depreciation.
  - Sudan: monetization of deficits generated inflation that eroded the debt ratio but devaluation raised the domestic value of foreign currency debts.

### Quantified regional debt dynamics (annualized, cross-country average)
- Table 2.2: Annualized contributions to changes in debt ratios for MENAP oil importers (percentage of GDP, per year)
  - 2003–10 vs 2011–18
  - Change in debt ratio: –2.8 (2003–10), 4.0 (2011–18)
  - Primary deficit: 0.5 (2003–10), 2.5 (2011–18)
  - Growth: –3.8 (2003–10), –1.6 (2011–18)
  - Other factors (inc. spreads): 0.5 (2003–10), 3.1 (2011–18)

### Ensuring debt sustainability — policy approaches
- Two complementary approaches to reduce debt ratios:
  - Lowering primary deficits.
  - Raising growth.
- Minimize growth costs of consolidation by focusing on composition of adjustments:
  - Rebalance spending away from inefficient current expenditures toward growth-enhancing investments.
  - Avoid cutting capital spending to the point that it undermines future growth.
  - Reduce large public sector wage bills where applicable (Morocco, Tunisia).
  - Continue reforms to eliminate regressive energy subsidies (progress noted in Egypt, Jordan, Morocco, Tunisia), recognizing temporary setbacks in 2018.
- Revenue-side measures:
  - Broaden tax bases and remove exemptions (noted scope in Jordan, Pakistan).
  - Example: Tunisia’s revenue package raised revenues by more than 2 percent of GDP.
  - Alternative consolidation choices (e.g., forgoing civil service wage hikes and cutting subsidies) could achieve similar deficit reduction with smaller growth costs.
- Strengthen fiscal institutions and debt management:
  - Establish transparency and credible medium-term frameworks.
  - Develop a medium-term debt management strategy to navigate market risks and exploit opportunities such as lower global interest rates.
- Reduce exposure to external shocks:
  - Countries with energy subsidies or fixed domestic prices (Lebanon, Mauritania, Sudan, Tunisia) are particularly vulnerable to global oil price fluctuations.
  - In contrast, countries with near-complete cost recovery are less vulnerable (Egypt, Jordan, Morocco).
- Recognize limits of inflation/monetization strategies:
  - In countries with large domestic-currency debts, inflation is not a viable long-term strategy because rising nominal interest rates will offset nominal debt reductions.

### Delivering higher and more inclusive growth — structural reforms
- Key reform priorities to boost growth and reduce public debt:
  - Privatize and improve governance of state-owned enterprises (SOEs) to reduce public debt stock and crowding out of private investment (priority in Egypt and Tunisia).
  - Improve public-sector governance, transparency, and monitoring of off-balance-sheet contingent liabilities (including SOE debt).
  - Tackle corruption through greater transparency and stronger fiscal institutions.
  - Address limited access to finance (Jordan, Mauritania) and poor infrastructure (Lebanon, Tunisia).
  - Raise female labor force participation via public investments in high-quality education and health services (especially in Egypt, Mauritania, Morocco, and Tunisia).
- External and international support where needed:
  - Concessional financing and direct budgetary support (examples cited: Jordan, Mauritania; IMF programs in Egypt, Jordan, Tunisia).
  - Technical assistance planned in 2020 to include: managing fiscal risks of SOEs and public–private partnerships; expenditure rationalization; tax administration; deepening and strengthening bank supervision; laws and institutions to combat money laundering and terrorist financing.
- Social inclusion:
  - To reduce the risk of disruptive unrest (notably observed in Sudan), governments could consider raising social spending—which remains low—to protect the most vulnerable and respond to societal demands for improved governance and opportunities.

### Conclusion and policy message
- MENAP oil-importing countries face twin threats of slow growth and fiscal unsustainability driven by persistent weak growth, larger primary deficits, and increased spreads.
- Governments cannot delay implementing a mix of growth-friendly fiscal consolidation and structural reforms to rebuild buffers, restore debt sustainability, and promote more inclusive growth.

*Source: IMF Regional Economic Outlook: Middle East and Central Asia, October 2019 — Chapter 2 (MENAP Oil-Importing Countries).*

### 2. MENAP OIL-IMPORTING COUNTRIEs: AddREssING FIsCAL ChALLENGEs AMId sOCIAL PREssUREs

### 2. MENAP OIL-IMPORTING COUNTRIEs: AddREssING FIsCAL ChALLENGEs AMId sOCIAL PREssUREs

### Egypt: Stabilization Program and Outcomes
- By mid-2016, an unsustainable macroeconomic policy mix left Egypt with low growth, elevated and rising public debt, and a mounting balance of payments problem with severe shortages of foreign exchange and an overvalued exchange rate.
- IMF arrangement under its Extended Fund Facility supported a significant policy adjustment anchored by:
  - liberalization of the foreign exchange market;
  - fiscal consolidation to ensure public debt sustainability;
  - phasing out of costly and poorly targeted fuel subsidies.
- Fiscal savings were used in part to ease the burden on the most vulnerable through expansion of cash transfer programs:
  - from 200,000 to 2.3 million households, covering about 10 million people.
- Authorities’ strong ownership and decisive up-front policy actions were critical in stabilizing the economy. Outcomes include:
  - growth has accelerated to among the highest in the region;
  - current account and fiscal deficits have narrowed;
  - international reserves have risen;
  - public debt, inflation, and unemployment have declined.

### Growth, Jobs, and Structural Challenges
- Sustainable long-term growth and job creation require macroeconomic stabilization as a precondition.
- Egypt needs to generate at least 700,000 jobs a year to absorb new entrants to the labor market expected from its fast-growing population.
- Recent acceleration in growth has been driven, in part, by the rebound in tourism and natural gas production.
- To sustain momentum, focus is shifting to long-standing structural impediments, including:
  - reforms to industrial land allocation;
  - competition and public procurement reforms;
  - improved governance.
- The transition to a transparent, market-driven economy will require broadening and deepening reforms to create an enabling environment for private sector development, including continued efforts to improve the business climate, tackle corruption, and reduce the role of the state.

### Regional Indicators (MENAP and Related Groupings)
- Excerpts from MENAP Region: Selected Economic Indicators, 2000–20 (Percent of GDP, unless otherwise indicated):
  - MENAP
    - Real GDP (annual growth)4.65.32.11.60.52.7
    - of which non-oil growth5.72.72.91.82.03.0
    - Current Account Balance 8.2 23.920.5 2.9 20.321.4
    - Overall Fiscal Balance2.9 29.525.623.224.725.1
    - Inflation (year average; percent) 6.55.47.09.37.99.1
  - MENAP oil exporters
    - Real GDP (annual growth)4.76.11.20.2 21.3 2.1
    - of which non-oil growth6.22.12.30.41.12.6
    - Current Account Balance 11.6 23.2 1.86.21.70.1
    - Overall Fiscal Balance5.7 210.425.221.923.924.5
    - Inflation (year average; percent) 6.94.43.68.77.08.2
  - MENAP oil exporters excl. conflict countries and Iran
    - Real GDP (annual growth)5.34.3 20.4 1.61.32.8
    - of which non-oil growth7.11.81.61.92.73.0
    - Current Account Balance 13.7 24.7 1.36.82.81.0
    - Overall Fiscal Balance7.0 211.325.421.223.323.9
    - Inflation (year average; percent) 3.52.40.92.2 20.3 2.1
  - Of which: Gulf Cooperation Council (GCC)
    - Real GDP (annual growth)4.82.3 20.3 2.00.72.5
    - of which non-oil growth6.71.91.91.92.42.8
    - Current Account Balance 15.3 22.8 2.88.55.33.1
    - Overall Fiscal Balance8.6 210.725.621.822.423.3
    - Inflation (year average; percent) 2.72.10.22.1 20.7 2.0
  - MENAP oil importers
    - Real GDP (annual growth)4.33.74.04.33.63.7
    - Current Account Balance 22.225.626.726.525.925.2
    - Overall Fiscal Balance 25.727.326.826.927.026.5
    - Inflation (year average; percent) 6.07.514.410.49.710.7
  - MENA
    - Real GDP (annual growth)4.65.41.81.10.12.7
    - of which non-oil growth5.82.42.61.31.93.1
    - Current Account Balance 8.8 24.220.2 3.80.1 21.3
    - Overall Fiscal Balance3.5 210.125.622.924.424.9
    - Inflation (year average; percent) 6.35.77.410.18.18.6
  - Arab World
    - Real GDP (annual growth)4.93.81.32.41.93.3
    - of which non-oil growth6.22.22.22.53.13.4
    - Current Account Balance 9.8 25.620.9 3.70.6 20.9
    - Overall Fiscal Balance4.0 211.426.422.924.424.9
    - Inflation (year average; percent) 3.94.96.96.03.34.8
- Notes: MENAP oil exporters: Algeria, Bahrain, Iran, Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia, the United Arab Emirates, and Yemen. MENAP oil importers: Afghanistan, Djibouti, Egypt, Jordan, Lebanon, Mauritania, Morocco, Pakistan, Somalia, Sudan, Syria, and Tunisia.

*Prepared by Matthew Gaertner. International Monetary Fund | October 2019*

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