## mreo1019-full-report ## Source details **Canonical URL:** [mreo1019-full-report](https://www.imf.org/-/media/files/publications/reo/mcd-cca/2019/october/english/mreo1019-full-report.pdf) ## Other formats - [Markdown version](/-/media/files/publications/reo/mcd-cca/2019/october/english/mreo1019-full-report.pdf.md) - [Structured JSON version](/-/media/files/publications/reo/mcd-cca/2019/october/english/mreo1019-full-report.pdf.json) --- ### MENAP oil-exporting countries — growth, oil prices, and fiscal risks - Growth projections and revisions: - MENAP oil exporters (excluding countries affected by conflict and Iran): 1.3 percent in 2019 (downward revision of 0.9 percentage point since April 2019); 2.8 percent in 2020 (downward revision of 0.7 percentage point). - GCC countries: 0.7 percent in 2019; 2.5 percent in 2020. - Iran: output in 2019 expected to shrink by 9.5 percent; near-zero growth expected in 2020. - Iraq: 3.4 percent in 2019; 4.7 percent in 2020. - Algeria: 2.6 percent in 2019; 2.4 percent in 2020. - Medium-term averages (2021–24): about 2.4 percent for GCC countries; 2.3 percent for non-GCC oil exporters (excluding Iran and Libya). - Oil price environment and drivers: - Oil prices swung from $55 to $75 a barrel since the start of the year. - Oil price volatility has risen but remains below 2018 highs; muted price response to geopolitical tensions partly due to rise of US shale as swing producer and historically high US crude inventories since 2015. - Regression (Jan 1999–Jun 2019) main coefficients (all time-series variables in percentage changes from previous month): - Δ Political risk in MENAP: 0.96** (robust standard error (0.59)) - Δ Political risk in MENAP * Shale dummy: −0.87* (robust standard error (0.63)) - Δ VIX: −0.12*** (robust standard error (0.03)) - Δ US crude inventory: −0.31*** (robust standard error (0.16)) - Box conclusion: increasing importance of US shale oil and trade uncertainty keep oil prices from rising substantially in response to regional geopolitical tensions. - Fiscal vulnerabilities and comovements: - Strong association between oil prices and government expenditures persists. - Fiscal consolidation is slowing in some countries and reversing in others due largely to increased spending. - Gross financing needs and public debt have moved up; governments’ net financial positions have deteriorated. - Countries more vulnerable to oil price declines: Bahrain, Iran, Iraq, Oman, and Yemen. - Estimated gap between the non-hydrocarbon primary balance needed for intergenerational equity and the projected primary balance in 2019 ranges between 5 and 23 percentage points of nonhydrocarbon GDP. ### Financial conditions, capital flows, and real estate risks - Global financial conditions and inflows: - Supportive global financial conditions and inclusion of GCC countries in global equity and bond indices boosted debt and equity flows in 2019. - Between 2016 and 2018, portfolio inflows to MENAP and the CCA reached highest levels—about 20 percent of total portfolio inflows to emerging market economies; cumulative portfolio inflows reached $164 billion, with nearly three-quarters going to Egypt, Oman, Qatar, and Saudi Arabia. - Oil-exporting countries were large Eurobond issuers, borrowing about $74 billion during 2018 through H1 2019 (about 25 percent of total gross issuance during that period). - Composition shifts and risks: - FDI has declined while portfolio and bank flows have risen; the region is twice as sensitive to global risk sentiment versus other emerging markets. - Portfolio inflows driven largely by global push factors (VIX, real US interest rate) and sensitive to oil prices; empirical coefficients (1990–2018, selected): - Log of VIX (MENAP and CCA): −1.267** (0.518) - Real US interest rate (MENAP and CCA): −0.713^ (0.528) - Log of real oil price: 0.765* (0.380) - Banking and real estate: - Modest recovery in private credit growth in GCC countries; real estate pressures persist. - Some banking sectors reducing credit allocation to construction and real estate (Qatar); mortgage lending increasing in Saudi Arabia from a low base. - Algeria, Iran, Yemen: monetary financing and exchange-rate pressures have lowered real credit growth. - Iraq: weak bank balance sheets; public banking system requires restructuring. - Policy implication: monitor real estate trends and consider macroprudential measures to contain risks. ### Productivity, investment, and diversification - Potential and drivers: - Potential non-oil GDP growth slowed due to diminishing productivity growth in non-GCC oil exporters, persistently negative productivity growth in GCC oil exporters, and declining capital accumulation across MENAP oil exporters. - Dominant public sectors in GCC countries skew investment toward nontradables, weighing on diversification and productivity. - Activity likely to remain subdued over the medium term absent structural reforms and higher investment. - Structural reform priorities to boost non-oil growth and productivity: - Improve business environment to catalyze domestic and FDI; closing FDI gaps in GCC could raise real non-oil GDP per capita growth by as much as 1 percentage point. - Improve competition and discipline: privatization, effective PPPs, better enforced competition laws, level playing field vs state enterprises. - Incentivize private sector employment and contain public-private wage gaps (Kuwait, Oman, Saudi Arabia, United Arab Emirates); communicate limited growth in public sector jobs where applicable. - Improve governance: protect contractual/ownership/creditor rights; increase transparency of beneficial ownership; criminalize bribery and embezzlement; reduce corruption and rent seeking. - Financial development and inclusion: - Increased financial development could raise annual per capita income growth by 0.4–0.7 percentage point. - Increased financial inclusion could be associated with higher growth of some 0.3–0.7 percentage point. - Reforms: access to finance for young/growing firms, financial sector competition, financial literacy, insolvency frameworks, develop debt and securities markets, improve corporate governance and investor protection. ### Policy recommendations for fiscal sustainability and inclusion - Near-term objective: stabilize macroeconomic conditions and build resilience by addressing unsustainable fiscal policies while protecting the most vulnerable. - Medium-term objective: promote inclusion and raise growth by tackling impediments to jobs and investment. - Key policy challenges for authorities: 1. Adopt fundamental reforms to fiscal conduct and institutions (fiscal transparency, credible medium-term fiscal frameworks). 2. Revitalize FDI and improve composition of capital flows (promote deeper markets, reduce restrictions, improve macro stability). 3. Implement structural reforms to boost growth and employment to reduce social tensions. - Specific fiscal policy measures: - Resume fiscal consolidation to rebuild policy buffers; pace should reflect fiscal space and cyclical conditions (in adverse shocks or where fiscal space is significant—Kuwait, Qatar, United Arab Emirates—slower consolidation could be warranted). - Enhance non-oil revenue collection: broaden tax base, reduce exemptions, strengthen tax administration; consider introducing a value-added tax in some countries (Kuwait, Oman, Qatar); expand consumption taxes in Iraq; consider income and property taxes. - Contain wage bills and energy subsidies; reform subsidies emphasizing cost recovery while strengthening social protection. - Improve public investment efficiency: better procurement, transparency, project appraisal and selection. - Strengthen fiscal frameworks and institutions: decouple public expenditures from volatile oil receipts via credible MTFFs; improve transparency and adopt credible MTFFs to support resilient fiscal policy. - Monetary and macro-financial measures: - Where inflation absent, consider lowering interest rates and intervening to accumulate reserves when inadequate. - Strengthen financial supervision and regulation, including nonbank institutions; use macroprudential tools. - Allow greater nominal exchange rate flexibility when supported by sound macro policy to act as shock absorber. ### MENAP oil-importing countries — fiscal pressures, debt, and social inclusion - Fiscal challenges and debt burdens: - Public debt levels very high—exceeding 85 percent of GDP on average, more than 150 percent in Lebanon and Sudan. - Gross financing needs particularly high in Egypt, Lebanon, Mauritania, and Pakistan at several multiples of public revenues. - Interest expenditures in MENAP oil importers average 50 percent of capital investment, or more than triple social spending. - Primary fiscal balances likely remain negative in all but one of 11 oil-importing countries during 2019. - Drivers of high debt: - Sustained declines in growth and rises in primary deficits, especially after 2011. - Exchange rate depreciations and sectoral/external pressures have raised debt ratios in specific countries. - Table 2.2 (cross-country average, percentage of GDP, per year): - Change in debt ratio: 2003–10 = −2.8; 2011–18 = 4.0 - Primary deficit: 2003–10 = 0.5; 2011–18 = 2.5 - Growth: 2003–10 = −3.8; 2011–18 = −1.6 - Other factors (inc. spreads): 2003–10 = 0.5; 2011–18 = 3.1 - Policy guidance to ensure debt sustainability: - Focus on composition of fiscal adjustment: rebalance spending away from inefficient current spending toward growth-enhancing investment; avoid cutting capital spending where possible. - Address large public wage bills (averaging about 8 percent of GDP in MENAP oil importers over last decade). - Reduce regressive energy subsidies while protecting vulnerable households. - Revenue-side: broaden tax bases and remove exemptions (Jordan, Pakistan); Tunisia example: revenue increase >2 percent of GDP via ambitious tax package and improved administration. - Strengthen fiscal institutions and debt management: credible MTFFs, enhanced debt management frameworks, medium-term debt management strategies. - Social protection: increase social spending to protect vulnerable populations and support inclusive reforms. - Country example — Egypt: - Policies under IMF Extended Fund Facility: FX liberalization, fiscal consolidation, fuel subsidy phase-out, expansion of cash transfers from 200,000 to 2.3 million households (~10 million people). - Outcomes: accelerated growth, narrower current account and fiscal deficits, higher reserves, lower public debt, inflation, and unemployment. - Structural priorities: generate at least 700,000 jobs a year; reforms to industrial land allocation, competition, procurement, governance; broaden reforms to improve private sector environment. ### Fiscal institutions and outcomes (evidence and recommendations) - Institutional weaknesses and potential gains: - Adoption of fiscal best practices (transparency, MTFF, PFM, procurement) can improve fiscal outcomes via disciplinary, stabilization, and predictability effects. - Estimated reductions in debt accumulation from improved institutions: - MENAP oil exporters: >4 percent of GDP (close to 5 percent in GCC and non-GCC oil exporters). - MENAP oil importers: about 3½ percent of GDP. - CCA: about 2 percent of GDP. - Procyclicality reductions: - MENAP oil exporters: procyclicality could be reduced by 30 percent; government spending volatility lowered by up to 19 percent. - CCA: procyclicality could be reduced by >20 percent. - Predictability effects: volatility of discretionary fiscal policy could decline (e.g., 14 percent lower in MENAP oil importers). - Strengthening transparency, PFM, and procurement: - Improvements could reduce fiscal volatility by about 10 percent across region; about 11 percent in MENAP oil importers and 13 percent in CCA countries. - Strengthening PFM controls could lower public debt by about 3–3½ percent of GDP for MENAP oil exporters and importers. - Country-specific reforms cited: Saudi Arabia (more comprehensive budget statements, audited financial statements); Kuwait (new procurement law); Azerbaijan and Uzbekistan (e-procurement); Tunisia and Uzbekistan (fiscal transparency evaluations). - Fiscal rules: - Well-designed fiscal rules, paired with strong institutions, enforcement mechanisms, and monitoring, can strengthen discipline and reduce procyclicality. - Rule types recommended: - MENAP oil exporters: budget balance rules and expenditure rules to reduce procyclicality and support intergenerational equity. - MENAP oil importers: budget balance rules and debt rules to contain rapid public debt rises while preserving shock resilience. - Georgia example: fiscal rules limiting public debt to 60 percent of GDP, budget balance to 3 percent of GDP, and expenditures to 30 percent of GDP; revisions improved clarity, bindingness, and escape clauses. - Revenue mobilization and tax administration: - Strengthen revenue institutions, modernize tax administration (electronic filing), adopt medium-term revenue strategies, and improve compliance risk management to boost nonresource revenue mobilization. ### Capital flows — drivers, composition, and policy implications - Regional capital flow patterns: - Gross inflows evenly split between oil importers and exporters; concentrated in top three countries accounting for >50 percent of flows. - FDI has fallen while portfolio and bank inflows have risen; region accounts for growing share of global portfolio inflows to EMs. - For oil-exporting countries, private external debt (GDP-weighted average) increased by 8.4 percent of GDP in last four years. - Short-term external debt share increases in some countries: Lebanon 83 percent, Algeria 77 percent, Qatar 62 percent. - Push-pull empirical findings (1990–2018, panel of 11 MENAP/CCA and 29 other EMs): - Portfolio inflows driven mostly by global push factors: VIX and real US interest rate. - Portfolio inflows to MENAP and CCA are almost twice as sensitive to changes in global uncertainty as those to other countries. - Higher oil prices increase portfolio inflows and dampen the impact of global financial conditions. - Regression highlights (selected): - Log of VIX (EMs): −0.592* (0.319) - Real US interest rate (EMs): −0.145*** (0.051) - Log of VIX (MENAP & CCA): −1.267** (0.518) - Real US interest rate * log of real oil price: 0.211^ (0.131) - Policy priorities on capital flows: - Revitalize FDI by easing restrictions, improving investment climate, strengthening institutional quality and rule of law. - Reduce reliance on volatile portfolio and bank flows; prefer FDI for growth impact. - Ensure fiscal sustainability to reduce vulnerability to sudden stops. - Use macroprudential tools, deepen domestic financial markets (develop government bond markets, build domestic institutional investor base), strengthen legal frameworks, and allow appropriate exchange rate flexibility to absorb shocks. - Monitor and manage short-term external debt and currency mismatches in private borrowing. - Capital outflows and foreign asset accumulation: - Net foreign asset accumulation declined since mid-2000s; oil exporters’ net purchases of foreign assets hit a minimum in 2015–16. - Median foreign asset acquisition for oil importers fell from 3.6 percent of GDP (2000–09) to 1.5 percent of GDP (2010–18), driven by declines in Lebanon and episodic reductions in Egypt and Pakistan. - Declining accumulation of foreign assets may increase vulnerability to volatile inflows, especially for oil importers with negative net foreign asset positions. ### Selected regional projections and key statistics (as reported) - Global and regional growth (Real GDP Growth, 2018–24 excerpt): - World: 3.6 (2018), 3.0 (2019), 3.4 (2020), 3.6 (2021–24) - Euro area: 1.9 (2018), 1.2 (2019), 1.4 (2020), 1.4 (2021–24) - United States: 2.9 (2018), 2.4 (2019), 2.1 (2020), 1.6 (2021–24) - China: 6.6 (2018), 6.1 (2019), 5.8 (2020), 5.7 (2021–24) - Russia: 2.3 (2018), 1.1 (2019), 1.9 (2020), 2.0 (2021–24) - MENAP: 1.6 (2018), 0.5 (2019), 2.7 (2020), 3.1 (2021–24) - MENAP oil exporters: 0.2 (2018), −1.3 (2019), 2.1 (2020), 2.1 (2021–24) - non-oil GDP growth (of which): 0.4 (2018), 1.1 (2019), 2.6 (2020), 2.5 (2021–24) - MENAP oil importers: 4.3 (2018), 3.6 (2019), 3.7 (2020), 4.8 (2021–24) - CCA: 4.2 (2018), 4.4 (2019), 4.4 (2020), 4.5 (2021–24) - CCA oil and gas exporters: 4.1 (2018), 4.3 (2019), 4.4 (2020), 4.5 (2021–24) - non-oil GDP growth (of which): 3.0 (2018), 5.1 (2019), 4.6 (2020), 4.2 (2021–24) - CCA oil and gas importers: 5.2 (2018), 4.9 (2019), 4.5 (2020), 4.5 (2021–24) - MENAP oil importers: real GDP growth expected to fall to 3.6 percent in 2019 (from 4.3 percent in 2018); excluding Pakistan and Sudan, 4.4 percent in 2019. - Immediate short-term external financing needs: about $238 billion in 2019, or more than 160 percent of reserve assets (oil importers). - Unemployment and labor market: - Regional unemployment averages 11 percent versus 7 percent across other emerging market and developing economies. - Women without jobs: more than 18 percent in 2018. - Young people without jobs: nearly 23 percent in 2018. - Tax and revenue measures: - Bahrain introduced a value-added tax at a 5 percent rate in January 2019. - Qatar introduced excise taxes in 2019: 100 percent on tobacco, 50 percent on all carbonated drinks, 100 percent on all energy drinks. - Iran-specific data points: - Gross trade in 2017: 47 percent of GDP (vs about 84 percent for other MENA oil exporters). - Iran’s share of global oil production: 5.5 percent in 2017 to 4 percent at end-2018. - Foreign resident claims on Iranian assets: $1.9 billion in Q3 2018 (BIS). - Iranian assets held overseas rose above $25 billion in Q3 2018. - Correspondent banking relationships declined from ~350 in 2017 to <60 in 2018. - Iranian residents made >10.5 million international trips in 2017 (60 percent rise since 2015); Turkey received >2.5 million visits from Iran in 2017. - Oil shipments through the Strait of Hormuz: equivalent to more than 20 percent of global consumption in 2018. - CCA key stats (selected): - CCA overall growth expectation: about 4½ percent in 2019–20. - Trading partner growth decline: 3.2 percent in 2018 to 2.3 percent in 2019. - Trading partner import growth: 11.4 percent in 2018 to −1.4 percent in 2019. - Exports growth for oil and gas exporters: 23 percent in 2017–18 to about −1.7 percent in 2019–20. - Current account balance: surplus of 0.3 percent of GDP in 2018 to deficit of 1.5 percent of GDP in 2019–20. - Government debt this year: about 23 percent of GDP for oil and gas exporters; 49.8 percent of GDP for oil and gas importers. - Labor market entrants: 4 million new entrants (12 percent of the labor force) expected over next 10 years. - Inflation examples: Turkmenistan 13.4 percent; Uzbekistan 14.7 percent. *Prepared from mreo1019-full-report — Regional Economic Outlook: Middle East and Central Asia, October 2019 (content as presented in the supplied PDF chapter/section).* ### 1. MENAP Oil-Exporting Countries: Transitioning to a Sustainable Fiscal Position and ### 1. MENAP Oil-Exporting Countries: Transitioning to a Sustainable Fiscal Position and Higher Growth ### Managing External and Domestic Policy Challenges - Topic heading indicates focus on balancing external and domestic policy priorities. - Associated figures and tables referenced: - Figure 1.1 APSP Crude Oil Prices and US Crude Oil Inventories - Figure 1.2 FDI Inflows, 2010–18 - Figure 1.3 Real GDP Growth: Non-Oil and Oil Contributions ### Improving but Subdued Growth - Topic heading signals assessment of growth prospects described as "Improving but Subdued." - Associated figures: - Figure 1.4 Potential Real Non-oil GDP Growth: Contributions of Capital, Labor, and Productivity - Figure 1.12 Diversification from Oil: Real Non-Oil GDP, Non-Oil Revenues, and Non-Oil Exports - Figure 1.13 Average Annual Wage and Productivity ### Improving Financial Conditions Supporting Growth - Topic heading indicates coverage of financial conditions that support growth. - Associated figures: - Figure 1.5 EPFR Bonds and Equity Net Flows - Figure 1.6 Real Oil Prices and General Government Expenditure ### Comovements between Oil Prices and Expenditures, and Fiscal Risks - Topic heading addresses the correlation of oil prices with expenditure patterns and fiscal risk assessment. - Associated figures: - Figure 1.6 Real Oil Prices and General Governement Expenditure - Figure 1.7 MENAPOE: Changes in Non-Oil Primary Fiscal Balances - Figure 1.8 MENAPOE: Changes in the Non-Oil Primary Balance, Expenditure, and Non-Oil Revenue - Figure 1.9 GCC: Non-Oil Real GDP Growth and Fiscal Impulses - Figure 1.10 MENAPOE: Changes in the Gross Public Debt, Gross Financing Needs, and the Net Financial Positions, 2014–19 - Boxes and special notes touching this theme: - Box 1 Decoupling of Regional Geopolitical Tensions and Oil Prices - Box 1.1 APSP Crude Oil Prices and US Crude Oil Inventories ### Addressing Fiscal Vulnerabilities and Intergenerational Equity - Topic heading indicates emphasis on fiscal vulnerabilities and considerations of intergenerational equity. - Associated figures: - Figure 1.10 MENAPOE: Changes in the Gross Public Debt, Gross Financing Needs, and the Net Financial Positions, 2014–19 - Figure 1.11 MENAPOE and Comparators: Infrastructure Quality Score and Public Capital Expenditure - Supplemental items: - Figure 1.7 MENAPOE: Changes in Non-Oil Primary Fiscal Balances - Figure 1.8 MENAPOE: Changes in the Non-Oil Primary Balance, Expenditure, and Non-Oil Revenue ### Structural Reforms to Achieve Higher and Inclusive Growth - Topic heading highlights structural reform priorities to lift and broaden growth. - Associated figures: - Figure 1.11 MENAPOE and Comparators: Infrastructure Quality Score and Public Capital Expenditure - Figure 1.12 Diversification from Oil: Real Non-Oil GDP, Non-Oil Revenues, and Non-Oil Exports - Figure 1.13 Average Annual Wage and Productivity - Country-specific and sectoral references: - 1.1 Iran: Regional Spillovers - Supplementary subfigures: 1.1.1 Imports Growth; 1.1.2 Iranian Overseas Claims *Source: Regional Economic Outlook: Middle East and Central Asia — chapter title and contents as listed in the supplied PDF content.* ### Annex 4.1. Push-Pull Factor Models of Capital Inflows ### Annex 4.1. Push-Pull Factor Models of Capital Inflows ### Global developments and implications for the Middle East and Central Asia region - Average growth worldwide is anticipated to reach 3 percent in 2019, and 3.4 percent in 2020 versus projections one year ago of 3.7 percent for both of these years. - The reduction in global demand may be partly offset by the recent loosening of global monetary policy, but concentration of the slowdown among key trading partners (especially Europe and China) has amplified the impact on the MCD region. - Despite rising geopolitical tensions (including those related to Iran), recent disruptions to Saudi Arabia’s oil production, and ongoing conflicts in the region (Libya, Yemen), global oil prices have remained low and financial conditions relatively loose. - The outlook for the MCD region is driven by a large contraction in Iran in the short term followed by a rebound in 2020. The risks around the forecast are skewed to the downside and are highly dependent on global factors. - Ongoing trade tensions are a substantial risk. In September, the United States introduced additional tariffs on Chinese goods, with more scheduled for December. Regional trade links to China are concentrated in MENAP oil exporters and Central Asia. - Export shares capture only direct effects; competitive spillovers from redirected trade can increase exposure to a China-focused slowdown. Figure 1 compares two measures of export elasticity to a reduction in Chinese demand: one assuming displaced competition is zero, and one that it is spread equally across all exporters to China. - A disorderly Brexit could significantly impact the region through reduced external demand in countries with tight trade links to Europe (for example, Morocco and Tunisia) and via financial channels given the UK is the largest banking counterparty for the MCD region. Several countries have considerable exposure to the pound sterling (Kuwait, Oman, Pakistan). - Social tensions across the region remain elevated (for example, protests in Algeria and Sudan, and in Georgia and Kazakhstan). These events underscore the urgent need for reforms to deliver higher and more inclusive growth. ### Oil prices, geopolitical tensions, and determinants of oil price movements - Oil price volatility has risen, while remaining below the highs of 2018. The overall level remains similar to that expected in the spring (Figure 2). - Recent events in the Gulf highlight the sensitivity of the global oil market to disruptions in oil shipments and facilities. - The muted response of oil prices to geopolitical tensions reflects: - Increased risks of an adverse demand shock (for example, rising uncertainties in global trade). - Supply-side changes: US shale oil producers have become increasingly important. US shale oil production increased from slightly less than 7 percent of the total US crude oil production in the early 2000s to more than 60 percent in 2018. - Crude oil inventories in the United States have remained at historically high levels since 2015, exerting downward pressure on oil prices. - Regression analysis (sample period January 1999 to June 2019) finds: - A positive and significant relationship between political risks in the MENAP region and real oil prices. - This effect is dampened by the rise of shale oil since 2010 (shale dummy = 0 before year 2010, and 1 from year 2010 onward). - Trade uncertainty, captured by spikes in the Chicago Board Options Exchange Volatility Index (VIX), is associated with a negative impact on oil prices. - Selected regression coefficients (Table 1; all time-series variables are in percentage changes from previous month): - Δ Political risk in MENAP coefficient: 0.96** (robust standard error (0.59)) - Δ Political risk in MENAP * Shale dummy coefficient: −0.87* (robust standard error (0.63)) - Δ VIX coefficient: −0.12*** (robust standard error (0.03)) - Δ US crude inventory coefficient: −0.31*** (robust standard error (0.16)) - Note: ***p < 0.05, **p < 0.1, *p < 0.2. - Box conclusion: The increasing importance of US shale oil as a major swing producer and trade uncertainty are key drivers keeping oil prices from rising substantially in response to regional geopolitical tensions. ### Regional growth projections (selected figures from Real GDP Growth, 2018–24) - World: 3.6 (2018), 3.0 (2019), 3.4 (2020), 3.6 (2021–24) - Euro area: 1.9 (2018), 1.2 (2019), 1.4 (2020), 1.4 (2021–24) - United States: 2.9 (2018), 2.4 (2019), 2.1 (2020), 1.6 (2021–24) - China: 6.6 (2018), 6.1 (2019), 5.8 (2020), 5.7 (2021–24) - Russia: 2.3 (2018), 1.1 (2019), 1.9 (2020), 2.0 (2021–24) - MENAP: 1.6 (2018), 0.5 (2019), 2.7 (2020), 3.1 (2021–24) - MENAP oil exporters: 0.2 (2018), −1.3 (2019), 2.1 (2020), 2.1 (2021–24) - of which: non-oil GDP growth: 0.4 (2018), 1.1 (2019), 2.6 (2020), 2.5 (2021–24) - MENAP oil importers: 4.3 (2018), 3.6 (2019), 3.7 (2020), 4.8 (2021–24) - CCA: 4.2 (2018), 4.4 (2019), 4.4 (2020), 4.5 (2021–24) - CCA oil and gas exporters: 4.1 (2018), 4.3 (2019), 4.4 (2020), 4.5 (2021–24) - of which: non-oil GDP growth: 3.0 (2018), 5.1 (2019), 4.6 (2020), 4.2 (2021–24) - CCA oil and gas importers: 5.2 (2018), 4.9 (2019), 4.5 (2020), 4.5 (2021–24) ### Policy challenges and recommendations - Near-term objective: stabilize macroeconomic conditions and build resilience by addressing unsustainable fiscal policies while protecting the most vulnerable. - Medium-term objective: promote inclusion and raise growth by tackling impediments to jobs and investment. - Country authorities face three key policy challenges: 1. Fundamental reforms to the conduct and institutions of fiscal policy are essential to tackle high public debt and inefficient government services. This includes adoption of policies to promote fiscal transparency and predictability, such as credible medium-term fiscal frameworks. 2. The composition of capital flows to the region has changed, becoming less conducive to growth. Foreign direct investment (FDI) has been replaced by portfolio flows, especially in MENAP countries; policies to promote deeper markets, reduce restrictions on investment, and improve macroeconomic stability can help attract FDI. 3. Structural reforms are essential for boosting growth and employment throughout the region. Failure to deliver higher and more inclusive growth may fuel social tensions and threaten regional stability. - Consider more accommodative policies if there is further slowdown in countries where growth is already too low and when there is policy space. *Prepared from Annex 4.1. Push-Pull Factor Models of Capital Inflows, mreo1019-full-report (October 2019).* ### Box 1 (continued)Box 1 (continued) ### Box 1 (continued)Box 1 (continued) ### Monitoring Social Unrest - The Reported Social Unrest Index (RSUI), which counts media reports of social unrest in member countries, shows reported social unrest has risen to highs not seen since 2014. - Recent unrest patterns: - Earlier in the year concentrated in Algeria and Sudan. - More recently, protests flared in Georgia and Kazakhstan, in a different social and political context than North Africa. - Policymakers face constrained choices: urgent reforms (for example, Tunisia’s public sector wage bill) were postponed due to fear of protests; major demonstrations led to policy changes in Armenia and Jordan. - The RSUI was previously computed only for 7 MENA countries; it is now calculated for the 27 MCD countries for which there are sufficient data. *Prepared by Philip Barrett.* --- ### Growth and Near-Term Outlook for MENAP Oil Exporters - Oil price volatility and global risks: - Oil prices swung from $55 to $75 a barrel since the start of the year. - Uncertainties include OPEC+ production decisions and the pace of US oil output expansion. - Growth projections and revisions: - MENAP oil exporters (excluding countries affected by conflict and Iran) growth is expected to be 1.3 percent in 2019 (a downward revision of 0.9 percentage point since April 2019), compared to 1.6 percent in 2018. - Growth is expected to pick up to 2.8 percent in 2020 (a downward revision relative to April of 0.7 percentage point). - Country- and subregion-specific projections: - GCC countries: growth projected at 0.7 percent in 2019, down from 2 percent in 2018. - GCC growth in 2020 expected to rebound to 2.5 percent. - Driven by a recovery in real oil GDP growth of 1.9 percent in 2020 (compared to –1.4 percent in 2019 and 2.5 percent in 2018). - Iran: output in 2019 is expected to shrink by 9.5 percent; some stability and near-zero growth expected in 2020. - Iraq: growth projected at 3.4 percent in 2019 (improving from –0.6 percent in 2018) and to increase to 4.7 percent in 2020. - Algeria: growth expected to reach 2.6 percent in 2019 (up from 1.4 percent in 2018), then moderate to 2.4 percent in 2020. - Medium-term outlook: - Real GDP growth is expected to average about 2.4 percent for GCC countries and 2.3 percent for non-GCC oil exporters (excluding Iran and Libya) during 2021–24. - These growth levels are insufficient to create the approximately 1 million new jobs a year needed to absorb new entrants into labor markets. *Prepared by Olumuyiwa Adedeji (lead author), Divya Kirti, Jorge de Léon Miranda, and Moussé Sow.* --- ### Downside Risks and Constraints - Downside risks are significant: - Lower global demand and oil production could weaken oil prices, business confidence, and investment, adversely affecting growth and fiscal and external positions. - Increased fiscal vulnerabilities in some countries amid higher public spending to support growth heighten risks from lower projected medium-term oil prices. - Increased bond and equity inflows can finance investment but can also increase susceptibility to international financial market developments. --- ### Productivity, Potential Growth, and Investment - Diminishing productivity growth and weaker capital accumulation: - Potential non-oil GDP growth has slowed due to diminishing productivity growth in non-GCC oil exporters, persistently negative productivity growth in GCC oil exporters, and declining capital accumulation across MENAP oil exporters. - Drivers and composition of activity: - Dominant public sectors in GCC countries skew investment toward nontradables, weighing on diversification and productivity growth. - Implication: - Activity is expected to remain subdued over the medium term unless structural reforms and higher investment improve productivity. --- ### Financial Conditions and Real Estate Risks - Supportive global financial conditions have benefited MENAP oil-exporting countries: - Interest rate cuts by major central banks (matched in most GCC countries) and the inclusion of GCC countries in global equity and bond indices boosted debt and equity flows to many countries in the region in 2019, outperforming other emerging market economies. - Banking and credit developments: - Modest recovery in private credit growth in GCC countries, partly supported by lower domestic interest rates. - Real estate market pressures persist; banking sectors are adjusting by reducing credit allocation to construction and real estate in some countries (Qatar) while mortgage lending is increasing in Saudi Arabia from a low base. - In Algeria, Iran, Yemen: monetary financing of fiscal deficits and exchange rate pressures have lowered real credit growth to the private sector. - Iraq: bank balance sheets remain weak; the public banking system requires restructuring. - Policy implication: - Continued effective monitoring of real estate trends and use of macroprudential measures may be needed to contain risks. --- ### Comovements Between Oil Prices and Expenditures; Fiscal Risks - Strong association between oil prices and government expenditures persists. - Fiscal consolidation trends: - Fiscal consolidation is slowing in some countries and reversing in others, largely due to increased spending. - The spending effect on growth has been modest so far, partly because of the composition of spending. - Fiscal vulnerabilities: - Gross financing needs and public debt have moved up; governments’ net financial positions have deteriorated. - Countries more vulnerable to declines in oil prices include Bahrain, Iran, Iraq, Oman, and Yemen. - The estimated gap between the non-hydrocarbon primary balance needed to ensure intergenerational equity and the projected primary balance in 2019 ranges between 5 and 23 percentage points of nonhydrocarbon GDP. --- ### Policy Recommendations to Address Fiscal Vulnerabilities and Support Growth - Resume fiscal consolidation to rebuild policy buffers and support private-sector-led growth; pace should reflect individual countries’ fiscal space and cyclical conditions. In adverse shocks or where fiscal space is significant (Kuwait, Qatar, United Arab Emirates), slower consolidation could be warranted. - Enhance non-oil revenue collection: - Countries have taken steps, but there is scope for further tax reforms to broaden the base by gradually reducing exemptions, eliminating loopholes, and strengthening tax administration. - Consider introducing a value-added tax in some countries (Kuwait, Oman, Qatar). - Expand and enhance consumption taxes in Iraq. - Consider other measures, including income and property taxes. - Contain wage bills and energy subsidies; improve quality and efficiency of spending: - Contain and streamline wage bills. - Reform energy subsidies with emphasis on cost-recovery and incentives to reduce energy intensity and inefficiencies, while strengthening social protection. - Improve public investment efficiency through better procurement, transparency, and project appraisal and selection. - Strengthen fiscal frameworks and institutions: - Decouple public expenditures from volatile oil receipts via credible medium-term fiscal frameworks. - Improve transparency and adopt credible medium-term fiscal frameworks to support resilient fiscal policy. *Prepared by IMF staff.* ### 2018. Bahrain introduced a value-added tax at a 5 percent rate in ### mreo1019-full-report - 2018. Bahrain introduced a value-added tax at a 5 percent rate in ### Tax policy changes and revenue measures - Bahrain introduced a value-added tax at a 5 percent rate in January 2019. - Qatar introduced excise taxes in 2019: - 100 percent on tobacco, - 50 percent on all carbonated drinks, - 100 percent on all energy drinks. ### Public debt, financing needs, and net financial positions (MENAP oil exporters, 2014–19) - Figure 1.10 presents changes in gross public debt, gross financing needs, and net financial positions for MENAP oil exporters for 2014–19 (percent of GDP). - Note definitions and caveats: - Net financial position = the difference between domestic and external debt, and government deposits. - Sovereign wealth funds are not included in the definition of the net financial position due to lack of information. - Gross financing needs for Kuwait include mandatory transfers to the sovereign wealth fund. - Country abbreviations use ISO country codes (BHR KWT OMN QAT SAU U UAE ALG IRN IRQ ... as shown in figure). ### Structural reforms to achieve higher and inclusive growth - Fiscal consolidation remains a priority, but there is pressing need to generate jobs across the region; growth must come from the private sector to ease the burden of fiscal adjustment. - Evidence on financial development and inclusion: - Increased financial development could raise annual per capita income growth by 0.4–0.7 percentage point. - Increased financial inclusion could be associated with higher growth of some 0.3–0.7 percentage point (Ben Ltaifa and others 2018). - Strategies to improve financial development and inclusion: - Reforms to strengthen access to finance for young and growing companies; promote financial sector competition; improve financial literacy and insolvency frameworks. - Develop debt and securities markets; make stock markets more accessible; improve corporate governance and investor protection. - Four key objectives to support private-sector-led non-oil growth and raise productivity: - Further improve the business environment to catalyze domestic and foreign direct investment (FDI). Closing FDI gaps in GCC countries could raise real non-oil GDP per capita growth by as much as 1 percentage point (Stepanyan and others 2018). Relaxing restrictions on foreign ownership would help attract FDI (Algeria). - Improve competition and discipline: privatization and effective public–private partnerships (GCC), broader and better enforced competition laws (Algeria and GCC), level playing field between private sector and state enterprises/foundations (Algeria, Iran). Industrial policy support should target sectors, be time-bound, and include specific performance criteria. - Incentivize private sector employment and improve competitiveness: contain public-private wage gaps (Kuwait, Oman, Saudi Arabia, United Arab Emirates) by more closely linking compensation to performance and improving control over bonuses and allowances; communicate expectations of limited growth in public sector jobs (Kuwait, Oman, Saudi Arabia); improve education and training to raise human capital and productivity. - Improve governance: strengthen legal frameworks to protect contractual, ownership, and creditor rights; increase transparency of corporate beneficial ownership; enhance asset declaration systems for senior public officials; criminalize bribery and embezzlement; reduce corruption and rent seeking. ### Diversification, infrastructure, and productivity - Non-oil revenues have been strengthened, but considerable scope exists for increasing the non-oil share of economic activity and exports (Figure 1.12). - Infrastructure quality and public capital expenditure metrics presented in Figure 1.11 (infrastructure quality score and public capital expenditure, avg. 2016–18, percent of GDP) across MENAPOE and comparators. - Productivity and wages: - Figure 1.13 shows the relationship between log(output per worker, constant 2010 US$) and log(average annual wage, US$), highlighting wage-productivity gaps for some countries (e.g., SAU, BHR, QAT) and outliers (Qatar and Yemen shown in parentheses with coordinates (5.0, 4.5) and (3.6, 3.9) respectively). - Note on data interpretation: World Economic Forum’s Global Competitiveness indicators combine official data and survey responses and should be interpreted with caution. ### Iran: regional spillovers and trade/financial linkages (Box 1.1) - Iran’s gross trade in 2017 was 47 percent of GDP, about half that of other MENA oil exporters (84 percent). - Iran’s share of global oil production dropped from 5.5 percent in 2017 to 4 percent at the end of 2018. - Foreign resident claims on Iranian assets were reported at $1.9 billion in Q3 2018 (Bank for International Settlements). - Iranian assets held overseas rose above $25 billion—more than double 2017 levels—with much of the increase in Germany and Korea. - Correspondent banking relationships declined from about 350 relationships in 2017 to fewer than 60 in 2018 due to US sanctions. - Table 1.1.1 lists 10 countries for which exports to Iran account for the largest fraction of total exports (examples and exact entries preserved as in table): - Tajikistan: US$ 67.4, Iranian import share 20.0 percent, Export share 60.0 percent, GDP share 10.00 percent. - UAE: US$ 7,716.9, Iranian import share 40.0 percent, Export share 40.0 percent, GDP share 0.02 percent, Major product Motor vehicles. - Armenia: US$ 84.1, Iranian import share 20.0 percent, Export share 40.0 percent, GDP share 0.01 percent, Major product Live animals. - Georgia: US$ 76.3, Iranian import share 50.0 percent, Export share 30.0 percent, GDP share 0.01 percent, Major product Live animals. - Uzbekistan: US$ 258.3, Iranian import share 0.0 percent, Export share 20.0 percent, GDP share 0.01 percent. - Afghanistan: US$ 32.3, Iranian import share 60.0 percent, Export share 20.0 percent, GDP share 0.00 percent. - Turkey: US$ 3,259.2, Iranian import share 70.0 percent, Export share 20.0 percent, GDP share 0.00 percent, Major product Metals. - Oman: US$ 597.4, Iranian import share 0.0 percent, Export share 20.0 percent, GDP share 0.01 percent, Major product Tobacco. - Sri Lanka: US$ 177.0, Iranian import share 0.0 percent, Export share 20.0 percent, GDP share 0.00 percent, Major products Tea, Coffee. - Brazil: US$ 2,559.7, Iranian import share 70.0 percent, Export share 10.0 percent, GDP share 0.00 percent, Major product Corn seed. - Trade and other specific market exposures: - Iraq relies on Iran for about one-third of its electricity supplies (direct supplies and gas for power stations). - Excess demand for US dollars in Iran has spilled over to Afghan currency markets, amplifying depreciation of the Afghani. - Agricultural producers in the Caucasus may be exposed to lower Iranian demand. - Tourism and migration: - Iranian residents made more than 10.5 million international trips in 2017, a rise of 60 percent since 2015. - Turkey received more than 2.5 million visits from Iran in 2017. - Iran hosts nearly 1 million refugees; more than 500,000 undocumented Afghans returned from Iran in the first nine months of 2018—more than double the same period in 2017. - Geopolitical risks to shipping and oil: oil shipments through the Strait of Hormuz were equivalent to more than 20 percent of global consumption in 2018. ### MENAP oil-importing countries: growth, external imbalances, and fiscal pressures - Growth outlook and projections: - Real GDP growth in MENAP oil importers is expected to fall slightly in 2019 to 3.6 percent, down from 4.3 percent in 2018, driven mostly by Pakistan and Sudan. - Excluding Pakistan and Sudan, the rest of the region’s real GDP growth in 2019 is projected to be 4.4 percent. - In 2020, real GDP growth in the region is expected to remain about 3.7 percent but recover to 5 percent over the medium term. - Table 2.1 (Real GDP Growth, median by group): - Emerging market economies: - MENAP oil importers: 2018 = 2.7, 2019 = 2.4, 2020 = 2.4. - Rest of world: 2018 = 3.0, 2019 = 2.8, 2020 = 3.1. - Low-income countries: - MENAP oil importers: 2018 = 2.8, 2019 = 3.0, 2020 = 3.5. - Rest of world: 2018 = 4.6, 2019 = 5.0, 2020 = 5.0. - External imbalances and financing: - Immediate short-term external financing needs (amortization of external debt plus current account deficits) are expected to total some $238 billion in 2019, or more than 160 percent of reserve assets. - Current account deficits in oil importers are financed principally by bank flows and reserve losses. - Example country notes: - Lebanon: current account deficit has exceeded one-fifth of GDP every year since 2015; reserves fell by 7 percent in 2018 as nonresident deposit growth declined. - Jordan: a current account deficit of 7 percent of GDP, private sector capital outflows, and falling FDI led to reserve losses. - Tunisia: donor support continues to play an important role in financing the current account deficit. - Inflation and exchange rates: - Inflationary pressures have been largely kept at bay by weak domestic and external demand. - Exchange rate depreciations contributed to increased inflation in Egypt, Pakistan, Sudan, and Tunisia at different times in the last three years. - Figure 2.1 shows CPI period averages with overall CPI and overall CPI excluding Egypt, Pakistan, Sudan, Tunisia (series plotted). - Social tensions and labor market: - Social and political tensions remain prominent across the region (Figure 2.2). - Unemployment averages 11 percent throughout the region versus 7 percent across other emerging market and developing economies. - Women and young people are particularly likely to be out of work: - More than 18 percent of women without jobs in 2018. - Nearly 23 percent of young people without jobs in 2018. - Structural reform progress: - Some progress in Egypt and Mauritania on structural reforms; overall business climate lags comparators, reflected in weak FDI performance since the global financial crisis. _International Monetary Fund | October 2019 — content as presented in the supplied PDF chapter/section_ ### 2. MENAP OIL-IMPORTING COUNTRIEs: AddREssING FIsCAL ChALLENGEs AMId sOCIAL PREssUREs ### 2. MENAP OIL-IMPORTING COUNTRIEs: AddREssING FIsCAL ChALLENGEs AMId sOCIAL PREssUREs ### Fiscal challenges and current debt burdens - Public debt levels are very high in many countries—exceeding 85 percent of GDP on average, and more than 150 percent in Lebanon and Sudan. - Gross financing needs are particularly high in Egypt, Lebanon, Mauritania, and Pakistan at several multiples of public revenues. - Interest expenditures have grown markedly and in many countries absorb large shares of total GDP: - 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 (Jordan, Lebanon, Sudan, Tunisia), limited revenue capacity (Jordan, Pakistan), narrow tax bases and relatively inefficient tax administrations (Sudan), and large current expenditures (Jordan, Lebanon) constrain the ability to raise surpluses quickly. ### Drivers of high debt - High public debt is not the result of a sudden runup (except perhaps Sudan); most countries experienced increases over many years driven by: - Sustained declines in growth. - A rise in primary deficits, particularly after the Arab uprisings in 2011 (Egypt, Jordan, Morocco, Tunisia). - Growth played an important role in debt dynamics (notably in Jordan and Lebanon). - Once debt started to rise, higher country-specific interest rate spreads further accelerated debt increases. - Changes in global interest rates contributed relatively little to debt dynamics. - Sectoral and external pressures have mattered: - Exchange rate depreciations (e.g., Tunisia in 2015–18; Egypt in 2017) contributed to higher debt ratios. - In Sudan, monetization of deficits generated inflation that eroded the debt ratio but devaluation increased the domestic value of foreign currency debts. - Table 2.2 — annualized contributions to changes in debt ratios for MENAPOIs (cross-country average, percentage of GDP, per year): - Change in debt ratio: 2003–10 = -2.8; 2011–18 = 4.0 - Primary deficit: 2003–10 = 0.5; 2011–18 = 2.5 - Growth: 2003–10 = -3.8; 2011–18 = -1.6 - Other factors (inc. spreads): 2003–10 = 0.5; 2011–18 = 3.1 ### Ensuring debt sustainability — fiscal policy composition and institutions - Two key policy approaches to reduce debt ratios: - Lowering primary deficits. - Raising growth. - Minimize the cost of consolidation by focusing on the composition of fiscal adjustments: - Rebalance spending away from inefficient current spending toward growth-enhancing investment. - Avoid cutting capital spending when possible, as such cuts harm future growth. - Address large public sector wage bills (Morocco, Tunisia); public wage bills in MENAP oil importers have averaged about 8 percent of GDP over the last decade. - Further reduce regressive energy subsidies (progress achieved in Egypt, Jordan, Morocco, Tunisia), noting political pressures and higher oil prices slowed progress in 2018 but ongoing reforms are expected to reverse the trend. - Revenue-side measures: - Scope for increased revenues through broadening the tax base and removing exemptions (Jordan, Pakistan). - Example: Tunisia’s ambitious tax package and improved administration led to a revenue increase of more than 2 percent of GDP. - Alternative consolidation mixes (e.g., forgoing civil service wage hikes and cutting subsidies) can achieve similar deficit reduction with smaller growth costs. - Strengthen fiscal institutions and debt management: - Build transparency and credible medium-term frameworks. - Enhance debt management frameworks and develop medium-term debt management strategies to manage market risks and exploit opportunities such as lower global interest rates. - Reduce exposure to external shocks: - Countries with ongoing energy subsidies or fixed domestic prices are particularly vulnerable to global oil price fluctuations (Lebanon, Mauritania, Sudan, Tunisia). - Countries with near-complete cost recovery are less vulnerable (Egypt, Jordan, Morocco). ### Delivering higher and more inclusive growth - Structural reforms remain critical to boost long-term growth: - Privatizing and improving 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, record and monitor off-balance-sheet contingent liabilities (notably SOE debt), and avoid excessive collateralization of debt. - Tackle corruption through greater transparency and accountability and stronger fiscal institutions. - Address binding constraints: - Limited access to finance (Jordan, Mauritania). - Poor infrastructure (Lebanon, Tunisia). - Low female labor force participation—requires public investments in high-quality education and health services (especially in Egypt, Mauritania, Morocco, and Tunisia). - External support where domestic constraints are severe: - Support for countries hosting large refugee programs (Jordan, Lebanon, Tunisia) via concessional financing, direct budgetary support, and technical assistance. - Planned 2020 IMF technical assistance to the region includes advice on managing fiscal risks of SOEs and public–private partnerships, expenditure rationalization, tax administration, deepening and strengthening bank supervision, and laws and institutions to combat money laundering and terrorist financing. - Social protection and inclusiveness: - Social unrest poses risks but also an opportunity; governments could increase social spending—which remains low—to protect the most vulnerable. - Reforms should aim to be growth-friendly and inclusive. ### Country example — Egypt (case summary) - By mid-2016 Egypt faced low growth, elevated and rising public debt, balance of payments problems, severe shortages of foreign exchange, and an overvalued exchange rate. - Policy adjustment under an IMF Extended Fund Facility included: - Liberalization of the foreign exchange market. - Fiscal consolidation to ensure public debt sustainability. - Phasing out costly and poorly targeted fuel subsidies. - Expanding cash transfer programs from 200,000 to 2.3 million households, covering about 10 million people. - Outcomes noted: - Growth accelerated to among the highest in the region. - Current account and fiscal deficits narrowed. - International reserves rose. - Public debt, inflation, and unemployment declined. - Structural priorities to sustain momentum: - Generate at least 700,000 jobs a year to absorb new labor market entrants. - Continue reforms to industrial land allocation, competition, public procurement, and governance. - Broaden and deepen reforms to create an enabling environment for private sector development, improve the business climate, tackle corruption, and reduce the role of the state. *International Monetary Fund | October 2019* ### Box 2.1. Egypt: From Stabilization to Inclusive Growth ### Box 2.1. Egypt: From Stabilization to Inclusive Growth ### Overview - Global trade tensions and slowing growth in key trading partners are affecting the Caucasus and Central Asia (CCA) region, contributing to weaker export growth but overall growth expected to remain broadly stable in 2019–20, supported by a looser fiscal stance and private sector credit growth. - Slower total factor productivity (TFP), especially in the region’s oil and gas exporters, points to lower potential growth and underscores the challenge of creating enough jobs for new workers. ### Growth and External Outlook - CCA overall growth is expected to remain about 4½ percent in 2019–20. - Growth in the region’s major trading partners is projected to fall from 3.2 percent in 2018 to 2.3 percent in 2019; import growth is projected to decline from 11.4 percent in 2018 to –1.4 percent in 2019. - Exports of goods and services growth: - Oil and gas exporters: from 23 percent in 2017–18 to about –1.7 percent in 2019–20. - Oil and gas importers: projected drop is noticeable but less dramatic. - Import growth in oil and gas exporters: from 10 percent in 2017–18 to 5.6 percent in 2019–20. - CCA region current account balance: projected decline from a surplus of 0.3 percent of GDP in 2018 to a deficit of 1.5 percent of GDP in 2019–20. - Fiscal stance: - General government fiscal balance declining by 1.5 percent of GDP from 2018 to 2019 to 0.6 percent. - Non-oil GDP growth in oil and gas exporters: from 3 percent in 2018 to 4.9 percent in 2019–20. - Inflation examples: - Turkmenistan: 13.4 percent. - Uzbekistan: 14.7 percent. - Medium-term projections and scenarios: - Region’s medium-term growth projected to remain about 4½ percent, assuming resumption in trading partner growth and recovery in oil and gas production. - Government debt levels projected to remain about 23 percent of GDP for oil and gas exporters and 49.8 percent of GDP for oil and gas importers this year. - Labor market and convergence: - 4 million new entrants (12 percent of the labor force) expected over the next 10 years. - Armenia and Georgia have the highest unemployment rates in the region; Kazakhstan and Uzbekistan must absorb the greatest number of new workers. - Growth will not be sufficient to lift per capita incomes to emerging Europe levels given current trajectories. ### Competitiveness and Structural Constraints - Exchange rates: IMF assesses exchange rates to be in line with fundamentals for most countries following devaluations after 2014–16 shocks. - Comparative strengths: - CCA compares well with peers on perceptions of non–price competitiveness. - CCA rates higher than emerging Asia on measures of human capital, though lower than emerging Europe. - Constraints and impediments: - Lower ratings on access to finance, the tax burden on the formal economy, and the cost of regulation. - High trade costs and transport times: average cost to ship a container to Shanghai or Rotterdam is more than five times higher for most CCA countries compared with emerging Europe. - Restrictions on trade and FDI, weak border management, and underdeveloped transportation and logistics infrastructure amplify geographic disadvantages (landlocked economies, harsh climates, low population density). - Share of noncommodity export volumes for oil and gas exporters has not kept pace with emerging market peers; export quality has fallen since 1995. - FDI inflows are relatively small and participation in global value chains (GVCs) is lower than in similar economies. - Large role of governments and state-owned enterprises (SOEs): - In Kazakhstan, SOEs account for about half of total value added, one-third of employment, and hold assets equal to nearly one-half of GDP. - Some SOEs have weak operations, lose money, require subsidies, or lack transparency and effective oversight. - Implicit guarantees on SOE liabilities are a growing concern and could have significant fiscal impact if fiscal support is required. ### Productivity and TFP - TFP growth has slowed considerably, driven by lower global growth following the global financial crisis and, for oil and gas exporters, by lower energy prices since 2014. - Example: TFP for oil exporters was positive in 2008–13 when average global oil prices rose 6 percent a year but became negative in 2014–18 when average prices fell 8 percent a year. - Growth accounting indicates capital, labor, and TFP contributions show divergence between oil exporters and oil importers over 2000–24. ### Policies and Recommendations to Promote Competitiveness and Inclusive Growth - Macroeconomic and financial policies: - Address weaknesses in banking systems (Azerbaijan, Kazakhstan, Tajikistan). - Modernize monetary policy frameworks to support greater exchange rate flexibility (Azerbaijan, Kyrgyz Republic, Tajikistan, Turkmenistan, Uzbekistan). - Strengthen fiscal institutions to support fiscal consolidation and rebuild buffers where needed (Armenia, Azerbaijan, Kazakhstan, Tajikistan). - Create space for more productive investment in infrastructure and human capital. - Improvements could include strengthening fiscal rules, fiscal transparency, and the efficiency of tax regimes and revenue administration. - Policies to boost external competitiveness, FDI, and infrastructure investment while guarding against global trade risks: - Create an enabling environment for the private sector by fostering competition and implementing sound industrial policy. - Reduce trade costs and transport times and improve connectivity to lower trade costs and boost FDI. - Example estimates: BRI transport projects could increase trade by 9.7 percent and reduce transport time by more than one-third; a 10 percent decrease in trade time is associated with a 12 percent increase in FDI. - Reduce impediments to trade to expand trade in intermediate goods and facilitate downstream diversification; promote e-commerce and telecommunications. - Attract FDI by reducing expropriation risks and streamlining entry procedures; strengthen rule of law and contract enforcement to foster innovation and protect intellectual property rights. - Reform SOEs to improve efficiency, transparency, and oversight and to reduce implicit fiscal risks. - Foster entrepreneurship and ensure well-functioning labor markets to absorb new workers and reduce unemployment. - Comparative advantage and diversification: - Allocate resources toward more dynamic and productive sectors to diversify exports. - Consider developing manufacturing and agribusiness where quality increases more rapidly, given limits to upgrading commodity quality. - Revealed comparative advantage (RCA) analysis suggests existing advantages in: - Mineral, metal, and chemical products for oil and gas exporters. - Agricultural products and textiles for oil and gas importers. - Remove impediments to growth in sectors with high RCAs to unlock export potential. ### Key Statistics and Indicators (as reported) - CCA overall growth expectation: about 4½ percent in 2019–20. - Trading partner growth: 3.2 percent in 2018 to 2.3 percent in 2019. - Trading partner import growth: 11.4 percent in 2018 to –1.4 percent in 2019. - Exports growth for oil and gas exporters: 23 percent in 2017–18 to about –1.7 percent in 2019–20. - Import growth in oil and gas exporters: 10 percent in 2017–18 to 5.6 percent in 2019–20. - Current account balance: surplus of 0.3 percent of GDP in 2018 to deficit of 1.5 percent of GDP in 2019–20. - General government fiscal balance: decline by 1.5 percent of GDP from 2018 to 2019 to 0.6 percent. - Non-oil GDP growth in oil and gas exporters: 3 percent in 2018 to 4.9 percent in 2019–20. - Inflation examples: Turkmenistan 13.4 percent; Uzbekistan 14.7 percent. - Government debt: about 23 percent of GDP for oil and gas exporters and 49.8 percent of GDP for oil and gas importers (this year). - Labor market: 4 million new entrants (12 percent of the labor force) over the next 10 years. - Infrastructure and trade facilitation impact estimates: - BRI transport projects could increase trade by 9.7 percent and reduce transport time by more than one-third. - A 10 percent decrease in trade time is associated with a 12 percent increase in FDI. - SOE example (Kazakhstan): SOEs account for about half of total value added, one-third of employment, and hold assets equal to nearly one-half of GDP. *International Monetary Fund | October 2019* ### 3. CAUCAsUs ANd CENTRAL AsIA: BOOsTING COMpETITIvENEss fOR HIGHER ANd MORE INCLUsIvE GROwTH ### 3. CAUCASUS AND CENTRAL ASIA: BOOSTING COMPETITIVENESS FOR HIGHER AND MORE INCLUSIVE GROWTH ### Reforming SOEs and Promoting Private Sector Jobs - State-owned enterprises (SOEs) in the CCA region display common problems: requirements to provide public services, overstaffing, insufficient oversight, loss-making, and potential fiscal costs. - Compared to other regions, SOEs in the CCA: - Tend to be involved in a broader range of quasi-fiscal activities, including noncore activities such as hospitals, tourism, and schools. - Have weaker financial reporting. - Research finding: - Price and governance reforms can improve SOE financial performance as measured by return on equity (Baum and others, forthcoming). - Policy recommendations for SOEs that create fiscal risks, lack profitability or financial stability, or rely heavily on government subsidies or guarantees: - Strengthen corporate governance and improve management. - Harden budget constraints and improve incentives (for example, pricing and accountability). - Reduce subsidies. - Separate SOE ownership from supervisory functions to mitigate risks and improve transparency and oversight. - Compensate SOEs for service mandates. - Create independent boards and hire professional managers; hold them accountable for financial and operational plans (including by fixing annual and midterm objectives). - Implement international accounting standards. - Regularly publish reports on financial and operational performance, including financial and fiscal risk statements. - Where SOEs operate in commercial markets, make them compete with private firms and consider privatization (IMF 2016b). - Labor market and private sector development policies to absorb new workers and boost inclusive growth: - Supply-side: boost quality of education and ensure workers have the right skills for sectors growing and adapting to new technologies. - Demand-side: ensure taxes and regulations do not make hiring too costly. - Structural measures: adopt policies (such as employment or social insurance and active labor market policies) that protect workers while promoting flexible labor markets (IMF 2019c). - Remove excessive regulation and address constraints to doing business, including access to finance, taxes and regulation, inflation, and weak governance. ### CCA Region: Selected Economic Indicators (2000–20) (Percent of GDP, unless otherwise indicated) - CCA Average 2000–15: Real GDP (annual growth) 7.8; Current Account Balance 0.6; Overall Fiscal Balance 1.9; Inflation (year average; percent) 8.9. - 2016: Real GDP (annual growth) 2.3; Current Account Balance 25.9; Overall Fiscal Balance 2.2; Inflation (year average; percent) 10.5. - 2017: Real GDP (annual growth) 4.0; Current Account Balance 22.3; Overall Fiscal Balance 2.8; Inflation (year average; percent) 9.4. - Projections: - 2018: Real GDP (annual growth) 4.2; Current Account Balance 0.3; Overall Fiscal Balance 2.1; Inflation (year average; percent) 8.3. - 2019: Real GDP (annual growth) 4.4; Current Account Balance 21.3; Overall Fiscal Balance 0.6; Inflation (year average; percent) 7.6. - 2020: Real GDP (annual growth) 4.4; Current Account Balance 21.7; Overall Fiscal Balance 0.1; Inflation (year average; percent) 7.6. - CCA oil and gas exporters (Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan): - Average 2000–15: Real GDP (annual growth) 8.0; of which non-oil growth 8.3; Current Account Balance 1.9; Overall Fiscal Balance 2.7; Inflation (year average; percent) 9.2. - 2016: Real GDP (annual growth) 2.1; of which non-oil growth 1.5; Current Account Balance 25.6; Overall Fiscal Balance 2.2; Inflation (year average; percent) 11.6. - 2017: Real GDP (annual growth) 3.8; of which non-oil growth 3.4; Current Account Balance 21.9; Overall Fiscal Balance 2.2; Inflation (year average; percent) 10.0. - Projections: - 2018: Real GDP (annual growth) 4.1; of which non-oil growth 3.0; Current Account Balance 1.5; Overall Fiscal Balance 2.6; Inflation (year average; percent) 9.0. - 2019: Real GDP (annual growth) 4.3; of which non-oil growth 5.1; Current Account Balance 20.5; Overall Fiscal Balance 1.0; Inflation (year average; percent) 8.1. - 2020: Real GDP (annual growth) 4.4; of which non-oil growth 4.6; Current Account Balance 21.0; Overall Fiscal Balance 0.5; Inflation (year average; percent) 7.9. - CCA oil and gas importers (Armenia, Georgia, the Kyrgyz Republic, and Tajikistan): - Average 2000–15: Real GDP (annual growth) 6.2; Current Account Balance 29.0; Overall Fiscal Balance 22.9; Inflation (year average; percent) 7.0. - 2016: Real GDP (annual growth) 3.5; Current Account Balance 28.3; Overall Fiscal Balance 25.4; Inflation (year average; percent) 1.8. - 2017: Real GDP (annual growth) 6.0; Current Account Balance 24.7; Overall Fiscal Balance 24.3; Inflation (year average; percent) 4.6. - Projections: - 2018: Real GDP (annual growth) 5.2; Current Account Balance 27.9; Overall Fiscal Balance 22.1; Inflation (year average; percent) 2.7. - 2019: Real GDP (annual growth) 4.9; Current Account Balance 27.1; Overall Fiscal Balance 22.6; Inflation (year average; percent) 3.8. - 2020: Real GDP (annual growth) 4.5; Current Account Balance 26.7; Overall Fiscal Balance 22.6; Inflation (year average; percent) 4.5. Sources: National authorities; and IMF staff calculations and projections. ### Changing Capital Flow Patterns and Risks - Capital flows to the Middle East and Central Asian countries have been resilient even as global financial conditions tightened in 2014–16. - As the region became more integrated into global financial markets: - Portfolio and bank flows have nearly doubled over the last decade. - Foreign direct investment (FDI) has almost halved. - The region is twice as sensitive to global risk sentiment compared to other emerging market economies. - Capital inflows helped finance current account and fiscal deficits, allowing for more gradual policy adjustments. - Policy priorities to manage inflows include: - Revitalizing FDI by easing restrictions and promoting macroeconomic stability in the near term and boosting potential growth over the medium term. - Ensuring fiscal sustainability, utilizing macroprudential tools, and, where appropriate, allowing for more flexible exchange rates. - Deepening and developing domestic financial markets, especially by strengthening legal frameworks. Key empirical findings and statistics on capital flows: - Gross inflows to the region are evenly split between oil importers and exporters and relatively concentrated, with the top three countries in both groups accounting for slightly more than one-half of total flows. - Composition of inflows has changed: FDI falling, portfolio and other (bank) inflows rising. - Between 2016 and 2018: - Portfolio inflows to MENAP and the CCA reached their highest levels—accounting for about 20 percent of the total portfolio inflows to emerging market economies (up from 5 percent before the global financial crisis). - Cumulative portfolio inflows in that period reached $164 billion, of which nearly three-quarters went to Egypt, Oman, Qatar, and Saudi Arabia. - Oil-exporting countries were large Eurobond issuers among emerging market economies, borrowing some $74 billion during 2018 through the first half of 2019 (about 25 percent of total gross issuance during that period, according to market analysts). - For oil-exporting countries, the GDP-weighted average of private external debt has increased by 8.4 percent of GDP in the last four years. - The share of short-term external debt has increased in some countries over the last four years: - Lebanon: rising to 83 percent. - Algeria: rising to 77 percent. - Qatar: rising to 62 percent. - Current account balances: - Median deficit for oil importers from 2010 to 2018 increased by 4.4 percentage points of GDP compared to 2000–09, owing to both lower savings and higher investment. - Fiscal balances: - Median postcrisis balance during 2009–18 worsened to a deficit of 0.1 percent of GDP, reflecting lower oil prices since 2014 and increased government spending. - Portfolio and bank inflows financed fiscal deficits in countries without large buffers (examples: Egypt, Bahrain, Oman). - In countries with large buffers (Qatar, Saudi Arabia, United Arab Emirates), capital inflows provided an economical way to finance deficits without liquidating foreign assets. - Risks associated with reliance on bank and portfolio inflows: - Portfolio and bank flows can be more volatile and prone to sudden stops than FDI. - Portfolio inflows to the region are almost twice as sensitive to changes in uncertainty compared to other emerging market economies, reflecting lower government and corporate transparency. - Rising bank and portfolio flows have contributed to increased private and public external indebtedness. - MENAP sovereign spreads tend to be higher than those of other emerging market economies of comparable ratings, likely reflecting elevated debt (Lebanon) and bouts of geopolitical instability. ### Policy Implications and Recommended Actions - Attracting more stable, growth-enhancing capital inflows: - Revitalize FDI by easing restrictions and improving the investment policy climate. - Promote macroeconomic stability to improve investor confidence. - Boost potential growth over the medium term to attract long-term capital. - Mitigating risks from capital inflow volatility: - Ensure fiscal sustainability to reduce reliance on volatile inflows for financing deficits. - Use macroprudential tools to limit financial vulnerabilities. - Where appropriate, allow for more flexible exchange rates to absorb external shocks. - Deepen domestic financial markets and strengthen legal frameworks to mobilize domestic savings and improve resilience. - Monitor and manage increases in short-term external debt and currency mismatches in private-sector borrowing. - Manage composition of inflows: - Encourage FDI over portfolio and short-term bank flows because of FDI’s higher growth impact. - Limit official-sector reliance on portfolio inflows for financing where it creates vulnerabilities. - Address structural constraints to private investment: - Remove excessive regulation and address barriers such as access to finance, taxes and regulation, inflation, and weak governance. *International Monetary Fund | October 2019 — Chapter 3, “CAUCASUS AND CENTRAL ASIA: BOOSTING COMPETITIVENESS FOR HIGHER AND MORE INCLUSIVE GROWTH”* ### 4. CApITAL FLOws TO MENAp ANd ThE CCA: OppORTUNITIEs ANd RIsKs ### 4. CApITAL FLOws TO MENAp ANd ThE CCA: OppORTUNITIEs ANd RIsKs ### Overview and risks - Global outlook: lower growth and rising uncertainty, including due to unresolved trade tensions. - Inflows to the region are highly sensitive to changes in global uncertainty; risks include capital inflows falling or reversing. - Oil exporters with large buffers (for example, Qatar and Saudi Arabia) likely face limited adverse impacts from reversals, but: - Reversals could amplify harmful effects of oil price declines on current account and fiscal balances, placing buffers under pressure. - Countries with smaller buffers could face significant adverse impacts. - Urgency: comprehensive policies needed to revitalize FDI and mitigate disruptive capital flow risks. ### Attracting stable capital inflows that increase growth - FDI drivers: - Unlike portfolio inflows, FDI inflows are driven more by domestic factors than by global factors. - Economic conditions have deteriorated in the region over the last decade: growth slowing more than in peer countries and economic and political risks rising faster. - Slower growth and higher risks can explain: - about half of the postcrisis decline in FDI among oil exporters, and - 20 percent of the decline in oil importers. - Key conditions to revitalize FDI: - Credible framework to boost potential growth and reduce country-specific risks. - Preserve macroeconomic stability and continue structural reforms. - Improve security in countries affected by armed conflicts and ensure inclusive growth. - Near-term policy levers to attract FDI: - Remove restrictions and increase investment opportunities (for example, opening up the services sector). - Recent measures: easing of travel restrictions for foreign investors in Uzbekistan; allowing 100 percent foreign ownership in more sectors in several GCC countries. - Effectiveness of capital account liberalization depends on domestic institutional quality, including control of corruption. - Perception of corruption could explain constrained ability to attract FDI despite liberalized capital accounts. - Reform priority: further strengthen institutional quality. - Longer-term priorities: - Increase skills through better education and training to attract FDI to higher-value-added sectors. - Education quality and median tertiary school enrollment in oil importers have lagged broader emerging market sample; oil exporters fare better but still need improvement. ### Mitigating potential risks from volatile flows - Priorities: - Address large fiscal and current account deficits to reduce risk of costly adjustments during a sudden stop episode. - Continue fiscal consolidation across the region. - Where inflationary pressures are absent, consider lowering interest rates and intervening to accumulate reserves where they are inadequate. - Strengthen financial supervision and regulation, including on nonbank financial institutions. - Utilize macroprudential tools to ensure financial stability and build resilience against volatile capital flows. - Exchange rate policy: - Greater nominal exchange rate flexibility, when supported by sound macroeconomic policies, can act as a shock absorber by dampening real exchange rate fluctuations. - Evidence: countries with more flexible exchange rates experienced smaller real appreciation during the emerging market inflow surge episode before the global financial crisis. - Inflexible exchange rates can exacerbate capital flow volatility and amplify vulnerabilities by encouraging borrowing in foreign currencies. - Deepen domestic financial markets: - Domestic institutional investors can provide more stable funding (examples: Chile—nearly half of financial sector assets; Malaysia—active domestic investors buying domestic equities/bonds when foreigners liquidate). - Financial development in the region varies; scope for improvement is large. - On average, financial development is higher in oil exporters than in oil importers, but most countries are below the emerging market average and all are below the advanced economy average. - Largest gaps: market liquidity and domestic institutional investor size. - Despite large market capitalization in some countries, stock market turnover ratios are very low compared to other emerging market economies—with the exception of Saudi Arabia. - Developing regional financial markets (for example, a joint stock market) could increase the investor base. - Government bond markets: - Governments can foster financial market development by developing a deep and liquid government bond market and establishing a government yield curve via gradual extension of maturities and regular issuances at varying tenors. - Recent inclusion of GCC countries in the global sovereign bond index could expand investor pool and increase market liquidity but may raise market volatility since benchmark investors are more sensitive to global factors—underscoring the need to expand domestic investor base. - Legal and governance reforms: - Rule of law is a precondition for financial market development; stronger legal protection encourages greater market participation. - Recent efforts by Bahrain, Saudi Arabia, and the United Arab Emirates to modernize bankruptcy laws are welcome. - Developing laws on the use of collateral could lower transaction costs and facilitate lending. - Governance gaps: control of corruption, human capital, and capital account restrictions—gaps larger in oil-importing countries. ### Capital outflows from MENAP and the CCA - Trend: - Capital outflows from the region have declined since the mid-2000s. - As oil prices fell, net purchases of foreign assets by oil exporters reached a minimum in 2015–16 owing to disposal of foreign assets by Algeria, Iraq, and Saudi Arabia. - In Algeria and Iraq, the decline was entirely due to a decline in official reserves. - In Saudi Arabia, other types of outflows offset an even larger decline in reserves. - Since 2015–16, foreign asset purchases have recovered only tenuously, with oil exporters spending oil revenues to service domestic needs. - Oil importers: - Median foreign asset acquisition fell from 3.6 percent of GDP in 2000–09 to 1.5 percent of GDP in 2010–18. - This trend driven by nearly continuous reduction in foreign assets in Lebanon and sporadic declines in countries such as Egypt and Pakistan where domestic vulnerabilities increased. - Implication: - Declining accumulation of foreign assets may increase vulnerabilities from volatile inflows, especially for oil importers whose net foreign asset positions are negative. - Note: Box prepared by Sergejs Saksonovs. ### Drivers of portfolio inflows — push-pull factor model (1990–2018) - Sample: panel of 11 MENAP and CCA countries and 29 other emerging market economies. - Findings: - Portfolio inflows are driven mostly by global push factors: the Chicago Board Options Exchange Volatility Index (VIX) and real US interest rate. - Portfolio inflows to MENAP and CCA countries are almost twice as sensitive to changes in global uncertainty as those in other countries—possible explanation: relatively weaker government and corporate transparency leading to larger outflows during crises. - Portfolio flows to the region depend on oil prices: - Higher oil prices increase portfolio inflows to the region (most likely by improving its risk profile). - Higher oil prices dampen the impact of global financial conditions—may reflect regional flows from oil-exporting countries whose liquidity is driven more by oil prices than US monetary policy. - Example: Coordinated Portfolio Investment Survey indicates at least two-thirds of Bahrain’s portfolio liabilities are held in other GCC economies. - Table 4.2.1. Impact of Push Factors on Portfolio Inflows/GDP, 1990–2018 (coefficients) - Column (1) EMs: - Log of VIX: –0.592* (0.319) - Real US interest rate: –0.145*** (0.051) - Column (2) MENAP and CCA: - Log of VIX: –1.267** (0.518) - Real US interest rate: –0.713^ (0.528) - Log of real oil price: 0.765* (0.380) - Log of VIX * MENAP dummy: –1.298* (0.698) - Real US interest rate * MENAP dummy: 0.192** (0.072) - Real US interest rate * log of real oil price: 0.211^ (0.131) - Regression notes: - All regressions include lagged real GDP growth, lagged composite risk index, global financial crisis dummies, and country fixed effects. - Robust standard errors clustered at country levels reported in parentheses. - Significance: ***p , 0.01, **p , 0.05, *p , 0.1, ^p , 0.2. - Note: Box prepared by Ling Zhu. *International Monetary Fund | October 2019* ### Chapter 1), while countries in the Caucasus and ### Chapter 1 ### Overview and context - MENAP and CCA countries face the challenge of reducing fiscal vulnerabilities to strengthen economic resilience while fostering higher and more inclusive growth. - Elevated global growth and trade uncertainties and prospects for lower and more volatile oil prices will weigh on MENAP oil exporters in particular. - Ensuring well-developed and credible fiscal institutions can ease adjustment burdens and reduce fiscal vulnerabilities on a lasting basis. ### Weak fiscal institutions in the Middle East and Central Asia - Measures of key fiscal institutions in MENAP and CCA countries tend to be weaker compared with peers, with important regional variation. - MENAP oil exporters have much lower budget transparency compared to other oil-exporting countries; measures for Algeria, Iraq, Qatar, and Saudi Arabia did not improve between 2012 and 2017. - Some MENAP and CCA oil importers have shown notable improvements in budget transparency in recent years. - Most MENAP oil exporters register very low nonresource tax revenues mainly because of large resource revenues. - MENAP oil importers’ tax systems suffer low progressivity and complexity, with multiple tax exemptions and rates. - MENAP oil exporters score higher than other oil exporters on the MTFF indicator, but this performance is largely driven by favorable elements in a few countries (Algeria, Kuwait) and does not necessarily reflect stronger MTFFs overall. - Most CCA countries fare well in terms of MTFF. - Countries in the CCA region perform poorly on public procurement; fragile and conflict-affected states face significant challenges due to limited administrative capacity. - IMF staff assessments indicate that more than 80 percent of CCA countries and half of MENAP oil exporters have MTFFs. A majority of MENAP oil importers do not have a formal MTFF. - MENAP and CCA countries improved their MTFFs by 10 percent over four years, whereas improvements took more than five years in other countries. ### How fiscal institutions influence fiscal outcomes (empirical findings) - Adoption of best practices for fiscal transparency, MTFF, PFM, and procurement could improve fiscal outcomes by increasing accountability and limiting discretionary and politically motivated changes in fiscal policy. - Disciplinary effect (slower public debt accumulation): - Across MENAP oil exporters, debt accumulation could be lower by more than 4 percent of GDP and close to 5 percent of GDP in the GCC and non-GCC oil-exporting countries, respectively, compared to current debt levels. - In MENAP oil importers, debt accumulation could be lower by about 3½ percent of GDP. - In the CCA, debt accumulation could be lower by 2 percent of GDP. - Specific country examples: in Algeria and Oman, debt accumulation could be lower by 4.5 and 6 percent of GDP, respectively, compared to current levels; in Qatar and Saudi Arabia it could be lower by 5 percent of GDP. Egypt, Lebanon, and Pakistan could slow public debt buildup by about 4 percent of GDP. In Armenia, the Kyrgyz Republic, and Tajikistan, improvements could slow debt accumulation on average by 2 percent of GDP. In Iraq, Lebanon, Sudan, and Yemen, debt accumulation could be slower by about 6 percent of GDP. - Stabilization effect (reducing procyclicality): - Procyclicality of fiscal policy across MENAP oil exporters could be reduced by 30 percent; the volatility of government spending could be lowered by as much as 19 percent, improving predictability. - In the CCA, the procyclicality of fiscal policy would be strongly reduced by more than 20 percent. - Azerbaijan and Uzbekistan could lower procyclicality by more than 20 percent. - Algeria, Qatar, and Saudi Arabia could reduce procyclicality by more than 30 percent compared to recent years. - Predictability effect (reducing volatility of discretionary spending): - Across MENAP oil importers, fiscal policy volatility could be 14 percent lower. - In the CCA, volatility of fiscal policy could be lowered by about 8 percent. - Improvements in budget transparency and procurement systems can enhance predictability of fiscal policy by lowering volatility of discretionary government spending. - Findings for a broader sample suggest that adoption of numerical fiscal rules, when accompanied by procedural rules and monitoring/enforcement mechanisms, is associated with less procyclical fiscal policy; greater transparency and credible MTFFs are associated with enhanced domestic nonresource revenue mobilization. ### Policy implications and recommendations - Improve fiscal transparency to support revenue mobilization and reduce fiscal vulnerabilities. - Adopt credible MTFFs to increase fiscal policy credibility, enable countercyclical policy, and reduce procyclical bias. - Strengthen public financial management (PFM) and procurement systems to improve efficiency and predictability of fiscal policy. - Pair numerical fiscal rules with procedural safeguards, monitoring, and enforcement mechanisms to limit procyclicality. - Recognize that improvements in fiscal institutions take time and may be hindered by administrative capacity and political constraints; benefits accrue over the medium to long term. *Source: mreo1019-full-report - Chapter 1), International Monetary Fund, October 2019.* ### 5. FIsCAL INsTITUTIONs ANd FIsCAL OUTCOMEs ### 5. FIsCAL INsTITUTIONs ANd FIsCAL OUTCOMEs ### Strengthening fiscal transparency, PFM, and procurement - Improving transparency and procurement systems could reduce volatility of fiscal policy by about 10 percent across the region; reductions could be about 11 percent in MENAP oil importers (Egypt, Mauritania, Pakistan) and 13 percent in CCA countries (Azerbaijan, Tajikistan, Uzbekistan). - Strengthening PFM controls—limiting unreported extra-budgetary expenditure, improving tax payment efficiency, and boosting oversight of fiscal risks from public enterprises—could lower public debt by about 3–3½ percent of GDP for MENAP oil exporters and importers. - Specific country actions and outcomes described: - Saudi Arabia: publishing more comprehensive budget statements, quarterly budget performance reports, and audited financial statements (including for the state oil company); further gains possible through more detailed data on budget projections, outturns, and fiscal risks and broader institutional coverage of fiscal reporting. - Tunisia and Uzbekistan: recent fiscal transparency evaluations in collaboration with IMF capacity development, with recommendations to improve fiscal reporting; Uzbekistan intends to participate in the 2021 Open Budget Index assessment for the first time. - Mauritania and Algeria: adoption of Organic Budget Laws to improve PFM systems and multiyear budgets. - Kuwait: new procurement law promoting competition and transparency, participation of small- and medium-sized enterprises, dedicated procurement bodies, modern bid evaluation approaches, life-cycle costing, and complaints procedures. - Saudi Arabia: new tendering and procurement law expected to improve public investment efficiency and tender transparency. - Azerbaijan and Uzbekistan: new legislation/regulations to establish e-procurement and increase transparency of bidding and contracting. - Armenia: plans to strengthen public investment management to facilitate prioritization. ### Moving toward well-designed fiscal rules - Empirical evidence: well-designed fiscal rules can strengthen fiscal discipline and reinforce fiscal policy stabilizing capacity. - For MENAP oil exporters: budget balance rules and expenditure rules may be more appropriate to reduce procyclicality while ensuring intergenerational equity. - For MENAP oil importers: budget balance rules and debt rules can help contain rapid rises in public debt while allowing fiscal policy to respond to shocks. - Caveats and design guidance: - Mere adoption of fiscal rules without strong fiscal institutions is unlikely to improve outcomes. - Procedural rules, enforcement and monitoring mechanisms, and independent bodies providing macroeconomic assumptions and compliance monitoring are crucial. - Comprehensive and robust PFM systems are preconditions for adopting fiscal rules. - Examples of fiscal-rule-related recommendations and country needs: - Algeria, Azerbaijan, Pakistan: foster compliance with existing rules. - Kyrgyz Republic: consider a lower cap for public debt when calibrating its fiscal rule. - Algeria and Pakistan: ensure compliance with existing MTFFs. - Qatar and the United Arab Emirates: bolster fiscal policy frameworks via explicit fiscal anchors. - Exact fiscal rule parameters cited for Georgia: fiscal rules limit public debt to 60 percent of GDP, the budget balance to 3 percent of GDP, and expenditures to 30 percent of GDP; revisions included eliminating the expenditure ceiling, clarifying scope of deficit and public debt under the rule, and defining escape clauses. ### Revenue institutions and revenue mobilization - Strengthening revenue institutions can boost domestic nonresource revenue mobilization, especially important for MENAP and CCA oil exporters. - Recommended institutional reforms: - Align revenue institutions with good practices for internal management. - Improve procedures regulating tax officials’ discretionary powers. - Develop core tax procedures and capabilities. - Ease filing and payment procedures via electronic filing. - Implement modern organizational structures and compliance risk management approaches. - Adopt a credible medium-term fiscal framework and a medium-term revenue strategy focused on tax system reform. ### A call for stronger institutions to improve policy outcomes - Regional priorities: - MENAP oil exporters: avoid procyclical fiscal policies to insulate economies from global oil price volatility. - MENAP oil importers: reduce precariously high public debt to create space to address growth weaknesses. - CCA countries: rebuild fiscal buffers to enhance macroeconomic stability and reduce external shock vulnerabilities. - Countries with low transparency scores (Algeria, Iraq, Qatar, Saudi Arabia) would benefit from transparency initiatives to reinforce discipline and reduce procyclicality and volatility by improving accountability and reducing discretionary spending powers. ### Lessons from Georgia (Box 5.1) - Reforms since 2003 included: - Adopting a new budget law: strengthened MTFF, consolidated budget legislation, unified central and local budgets, accelerated budget approval and execution, and introduced program budgeting. - Adopting numerical fiscal rules (debt, budget balance, and expenditure rules) in 2011 and enhancing them in 2018. - Streamlining tax policy and strengthening tax administration with e-government taxpayer services and procurement. - Improving coverage, analysis, and reporting of fiscal risks. - Outcomes: - Fiscal transparency (Open Budget Index) improved markedly. - Tax revenues rose and revenue collection efficiency exceeded peers. - Types of taxes reduced from 21 to 6. - Adoption of flexible fiscal rules fostered fiscal discipline, limited rise in public debt, and reduced volatility of government expenditure. - Remaining reform scope: - Enhance spending efficiency. - Make the medium-term budget framework more binding. - Improve oversight and management of public investment and state-owned enterprises in line with Public Investment Management Assessment recommendations. - Continue modernization of tax policy and revenue administration via a medium-term revenue strategy. - Prepared by Iulia R. Teoduro. ### Empirical framework linking fiscal institutions and fiscal performance (Box 5.2) - Fiscal institutions measured by: transparency of the budget cycle, adoption of a credible medium-term fiscal framework (MTFF), introduction of fiscal rules, procurement quality, and public financial management quality. - Three main effects studied: - Disciplinary effect: impact of fiscal institutions on changes in gross public debt (Equation 1). - Stabilizing effect: impact on procyclicality or countercyclicality of fiscal policy via a two-step approach (Equations 2 and 3) estimating time-varying country-specific cyclical coefficients (β̂it). - Volatility reduction: isolating discretionary changes in government spending using residuals from a spending equation (Equation 4), computing five-year standard deviations σit, and estimating institutional impacts via Equation 5. - Role of fiscal rules tested with interaction terms capturing procedural rules, monitoring/enforcement bodies, escape clauses, or rules excluding investment spending (Equation 6). - Revenue mobilization model: dependent variable Revit (total revenue/GDP or nonresource revenue/GDP) with explanatory FIit and interactions (Equation 7). - Sample and estimation: - Sample covers 114 countries across all income groups and regions, including 31 Middle East and Central Asia countries. - Panel is unbalanced; five-year averages used because fiscal institutions change slowly. - Equations 1, 3, 5, and 6 estimated using Driscoll and Kraay (1998) method for robust standard errors; Equation 7 estimated using fixed effects with robust standard errors. - Controls include macroeconomic, structural, political, and institutional variables; country fixed effects included to reduce cross-sectional dependence. - Interpretation: causality assumed from fiscal institutions to fiscal outcomes following Alesina and Perotti (1999), mitigating endogeneity from reverse causality. - Box prepared by Moussé Sow. *International Monetary Fund | October 2019* --- _Source: https://www.imf.org/-/media/files/publications/reo/mcd-cca/2019/october/english/mreo1019-full-report.pdf_