## mreo1020-full-report

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### Regional developments and outlook
- Real GDP in the MCD region is projected to fall by 4.1 percent in 2020; growth was 1.4 percent in 2019.
- The projected 2020 contraction is 1.3 percentage points larger than projected in April 2020 REO.
- MENAP first-quarter real GDP contracted by 5 percent year over year; CCA first-quarter real GDP growth declined to 3 percent year over year.
- Fragile and conflict-affected states: projected to contract by nearly 13 percent in 2020 (after 2.4 percent growth in 2019); GDP per capita implied to fall from $2,900 in 2018–19 to under $2,000 in 2020 (about $5 a day).
- Health capacity varies widely: doctors per 100,000 range from about 2.3 (Somalia 2014) to 712 (Georgia).
- As of September 8, countries reported between 61 and 48,038 COVID-19 cases per million and fatality rates between 2 and 304 people per million; COVID-19-related deaths average 70 individuals per million in the MCD region.
- Key assumptions and conventions:
  - Oil price assumed: $41.69 a barrel in 2020 and $46.70 a barrel in 2021.
  - Six-month LIBOR on US dollar deposits assumed to average 0.74 percent in 2020 and 0.41 percent in 2021.
  - Projections based on established policies maintained and data through early September 2020.

### Activity, trade, remittances, and oil-sector impact
- Mobility and containment:
  - Mobility collapsed (seven-day moving average values down to –100 on mobility indices); activity collapsed in Q2 2020 in line with mobility declines.
- Tourism and remittances:
  - Remittances declined by 6 percent year over year in Uzbekistan during H1 2020 and by more than 25 percent in the Kyrgyz Republic during H1 2020.
  - Pakistan’s remittances rose due to strong flows from the United States and increased use of formal channels.
  - Remittances to MENAP oil importers would take more than four years to recover to precrisis levels on average.
  - Remittances are estimated to have contracted by 19 percent on average, year over year, during H1 2020; under a moderate H2 2020 recovery remittances could fall on average by 20 percent.
- Trade and capital flows:
  - Export declines during H1 2020 ranged from 1 percent of GDP in Pakistan to nearly 4 percent of GDP in Uzbekistan.
  - Estimated outflows from MCD region in March–April: $6 billion to $8 billion; cumulative outflows since the start of the crisis remain negative and total more than $5 billion.
  - Since end-March, MCD countries accounted for more than 40 percent of sovereign issuances by all emerging markets.
- Oil-sector shocks:
  - Oil prices dropped to 20-year lows between March and April; OPEC+ agreements stabilized prices, which recovered more than 50 percent of losses since end-2019 but remain 40 percent below pre-COVID-19 levels.
  - Oil revenues collapsed during H1 2020, approaching a maximum of 50 percent (for Iraq).
  - Oil futures curves indicate prices expected to increase toward $48 a barrel in the medium term (from $41 for 2020), remaining some 25 percent below the 2019 average.

### Fiscal, monetary, and macro-financial responses
- Fiscal support:
  - Fiscal packages in the region, including off-budget measures, average about 2 percent of GDP (regional average), lower than the emerging market and developing economy average of about 3 percent of GDP.
  - Median size of revenue and expenditure measures in 2020: oil importers: 2 percent of GDP; oil exporters: 1 percent of GDP. Including non-deficit measures increases medians to 2.7 percent (oil importers) and 1.9 percent (oil exporters).
  - Expected decline in revenues in nominal terms compared with precrisis baseline: 4.8 percent of 2019 GDP overall (oil exporters: 5.9 percent of 2019 GDP; oil importers: 3.7 percent of 2019 GDP).
  - Median expected decline in primary balances in 2020: oil importers: 4 percent of GDP.
  - Fiscal deficits examples: about 0.8 percent of GDP in Azerbaijan to 4 percent of GDP for Jordan and Tunisia.
  - Debt risks:
    - Debt levels in MENAPOI and CCA oil importers expected to reach over 90 percent of GDP and nearly 60 percent of GDP, respectively, by end-2020.
    - Debt-to-GDP levels among oil exporters: "46 and 27 percent of GDP" for MENAPOE and CCA oil exporters, respectively.
    - Region will face external debt amortizations of about "$45 billion" in 2021, mostly sovereign debt service.
    - Country external amortization pressures in 2021: Tunisia: "more than 7 percent of GDP"; Bahrain, Georgia, Pakistan, Qatar, Turkmenistan: "about 4 percent of GDP" each.
- Monetary and financial measures:
  - Central banks cut policy rates by end-August in most cases (Egypt: cumulative cut of 300 basis points; a further 50 basis points cut at end-September; Pakistan: cumulative cut of 625 basis points).
  - Half of the region’s central banks supplied additional liquidity totaling more than $40 billion.
  - Macro-financial support measures: liquidity injections, reserve requirement changes, asset purchases, funding for lending; about half of central banks loosened macro-financial stance.
  - Direct central bank financing of the public sector used in Bahrain and Turkmenistan; central bank FX interventions in Egypt, Iran, Tajikistan, Turkmenistan.
- Near-term financing patterns (table highlights):
  - Median increase in financing needs: 4.3 percent of GDP.
  - Total financing needs (Percent of region GDP): MENAP Oil Importers: 28.5; CCA Oil Importers: 10.8; MENAP Oil Exporters: 14.0; CCA Oil Exporters: 7.6.
  - Domestic financing (total): MENAP Oil Importers: 23.7; CCA Oil Importers: 7.5; MENAP Oil Exporters: 11.1; CCA Oil Exporters: 4.6.
  - External financing (total): MENAP Oil Importers: 4.8; CCA Oil Importers: 9.3; MENAP Oil Exporters: 2.9; CCA Oil Exporters: 3.0.

### Financial-stability assessment and stress tests
- Macro-level stress test assumptions:
  - Reclassification of 15 percent of performing loans into NPLs.
  - New NPLs provisioned at an average rate of 50 percent.
  - FX depreciation scenario: one-off depreciation of 30 percent; indirect channel increases FX NPLs by 6 percent, also provisioned at 50 percent.
- Key stress-test results:
  - Estimated total losses from asset impairment in MCD banking systems: $190 billion (5 percent of GDP).
    - CCA losses: $10 billion, or up to 2 percent of GDP.
    - MENAP oil importers losses: $30 billion, or 3 percent of GDP.
    - MENAP oil exporters losses: $150 billion, or 6 percent of GDP.
  - Recapitalization costs to reach Basel 8 percent CAR could amount to $40 billion at the MCD level:
    - Concentrated in MENAP oil importers: $8 billion, or 1 percent of GDP.
    - Iran: $33 billion, or 6 percent of GDP.
  - Post-shock NPL ratio for the MCD region: approximately 16.5 percent (a tripling of the aggregate NPL ratio).
  - Caveats: aggregate results may mask distributional needs; actual costs may be higher; FX component less likely in fixed-exchange-rate countries.
- Financial system characteristics and risks:
  - SMEs represent about 95 percent of all registered firms and employ about half of the region’s total labor force; SME lending is only 7 percent of total bank lending.
  - Risks from macroprudential relaxation: potential evergreening of asset quality, increased NPLs, stronger bank-sovereign nexuses, and lending to lower-quality borrowers.
- Policy guidance for financial stability:
  - Calibrate timing of unwinding support and regulatory forbearance; encourage appropriate provisioning or restructuring.
  - Record NPLs transparently and provision sufficiently; restrict direct central bank financing of fiscal deficits.
  - Consider private and official capital injections where undercapitalized banks exist; government intervention as last resort.
  - Strengthen supervision, insolvency frameworks, and bank-resolution frameworks; expand financial inclusion while guarding fiscal space.

### Scarring, labor markets, and remittances
- Estimated medium-term scarring:
  - Five years from now, countries could be 12 percent below the GDP level implied by precrisis trends; return to trend could take more than a decade.
- Channels of scarring:
  1. Services/tourism exposure: could reduce baseline GDP and employment growth for tourism-intensive countries by about 5 percentage points each on average in 2020; employment effects up to 4.9 percentage points on average.
  2. High firm leverage and revenue contraction: firms about twice as likely to default by early 2021 as before the pandemic (Bottom-Up Default Analysis).
  3. Protracted impact on contact-intensive sectors and limited ability to work from home.
  4. Sharp drop and protracted recovery in remittances: could add more than 1.3 million new extreme poor, raising poverty headcount by more than 3.7 percent in 2020 to about 5.25 percent of the population of remittance-dependent MCD countries.
- Labor-market specifics:
  - Ability to work from home averages between 10 and 23 percent across MCD countries (Dingel and Neiman cross-country average: 26 percent).
  - Working-hours declines: Arab states Q1 2020: 1.8 percent (≈1 million full-time jobs); Q2 2020: 10.3 percent (≈6 million full-time jobs).
  - Long-term unemployment scarring evidence: Egypt and Jordan panel evidence shows those unemployed are about 9 and 14 percent more likely to remain unemployed or out of the labor force six years later.
- Remittances and poverty:
  - Remittances are a sizable income source for 14 MCD countries (exceeding 5 percent of GDP for those countries).
  - GCC, Russia, and the United States account for two-thirds of total remittances.
  - Remittances falling by about 1 percent associated with an estimated 2 percentage point decline in the income share of the lowest 20 percent.

### Policy recommendations (near- and medium-term)
- Immediate priorities:
  - Health first: contain rising cases; for controlled countries, strengthen testing, tracing, isolation, safe distancing, localized lockdowns; develop vaccine procurement strategy.
  - Continue decisive action to secure jobs, provide liquidity to businesses and households, and protect the poor and vulnerable.
  - Ensure adequate resources for health systems and correctly target support programs.
- Fiscal policy:
  - Remain supportive and flexible until a safe and durable exit is secured; avoid premature rapid retrenchment.
  - For limited fiscal-space countries: prioritize expenditure reallocation toward health, education, and social sectors; adapt support by sector and distinguish liquidity from insolvency.
  - Prepare credible medium-term fiscal plans emphasizing revenue mobilization, minimizing tax avoidance, greater tax progressivity where appropriate, and higher spending efficiency.
  - Embed COVID-19 support into MTFFs; enhance fiscal risk monitoring and disclosure; strengthen debt management offices and market communication.
- Debt and sovereign financing:
  - Oil importers with debt concerns but market access should seek maturity extensions and reduce rollover risk; high-spread countries may consider private-sector-involved restructuring.
  - Low-income and fragile states should seek concessional financing, grants, and debt relief.
- Monetary and financial policy:
  - Keep monetary and financial stances accommodative; timely recognition of credit losses; consider capital injections for banks and systemic nonfinancial firms if necessary while preserving central bank balance sheets.
  - Avoid direct central bank financing of fiscal deficits where possible.
- Labor-market and structural policies:
  - Incentivize worker reallocation via hiring subsidies, active labor policies, and reduced hiring-deterring rigidities.
  - Target support to enable resource shifts away from permanently smaller sectors (contact-intensive); prioritize tourism-dependent countries (Armenia, Azerbaijan, Georgia, Jordan, Lebanon, Morocco).
- Social protection and human capital:
  - Permanently strengthen social safety nets and social insurance; invest in digital infrastructure and digital skills; implement remedial education policies to recover lost learning.
- Climate- and growth-oriented public investment:
  - Redeploy fiscal resources to renewable energy, power transmission efficiency, and building retrofits; redouble efforts toward diversification away from oil, tourism, and remittances dependence.
- Financial-sector and SME policy:
  - Design SME support to be temporary, targeted, and transparent; expand public credit guarantee programs where well-governed; avoid long-term prudential relaxation that jeopardizes stability.
  - Expand SME financial inclusion through institutions, capital markets, and fintech while monitoring fiscal risks.
- Fragile states:
  - International and donor support crucial to avoid abrupt adjustments and to secure vaccine access when available.

### Selected key statistics and country vulnerabilities (preserved exactly)
- Regional GDP projection: fall by 4.1 percent in 2020.
- MENAPOE 2020 real GDP change projected at –6.6 percent; oil GDP: –7.7 percent; non-oil GDP: –5.8 percent.
- MENAPOI projected growth in 2020: −1 percent (rebound to 2.2 percent in 2021); Morocco: −7 percent in 2020; Jordan: −5 percent in 2020.
- CCA projected contraction in 2020: 2.1 percent; CCA oil importers: −5 percent in 2020; CCA oil exporters: −1.6 percent in 2020.
- Fragile states projected contraction in 2020: nearly 13 percent.
- External amortizations in 2021: about "$45 billion".
- Projected post-shock NPL ratio for MCD: approximately 16.5 percent.
- Stress-test calibrations: 15 percent (reclassification); 50 percent (provisioning); 30 percent (FX depreciation); 6 percent (increase in FX NPLs); tripling (aggregate NPL ratio under shock).
- SME facts: SMEs represent about 95 percent of registered firms; employ about half of the region’s labor force; only 7 percent of total bank lending.
- IMF financing to region (first seven months of 2020): nearly "$17 billion" in new financing.

*International Monetary Fund | Regional Economic Outlook: Middle East and Central Asia (October 2020), excerpts from mreo1020-full-report*

### 1. Regional Developments and Outlook 1

### 1. Regional Developments and Outlook

### Necessary Lockdowns Came at an Economic Cost
- The coronavirus disease (COVID-19) pandemic continues to sweep across the region; countries are cautiously proceeding with reopening.
- Real GDP in the MCD region is projected to fall by 4.1 percent in 2020.
- Growth was 1.4 percent in 2019.
- The projected 2020 contraction is 1.3 percentage points larger than projected in April 2020 REO.
- The MCD countries’ top 10 trading partners are projected to contract by 1.5 percentage points more relative to the April 2020 REO.
- Countries introduced measures to restrict travel, close businesses and schools, trace and quarantine individuals, and require masks/gloves.
- Health capacity varies widely: number of doctors per 100,000 people ranges from about 2.3 (Somalia 2014) to 712 (Georgia).
- As of September 8, countries reported between 61 and 48,038 COVID-19 cases per million people and fatality rates between 2 and 304 people per million.
- COVID-19-related deaths average 70 individuals per million in the MCD region (higher than sub-Saharan Africa and the Asia Pacific region, but well below Europe and the Western Hemisphere).

### Early Signs of Improvement in a Difficult Environment
- Mobility reductions and containment measures greatly decreased activity, with purchasing managers’ indices across several countries showing severe adverse effects.
- MENAP first-quarter real GDP contracted by 5 percent year over year.
- CCA first-quarter real GDP growth declined to 3 percent year over year (remained positive).
- Purchasing managers’ indices have rebounded somewhat but remain subdued around the expansion threshold.
- Tourism and remittances—key income sources—fell sharply:
  - International flights have largely stopped in many countries.
  - Remittances declined by 6 percent year over year in Uzbekistan during the first half of 2020 and by more than 25 percent in the Kyrgyz Republic during the first half of 2020.
  - Pakistan’s remittances bucked the trend due to strong flows from the United States and increased usage of formal channels.
  - Fragile states (data not available) likely face sizable impacts (for example, Yemen and Syria depend highly on GCC remittances).
- Oil-exporting countries faced a double shock from the pandemic and a sharp decline in oil demand/prices:
  - Oil prices dropped to 20-year lows between March and April.
  - OPEC+ agreement in April and extension in June stabilized prices; prices recovered more than 50 percent of losses since end-2019 but remain 40 percent below pre-COVID-19 levels.
  - Oil revenues collapsed during the first half of 2020, approaching a maximum of 50 percent (for Iraq).
  - Oil futures curves indicate prices are expected to increase toward $48 a barrel in the medium term (from $41 for 2020), remaining some 25 percent below the 2019 average.
- Fiscal accounts deteriorated in several countries during the first half of 2020, reflecting smaller packages and expenditure reallocation.

### Swift Support with Room for Enhancements
- Despite supportive policies, growth revisions reflect a deeper-than-expected impact of lockdowns on mobility and weak global growth.
- Immediate priorities identified:
  - Ensure adequate resources for health systems.
  - Correctly target support programs.
- Near-term policy actions recommended:
  - Secure jobs.
  - Provide liquidity to businesses and households.
  - Protect the poor.
  - Put in place a carefully designed economic road map to recovery.
- Further actions are necessary in countries with limited fiscal space to ensure a smooth recovery while maintaining macroeconomic sustainability.

### Examining the MENAP and CCA Outlooks
- Early reopeners experienced growth in cases; listed early reopeners include Algeria, Azerbaijan, Djibouti, Iran, Jordan, Kuwait, Kyrgyz Republic, Lebanon, Syria, United Arab Emirates, Uzbekistan, West Bank and Gaza.
- Reopeners had higher infection rates prior to reopening.
- With global recovery subdued, downside risks continue to dominate the outlook as the pandemic persists.

### Downside Risks Continue to Prevail
- The pandemic continues to test countries; downside risks and uncertainties surrounding assumptions add to projection margins of error.
- Projection data are based on statistical information available through early September 2020.

### Near- and Medium-Term Policy Recommendations
- Immediate priorities:
  - Continue decisive action to secure jobs.
  - Provide liquidity to businesses and households.
  - Protect poor and vulnerable populations.
  - Ensure adequate resources for health systems and correctly target support programs.
- Medium-term priorities:
  - Put in place a carefully designed economic road map to recovery.
  - In countries with limited fiscal space, take further actions to address vulnerabilities while maintaining macroeconomic sustainability.

### International Support and Rebuilding Sustainably Stronger
- The report underscores the role of international support in sustaining recovery and rebuilding stronger economies (section title noted; substantive details appear elsewhere in the chapter).

### Key Assumptions and Conventions (selected)
- Assumed oil price average: $41.69 a barrel in 2020 and $46.70 a barrel in 2021.
- Six-month LIBOR on US dollar deposits assumed to average 0.74 percent in 2020 and 0.41 percent in 2021.
- Projections are based on established policies being maintained and on data through early September 2020.

*Source: Regional Economic Outlook: Middle East and Central Asia (October 2020), Chapter 1: Regional Developments and Outlook.*

### 1. MCD: Mobility and Stringency Index

### 1. MCD: Mobility and Stringency Index

### Mobility, stringency, and activity
- Mobility collapsed as countries locked down to fight the pandemic (seven-day moving average; figures indicate steep declines up to –100 on mobility indices).
- Lockdowns and stringency measures coincided with a collapse in economic activity in Q2 2020.
- Change in international flight arrivals: large year-over-year declines across multiple countries (figures show values down to –100 to –60 for some economies).
- Remittances: marked declines in 2020:H1 versus 2019:H1 for several countries (country labels include KGZ, TUN, JOR, UZB, PAK among others).
- Sources for mobility and stringency measures: Oxford Coronavirus Government Response Tracker; Google Mobility Trends; national authorities; and IMF staff calculations.

### Real GDP performance and projections
- Regional and global context:
  - Global growth is presented year-over-year (figures show sharp declines in 2020).
  - Real GDP growth (year over year, percent change) shows a collapse in Q2 2020 consistent with mobility declines.
- Key projections and historical comparisons:
  - MENAP oil exporters (MENAPOE): change in real GDP projected at –6.6 percent in 2020.
    - Oil GDP: projected to contract by 7.7 percent in 2020.
    - Non-oil GDP: projected to contract by 5.8 percent in 2020.
  - MENAP oil importers (MENAPOI): projected growth of −1 percent for 2020 (after expansion of 2.8 percent in 2019); rebound to 2.2 percent in 2021.
    - Morocco: projected contraction of 7 percent in 2020.
    - Jordan: projected contraction of 5 percent in 2020.
    - Egypt: exception in the group, with weaker growth in second half of 2020 reflected in lower projections for fiscal year 2020/21.
  - Caucasus and Central Asia (CCA) region: projected contraction of 2.1 percent in 2020 (after 4.8 percent growth in 2019).
    - CCA oil importers: projected contraction of 5 percent in 2020 (after growth of 6.1 percent in 2019).
    - CCA oil exporters: projected downturn of 1.6 percent in 2020.
  - Fragile and conflict-affected states: projected to contract by nearly 13 percent in 2020 (after 2.4 percent growth in 2019).
    - Implication for GDP per capita: from $2,900 in 2018–19 to under $2,000 in 2020 (or about $5 a day).

### External sector, trade, remittances, and capital flows
- Trade:
  - Export declines during H1 2020 ranged from 1 percent of GDP in Pakistan to nearly 4 percent of GDP in Uzbekistan.
  - Import compression was of the same or larger magnitude for several countries, improving trade balances in some cases (Pakistan, Tunisia, Uzbekistan).
- Capital flows:
  - Estimated outflows from MCD region in March–April: $6 billion to $8 billion.
  - Cumulative outflows from the region since the start of the crisis remain negative and total more than $5 billion.
  - Since the end of March, MCD countries accounted for more than 40 percent of sovereign issuances by all emerging markets.
- Remittances:
  - Large declines in remittances for several CCA and MENAP countries (noted impacts on Kyrgyz Republic and others).
- Oil prices and volatility:
  - Figures show Brent prices and an Oil Price Volatility Index with major events (Coronavirus spread; OPEC+ deal breakdown; Attack on Aramco facilities; OPEC+ agreements) through Sep. 2020.
- Reserve coverage and vulnerabilities:
  - Projected reserve coverage remains generally adequate (at more than four months of imports for most countries).
  - Countries warranting attention for low projected reserve coverage: Bahrain, Djibouti, Pakistan, Sudan, Tunisia.

### Fiscal and monetary policy responses
- Fiscal support:
  - Fiscal packages in the region, including off-budget measures, average about 2 percent of GDP (regional average).
  - This is lower than the emerging market and developing economy average of about 3 percent of GDP.
  - Fiscal deficits (examples for period referenced): ranged from about 0.8 percent of GDP in Azerbaijan to 4 percent of GDP for Jordan and Tunisia.
  - Fiscal deficits among oil importers: expected to worsen in 2020 versus 2019.
    - MENAPOI: fiscal balances projected to decline by 0.6 percentage point of GDP (to –7.9 percent of GDP) in 2020.
    - CCA importers: fiscal balances foreseen to deteriorate nearly 6 percentage points of GDP (to –7.1 percent of GDP) in 2020.
  - Debt risks:
    - Debt levels in MENAPOI and CCA oil importers expected to reach over 90 percent of GDP and nearly 60 percent of GDP, respectively, by end-2020.
  - Non-oil fiscal metrics:
    - MENAPOE: non-oil fiscal deficit in 2020 projected at 33 percent of non-oil GDP (broadly the same as 2019).
    - CCA oil exporters: non-oil fiscal balance projected to widen by over 2 percentage points.
- Monetary and financial measures:
  - Central banks cut policy rates by end-August in most cases.
    - Egypt: cumulative cut of 300 basis points; a further 50 basis points cut at end-September.
    - Pakistan: cumulative cut of 625 basis points.
  - Half of the region’s central banks supplied additional liquidity to the banking system, totaling more than $40 billion.
  - Macro-financial support measures included liquidity injections, reserve requirement changes, asset purchases, funding for lending.
  - About half of central banks loosened macro-financial stance: relaxed countercyclical capital requirements, liquidity ratios, capital adequacy requirements, and in some cases loan classification and provisioning rules.
  - Direct central bank financing of the public sector used in Bahrain and Turkmenistan.
  - Central bank interventions in FX markets occurred in Egypt, Iran, Tajikistan, Turkmenistan to prevent disorderly conditions.
- Other policy measures:
  - Health sector support: tax exemptions on food and medical supplies, increased spending on medical equipment and supplies, allowances for health care staff, augmentation of hospital capacity, building quarantine facilities.
  - Revenue measures: exemptions, deferrals, or exemptions on declaration and payments of individual and corporate taxes; suspension or reduction of various government fees and penalties.
  - Spending measures: strengthening unemployment benefits, cash transfers to low-income households, subsidies to SMEs, utility subsidies; subsidized loans and lending guarantees to SMEs and hard-hit sectors.
  - Trade and price measures: some trade restrictions (Algeria; Iran; Jordan; Kazakhstan; Mauritania; Pakistan; Somalia; Sudan; Tajikistan; Turkmenistan) and price controls (Iran; Jordan; Kazakhstan; Kyrgyz Republic; Morocco; Pakistan; Qatar; Sudan; Tajikistan; Turkmenistan).
  - Capital flow measures: additional capital flow management measures have been very limited.

### Policy evaluation and recommendations (areas needing attention)
- Fiscal policy:
  - Average fiscal support is the smallest among regional groups; constraints reflect pre-existing fiscal limits and crisis effects.
  - Some fiscal measures (tax increases) were necessary for short-term fiscal accounts but may risk the recovery.
  - Land and property tax exemptions tend to be regressive and should be unwound if not well targeted.
  - Income and consumption tax deferrals and lending programs should be better targeted toward neediest households or SMEs; where used, they should distinguish recipients by income levels, sectors, or firms’ preconditions.
  - Effective communications and streamlined procedures are needed to ensure support reaches intended beneficiaries.
- Monetary and financial policy:
  - Regulatory forbearance may contribute to financial instability; direct central bank financing of fiscal deficits should be removed as it could lead to inflation pressures and jeopardize institutional credibility.
  - Banking supervision and financial inclusion should be strengthened.
- Broader:
  - Attention warranted to countries with low reserve coverage and high debt vulnerabilities.
  - Continued monitoring of social tensions and geopolitical risks, as regional uncertainty remains high given ongoing conflicts (Afghanistan, Libya, Somalia, Syria, Yemen) and renewed hostilities in Nagorno-Karabakh.

*International Monetary Fund | Regional Economic Outlook: Middle East and Central Asia | October 2020 — Chapter 1 excerpt*

### 12.3 to 14.6 percent of non-oil GDP) in 2020

### mreo1020-full-report - 12.3 to 14.6 percent of non-oil GDP) in 2020

### Major findings and key statistics
- Debt-to-GDP levels among oil exporters remain relatively subdued at "46 and 27 percent of GDP" for MENAPOE and CCA oil exporters, respectively.
- Some oil exporters face much higher levels of gross debt: Algeria, Bahrain, Iraq, Oman, Qatar, Yemen (with substantial financial assets in some cases, e.g., Qatar).
- The region will face external debt amortizations of about "$45 billion" in 2021, most of which correspond to sovereign debt service.
- Country-specific external amortization pressures in 2021:
  - Tunisia: "more than 7 percent of GDP"
  - Bahrain, Georgia, Pakistan, Qatar, Turkmenistan: "about 4 percent of GDP" each.
- For 2021, all countries in the region except Lebanon and Oman are projected to see positive growth.
- Real GDP: MENAPOI and CCA expected to return to their 2019 level in 2021, but "well below the precrisis trend"; MENAPOE real GDP levels expected to be "nearly 4 percent below the levels of 2019".
- Fiscal outlook:
  - In 2021, fiscal balances are projected to improve for all regions (especially for CCA oil importers) as COVID-19 measures are unwound.
  - Beyond 2021, oil importers: projected return to fiscal consolidation expected to help close deficits by "more than 4 percentage points of GDP", and debt is projected to modestly decline (but remain higher than precrisis levels for some countries).
  - Oil exporters: non-oil fiscal balances expected to remain broadly flat with an increasing path for public debt.

### Downside risks and channels
- Continued uncertainty over the pandemic path; upside scenarios include faster global recovery, extended fiscal support, low infection rates, a safe and effective vaccine, and advances in digital technology.
- Key vulnerabilities exacerbated by the crisis: excessive debt, elevated financing needs, exposure to oil market volatility, and high unemployment and informality.
- Stop-start containment measures risks:
  - Prolonged uncertainty for firms and households; potential permanent job losses from furloughs and reduced hours.
  - Liquidity concerns for SMEs could turn into insolvencies given relatively low access to finance (Box 4.2 referenced).
  - Widening inequality and poverty as informal jobs are hit harder and social safety nets remain weak; school closures likely to impact youth in lower-income households and cause long-term scarring.
- External risks:
  - Weaker global recovery could cause oil market oversupply and volatility, slower recoveries in remittances and tourism.
  - Rising debt sustainability concerns and tighter financial conditions could restart capital outflows and tip vulnerable countries into debt and balance of payments crises.
- Structural risks: intensifying geopolitical tensions, accelerating deglobalization, supply-chain breakdowns, and region’s dependence on expatriate labor (GCC), with expatriates concentrated in hard-hit services and limited social protection.

### Financial sector risks
- Financial sector remains generally stable but faces risks from weakening corporate balance sheets, increased credit risk, and declining oil-price-driven liquidity pressures.
- Increased operational risks, including cyber and technology-related risks.
- Risk of bankruptcies and debt overhangs could have important implications for financial stability and the recovery if not addressed.
- Countries that entered the crisis with limited loss-absorbing buffers (notably MENAPOI) may see banking sector resilience tested later; enhanced surveillance and strengthened liquidity management are needed.

### Near- and medium-term policy recommendations
- Health first:
  - Where cases are rising, contain the health crisis as the first priority.
  - For countries with controlled infection rates, strengthen health care capacity for safe return to work: timely testing, tracing, isolation, safe distancing practices, localized lockdowns.
  - Develop a strategy for securing vaccine supplies once available.
- Fiscal policy:
  - Remain supportive and flexible until a safe and durable exit from the crisis is secured; avoid premature rapid retrenchment.
  - For countries with limited fiscal space, prioritize expenditure reallocation and reorient non-priority spending toward health, education, and social sectors.
  - As recovery progresses, adapt support by sector and distinguish liquidity from insolvency when designing measures; complement support with governance reforms for efficient financing use.
  - Cushion income losses in short term; expand social spending to protect the most vulnerable (paid and family sick leave, expanded unemployment insurance eligibility, strengthened health benefit coverage).
  - Oil exporters should avoid procyclical fiscal policy as the new cycle begins—contain spending even if oil revenues rebound.
  - Prepare credible medium-term fiscal plans focusing on improved revenue mobilization, minimizing tax avoidance, greater tax progressivity where appropriate, and higher spending efficiency.
- Debt and sovereign financing:
  - Oil importers with debt sustainability concerns but market access should seek maturity extensions and reduce rollover risk.
  - Countries with very high spreads may need to consider restructuring with private sector participation, including interest and principal reductions.
  - Low-income countries and fragile states should seek concessional financing, grants, and debt relief.
- Monetary and financial policy:
  - Keep monetary and financial stances accommodative; central bank interventions to keep borrowing costs low and credit conditions supportive.
  - Timely recognition of credit losses; consider capital injections for banks and systemic nonfinancial firms if necessary while guarding central bank balance sheet health.
  - Enhance financial surveillance and liquidity management, particularly for countries with limited buffers (MENAPOI).
- Labor market and structural policies:
  - As recovery materializes, incentivize worker reallocation via hiring subsidies, active labor policies, and measures to reduce hiring-deterring rigidities.
  - Target support to enable resource shifts away from sectors likely to remain smaller (e.g., contact-intensive sectors); prioritize countries with high dependence on travel and tourism (Armenia, Azerbaijan, Georgia, Jordan, Lebanon, Morocco).
- Social protection and human capital:
  - Permanently strengthen social safety nets, social assistance, and social insurance systems for wider coverage and better targeting—especially for low-income countries and fragile states.
  - Invest in digital infrastructure to support e-commerce and digitalization; accompany with labor reforms and digital skills training for youth and women.
  - Consider policies to recover lost learning: adjust school year length, train teachers on remedial approaches, broaden tutoring programs; retool educational programs toward in-demand skills (health sector skills and digital literacy).
- Climate- and growth-oriented public investment:
  - Redeploy fiscal resources to invest in renewable energy, efficiency in power transmission, and retrofitting buildings to reduce carbon footprints.
  - Redouble efforts toward diversification to reduce dependence on oil (MENAPOE), tourism (Georgia, Jordan, Lebanon, Morocco), and remittances (Egypt, Kyrgyz Republic, Pakistan, Tajikistan).
- For low-income and fragile states: international and donor support is crucial to avoid abrupt adjustments.

### International support and IMF engagement
- During the first seven months of 2020, the IMF approved nearly "$17 billion" in new financing for the region.
- Support instruments included emergency financing, augmented programs, debt relief, and catalyzing funding from other official creditors.
- Access limits to IMF emergency financing facilities have been temporarily increased; IMF improved ability to provide grant-based debt service relief.
- IMF continues to provide policy support, technical advice, and remote capacity development, with increased engagement for MCD fragile states since the crisis began.

### Policy measures adopted by MCD countries (major examples)
- Fiscal policy measures:
  - Exempting or postponing rent payments or property and land taxes: Bahrain, Egypt, Georgia, Kyrgyz Republic, Lebanon, Oman, Qatar, Tajikistan, United Arab Emirates.
  - Deferring or exempting tax declarations and payments: Afghanistan, Algeria, Egypt, Lebanon, Saudi Arabia, Turkmenistan, West Bank and Gaza.
  - Suspending or reducing various government fees and penalties: Algeria, Bahrain, Iran, Kuwait, Lebanon, Oman, Saudi Arabia, Tunisia.
  - Strengthening and/or broadening unemployment benefits: Algeria, Azerbaijan, Bahrain, Iran, Jordan, Morocco, Qatar, Saudi Arabia, Sudan, United Arab Emirates, Uzbekistan, West Bank and Gaza.
  - Expanding cash transfers to low-income households: nearly all countries in the region.
  - Expanding energy subsidies for SMEs and households: Bahrain, Djibouti, Georgia, Iran, Kazakhstan, Oman, Pakistan, Qatar, Turkmenistan, United Arab Emirates.
  - Providing subsidized loans to SMEs, hard-hit businesses, and low-income households: Armenia, Bahrain, Egypt, Iran, Kuwait, Qatar, Saudi Arabia, Tunisia, United Arab Emirates, Uzbekistan.
- Monetary policy measures:
  - Cutting policy interest rates: Algeria, Armenia, Bahrain, Egypt, Georgia, Jordan, Kazakhstan, Kuwait, Mauritania, Morocco, Oman, Pakistan, Qatar, Saudi Arabia, Tajikistan, Tunisia, United Arab Emirates, Uzbekistan.
  - Injecting liquidity into the banking system: Armenia, Georgia, Jordan, Morocco, Qatar, Saudi Arabia, Tajikistan, Tunisia, United Arab Emirates, Uzbekistan.
  - Expanding lending tools (cutting reserve requirements, extending loan maturities): Algeria, Bahrain, Iraq, Jordan, Lebanon, Morocco, Qatar, Saudi Arabia, Tajikistan.
  - Introducing repo arrangements, liquidity support for lending, loan guarantees, lowering refinancing costs: Armenia, Bahrain, Georgia, Iran, Kazakhstan, Qatar.
  - Opening bilateral swap lines with central banks of major trading partners: Azerbaijan.
- Macro-financial measures:
  - Easing countercyclical buffers or liquidity ratio: Kazakhstan, Kyrgyz Republic, West Bank and Gaza.
  - Lowering capital adequacy requirements: Iran, Kazakhstan, Morocco, Sudan, United Arab Emirates.
  - Relaxing loan classification and provisioning: Afghanistan, Iran, Kazakhstan, Kyrgyz Republic, Morocco, Oman, Pakistan, United Arab Emirates, West Bank and Gaza.
  - Providing direct central bank financing to the public sector: Bahrain, Turkmenistan.

*Source: International Monetary Fund | October 2020, REGIONAL ECONOMIC OUTLOOK: MIDDLE EAST AND CENTRAL ASIA.*

### Box 1.1. Policy Responses to the Pandemic

### Box 1.1. Policy Responses to the Pandemic

### Fiscal policy responses and revenue measures
- A few countries implemented measures to raise revenues: Afghanistan, Egypt, Saudi Arabia, Tunisia.
- Some countries cut or postponed spending to compensate for lower oil revenues or pandemic-related spending: Afghanistan, Jordan, Oman, Saudi Arabia.
- Notable country measures:
  - Saudi Arabia: tripled its value-added tax rate and increased customs duties substantially.
  - Egypt: introduced a temporary 1 percent tax deduction on all salaries and 0.5 percent on pensions, applicable to all public and private sector employees for 12 months; very low-income workers are exempt from the tax increase.
- Assessment of tax measures:
  - Although some tax measures may be desirable medium-term reforms, in general, tax increases would be more effective after the crisis.
  - These measures may improve the short-term fiscal situation somewhat, but they will likely be a drag on the recovery and invite larger fiscal costs in the future.
  - Compensation measures are needed to protect the most vulnerable groups from the tax increases.

### Monetary and financial policy considerations
- Monetary and financial policies need to balance immediate market stabilization and future policy credibility.
- Further reduction of policy rates and liquidity injections should be carefully designed in countries where:
  - inflation is high, or
  - potential financial instability due to capital outflows is still a risk.
- Regulatory forbearance (for example, relaxing loan classification) was used in some countries but may negatively affect financial stability and market development in the future.
- Direct central bank financing of fiscal deficits may:
  - undermine the credibility of central banks,
  - alter inflation expectations,
  - lead to difficulties in conducting monetary policy in the future.

### Targeting, inclusiveness, and delivery of pandemic-related support
- A well-targeted approach is crucial for pandemic-related policies.
  - Some lending and subsidy programs target SMEs, businesses in hard-hit sectors, or low-income households (see Box 4.2 referenced in source).
  - Targeting could be improved; example: Armenia provides subsidized loans only to firms with good credit history.
- Many tax deferral and exemption programs are broad-based; policymakers should consider tailoring such programs to distinguish among income levels, sectors, or firms’ preconditions.
- Exemptions on land and property taxes, if implemented broadly, tend to be highly regressive.
- Most measures other than those related to health are not designed to benefit expatriates.
  - Recommendation: extend health and basic financial support to all residents, including expatriates who are unable to leave the country, to help contain the spread of the virus, aid economic recovery, and enhance social cohesion.
- Effective communication and streamlined procedures are important to realize the full benefits of social spending and SME support.
  - Many poor households and SMEs lack capacity to navigate regulatory processes to file applications and receive support.
  - Capacity constraints may lead to underuse of SME and social transfer programs that have lengthy bureaucratic procedures.
  - Governments should simplify administrative processes by using digital technology and self-service wherever possible and communicate policies extensively through all channels to inform those eligible for support programs.

### Fragile states: humanitarian and economic challenges
- The pandemic aggravates underlying challenges in fragile states: armed conflicts (Afghanistan, Iraq, Libya, Somalia, Syria, Yemen); anti-government protests and fear of a humanitarian crisis in Lebanon; years of conflict and political uncertainty in West Bank and Gaza; climate vulnerabilities in Afghanistan, Somalia, Yemen.
- The region hosts a large share of the world’s refugees and internally displaced people (referenced Figure 1.2.1).
- Key vulnerabilities in fragile states:
  - Large informal sectors hit particularly hard by containment measures, with lack of digitalization and limited remote working.
  - Weak monetary transmission amid shallow financial markets, dollarization, and explicit or implicit exchange rate pegs (or lack of a domestic currency, e.g., West Bank and Gaza) constraining monetary policy effectiveness.
  - Social safety nets remain weak because of poor design and insufficient information about recipients (particularly given internally displaced people and refugees) and weak delivery mechanisms given cash dominance and security circumstances.
  - Declines in incomes will directly translate into higher unemployment and poverty.
  - Poor living conditions among refugees and internally displaced persons increase infection risks; weak health systems raise treatment concerns; border closures affect asylum seekers; food insecurity risks loom large.
- Policy space is extremely limited in fragile states, increasing the need for continued and timely international support.
  - External financing needs have increased and become more urgent, while financing has become more constrained due to declines in growth and trade and limited market access given debt distress risk.
  - The IMF has been helping by providing emergency financing and debt relief (Afghanistan, Djibouti, Tajikistan, Yemen), offering policy advice and targeted technical assistance in spending efficiency, revenue collection, and debt management, and reinforcing collaboration with other international financial institutions.
  - International support will be key to ensure fragile states have access to vaccines once available.

### Table 1.2.1 summary: Fragile States—Policy Response (as of July 6, 2020)
- The source presents a table listing fragile states and responses across Fiscal; Monetary; Macroprudential/Banking Supervision; IMF Emergency Support; Debt Relief. The table indicates:
  - Afghanistan: fiscal and monetary measures noted; IMF Emergency Support: RCF; Debt Relief: indicated.
  - Djibouti: fiscal and monetary measures noted; IMF Emergency Support: RCF; Debt Relief: indicated.
  - Iraq: fiscal and monetary measures noted.
  - Lebanon: fiscal and monetary measures noted.
  - Libya: monetary measures noted.
  - Somalia: fiscal and monetary measures noted.
  - Sudan: fiscal and monetary measures noted.
  - Tajikistan: fiscal, monetary, and macroprudential measures noted; IMF Emergency Support: RCF; Debt Relief: indicated.
  - West Bank and Gaza: fiscal and monetary measures noted.
  - Yemen: monetary measures noted; Debt Relief: indicated.
- Note: RCF = Rapid Credit Facility. (Source: National authorities, as of July 6, 2020.)

### Channels and magnitude of economic scarring in MCD
- Region-wide vulnerabilities preceding the crisis:
  - Compared with conditions before the global financial crisis (when countries in the region averaged fiscal and current account surpluses of 4.7 and 7 percent of GDP, respectively), in 2019 countries averaged deficits of 2.5 and 2 percent of GDP.
  - Debt to GDP rose from 43 percent in 2006 to 59 percent by 2019.
- Potential medium-term scarring estimates:
  - It is estimated that five years from now, countries in the region could be 12 percent below the GDP level implied by precrisis trends, and a return to the trend level could take more than a decade.
- Four key channels of scarring identified:
  1. Large exposure in hard-hit services (particularly tourism): could reduce baseline GDP and employment growth for MCD tourism-intensive countries by about 5 percentage points each on average in 2020, with potential lingering effects for the next two to five years.
  2. High leverage and a sizable contraction in revenues and profitability for firms in 2020: firms about twice as likely to default by early 2021 as they were before the pandemic.
  3. Protracted impact on contact-intensive sectors and limited ability to work from home: will exacerbate unemployment; slow reallocation of labor away from affected sectors could lead to higher unemployment for several years.
  4. Sharp drop and protracted recovery in remittances: could increase the number of new extreme poor by 1.3 million, reaching a poverty headcount of about 5.25 percent of the population of MCD remittances-dependent countries, with fragile and conflict-affected states overwhelmingly representing the new extreme poor.

### Services and tourism-specific impacts
- Services sector exposure:
  - The services sector’s contribution to value added exceeds 34 percent for more than two-thirds of MCD countries.
  - Travel and tourism can account for up to 26.6 percent of total employment and contribute as much as 30.5 percent of GDP in some MCD tourism-intensive countries.
- Scenario calibrated to a severe six-month disruption (matching high-frequency indicators between April and June 2020):
  - Expected reduction in baseline GDP growth in 2020 up to 5.4 percentage points on average for tourism-intensive countries.
  - Expected reduction in baseline employment growth in 2020 up to 4.9 percentage points on average for tourism-intensive countries.
  - Countries particularly affected: Georgia, Jordan, Lebanon, Morocco.
- Historical persistence:
  - In the five years after the global financial crisis and Arab uprisings, tourism receipts remained on average 13 percent below their precrisis levels in Middle East, North Africa, Afghanistan, and Pakistan oil importers.
  - Example country impacts: Egypt tourism receipts in 2015 remained 50 percent below 2010 levels; Tunisia about 50 percent below 2010 levels.
- The current recovery could be more protracted due to:
  - Negative wealth effects from the crisis, and
  - Potential that travelers could avoid MCD countries if the region lags the rest of the world in controlling COVID-19 and reopening to air travel.

### Corporate sector vulnerabilities
- Firms entered the pandemic with relatively weak fundamentals:
  - On average, lower profitability, liquidity, and revenue growth before the current crisis compared with preexisting conditions in other crises.
- Compared with other regions, MCD firms:
  - Entered the pandemic with higher leverage and lower capacity to cover interest expenses (see Table 2.1, panel 1 referenced in source).
- Oil-exporting country firms:
  - Although more liquid, had worse pre-pandemic revenue growth.

_International Monetary Fund | October 2020 — Box 1.1. Policy Responses to the Pandemic (mreo1020-full-report)_

### 2. ADDRESSING ECONOMIC SCARRING FROM ThE CRISIS

### 2. ADDRESSING ECONOMIC SCARRING FROM ThE CRISIS

### Firm-level financial deterioration and default risk
- Aggregate performance deteriorated during H1 2020 compared with the 2018–19 average:
  - Revenue growth contracted by 11 percentage points (deeper in oil importers than oil exporters: –17.5 and –7.5 percentage points, respectively).
  - Profitability has taken a bigger hit in oil-importing countries, where it has more than halved.
  - Leverage increased regionwide during the pandemic.
  - Q2 2020 shows a deeper impact on revenue growth: a contraction of 19 percentage points.
- Sectoral impacts (selected):
  - Energy sector: revenue growth and profitability contracting by 28.4 and 4 percentage points, respectively.
  - Services, durable goods, business equipment, and manufacturing: double-digit declines in revenues in many cases.
- Liquidity and solvency risks:
  - A 6 percent increase in the number of firms whose interest coverage ratio dropped below 1.
- Stress-test results (Bottom-Up Default Analysis, conditional on pre-pandemic WEO projections and current WEO projections):
  - Firms on average are now about twice as likely to default by early 2021 as they were before the pandemic.
  - All industries except technology face greater default risks; services and energy-related firms are most pronounced.
  - Default risks improve steadily in the stress scenario but remain higher than pre-pandemic levels three years later.

### Labor market impacts and ability to work from home
- Ability to work from home in MCD countries is limited:
  - The share of jobs that can be performed at home averages between 10 and 23 percent for countries in the region.
  - Dingel and Neiman’s cross-country study average was 26 percent.
  - Lower-income countries with high shares of agriculture and elementary occupations (for example, Afghanistan, Mauritania) have an even more pronounced limitation.
  - Estimates likely represent an upper bound given low internet access in some countries.
  - In GCC countries, the ability to work from home is higher for nationals than for expatriates.
- Working-hours and job loss estimates (ILO-based):
  - Working hours in Arab states declined by 1.8 percent during Q1 2020 (equivalent to about 1 million full-time jobs).
  - Working hours further declined by 10.3 percent in Q2 2020 (equivalent to about 6 million full-time jobs).
  - About one-third of individuals in the Arab region are employed in sectors considered most at risk from the COVID-19 shock.

### Persistent adverse labor outcomes and hysteresis
- Long-lasting individual scarring:
  - Studies document persistent earnings losses in the range of 20 to 40 percent in the United States after long unemployment spells.
  - Labor panel evidence for Egypt and Jordan: those who are unemployed are about 9 and 14 percent more likely to remain unemployed or out of the labor force six years later, respectively, controlling for age, sex, education, and wealth.
- Economy-wide hysteresis in unemployment:
  - Recessions, on average, have been associated with a 1 percentage point increase in the unemployment rate after five years in both oil-exporting and oil-importing countries.
  - For oil-importing countries, this estimate increases to almost 2 percentage points for deeper output contractions over the past three decades.
  - For oil exporters, the initial impact on unemployment is relatively muted but the longer-term impact increases, reflecting enduring effects on job creation capacity.
  - Given the depth and sectoral unevenness of the current downturn, the eventual impact on unemployment could be greater if recovery is protracted or significant structural workforce change is required.

### Remittances, poverty, and inequality
- Remittance flows and origins:
  - Remittances are a sizable source of income for 14 MCD countries, exceeding 5 percent of GDP for those countries.
  - GCC countries, Russia, and the United States account for two-thirds of total remittances to these countries.
- Recent changes and projected paths:
  - Remittances are estimated to have contracted by 19 percent on average, year over year, during the first half of 2020.
  - Under a moderate recovery in H2 2020, remittances could fall on average by 20 percent.
  - Countries depending on GCC-origin flows are likely to see an above-average drop because of the GCC’s subdued outlook.
  - On average, remittances to MENAP oil importers would take more than four years to recover to precrisis levels (twice as long as the recovery following both the global financial crisis and the 2014–15 oil shock).
  - CCA oil-importing countries and some fragile and conflict-affected states would see a smaller-than-average drop (about 13.5 and 18 percent, respectively) and a faster recovery (one to three years).
  - Risks are tilted to the downside, including the possibility that remittances may not recover as fast as after the global financial crisis because the current crisis disproportionately affected sectors of migrant employability.
- Poverty and inequality effects:
  - Poverty headcount in the region could rise by more than 3.7 percent in 2020, reaching about 5.25 percent of the population of MCD remittance-dependent countries, or adding more than 1.3 million new extreme poor (extreme poverty defined as $1.90 a day).
  - Remittances falling by about 1 percent would be associated with an estimated 2 percentage point decline in the share of income of those in the lowest 20 percent.
  - These results are likely lower bounds because they reflect only the immediate remittance channel; broader labor market and human capital channels could produce larger and more persistent deterioration in inequality for up to five years after the pandemic.

### Policy implications and priorities to minimize scarring
- Key policy trade-offs and priorities emerging from the evidence:
  - Strike a careful balance between preserving livelihoods, minimizing scarring, and promoting recovery without creating “zombie” sectors reliant on extended government support beyond the crisis phase.
  - Target policies to support firm liquidity and solvency where feasible while allowing market-based reallocation where necessary to avoid long-term productivity losses.
  - Protect employment relationships and facilitate reallocation toward sectors and occupations less prone to permanent scarring, taking into account limited ability to work from home in many countries.
  - Support remittance-dependent households and fragile and conflict-affected states, given the outsized contribution of remittances to poverty reduction and the projected protracted recovery of remittance flows.

*International Monetary Fund | October 2020 — Chapter: 2. ADDRESSING ECONOMIC SCARRING FROM ThE CRISIS*

### 1. Remittances’ Impact on Poverty

### 1. Remittances’ Impact on Poverty

### Key measures and data sources
- Measures shown: "Millions of extreme poor and percent of population"; "Impact of Remittances on Gini Coefficient (Units)"; "Proportion of New Extreme Poor, 2020 Forecast (Percent)".
- Sources: World Bank povacalNet and World Development Indicator databases; national authorities; and IMF staff calculations.
- Note: rhs = right-hand scale. The measure of extreme poverty refers to $1.90 a day international poverty line.

### Empirical specification and identification
- Estimated log-linear model (following Azizi (2019), estimated over 1993–2015 for 80 countries, including 10 MCD countries):
  - log (H_it) = β_0 + β_1 log (RPC_it) + β_2 log (YPC_it) + Xʹ_it γ + e_it
  - Where H_it is the poverty or inequality measure, RPC_it is remittances per capita, YPC_it is per capita income, X_it is a matrix of other variables that affect H_it, and e_it is the error term.
  - β_1 is the elasticity of remittances with respect to poverty or inequality.
- Endogeneity strategy:
  - A first stage regression of remittances per capita was estimated on instruments.
  - Instruments used: weighted per capita income, unemployment, real interest rate and real exchange rate of the sending countries (where the weight is bilateral remittances).

### Interpretation of coefficients and policy-relevant parameters
- β_1 interpretation: elasticity of poverty or inequality with respect to remittances per capita (as specified in the log-linear model).
- The model controls for per capita income (β_2) and other covariates in X_it, isolating the association between remittances and H_it.

### Notes on reported indicators and forecasts
- Figures/plots in the source present:
  - Levels and shares of the extreme poor (millions and percent of population).
  - Units change in the Gini coefficient attributed to remittances.
  - Proportion of new extreme poor in the 2020 forecast (percent).
- The chapter emphasizes that social protection measures should be calibrated to consider the fall in remittances, reflecting remittances’ role in poverty mitigation.

*Italic: Sources: World Bank povacalNet and World Development Indicator databases; national authorities; and IMF staff calculations.*

### 1. How much fiscal space is left to support

### 1. How much fiscal space is left to support the recovery?

### The Crisis Prompted Diverse Policy Responses across the Region
- Most oil importers focused on increasing health spending and targeted social transfers; most oil exporters centered efforts on temporarily reducing taxes, extending tax payment deadlines, increasing other spending (for example, on partial payment of salaries to preserve employment), and providing loans.
- Calculations concerning frequency of country policies and their fiscal impact reflect information available as of August 7, 2020.
- The median size of revenue and expenditure measures in 2020:
  - Oil importers: 2 percent of GDP (equal to the median of emerging market and developing economies).
  - Oil exporters: 1 percent of GDP (half the median of oil importers).
- Including measures without direct deficit impact (tax-deadline extensions, loans, guarantees) increases median cost:
  - Oil importers: 2.7 percent of GDP.
  - Oil exporters: 1.9 percent of GDP.

### Fiscal Responses, Spending Patterns, and Health Measures
- Spending increases caused by COVID-19 have been broadly offset by cuts in other categories; 24 countries are expected to cut capital spending in 2020.
- Total government spending, in nominal terms, is projected to increase in only 8 countries (out of 29).
- Non-interest current expense is expected to increase in 18 countries.
- The unprecedented contraction in economic activity is projected to increase non-interest spending as a share of GDP in 22 countries:
  - Median increases: oil exporters: 2.2 percent of GDP (second highest, compared with 2.3 in 2009); oil importers: 2 percent of GDP (highest, compared with 1.1 in 2007).
- Median COVID-19-related health spending measures, 2020:
  - Oil importers: 0.6 percent of GDP.
  - Other emerging market and developing economies: 0.5 percent of GDP.

### Impact on Revenues, Primary Balances, and Fiscal Easing
- Expected decline in revenues in nominal terms, compared with precrisis baseline: 4.8 percent of 2019 GDP overall.
  - Oil exporters: 5.9 percent of 2019 GDP.
  - Oil importers: 3.7 percent of 2019 GDP.
- Median expected decline in primary balances in 2020:
  - Oil importers: 4 percent of GDP (in line with other EMDEs at 3.6 percent; highest in past 20 years though three-quarters of oil importers have previously experienced greater fiscal easing).
- For oil exporters: median non-oil primary balance as a share of non-oil GDP is expected to decline by 1.4 percentage points from its 2019 level (fourth largest annual decline in past 20 years).
- The crisis has resulted in the largest synchronous fiscal easing in oil importers and a significant one in oil exporters.

### Financing Needs and Debt: Near-Term Patterns (Table 3.1)
- Median increase in financing needs in the region: 4.3 percent of GDP.
- Financing patterns by subregion and oil status (Percent of region GDP; figures from Table 3.1):
  - Financing Needs — Overall Balance:
    - MENAP Oil Importers: 7.9
    - CCA Oil Importers: 7.0
    - MENAP Oil Exporters: 11.2
    - CCA Oil Exporters: 6.1
  - Debt Amortization:
    - MENAP Oil Importers: 20.6
    - CCA Oil Importers: 3.8
    - MENAP Oil Exporters: 2.8
    - CCA Oil Exporters: 1.5
  - External Amortization:
    - MENAP Oil Importers: 2.2
    - CCA Oil Importers: 2.0
    - MENAP Oil Exporters: 0.7
    - CCA Oil Exporters: 1.3
  - Domestic Amortization:
    - MENAP Oil Importers: 18.4
    - CCA Oil Importers: 1.8
    - MENAP Oil Exporters: 2.1
    - CCA Oil Exporters: 0.2
  - Total Financing Needs:
    - MENAP Oil Importers: 28.5
    - CCA Oil Importers: 10.8
    - MENAP Oil Exporters: 14.0
    - CCA Oil Exporters: 7.6
- Financing Sources (Percent of region GDP):
  - Domestic financing (total):
    - MENAP Oil Importers: 23.7
    - CCA Oil Importers: 7.5
    - MENAP Oil Exporters: 11.1
    - CCA Oil Exporters: 4.6
  - Government and SWF Resources:
    - MENAP Oil Importers: 0.8
    - CCA Oil Importers: 21.4
    - MENAP Oil Exporters: 3.8
    - CCA Oil Exporters: 3.2
  - Central Banks:
    - MENAP Oil Importers: 0.0
    - CCA Oil Importers: 0.0
    - MENAP Oil Exporters: 0.3
    - CCA Oil Exporters: 0.4
    - CCA Oil Exporters (last column): 0.0
  - Commercial Banks:
    - MENAP Oil Importers: 22.9
    - CCA Oil Importers: 2.6
    - MENAP Oil Exporters: 6.9
    - CCA Oil Exporters: 1.4
  - External financing (total):
    - MENAP Oil Importers: 4.8
    - CCA Oil Importers: 9.3
    - MENAP Oil Exporters: 2.9
    - CCA Oil Exporters: 3.0
  - Bond Issuance:
    - MENAP Oil Importers: 1.2
    - CCA Oil Importers: 0.0
    - MENAP Oil Exporters: 2.6
    - CCA Oil Exporters: 0.5
  - Commercial Loans:
    - MENAP Oil Importers: 0.3
    - CCA Oil Importers: 0.0
    - MENAP Oil Exporters: 0.0
    - CCA Oil Exporters: 2.1
  - IFI, Official Bilateral:
    - MENAP Oil Importers: 3.2
    - CCA Oil Importers: 9.3
    - MENAP Oil Exporters: 0.1
    - CCA Oil Exporters: 1.4
- Near-term financing source patterns:
  - MENAP countries expected to rely primarily on domestic financing, notably commercial banks (examples: Egypt and Morocco).
  - CCA economies rely more on external financing; CCA oil importers expect significant borrowing from international financial institutions.
  - CCA oil exporters rely mostly on government and sovereign wealth fund resources.
- The share of foreign-currency-denominated debt is expected to increase in 10 out of 29 countries, often due to increased official financing.

### Rising Debt, Medium-Term Revisions, and Borrowing Costs
- 2020 projected increases in government-debt-to-GDP ratios (median increases):
  - MENAP oil exporters: about 11 percentage points.
  - CCA oil importers: about 12 percentage points.
- Since the onset of the pandemic, medium-term projections of government-debt-to-GDP ratios have been revised up by as much as 44 percentage points of GDP for some countries, with the largest revisions in MENAP oil exporters.
- Lower projected GDP growth rates account for about half of these revisions in many countries.
- Debt does not stabilize under baseline projections for Algeria, Bahrain, Kuwait, and Oman (combined with the 2020 level shift in debt).
- Within MENAP, median government debt is projected to rise above 70 percent of GDP over the medium term.
- Expected effective interest rates (2021–23) are projected to decline over the medium term from precrisis levels for MENAP oil exporters and CCA oil importers, reflecting advanced-economy monetary easing and increased official financing to many countries in the region.
- Despite lower expected borrowing costs, risks have risen, particularly from increased reliance on domestic financing (fiscal dominance and closer sovereign-bank linkages) and fickle international capital markets (examples: Egypt issued $5 billion in May with spreads above 550 bps; Jordan issued $1.75 billion in June with spreads below 520 bps).

### Erosion of Fiscal Space and Country Assessments
- Several countries entered the pandemic with essentially no fiscal space:
  - Oil importers: Egypt, Jordan, Lebanon, Pakistan, Tunisia.
  - Oil exporters: Iran, Oman.
- The pandemic has further eroded fiscal space for some countries (examples):
  - Lebanon: unsustainability of debt underscored by deterioration in access to market financing and consolidation plans.
  - Oman: heightened fiscal risks.
  - Iraq: assessed as at risk due to upward revisions in medium-term debt outlook by about 20–30 percentage points of GDP.
  - Algeria and Morocco: fiscal space eroded because of more elevated debt levels (Algeria, Morocco) or higher medium-term adjustment needs (Morocco).
- Countries with some or substantial fiscal space at the current juncture:
  - Oil importers: Armenia, Georgia.
  - Oil exporters: Azerbaijan, Kazakhstan, Kuwait, Qatar, Saudi Arabia, Turkmenistan, United Arab Emirates.
- Most countries with no fiscal space are expected to see real GDP contract by 5–13 percent in 2020.

### Baseline Fiscal Adjustments Sensitive to Growth Assumptions
- Mitigating debt sustainability concerns would require many countries to embark on strong and front-loaded fiscal consolidations.
- Such consolidations require an ambitious effort and a timely economic recovery; both could be muted or delayed if a second wave of COVID-19 occurs.
- The median projected fiscal adjustment over the next three years (measured as the cumulative ...) — (section continues in the source beyond the supplied excerpt).

*Source: International Monetary Fund — Regional Economic Outlook: Middle East and Central Asia, October 2020 (Chapter 3, “Fiscal Challenges from the Pandemic”).*

### 3. FISCAL ChALLENGES FROM ThE pANDEMIC

### 3. FISCAL ChALLENGES FROM ThE pANDEMIC

### Projected fiscal adjustments and historical context
- Projected three-year cumulative fiscal adjustments (2021–23):
  - MENAP oil importers (excluding Sudan): 3.6 percent of GDP (change in primary balance).
  - MENAP oil exporters: 5.8 percent of non-oil GDP (cumulative change in non-oil primary balance).
  - CCA oil importers: 4.1 percent of GDP.
  - CCA oil exporters: 1.3 percent of non-oil GDP.
- These projections mostly reflect:
  - Increases in projected revenue growth in oil importers.
  - Declines in expenditure-to-GDP ratios in oil exporters, driven by a projected strong recovery in non-oil GDP (subject to sizable uncertainties).
- Historical comparison:
  - The assumed three-year adjustment for oil importers lies on the upper quartile of the distribution of past adjustments, implying that historically the expected consolidations are undertaken between 10 and 25 percent of the time.
  - Among oil exporters, this upper-quartile placement appears to apply to Iraq and Kazakhstan.
- Cautions in interpretation:
  - The fiscal-adjustment measure does not account for cyclical changes to the fiscal balance; sharp deteriorations in 2020 inflate adjustments in subsequent years.
  - Projected fiscal paths partly reflect improvements through automatic stabilizers because of the assumed strong rebound after the crisis.
  - Fiscal policies in oil exporters remain highly susceptible to volatile oil prices.
- Institutional context:
  - Regional fiscal institutions are relatively weak (October 2019 Regional Economic Outlook: Middle East and Central Asia), implying potentially large gains from improving MTFFs and debt management.

### Downside risks and strategic priorities
- Significant downside risks to projected fiscal improvements include a delayed or weaker-than-expected economic recovery.
- Policy priorities:
  - Protect public health and support the most vulnerable.
  - Mitigate fiscal risks, particularly those stemming from the crisis, to prevent further deterioration of fiscal space.
  - Adopt additional growth-friendly and equitable policies to expand fiscal space through efficiency gains.

### Mitigate fiscal risks and improve debt management (policy recommendations)
- Embed COVID-19-related fiscal support into a medium-term fiscal framework (MTFF) to:
  - Make the extent and impact of support transparent.
  - Account for the full cost of support, including potential contingent liabilities.
  - Anchor plans for gradual unwinding of crisis support, while avoiding premature withdrawal of targeted support.
- Enhance fiscal risk monitoring and disclosure:
  - Add fiscal risk statements into budgets, including stocktaking of new contingent liabilities from COVID-19 measures (for example, government loans or guarantees).
- Strengthen debt management offices and market communication:
  - Increase outreach to gauge market sentiment and timing for issuances.
  - Revise debt management strategies to prepare for sudden changes in market conditions (example cited: Egypt).
- Expected benefits:
  - Developing and improving MTFFs and strengthening debt management can yield particularly large gains in the region because of relatively weak fiscal institutions.

### Expand fiscal space and spur an inclusive recovery (policy recommendations)
- Short- and medium-term priorities:
  - Continue fiscal support for vulnerable households and viable companies in sectors facing economic scarring.
  - Prepare plans to restore taxpayer compliance (address extended deadlines, limited staff availability, surge in support requests).
  - Scale up revenue-administration capacity in anticipation of increased workloads.
- Revenue-side measures:
  - Strengthen progressivity of the tax system.
  - Curb broad-based tax and fee exemptions that disproportionately benefit those with capacity to pay.
  - Consider temporary social solidarity taxes if longer provision of targeted support is needed.
- Expenditure-side measures:
  - Improve spending efficiency, including:
    - Gradually lifting fuel subsidies.
    - Rationalizing public wage bills.
    - Reorienting spending within existing budgets and reducing nonpriority spending to make room for social protection, education, and health.
- Structural and governance reforms:
  - Adopt fiscal rules and continue reforms to curb corruption and improve governance.
  - Fiscal rules can reduce fiscal procyclicality; only one-third of countries in the region have enacted fiscal rules.
  - Well-designed fiscal rules that decouple expenditure from revenue (and, for oil exporters, from oil prices), alongside strengthened public financial management, can help rebuild buffers.
- Social inclusion and labor market measures:
  - Ensure medium-term priority on inclusive recovery given expected rises in poverty and inequality.
  - Where fiscal space exists and scarring is large, consider a temporary stimulus once the health crisis recedes.
  - In countries with limited policy space, focus on protecting the vulnerable and improving efficiency.
  - Expand spending to provide universal access to healthcare and education and facilitate labor reallocation via job retraining.
- Digitalization and social safety nets:
  - Strengthen targeting and digital delivery of transfers and government services to improve efficiency and coverage.
  - Prioritize automatic transfers on digital platforms where bank and phone coverage allow and use phone coverage to scale official registries.

### Fiscal space assessment framework (methodology and benchmarks)
- Fiscal space defined as the room for undertaking discretionary fiscal policy without endangering market access and debt sustainability.
- Assessment approach: four-stage framework (Initial state; Fiscal sustainability; Analysis of discretionary fiscal policy in a dynamic model; Country team bottom-line assessment).
- Benchmarks used (indicative; correspond to Debt Sustainability Framework for Market Access Countries):
  - Sovereign spreads:
    - Below 200 (400) basis points (bps) for low risk (green);
    - Between 200 and 600 (400 and 600) bps for medium risk (orange);
    - Above 600 (600) bps for high risk (red) for emerging markets (advanced economies).
    - Values correspond to latest three-month average spread and average spread over past five years.
  - Share of public debt in foreign currency (emerging markets only): below 20 bps (green); between 20 and 60 bps (orange); above 60 bps (red).
  - External financing requirements as a share of GDP:
    - Below 5 (17) bps for low risk (green);
    - Between 5 and 15 (17 and 25) bps for medium risk (orange);
    - Above 15 (25) bps for high risk (red) for emerging markets (advanced economies).
  - Debt burden indicators:
    - Does the debt level breach the benchmark during the projection period? No/green (yes/red) if below (above) 70 for emerging markets and 85 for advanced economies.
  - Public gross financing needs over the projection period:
    - Green if below 15 percent of GDP for emerging markets (20 percent for advanced economies); red if above.
  - Realism of fiscal adjustment needs:
    - Because of data limitations on cyclically adjusted balances, three-year adjustment in primary balance as a share of GDP is used, with the historic (2003–19) upper quartile applied as the threshold for green and red.

### Reaching informal workers: digital solutions and country examples
- Challenge: Reaching informal workers has been a major implementation challenge for coronavirus-related support.
- Digital innovations have expanded coverage and targeting:
  - Morocco:
    - Combination of mobile payments for RAMED medical insurance beneficiaries and online cash claims for those who do not qualify.
    - RAMED payments ranged from 800–1,200 dirhams (US$80–$120), depending on household composition.
    - As of April this year, the program had reached 85 percent of eligible households in the informal sector.
    - Direct cash transfers have also been extended to informal workers in Jordan and Tunisia (footnote).
  - Pakistan:
    - Developing digital infrastructure to better identify households (National Socio-Economic Registry underway).
    - The one-window registry Ehsaas-Emergency Cash Program developed to assist beneficiaries and reduce duplication and abuse.
    - The National Socio-Economic Registry database completion is expected by June 2021 (footnote).
  - Togo (outside the region):
    - NOVISSI mobile cash-transfer program launched in April.
    - State grant of at least 30 percent of the minimum wage; payouts from 10,500 CFA francs (US$18) to 20,000 CFA francs (US$34).
    - Based on program data, 65 percent of beneficiaries are women.
    - In total, 1.4 million individuals have registered, and nearly 600,000 have received a NOVISSI payment.
- Wider implications:
  - Digital delivery minimizes human interaction during a pandemic and can improve donor and government transfer implementation (examples: Eswatini moving elderly payments to electronic funds transfers; The Gambia using existing databases for donor cash transfers).
  - When designing support for informal workers, governments could incentivize formalization to boost the tax base when recovery takes hold.
  - Informality is especially large in CCA, where the informal economy represents more than 40 percent of GDP on average; formalization gains could be substantial (example: Armenia).

*International Monetary Fund | October 2020*

### Box 3.2. Recent Innovative Digital Solutions to Expand Social Protection

### Box 3.2. Recent Innovative Digital Solutions to Expand Social Protection

### Financial Stability before the Pandemic
- Banking systems in most MCD countries strengthened over the past decade and mostly recovered from the 2014–15 oil crisis.
- Key pre-pandemic characteristics:
  - Heterogeneous banking systems: total assets of oil exporters in MENAP were about 110 percent of GDP; CCA banking system assets were approximately 50 percent of GDP.
  - Adequate capital buffers: CARs at end-2019 were well above regulatory requirements in the region, except in Iran and Lebanon.
    - CARs were above 20 percent in the CCA.
    - MENAP oil exporters had CARs above 16 percent.
    - MENAP oil importers had CARs of about 12 percent.
  - NPL improvement: overall NPL ratio in MCD reached 5.2 percent at the end of 2019, almost half the value at the end of 2010.
  - Rising credit to government: net domestic credit to government expanded rapidly over the past decade, mainly in MENAP, creating strong balance sheet linkages between the public sector and banks.
  - Slowing private sector credit before the pandemic: credit growth began slowing toward the end of 2017; the credit gap in the three MCD subregions turned negative in 2019.

### A Shock Like No Other — Channels and Stress Test Approach
- The pandemic caused severe disruption to domestic and regional economic activity, disproportionately affecting SMEs.
- Preliminary Q1 2020 data for seven MCD countries did not show deterioration of financial soundness indicators except:
  - Lebanon: NPL ratio increased to 20 percent.
  - Bahrain, Georgia, Oman, United Arab Emirates: profitability deteriorated.
- The chapter conducts a forward-looking, streamlined macro-level stress test focusing on credit and foreign exchange risks as propagation channels.
- The stress test purpose: provide a concise picture of balance sheet repercussions from the recession without the many assumptions required for a full scenario.

### Stress Test Results and Implications
- Estimated total losses from asset impairment in MCD banking systems: $190 billion (5 percent of GDP).
  - CCA losses: $10 billion, or up to 2 percent of GDP.
  - MENAP oil importers losses: $30 billion, or 3 percent of GDP; several countries could see CARs drop below the Basel regulatory minimum of 8 percent because of weaker initial CARs and large increases in NPLs.
  - MENAP oil exporters losses: $150 billion, or 6 percent of GDP; capital would remain above 8 percent in all MENAP oil exporters except Iran.
- Recapitalization costs (to bring average capital to the Basel minimum of 8 percent) could amount to $40 billion at the MCD level:
  - Concentrated in MENAP oil importers: $8 billion, or 1 percent of GDP.
  - Iran: $33 billion, or 6 percent of GDP.
- Caveats and reasons actual costs may be higher:
  - Distribution of CARs within countries may require injections to specific banks even if aggregate results pass.
  - Several jurisdictions have minimum CAR requirements higher than the 8 percent threshold used.
  - Even jurisdictions not requiring immediate capital injections will likely need several years to absorb the shock and bring NPLs back to precrisis levels, implying prolonged impaired credit provision.
- Foreign exchange depreciation scenario:
  - Assumed 30 percent FX depreciation leads to a 1 percent drop in CARs at the MCD level.
  - Aggregate impact limited due to small net open positions, small pool of FX loans to private sector in most countries, and important data gaps.

### Risks to the Outlook
- Risks remain tilted to the downside. Potential triggers that could escalate banking-sector impacts include:
  - Sudden removal of emergency support measures.
  - A new pandemic wave and higher persistence of the shock.
  - Large capital outflows accompanied by disruptive FX depreciations.
- Additional balance-sheet risks not included in the stress test:
  - Liquidity risks from capital outflows or sudden FX deposit withdrawals.
  - Headwinds to profitability from low interest margins, low credit demand, and losses on government securities from rising domestic rates.

### A Swift Policy Response — Measures Implemented and Effects
- Authorities across the region deployed supportive financial sector policies to ease credit provision and help banks absorb stresses.
- Policy responses included:
  - Reducing policy rates.
  - Lowering reserve requirements.
  - Mandating loan deferrals (often without interest or penalty).
  - Supplying liquidity to the banking system.
  - Loosening various regulatory requirements.
- Coverage and magnitude of responses:
  - Slightly fewer than 60 percent of MCD countries have loosened macro-financial policy.
  - The share of countries that eased countercyclical buffers: 16 percent in MCD versus 9 percent among emerging market and developing economies.
  - The fraction that loosened liquidity requirements: about 40 percent in the CCA versus 22 percent among emerging market and developing economies.
  - Some central bank packages were as large as 20 percent of GDP (United Arab Emirates).
- Country-specific measures included:
  - Reinforcing liquidity monitoring (Djibouti).
  - Developing pandemic-specific stress tests (Pakistan).
  - Postponing IFRS-9 implementation (Afghanistan).
  - Introducing FX swaps and broadening collateral for refinancing (Georgia).
  - Suspending provisioning requirements with payment moratoria (Algeria, Morocco).
  - Proactively asking banks to preemptively provision (Georgia).
- Support for SMEs: moratoriums on debt repayments, direct lending through public institutions, extension of guarantees.
- Preliminary assessment:
  - Macroprudential relaxation and liquidity provision may have helped slow procyclical credit contraction in MENAP and CCA and mitigate short-term asset impairment risks.
  - Liquidity support and payment deferrals helped postpone or prevent increases in NPLs.
  - Assessment remains preliminary given limited and lagging data; some vulnerabilities may materialize with a lag of a few quarters.

*International Monetary Fund | October 2020 — Box 3.2. Recent Innovative Digital Solutions to Expand Social Protection*

### 4. FINANCIAL STABILITY CONSIDERATIONS AMID ThE pANDEMIC

### 4. FINANCIAL STABILITY CONSIDERATIONS AMID ThE pANDEMIC

### Financial Conditions
- Financial conditions appear to have stabilized—in line with emerging markets—after initial tightening at the onset of the crisis (Figure 4.9).
- Sources and indicators cited: Bloomberg Finance L.p.; IMF staff calculations; haver Analytics.  
- Regional group definitions preserved: CCA = Caucasus and Central Asia; EM = emerging market economies; MENApOE = Middle East and North Africa oil exporters; MENApOI = Middle East and North Africa oil importers; MCD = Middle East and Central Asia; LBN = Lebanon; rhs = right-hand scale.

### Securing Financial Stability — Policy Trade-offs and Recommendations
- Policy objective: strike a careful balance between supporting the recovery through sustained provision of credit and preserving financial stability.
- Medium- and long-term repercussions of macroprudential relaxation should be carefully assessed, accounting for banking sector risks identified in the stress-testing exercise, including:
  - (1) further exacerbation of pre-COVID-19 vulnerabilities to banks’ balance sheets, including stronger bank-sovereign nexuses as MENAP countries are expected to increase domestic financing in 2020 (Chapter 3);
  - (2) state-owned banks’ large and increased exposure to poor quality loans of state-owned enterprises (Algeria, Iran, Iraq);
  - (3) potential evergreening of asset quality problems and increased NPLs in the future;
  - (4) lending to lower-quality borrowers and excessive credit risk taking, including through credit to sectors most affected by COVID-19 (leisure, airlines, auto, oil and gas) with muted prospects for recovery;
  - (5) easing of countercyclical capital buffers and capital and liquidity requirements in many countries (Figure 4.7).
- Specific recommendations:
  - Authorities should carefully calibrate the timing of any unwinding of financial sector support, including regulatory forbearance.
  - Authorities may implement further relaxation of macro-financial policies where capital and liquidity buffers still allow it, while encouraging appropriate loan provisioning or restructuring by banks.
  - Trade-offs associated with macroprudential relaxation should be considered case-by-case, given uncertainty about the economic outlook and the need to avoid procyclical effects; if lending or prudential constraints become binding, relaxation may need to speed up to avoid drying up of credit.
  - Coordinate more supportive macro-financial policy with other policy initiatives and communicate prudential and financial stability implications clearly.
  - Continue close tracking of external and exchange rate sustainability implications of supportive policies, especially in highly dollarized banking systems (Armenia, Georgia, Kyrgyz Republic, Tajikistan, Uzbekistan) and in countries with fiscal dominance.
  - Record NPLs transparently and set aside sufficient provisions immediately, reflecting effective riskiness of exposures, to preserve supervisory credibility.
  - Any further support to borrowers should be transparent, temporary, and targeted to avoid funding insolvent borrowers—with careful assessments of sectors permanently shrunk by the pandemic—and to align incentives with best credit risk management practices (Afghanistan, Algeria, Armenia, Azerbaijan, Georgia, Iran, Kazakhstan, Kyrgyz Republic, Pakistan).
  - Undercapitalized banks (Algeria, Azerbaijan, Iran, Lebanon, Libya, Mauritania, Pakistan, Tunisia) should be considered case-by-case; possible measures include a mix of private and official support—capital injections, emergency liquidity assistance, and guarantees—taking into account fiscal space, contagion risks, and enhanced supervision. If needed, they could be ring-fenced with a precise communication strategy to prevent contagion and maintain central banks’ and regulators’ credibility.
  - Government intervention should be the last resort, only to preserve financial stability. Where possible, recapitalization should be based on private sector investments to minimize moral hazard, and authorities should reverse public sector injections as soon as market conditions allow it.

### After the Crisis — Strengthening Institutions and Access to Finance
- As public emergency support is removed, regulators should:
  - Monitor developments and stand ready to preserve financial stability, beginning with less-effective programs.
  - Encourage banks to repair balance sheets progressively by strengthening liquidity and other financial soundness indicators, comply with pre-COVID-19 regulatory requirements, and rebuild buffers (Iraq, Iran, Pakistan).
  - Advance resolution of unviable, nonsystemic banks and reform of large state-owned banks (Iraq, Iran).
- Supervisory and institutional reforms:
  - The pandemic experience may prompt strengthening of risk-based supervisory frameworks (Algeria, Armenia, Georgia, Iran, Pakistan, West Bank and Gaza) and bank resolution frameworks (Georgia, Iran, Pakistan, West Bank and Gaza).
  - Insolvency frameworks have been improving, but there is room for streamlining insolvency proceedings to facilitate NPL resolution (Figure 4.10).
- Financial inclusion and access to finance:
  - Increasing access to financial services could enhance banks’ capacity to channel savings to productive uses.
  - Public support may boost household and SME financial inclusion in the MCD region, but benefits should be balanced with fiscal space.
  - Increasing financial inclusion should remain a priority during and after the pandemic (Box 4.2).
- IMF support:
  - Delivery of remote technical assistance has recently increased markedly to help countries address financial stability issues raised by the crisis.
  - Since April 2020, COVID-19-related technical assistance requests and delivery have focused on central bank risk management, top-down stress testing, and development of securities markets, among others.

### Macro-Level Stress Test — Assumptions and Scenario
- The stress test is a sensitivity analysis based on aggregate balance sheets for each MCD country; results exclude Iraq, Libya, Mauritania, Syria, Turkmenistan, and Yemen because of data limitations.
- Two shocks modeled:
  - Asset impairment:
    - Calibrated as a one-off reclassification of 15 percent of performing loans into the nonperforming loan (NPL) category.
    - New NPLs assumed provisioned at an average rate of 50 percent.
    - Countries with weaker asset quality and significant related-entity lending could face a larger shock.
  - Foreign exchange (FX) depreciation:
    - Calibrated as a one-off depreciation of 30 percent from the exchange rate level at the end of 2019 and applied to all MCD countries regardless of FX regime.
    - Indirect channel: calibrated as an increase of 6 percent in FX NPLs, also provisioned at 50 percent.
- Scenario plausibility and outcomes:
  - The shocks calibration produces a post-shock NPL ratio for the MCD region of approximately 16.5 percent, or a tripling of the aggregate NPL ratio.
  - The calibrated shock is lower than what some countries experienced after the global financial crisis and lower than the 22 percent ratio found as the NPL average in crisis episodes with elevated NPLs (Ari, Chen, and Ratnovski 2019).
  - Given the pandemic’s macroeconomic shock is several standard deviations worse than previous shocks, the scenario may have considerable downside risks and prove optimistic.
  - The FX component is less likely to materialize in countries with a fixed FX regime and stable fundamentals to sustain it.
- Interpretation note: Aggregate ratios in the stress test can be interpreted as weighted averages across banks.

### Small and Medium-Sized Enterprises’ Financial Inclusion (Box 4.2)
- Key facts:
  - SMEs represent about 95 percent of all registered firms and employ about half of the region’s total labor force.
  - SME access to finance in the MCD region is the lowest in the world, with only 7 percent of total bank lending.
- Macro benefits of reducing the SME financial inclusion gap:
  - Could increase economic growth and job creation.
  - May enhance the effectiveness of fiscal and monetary policy.
  - Under adequate supervisory and regulatory frameworks, could contribute to financial stability.
  - Capital markets and fintech could facilitate greater SME financial inclusion by supplying bank credit or offering new financing channels.
- Pre-pandemic public interventions to support SME inclusion:
  - Public credit guarantee programs (PCGs), state-owned or development banks, interest rate regulations, and tax incentives.
  - Best practices and risks of PCGs:
    - Well-designed PCGs can reduce collateral requirements and credit risk for lenders but should have sound governance and transparent reporting.
    - Risks include misallocation of resources, moral hazard, and transfer risks to the public sector; fiscal risks related to PCGs should be closely monitored.
    - PCGs are funded by public institutions, including state banks or foreign donors (Algeria, Jordan, West Bank and Gaza) or by public and private institutions (Egypt, Lebanon, Morocco, Tunisia).
  - Development banks play a role (examples: Jordan, Tunisia, Armenia), but international experience raises concerns about lack of diversification, poor asset quality, and regulatory forbearance.
  - Interest rate caps can reduce SME lending; interest rates should be set on a commercial basis but could be subsidized using fiscal resources where fiscal space is available.
  - Relaxing prudential requirements (e.g., changing risk weights) is discouraged as it may jeopardize financial stability and its effectiveness is not established.
- Supporting SME credit supply during COVID-19:
  - SME vulnerabilities: lower cash buffers, informality, higher risk of closure even if illiquid rather than insolvent.
  - Policy channels to ease financing constraints where fiscal space allows:
    - Expand PCGs to limit lenders’ potential credit losses.
    - Timely, temporary, and targeted fiscal measures to help viable firms, including in informal sectors, through institutions that serve these groups (microcredit institutions, informal sector organizations).
    - Central banks can provide term funding to eligible financial institutions at a cost consistent with policy rates (potentially below market funding costs).
    - Central banks can finance government-backed special purpose vehicles’ acquisition of loans (taking the vehicles as collateral).
    - Combine grants with a temporarily higher future corporate tax rate (text truncated in source).

### Key Statistics Preserved Exactly from Source
- 15 percent (reclassification of performing loans into NPLs in stress test).
- 50 percent (average provisioning rate for new NPLs in stress test).
- 30 percent (one-off FX depreciation in stress test).
- 6 percent (increase in FX NPLs in stress test).
- approximately 16.5 percent (post-shock NPL ratio for the MCD region).
- tripling (the aggregate NPL ratio under the calibrated shock).
- 22 percent (NPL average in crisis episodes referenced from recent paper).
- SMEs represent about 95 percent of all registered firms.
- SMEs employ about half of the region’s total labor force.
- only 7 percent of total bank lending (SME lending share in MCD).

*International Monetary Fund | October 2020*

### Box 4.2 (continued)

### Box 4.2 (continued)

### SME Policy Responses in MCD Countries
- Policy types implemented (as summarized in Figure 4.2.3):
  - Deferral of taxes
  - Moratorium on debt repayments and/or loan reprofiling
  - Extended/simplified loan guarantee provisions
  - Direct lending through public institutions
  - Grants & subsidies
  - Interest rate caps on bank loans
  - Other central bank measures to boost lending
  - Other measures
- Country examples of specific measures:
  - Deferral of taxes: Algeria, Kazakhstan, Kyrgyz Republic, Qatar
  - Moratorium on debt repayments: Djibouti, Iran, Iraq, Kuwait, Oman, Qatar, West Bank and Gaza
  - Extended provision of loan guarantees: Bahrain, Kazakhstan, Pakistan
  - Other measures (mentioned in text): various central bank and fiscal supports across MCD countries
- Note: The size of the columns in Figure 4.2.3 reflects the number of countries that implemented each policy. Sources for the figure: Announcements by national authorities; IMF Policy Tracker; and IMF staff calculations. Note abbreviations: CCA = Caucasus and Central Asia; MENAPOE = Middle East and North Africa oil exporters; MENAPOI = Middle East and North Africa oil importers. Country abbreviations are ISO country codes.

### Assessment and Recommendations
- Many of the SME measures taken by MCD countries are "in the right direction" and align with experiences elsewhere.
- Fiscal and financial considerations:
  - All these policies would require new expenditures or may generate contingent liabilities.
  - Therefore, they must be temporary, targeted, and transparent.
  - Careful consideration of fiscal space is warranted (see Chapter 3).
- Policy design notes:
  - Certain measures (e.g., temporary subsidized loans that lower borrowing costs and induce self-selection of firms) can act as an equity injection for SMEs (cited: Blanchard, Philippon, and Pisani-Ferry 2020).
  - As the crisis abates, additional support should be withdrawn smoothly.
- Longer-term recommendation:
  - To support economic recovery, MCD countries should continue reforms aimed at expanding SME financial inclusion by developing adequate institutions and improving the business environment.
  - Lasting SME financial inclusion could be a key source of sustainable and inclusive growth over the medium term.

### Selected Economic Indicators — MENAP Region (selected highlights)
- MENAP (Percent of GDP, unless otherwise indicated)
  - Average 2000–16; 2017; 2018; 2019; Projections 2020; 2021
  - Real GDP (annual growth): 4.62; 2.4; 1.8; 0.9; 24.4; 2.9
  - of which non-oil growth: 5.62; 2.8; 2.4; 2.4; 23.9; 2.7
  - Current Account Balance: 7.3; 20.6; 3.1; 0.9; 23.6; 22.6
  - Overall Fiscal Balance: 2.2; 25.6; 22.7; 24.1; 10.3; 27.6
  - Inflation (year average; percent): 6.8; 7.2; 8.9; 7.3; 9.5; 9.9
- MENAP oil exporters
  - Real GDP (annual growth): 4.8; 1.5; 0.4; 20.3; 26.6; 3.4
  - of which non-oil growth: 6.0; 2.0; 1.3; 2.1; 25.8; 3.4
  - Current Account Balance: 10.7; 1.8; 6.6; 3.2; 23.4; 22.0
  - Overall Fiscal Balance: 4.8; 25.2; 21.2; 23.0; 21.1; 27.7
  - Inflation (year average; percent): 6.5; 3.5; 8.0; 6.6; 7.5; 8.4
- MENAP oil exporters excl. conflict countries and Iran
  - Real GDP (annual growth): 5.2; 20.3; 1.6; 1.1; 26.5; 2.4
  - of which non-oil growth: 6.8; 1.8; 2.0; 2.7; 26.1; 3.2
  - Current Account Balance: 12.6; 1.3; 6.9; 3.9; 23.7; 22.3
  - Overall Fiscal Balance: 6.0; 25.5; 21.0; 22.3; 10.7; 27.4
  - Inflation (year average; percent): 3.5; 0.9; 2.2; 20.9; 1.7; 2.8
- GCC (Of which)
  - Real GDP (annual growth): 4.7; 20.2; 1.9; 0.7; 26.0; 2.3
  - of which non-oil growth: 6.4; 2.1; 1.7; 2.4; 25.7; 2.9
  - Current Account Balance: 14.3; 2.8; 8.6; 5.8; 21.8; 0.4
  - Overall Fiscal Balance: 7.6; 25.6; 21.5; 22.0; 29.2; 25.7
  - Inflation (year average; percent): 2.9; 0.2; 2.2; 21.5; 1.5; 2.9
- MENAP oil importers
  - Real GDP (annual growth): 4.3; 3.9; 4.1; 2.8; 21.0; 2.2
  - Current Account Balance: 22.6; 26.8; 26.7; 25.8; 24.1; 24.4
  - Overall Fiscal Balance: 25.9; 26.6; 26.9; 27.3; 27.9; 27.3
  - Inflation (year average; percent): 7.3; 14.1; 10.3; 8.6; 12.6; 12.3
- MENA and Arab World aggregates (selected lines)
  - MENA Real GDP (annual growth): 4.6; 2.0; 1.2; 0.8; 25.0; 3.2
  - MENA Inflation (year average; percent): 6.7; 7.7; 9.7; 7.5; 9.4; 10.1
  - Arab World Real GDP (annual growth): 4.8; 1.6; 2.4; 2.0; 25.0; 3.2
  - Arab World Inflation (year average; percent): 4.7; 7.3; 6.2; 2.7; 6.2; 7.1
- Notes on coverage and data:
  - 2011–21 data exclude Syrian Arab Republic.
  - Fiscal year references for specific countries are provided in the source notes.
  - MENAP oil exporters: Algeria, Bahrain, Iran, Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia, the United Arab Emirates, and Yemen.
  - GCC countries: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates.
  - MENAP oil importers: Afghanistan, Djibouti, Egypt, Jordan, Lebanon, Mauritania, Morocco, Pakistan, Somalia, Sudan, Syria, Tunisia, and West Bank and Gaza.
  - Arab World membership list provided in source notes.

### Selected Economic Indicators — CCA Region (selected highlights)
- CCA (Percent of GDP, unless otherwise indicated)
  - Real GDP (annual growth): 7.3; 4.1; 4.3; 4.8; 22.1; 3.9
  - Current Account Balance: 0.2; 22.3; 0.2; 21.5; 24.1; 23.8
  - Overall Fiscal Balance: 1.6; 22.8; 1.9; 0.5; 24.9; 23.3
  - Inflation (year average; percent): 9.0; 9.1; 7.9; 6.6; 7.6; 6.4
- CCA oil and gas exporters (Azerbaijan, Kazakhstan, Turkmenistan, Uzbekistan)
  - Real GDP (annual growth): 7.5; 3.8; 4.2; 4.6; 21.6; 3.5
  - of which non-oil growth¹: 7.9; 3.1; 3.9; 5.6; 21.6; 3.6
  - Current Account Balance: 1.5; 21.9; 1.4; 20.9; 23.3; 23.2
  - Overall Fiscal Balance: 2.4; 22.7; 2.5; 0.7; 24.6; 23.1
  - Inflation (year average; percent): 9.4; 9.8; 8.8; 7.0; 7.9; 6.8
- CCA oil and gas importers (Armenia, Georgia, the Kyrgyz Republic, Tajikistan)
  - Real GDP (annual growth): 6.0; 5.9; 5.1; 6.1; 25.0; 5.8
  - Current Account Balance: 28.8; 24.6; 28.1; 25.6; 21.0; 28.3
  - Overall Fiscal Balance: 23.0; 24.0; 21.9; 21.4; 27.1; 24.6
  - Inflation (year average; percent): 6.7; 4.4; 2.6; 3.8; 5.3; 3.9
- Notes:
  - Aggregate for Azerbaijan, Kazakhstan and Turkmenistan. Uzbekistan data for non-oil GDP is not available.

*Source: mreo1020-full-report - Box 4.2 (continued).*

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_Source: https://www.imf.org/-/media/files/publications/reo/mcd-cca/2020/october/english/mreo1020-full-report.pdf_