## Regional Developments and Outlook (Chapter 1 excerpt)

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### A Year Into the Pandemic: Overview and Current Position
- Recovery in the Middle East and Central Asia is expected to be long and divergent across countries, depending on the pandemic’s path, vaccine rollouts, underlying fragilities, exposure to tourism and contact-intensive sectors, and policy space and actions.
- Policymakers’ 2021 balancing act: continue saving lives and livelihoods, promote recovery, and preserve debt sustainability and financial resilience while advancing transformational reforms to build more inclusive, resilient, sustainable, and green economies.
- Regional and international cooperation are highlighted as key complements to strong domestic policies.

### Learning to Live with the Pandemic and Vaccination Rollouts
- Infection trends:
  - Second wave late in 2020 after summer easing; infections and deaths declined rapidly in early 2021 but were increasing again as of the report.
  - Eight countries reported new COVID-19 variants.
- Vaccination rollout groupings and timing:
  - Early inoculators: began vaccinations in December 2020 or January 2021; expected to inoculate a significant share of their population by end-2021 (includes GCC countries, Kazakhstan, Morocco).
  - Slow inoculators: 13 countries and territories (Afghanistan, Algeria, Djibouti, Egypt, Iran, Iraq, Jordan, Lebanon, Libya, Pakistan, Tunisia, Uzbekistan, West Bank and Gaza) started with limited coverage; generally not expected to inoculate a significant portion until at least mid-2022 barring additional efforts.
  - Late inoculators: 11 countries, especially LICs; short-term vaccination limited to COVAX doses (covers up to 20 percent of a country’s population); full vaccination not expected until 2023 at the earliest without further actions.
- Regional cooperation:
  - Hope Consortium (UAE) working on vaccine storage and distribution.
  - Vaccine Logistics Alliance expected to support delivery of two billion doses under COVAX this year.

### External Backdrop and Commodity Prices
- Global and trade developments:
  - Activity in advanced and major emerging market economies rebounded better than expected (April 2021 WEO, Chapter 1).
  - Global merchandise trade rebounded strongly in Q3 2020; service trade remained subdued.
- Oil prices and projections:
  - Oil prices fell to $27 per barrel in April 2020 and reached $67 per barrel in mid-March 2021.
  - $67 per barrel was about 4.5 percent above the 2019 average.
  - Oil futures curves indicate $57 per barrel at end-2021 and $53 per barrel in 2022, compared with the $64 per barrel 2019 average.
- Other commodities:
  - Non-fuel commodity prices, particularly food prices, rose substantially in H2 2020 and are expected to remain elevated in 2021.
  - IMF’s food price index is projected to rise by nearly 14 percent in 2021.
- Capital flows and financial conditions:
  - After outflows of at least $6 billion in H1 2020, inflows in the final six months of 2020 reached $4 billion; by end-February 2021 cumulative flows since the start of the pandemic had turned positive.
  - This trend was noted to have ended with recent increases in U.S. long-term bond yields.

### Policy Responses: Fiscal, Monetary, and Exchange Rate Actions
- Fiscal support:
  - Fiscal packages introduced averaged about 2 percent of GDP.
  - Some oil exporters absorbed additional health care costs within existing budgets.
- Monetary policy:
  - By end-August 2020 most central banks had cut policy rates.
  - After end-August 2020, five central banks cut rates further by 25 to 100 basis points (Armenia, Azerbaijan, Egypt, Tunisia, Uzbekistan).
  - Total cuts were especially deep in Pakistan (625 basis points) and Egypt (400 basis points).
  - Additional measures: reserve requirement cuts, loan repayment moratoriums, liquidity provision, use of capital conservation buffers, lowered liquidity requirements.
- Exchange rate and FX intervention:
  - Exchange rate flexibility absorbed part of the shock in Armenia, Georgia, Kazakhstan, Kyrgyz Republic, Morocco, Pakistan, Tajikistan, Tunisia.
  - FX intervention occurred in Armenia, Egypt, Georgia, Kazakhstan, Pakistan to reduce excessive volatility.

### Activity, Sectoral Dynamics, and Labor Markets
- Macroeconomic activity:
  - Activity more resilient in H2 2020; strong rebound in real GDP in Q3 2020 as lockdowns relaxed.
  - Purchasing managers’ indices returned to expansionary territory by mid-2020 in Qatar, Saudi Arabia, UAE; contraction in Egypt and weaker outcomes where lockdowns were reimposed (Lebanon).
- Remittances:
  - Workers’ remittances rebounded in Q3 2020 after a sizable drop in Q2 2020.
  - Initial decline in remittances in the CCA was larger than in MENA, influenced by seasonal employment patterns in Russia and ruble depreciation.
- Sectoral performance:
  - Contact-intensive sectors, smaller firms, and firms with weaker pre-pandemic fundamentals still not posting positive revenue growth.
  - Noncontact-intensive sectors and large firms recouped most pre-pandemic performance; wages in noncontact-intensive sectors resumed positive growth in Q3 2020.
  - Wages in contact-intensive sectors (absorbed more than 55 percent of pre-pandemic private sector employment in the region) fell dramatically in Q2 2020 and had not recovered by reporting.
  - Wages in state-owned enterprises grew in each of the first three quarters of 2020.
- Labor market outcomes:
  - Labor market conditions deteriorated significantly, especially for youth.
  - Examples: Kazakhstan: 5 percent (reference); Jordan: 25 percent (first-half spike).
  - Youth unemployment rates in Q4 2020: Morocco: nearly 32 percent; Tunisia: 36.5 percent; Jordan: 55 percent.
  - These youth unemployment rates were between 3 to 10 percentage points above precrisis levels for the cited countries.

### Fiscal Accounts and Public Finances
- Fiscal deterioration in 2020:
  - Fiscal deficits widened to 10.1 percent of GDP in 2020 for the MENA region.
  - Fiscal balance for the CCA fell to −5.6 percent of GDP from a surplus of 0.5 percent of GDP in 2019.
  - Government debt increased to 56.4 percent of GDP in MENA, from 47.6 percent in 2019.
  - Government debt increased to 33 percent of GDP in the CCA, from 25.9 percent in 2019.
  - More than one-third of countries in the Middle East and Central Asia have debt-to-GDP ratios above 70 percent of GDP, most in the MENA region.
  - Average public gross financing needs in 2021–22 in the region’s emerging markets expected to reach 37 percent of GDP in Bahrain and Egypt per year.
  - Median domestic amortization is high at about 10 percent of GDP per year.
- Banking sector and bank-sovereign links:
  - Banks entered the crisis with relatively strong balance sheets; capital positions remain comfortable.
  - Large share of gross public financing needs was financed by domestic banks in 2020, increasing banks’ claims on the public sector.
  - Continued reliance on domestic banks could lead to further crowding out of private credit.
- Current accounts and commodity effects:
  - Current account balances of oil exporters deteriorated due to lower oil prices and exports.
  - Current account deficits of oil importers improved (except Georgia), driven by collapse in domestic demand, import compression, lower import prices, and recovering remittances.
  - Increase in oil prices expected to improve oil exporters’ external position; current account balance projected to increase by $128 billion.
  - Oil importers’ current account deficit forecast to slightly widen due to higher oil prices and rising domestic demand.

### Divergent Recovery Paths and Vaccine Role
- 2021 growth revised upward since October 2020, but recovery paths diverge depending on vaccine rollouts, exposure to tourism and contact-intensive sectors, and policy space and actions.
- Early inoculators: 2021 growth revised up; GDP levels expected to reach 2019 levels in 2022.
- Slow and late inoculators: GDP levels expected to return to 2019 levels sometime between 2022–23.
- Countries with above-average fiscal support in 2020 expected to return to pre-pandemic GDP levels in 2022.
- Countries with below-average fiscal support expected to return to 2019 levels only in 2023.
- Amount of scarring expected largest for tourism-dependent countries and smallest for oil exporters.

### MENA, Pakistan, Afghanistan Outlook and Key Projections
- Real GDP growth:
  - MENA projected to pick up to 4.0 percent in 2021 (upgrade of 0.9 percentage point relative to October).
  - Pakistan and Afghanistan growth in 2021: 1.5 percent and 4.0 percent, respectively.
  - Over the medium term, real GDP expected to stay under precrisis projections by nearly 6 percentage points.
- Sectoral projections:
  - Non-oil GDP in GCC economies projected to expand by 3.3 percent in 2021.
  - Oil GDP projected to expand by 5.8 percent in 2021, primarily reflecting a +233 percent surge in Libya’s oil production after reopening of oil fields and ports in late 2020.
- Other near-term outcomes:
  - Recovery in oil importers projected sluggish with growth at 2.3 percent in 2021 (downgrade of 0.4 percentage point relative to October).
  - Lebanon is the only country in the region where activity is expected to contract further.
  - Sudan’s move toward the Heavily Indebted Poor Countries Decision Point and re-engagement expected to end prior contractions and bolster medium-term activity.
  - Inflation in the region forecast to increase to 12.8 percent in 2021.
  - Inflation expected to remain at double-digits in fragile and conflict-affected states (Lebanon, Libya, Sudan, Yemen).
  - With recovery, fiscal balances expected to improve due to higher revenues and expiration of pandemic measures; fiscal consolidation expected in Egypt, Iraq, Jordan, Oman, and Pakistan.

### Caucasus and Central Asia (CCA) Outlook and Key Projections
- Output in the CCA projected to rise by 3.7 percent in 2021, returning to its precrisis level because of strong 2020 policy support.
- Medium-term GDP levels expected to remain below precrisis projections by about 9 percentage points.
- Inflation in the CCA forecast to decelerate to 6.9 percent in 2021.
- Fiscal deficits in the CCA forecast to decline by 2.4 percentage points of GDP to 3.2 percent of GDP in 2021.
- External accounts expected to benefit from rebound in global demand, higher oil prices for oil exporters, and recovering remittances; tourism likely to remain a drag.
- Activity in oil and gas exporters projected to grow by 3.7 percent in 2021.
- Growth in parts of the region revised down significantly (Armenia, Georgia, Kyrgyz Republic) due to conflict, second waves, and weak tourism.

### Exceptional Uncertainty Around the Outlook and Scenarios
- Faster vaccine production and accelerated distribution could boost regional growth by roughly ¼ percentage point in 2021, accelerating to an additional ¾ percentage point in 2022.
- Vaccination cost assumption: $27 to fully vaccinate one person, based on a COVAX dose price of about $11 and including transportation, cold-chain storage, and supply and delivery costs.
- Risks:
  - New infections and variants could lead to renewed lockdowns; risk increases if vaccinations are delayed.
  - Rapid rise in US bond yields could tighten global financial conditions, cause renewed capital outflows, and higher sovereign spreads.
  - Portfolio flows to the region historically almost twice as sensitive to changes in global uncertainty.
  - Sovereign–bank nexus: tighter conditions could raise governments’ reliance on domestic bank financing, crowding out private credit.
  - Social risks: rise in social unrest due to lockdown fatigue, economic impacts, food insecurity, and unequal recovery.

### Policy Guidance: Managing the Crisis and Accelerating Recovery
- Immediate priorities:
  - Save lives and livelihoods; improve vaccine distribution; ensure health systems are resourced; targeted local restrictions as needed.
- Policy stance by fiscal space:
  - Countries with some fiscal space (some CCA countries: Azerbaijan, Kazakhstan, Turkmenistan; some oil exporters: Kuwait, Qatar, UAE; Mauritania; Morocco):
    - Maintain policy flexibility; well-targeted support until recovery entrenched; use space to rebuild buffers if recovery stronger than expected.
  - Countries without fiscal space:
    - Balance support to preserve debt sustainability; fiscal consolidation to begin in 2021 partly from expiring measures and recovering revenues.
    - Consolidation anchored on credible medium-term fiscal plan: improve revenue mobilization (reining in tax exemptions, broadening tax base), higher spending efficiency, gradually eliminate subsidies, contain high wage bills.
    - Expenditure reprioritization to meet short-term needs; new targeted lifelines balanced with offsets.
    - Bolster debt management to address liquidity, rollover and refinancing risks, expand investor base, monitor and prevent contingent liabilities.
- Targeting and delivery:
  - Further support should be well targeted, fairly distributed, and focused on the post-COVID-19 economy.
  - Explore proxy-means testing, mobile money, in-kind transfers, cross-matching beneficiary databases, community-based methods.
  - For firms, limit support to market failures and level playing field between SOEs and private sector; encourage vocational training and hiring incentives.
- Monetary, fiscal, and financial complementarities:
  - Consider fiscal space, monetary transmission effectiveness, and financial conditions when choosing further monetary versus fiscal measures.
  - For countries with flexible exchange rates and well-anchored inflation expectations (some CCA countries and Egypt), central banks should remain accommodative but monitor inflation and tightening financial conditions.
  - Exchange rate flexibility can buffer shocks; monitor balance sheet effects, especially in highly dollarized CCA countries.
- Financial sector exit strategy:
  - Gradual exit from targeted support; continue liquidity support to distressed but viable borrowers; monitor loan performance and corporate leverage.
  - Mitigate banks’ overexposure to sovereign and pursue debt market development.
- Global and regional vaccine cooperation:
  - Redistribute excess supplies under COVAX; bolster COVAX funding and coverage; improve vaccine contract transparency.
  - Regional sharing of expertise, equipment, and surplus vaccines to help low-income and fragile states.
- IMF engagement:
  - IMF supported the region with more than $17 billion in financing in 2020 and will remain a partner through financing, technical assistance, policy advice, and coordination.

### Building Forward Better: Structural and Long-Term Priorities
- Reform priorities:
  - Tackle inequality, poverty, and corruption; promote private sector jobs; address climate change; improve governance.
  - Pursue growth-friendly, medium-term fiscal frameworks with fair tax contributions and a new social contract emphasizing private sector jobs, governance, transparency, and accountability.
  - Reform large public sector and SOEs; labor market reform to reduce distortions favoring public sector jobs and reduce informality.
  - Streamline rules and strengthen anti-corruption frameworks.
- Social spending and safety nets:
  - Boosting efficiency of social spending, even without increasing spending, could help close up to one-third of the region’s Human Development Index gap (IMF research).
  - Expand targeted and conditional social assistance; reassess emergency registries; enhance social protection responsiveness.
  - Promote financial access and invest in internet infrastructure to enable wide-reaching, well-targeted safety nets.
- Climate and green transition:
  - Urgent adaptation priorities and investment in climate-resilient infrastructure due to extreme heat events and water stress.
  - Oil exporters face transition challenges away from oil dependence.
  - Rebuild financial buffers, diversify economically and fiscally, mitigate negative distributional impacts.
  - Use recovery programs, public spending, and regulations to mitigate climate shocks; green transition can offer employment and investment opportunities.

### Government Debt, Financing Risks, and Bank–Sovereign Linkages
- Pre-pandemic vulnerabilities:
  - By end-2019, one-third of countries had government debt ratios above 70 percent of GDP; five faced public gross financing needs above 15 percent of GDP.
  - Lebanon in default; three LICs in debt distress (Somalia, Sudan, Yemen); four at high risk of debt distress (Afghanistan, Djibouti, Mauritania, Tajikistan).
- Debt holder structure and bank exposure:
  - Domestic banks accounted for 81 percent of domestic debt (excluding central bank holdings) in many emerging markets in the region.
  - Before COVID-19, domestic banks’ exposure to sovereign exceeded 20 percent of total banks’ assets in Iraq, Jordan, Qatar; above 45 percent in Algeria, Egypt, Pakistan; up to 60 percent in Lebanon.
- Pandemic-driven fiscal deterioration:
  - Compared with pre-pandemic forecasts, primary deficits widened, on average, by 7 percent of GDP in 2020.
  - Combination of higher deficits and economic contraction led to an average increase of 9 percentage points in the debt-to-GDP ratio.
  - By end-2020, thirteen countries had government debt exceeding 70 percent of GDP (compared with nine by end-2019).
  - Fourteen countries, compared with five pre-pandemic, had public gross financing needs exceeding 15 percent of GDP.
- 2020 financing composition and market access:
  - Domestic banks covered more than 50 percent of public gross financing needs in Bahrain, Egypt, Jordan, Pakistan, Tunisia.
  - Including central bank financing, banking sector share also exceeded 50 percent in Armenia, Iraq, Lebanon.
  - One-third of countries tapped international markets; ten countries tapped markets since early 2020 (Armenia, Bahrain, Egypt, Jordan, Morocco, Oman, Qatar, Saudi Arabia, UAE, Uzbekistan), representing 26 percent of emerging market issuances and on average accounting for 20 percent of public gross financing needs.
  - Nonresident participation in local currency government debt markets remained negligible in most countries; Egypt and Pakistan experienced heavy foreign outflows in March–May 2020 (amounting to more than $15 billion and $2.5 billion, respectively).
- LICs response:
  - Median increase in the primary deficit for LICs in the region was 2 percent of GDP in 2020.
  - LICs relied on official and central bank financing; official creditors hold about 80 percent of government debt in LICs, with about 45 percent of external government debt owed to non–Paris Club creditors.
  - International support included $1.7 billion in IMF financing to LICs in the region and $3.9 billion from other official donors; additional relief from DSSI, IMF Catastrophe Containment and Relief Trust, and HIPC relief in Somalia.

### Government Debt Structure by Creditor and 2021–22 Financing Aggregates
- ME&CA emerging markets: overall public gross financing needs of $1,070 billion during 2021–22; financed by $862 billion from domestic creditors and $208 billion from external sources.
- GCC: $248 billion overall; $130 billion domestic; $118 billion external.
- ME&CA-LICs: $29 billion overall; $11 billion domestic; $19 billion external.
- Memorandum items:
  - ME&CA: $1,100 billion overall; $873 billion domestic; $227 billion external.
  - MENA: $919 billion overall; $735 billion domestic; $185 billion external.
  - CCA: $27 billion overall; $15 billion domestic; $11 billion external.
- Average public gross financing needs during 2021–22 expected to remain higher than 15 percent of GDP in most emerging markets in the region.
- Median external debt amortization is about 4 percent of GDP; domestic amortization elevated in some countries, above 15 percent of GDP in Bahrain, Egypt, Pakistan.

### Stress Scenario and Simulated Impacts
- Combined shocks examined:
  - Yields (domestic and external) shocked by 200 basis points; rollover shock assuming only one-half of maturing external bonds rolled over during 2021–22.
  - Delayed fiscal adjustment: planned consolidation delayed by one year.
- Simulated impacts:
  - Under combined scenario, average public gross financing needs during 2021–22 would increase by about 3 percent of GDP.
  - Assuming additional needs funded by domestic banks, four governments (Egypt, Oman, Pakistan, Tunisia) would absorb an additional 10 to 23 percent of banks’ assets as government debt during 2021–22.
  - Intensified sovereign-bank linkages would reduce banks’ capacity to lend to the private sector.

### Policy Implications and Recommended Reforms (Debt Markets, Banks, and Macroeconomic Policy)
- Fiscal and debt management:
  - Implement policies to reduce elevated public gross financing needs and mitigate concentration of bank exposure to sovereign.
  - Strong medium-term debt management strategy and transparent communication with markets.
  - Coordinate debt management, monetary, fiscal, and regulatory authorities on domestic markets’ absorption capacity and policy impacts on sovereign borrowing.
  - Market-access countries should proactively mitigate rollover/refinancing risks including liability management operations as needed.
- Domestic capital markets and investor base development:
  - Address structural excess bank liquidity inhibiting money market development.
  - Increase domestic savings in long-term instruments; establish deep and liquid secondary markets and larger benchmark securities.
  - Expand investor base (institutional investors, retail participation), nonbank financing sources, and instrument variety (floating rate, inflation-linked, sukuk, green securities).
  - Attract nonresident participation supported by liquid secondary markets and inclusion in global indices.
- Financial sector measures:
  - Continue supporting credit while mitigating banks’ sovereign overexposure.
  - Encourage banks to recognize upfront losses while allowing time to rebuild capital buffers to avoid crowding out private credit.
  - Enhance transparency and disclosure to foster market discipline and reduce excessive sovereign holdings.
  - Over medium term, strengthen bank and sovereign balance sheets, improve governance, and develop alternative bank lending opportunities (including financial inclusion).
  - Consider time-variant “through-the-cycle” risk weights and capital requirements that increase with sovereign concentration to contain sovereign-bank nexus while minimizing procyclical effects.
- Support for LICs and fragile states:
  - Provide concessional resources (particularly grants) and debt relief under DSSI to support SDG progress.
  - Countries facing significant debt servicing difficulties could benefit from timely, orderly restructuring of commercial and bilateral debt, supported by the Common Framework on a case-by-case basis.

*International Monetary Fund | April 2021 — Regional Economic Outlook: Middle East and Central Asia (Chapter 1, text excerpt).*

### 1. Regional Developments and Outlook 1

### Regional Developments and Outlook

### A Year Into the Pandemic: Overview and Current Position
- A year into the COVID-19 pandemic, recovery in the Middle East and Central Asia is expected to be long and divergent across countries, depending on the pandemic’s path, vaccine rollouts, underlying fragilities, exposure to tourism and contact-intensive sectors, and policy space and actions.
- Policymakers face a balancing act in 2021: continue saving lives and livelihoods, promote recovery, and preserve debt sustainability and financial resilience while advancing transformational reforms to build more inclusive, resilient, sustainable, and green economies.
- Regional and international cooperation are highlighted as key complements to strong domestic policies.

### Learning to Live with the Pandemic and Multispeed Vaccination Campaigns
- Infection trends:
  - After easing of restrictions and rising mobility over the summer of 2020, the region experienced a resurgence (second wave) late in 2020. Infection and death rates declined rapidly in early 2021 but were again on an increasing path as of the report, with eight countries reporting new COVID-19 variants.
- Vaccination rollout groupings and timing:
  - Early inoculators: Most countries in this group (including Gulf Cooperation Council countries, Kazakhstan, and Morocco) began vaccinations in December 2020 or January 2021 and are expected to inoculate a significant share of their population by the end of 2021.
  - Slow inoculators: 13 countries and territories (Afghanistan, Algeria, Djibouti, Egypt, Iran, Iraq, Jordan, Lebanon, Libya, Pakistan, Tunisia, Uzbekistan, West Bank and Gaza) started inoculations with limited coverage and are generally not expected to inoculate a significant portion of their population until at least mid-2022 barring additional efforts.
  - Late inoculators: 11 countries, especially low-income countries (LICs), will likely experience prolonged vaccination rollouts; vaccination in the short term will be limited to doses provided by COVAX (covers up to 20 percent of a country’s population). Full vaccination for these countries is not expected until 2023 at the earliest without further actions.
- Regional cooperation examples:
  - Hope Consortium (UAE) is working on vaccine storage and distribution in the region.
  - Vaccine Logistics Alliance is expected to support delivery of two billion doses under COVAX this year.

### External Backdrop and Commodity Prices
- Global and trade developments:
  - Activity in advanced and major emerging market economies rebounded better than expected (April 2021 WEO, Chapter 1).
  - Global merchandise trade rebounded strongly in Q3 2020 while service trade remained subdued due to weakness in tourism and travel.
- Oil prices and projections:
  - Oil prices fell to $27 per barrel in April 2020 and reached $67 per barrel in mid-March 2021.
  - The $67 per barrel level was about 4.5 percent above the 2019 average.
  - Oil futures curves (EIA projections cited) indicate $57 per barrel at the end of 2021 and $53 per barrel in 2022, compared with the $64 per barrel 2019 average.
- Other commodities and food prices:
  - Non-fuel commodity prices, particularly food prices, rose substantially in the second half of 2020 and are expected to remain elevated in 2021.
  - The IMF’s food price index is projected to rise by nearly 14 percent in 2021.
- Capital flows and financial conditions:
  - Global financial conditions remained broadly accommodative due to low global interest rates and spreads, supporting sovereign issuances in the region.
  - After outflows of at least $6 billion out of the region in the first half of 2020, total inflows in the final six months of 2020 reached $4 billion; by end-February 2021 cumulative flows since the start of the pandemic had turned positive. This trend was noted to have ended with recent increases in U.S. long-term bond yields.

### Policy Responses: Fiscal, Monetary, and Exchange Rate Actions
- Fiscal support:
  - Fiscal packages introduced to cushion the pandemic’s impact averaged about 2 percent of GDP.
  - Many countries reprioritized spending; some oil exporters absorbed additional health care costs within existing budget envelopes.
- Monetary policy:
  - By end-August 2020, most central banks had cut policy rates.
  - After end-August 2020, five central banks cut rates further, ranging from 25 to 100 basis points (Armenia, Azerbaijan, Egypt, Tunisia, Uzbekistan).
  - Total cuts were especially deep in Pakistan (625 basis points) and Egypt (400 basis points).
  - Central banks also cut reserve requirements, encouraged loan repayment moratoriums, provided liquidity, permitted banks to use capital conservation buffers, and lowered liquidity requirements.
- Exchange rate and FX intervention:
  - Exchange rate flexibility absorbed part of the shock in several countries (Armenia, Georgia, Kazakhstan, Kyrgyz Republic, Morocco, Pakistan, Tajikistan, Tunisia), with partial reversals in some cases.
  - Foreign exchange intervention occurred in a few cases to reduce excessive volatility (Armenia, Egypt, Georgia, Kazakhstan, Pakistan).

### Activity, Sectoral Dynamics, and Labor Markets
- Macroeconomic activity:
  - Activity was more resilient in H2 2020 due to more targeted lockdowns with smaller mobility impacts, reflected in a strong rebound in real GDP in Q3 2020 as countries relaxed lockdown measures.
  - Purchasing managers’ indices returned to expansionary territory by mid-2020 in several oil exporters (Qatar, Saudi Arabia, UAE), but showed contraction in some oil importers (Egypt) and weaker outcomes where lockdowns were reimposed (Lebanon).
- Remittances:
  - Workers’ remittances rebounded in Q3 2020 after a sizable drop in Q2 2020, supported by improved growth in remittance-sending countries, accelerated switch to formal transfer channels, and incentives for electronic transfers (example: Pakistan).
  - The initial decline in remittances in the Caucasus and Central Asia (CCA) was larger than in MENA, influenced by seasonal employment patterns in Russia and ruble depreciation.
- Sectoral and corporate performance:
  - Recovery has been uneven across sectors and firms.
  - Contact-intensive sectors (particularly services and retail), smaller firms, and firms with weaker pre-pandemic fundamentals are still not posting positive revenue growth.
  - Noncontact-intensive sectors (for example, consumer goods and manufacturing) and large firms recouped most of their pre-pandemic performance; wages in noncontact-intensive sectors resumed positive growth in Q3 2020.
  - Wages in contact-intensive sectors, which absorbed more than 55 percent of pre-pandemic private sector employment in the region, fell dramatically in Q2 2020 and had not recovered by the time of reporting.
  - Wages in state-owned enterprises grew in each of the first three quarters of 2020, likely reflecting government support to SOEs and public employment.
- Labor market outcomes:
  - Labor market conditions deteriorated significantly across the region, especially for youth.
  - Unemployment rates remained persistently high in H2 2020 after spikes in H1 2020; country examples of unemployment outcomes:
    - Kazakhstan: 5 percent (reference point for range)
    - Jordan: 25 percent (upper example of the first-half spike)
  - Youth unemployment rates in Q4 2020:
    - Morocco: nearly 32 percent
    - Tunisia: 36.5 percent
    - Jordan: 55 percent
  - These youth unemployment rates were between 3 to 10 percentage points above precrisis levels for the cited countries.

### Fiscal Accounts and Public Finances
- Fiscal deterioration in 2020:
  - Fiscal accounts deteriorated sharply across the region in 2020 due to lower revenue from contracting domestic demand and the slump in oil prices, plus policy support measures.
  - Oil exporters recorded a larger deterioration in public finances than oil importers because of lower oil revenue.
  - For the MENA region, fiscal deficits widened to 10.1 percent of GDP in 2020.

*International Monetary Fund | April 2021 — Regional Economic Outlook: Middle East and Central Asia (Chapter 1).*

### 3.8 percent of GDP in 2019. For the CCA, the

### text - 3.8 percent of GDP in 2019. For the CCA, the

### Fiscal balances and public debt
- Fiscal balance for the CCA fell to −5.6 percent of GDP from a surplus of 0.5 percent of GDP in 2019.
- Government debt increased to 56.4 percent of GDP in the MENA region, from 47.6 percent in 2019.
- Government debt increased to 33 percent of GDP in the CCA, from 25.9 percent in 2019.
- More than one-third of countries in the Middle East and Central Asia have debt-to-GDP ratios above 70 percent of GDP, most of them in the MENA region.
- Public gross financing needs are also high (see Chapter 2).
- Average public gross financing needs in 2021–22 in the region’s emerging markets are expected to reach 37 percent of GDP in Bahrain and Egypt per year.
- Median domestic amortization is high at about 10 percent of GDP per year.

### Banking sector and bank-sovereign links
- Banks entered the crisis with relatively strong balance sheets and capital positions remain at comfortable levels.
- Full impact of the crisis on the banking sector is yet to be observed, given continued policy support and regulatory forbearance measures.
- A large share of gross public financing needs was financed by domestic banks in 2020, increasing banks’ claims on the public sector and, in some MENA countries, increasing such claims even in net terms (Chapter 2).
- Continued reliance on domestic banks to cover most budgetary financing obligations could lead to further crowding out of private credit.

### Current accounts and commodity effects
- Current account balances of oil-exporting countries deteriorated because of lower oil prices and exports.
- Current account deficits of oil importers improved (except for Georgia), driven by the collapse in domestic demand and associated import compression, lower import prices (particularly oil), and recovering remittances.
- The increase in oil prices is expected to markedly improve oil exporters’ external position; their current account balance is projected to increase by $128 billion.
- Oil importers’ current account deficit is forecast to slightly widen, due to higher oil prices and rising domestic demand.

### Divergent recovery paths and vaccine role
- 2021 growth was revised upward since October 2020, but recovery paths are diverging across the region depending on vaccine rollouts, exposure to tourism and contact-intensive sectors, and policy space and actions.
- Early inoculators revised 2021 growth up relative to October projections, with GDP levels expected to reach 2019 levels in 2022.
- Slow and late inoculators: GDP levels expected to go back to 2019 levels sometime between 2022–23.
- Countries with above-average fiscal support in 2020 are expected to return to pre-pandemic GDP levels in 2022.
- Countries with below-average fiscal support are expected to return to 2019 levels only in 2023.
- The amount of scarring is expected to be largest for tourism-dependent countries and smallest for oil exporters.

### MENA, Pakistan, and Afghanistan outlook
- Real GDP growth in the MENA region is projected to pick up to 4.0 percent in 2021, an upgrade of 0.9 percentage point relative to October.
- Pakistan and Afghanistan growth in 2021: 1.5 percent and 4.0 percent, respectively.
- Over the medium term, real GDP is expected to stay under precrisis projections by nearly 6 percentage points.
- Non-oil GDP in GCC economies is projected to expand by 3.3 percent in 2021.
- Oil GDP is projected to expand by 5.8 percent in 2021, primarily reflecting a +233 percent surge in Libya’s oil production after reopening of oil fields and ports in late 2020.
- Recovery in oil importers is expected to be sluggish in the near term, with growth projected at 2.3 percent in 2021—a downgrade of 0.4 percentage point relative to October.
- Lebanon is the only country in the region where activity is expected to contract further.
- Sudan’s move toward the Heavily Indebted Poor Countries Decision Point and re-engagement is expected to bring an end to the contraction in previous years and bolster medium-term activity.
- Inflation in the region is forecast to increase to 12.8 percent in 2021.
- Inflation expected to remain at double-digits in fragile and conflict-affected states (Lebanon, Libya, Sudan, and Yemen) driven by domestic macroeconomic instability.
- With recovery underway, fiscal balances expected to improve across the region due to higher revenues and expiration of pandemic-related measures; fiscal consolidation expected in some countries (Egypt, Iraq, Jordan, Oman, and Pakistan).

### Caucasus and Central Asia (CCA) outlook
- Output in the CCA region is projected to rise by 3.7 percent in 2021, returning to its precrisis level because of strong policy support in 2020.
- Medium-term GDP levels are expected to remain below their precrisis projections by about 9 percentage points.
- Inflation in the CCA is forecast to decelerate to 6.9 percent in 2021.
- Fiscal deficits in the CCA are forecast to decline by 2.4 percentage points of GDP to 3.2 percent of GDP in 2021.
- External accounts are expected to benefit from rebound in global demand, higher oil prices for oil exporters, and recovering remittances, while tourism will likely remain a drag.
- Activity in the region’s oil and gas exporters projected to grow by 3.7 percent in 2021.
- Libya’s earlier noted oil production surge is a driver of oil GDP expansion for the region overall.
- Growth in parts of the region revised down significantly (Armenia, Georgia, Kyrgyz Republic) due to conflict, pandemic second waves, and weak tourism.

*Source: IMF Regional Economic Outlook: Middle East and Central Asia, April 2021 (text excerpt).*

### 1.5 percentage points to 2.1 percent of GDP this

### 1.5 percentage points to 2.1 percent of GDP this year, mainly driven by improvement in oil and gas exporters, while the current account deficit of oil importers is set to remain broadly unchanged.

### Exceptional Uncertainty Around the Outlook
- Growth scenario impacts:
  - Faster vaccine production and accelerated distribution could boost regional growth by roughly ¼ percentage point in 2021, accelerating to an additional ¾ percentage point in 2022.
- Vaccination costs and benefits:
  - Note assumes a cost of $27 to fully vaccinate one person, based on a COVAX dose price of about $11, and including transportation, cold-chain storage, and supply and delivery costs.
- Risks from renewed infections and variants:
  - New infections and variants could lead to renewed lockdowns; this risk increases if vaccinations are delayed.
  - Continued infections complicate exits from policy support, raising government debt and financing risks.
- Financial conditions and spillovers:
  - The region remains vulnerable to a rapid rise in US bond yields; further rapid increases in US rates could lead to tighter global financial conditions, renewed capital outflows, and higher sovereign spreads.
  - Portfolio flows to the region have historically been almost twice as sensitive to changes in global uncertainty.
  - Countries with elevated external debt and limited fiscal space face higher vulnerabilities despite comfortable reserve levels for some emerging markets.
- Sovereign–bank nexus and financial stability:
  - Domestic banks’ already high exposure to government debt, particularly among oil importers, implies that tighter conditions would raise governments’ reliance on domestic bank financing, potentially crowding out private credit and weighing on recovery prospects.
- Social and distributional risks:
  - Incipient rise in social unrest due to lockdown fatigue and economic impacts could accelerate, especially in countries with limited policy space.
  - In fragile and conflict-affected states, weaker food storage, volatile food prices, and uneven vaccine access could trigger unrest and raise food insecurity risks.
  - Unequal recovery risks persistent widening of inequality, higher poverty, and intergenerational income gaps, potentially reinforcing social unrest.

### Balancing Act: How Should Countries Manage the Crisis and Accelerate Recovery
- Immediate priorities:
  - Saving lives and livelihoods remains a top priority; improve vaccine distribution and ensure health systems are adequately resourced.
  - Targeted local restrictions might be necessary to stem new flare-ups.
- Policy stance by fiscal space:
  - Countries with some fiscal space (some CCA countries [Azerbaijan, Kazakhstan, Turkmenistan], some oil exporters [Kuwait, Qatar, UAE], and Mauritania, and Morocco):
    - Policy should remain flexible to respond to recurrent outbreaks with health, economic, and fiscal contingency plans.
    - Well-targeted support should remain until recovery is entrenched; if recovery is stronger than expected, use space to rebuild buffers.
  - Countries without fiscal space:
    - Support requires careful balancing to preserve debt sustainability.
    - Fiscal consolidation will begin in 2021, partly reflecting expiring measures and recovering revenues.
    - Consolidation should be anchored on a credible, medium-term fiscal plan relying on improved revenue mobilization—reining in tax exemptions, broadening the tax base—and higher spending efficiency, including gradually eliminating subsidies and containing high wage bills.
    - Expenditure reprioritization is key to meet short-term needs; any new targeted lifelines should be balanced with offsetting measures.
    - Bolster debt management strategies to address emerging liquidity risks, mitigate rollover and refinancing risks, expand the investor base, and monitor and prevent contingent liabilities, including from off-budget pandemic support.
- Targeting and delivery of support:
  - Further support should be well targeted, distributed fairly, and focused on the post-COVID-19 economy.
  - Explore proxy-means testing, mobile money, in-kind transfers, cross-matching beneficiary databases, and community-based methods to limit leakage and reach those most in need.
  - For firms, limit support to cases of market failure and level the playing field between state-owned enterprises and the private sector.
  - Support policies should encourage shifts to the post-COVID-19 economy (vocational training, hiring incentives).
- Monetary, fiscal, and financial complementarities:
  - Choice between further monetary measures and fiscal support should consider fiscal space, effectiveness of monetary transmission, and domestic and global financial conditions.
  - For countries with flexible exchange rates and well-anchored inflation expectations (some CCA countries and Egypt), central banks should maintain an accommodative stance but monitor inflation risks and tightening financial conditions.
  - Exchange rate flexibility can act as an important buffer; monitor balance sheet effects, especially in highly dollarized CCA countries.
- Financial sector exit strategy:
  - Gradual exit from targeted support is key to ensure the financial sector supports private sector recovery.
  - Continue liquidity support to distressed but viable borrowers; monitor loan performance and corporate leverage as emergency policies are withdrawn.
  - Mitigate banks’ overexposure to the sovereign and pursue debt market development.
- Global and regional cooperation on vaccines:
  - Global and regional cooperation regarding vaccine access would help cement the post-COVID-19 world; hotspots anywhere imply risks of further variants.
  - Countries’ excess supplies should be distributed to countries with insufficient supplies under the COVAX initiative; COVAX funding and coverage should be bolstered swiftly.
  - Improved vaccine contract transparency would ensure countries access vaccines on reasonable terms.
  - Regional sharing of expertise, equipment, and surplus vaccines could help low-income and fragile states with logistics and distribution challenges.
- IMF engagement:
  - The IMF supported the region with more than $17 billion in financing in 2020 and will remain a partner through financing, technical assistance, and policy advice, and coordination with international and regional institutions.

### Building Forward Better: Structural and Long-Term Priorities
- Reform priorities:
  - Tackle inequality, poverty, and corruption; promote private sector jobs; address climate change; and improve governance.
  - Opportunity for bolder reforms supported by growth-friendly, medium-term fiscal frameworks with fair tax contributions.
  - New social contract: more private sector jobs, enhanced governance, transparency, and accountability.
  - Reform large public sector and state-owned enterprises to allow private sector growth and better public outcomes.
  - Labor market reform to reduce distortions favoring public sector jobs, reduce informality, and create high-value-added private sector jobs.
  - Streamline rules, ensure fair enforcement, and strengthen anti-corruption frameworks.
- Social spending and safety nets:
  - Boosting efficiency of social spending, even without increasing spending, could help close up to one-third of the region’s Human Development Index gap, according to IMF research.
  - Draw lessons from pandemic accomplishments: expansion of more targeted and conditional social assistance programs.
  - Reassess emergency registries and enhance social protection systems to be more responsive to future shocks.
  - Promote financial access and invest in internet infrastructure where needed to enable wide-reaching and well-targeted safety nets.
- Climate and green transition:
  - Climate change is already affecting the region via extreme heat events and water stress; urgent adaptation priorities and investment in climate-resilient infrastructure are needed.
  - Oil exporters face the challenge of transition away from oil dependence as the world shifts from fossil fuels.
  - Rebuilding financial buffers, economic and fiscal diversification, and mitigating negative distributional impacts on households are key priorities.
  - Recovery programs, public spending, and regulations should be leveraged to mitigate climate shocks; the green transition can offer employment and investment opportunities.

### Government Debt and Financing Legacy Risks from the Pandemic
- Pre-pandemic vulnerabilities:
  - By end-2019, one-third of countries had government debt ratios above 70 percent of GDP, and five faced public gross financing needs above 15 percent of GDP.
  - Lebanon was in default; three LICs were in debt distress (Somalia, Sudan, Yemen); four were assessed at high risk of debt distress (Afghanistan, Djibouti, Mauritania, Tajikistan).
- Debt holder structure and banking sector exposure:
  - Domestic banks accounted for 81 percent of domestic debt (excluding central bank holdings) in many emerging markets in the region.
  - Before COVID-19, domestic banks’ exposure to the sovereign exceeded 20 percent of total banks’ assets in Iraq, Jordan, and Qatar; was above 45 percent in Algeria, Egypt, and Pakistan; and up to 60 percent in Lebanon.
  - Such overexposure is detrimental for domestic debt market development and for government and private sector financing options.
- Pandemic-driven fiscal deterioration:
  - Compared with pre-pandemic forecasts, primary deficits widened, on average, by 7 percent of GDP in 2020.
  - The combination of higher deficits and economic contraction led to an average increase of 9 percentage points in the debt-to-GDP ratio.
  - By end-2020, thirteen countries had government debt exceeding 70 percent of GDP (compared with nine by end-2019).
  - Fourteen countries, compared with five pre-pandemic, had public gross financing needs exceeding 15 percent of GDP.
- Financing composition in 2020:
  - Domestic banks covered more than 50 percent of public gross financing needs in Bahrain, Egypt, Jordan, Pakistan, and Tunisia.
  - Including central bank financing, the banking sector’s share also exceeded 50 percent in Armenia, Iraq, and Lebanon.
  - One-third of countries tapped international markets; ten countries tapped markets since early 2020 (Armenia, Bahrain, Egypt, Jordan, Morocco, Oman, Qatar, Saudi Arabia, UAE, Uzbekistan), representing 26 percent of emerging market issuances but, on average, accounting for 20 percent of public gross financing needs.
  - Nonresident participation in local currency government debt markets remained negligible in most countries; Egypt and Pakistan experienced heavy foreign outflows in March–May 2020 (amounting to more than $15 billion and $2.5 billion, respectively).
- Low-income countries (LICs) response:
  - Most LICs had a small crisis response given financing constraints; median increase in the primary deficit for LICs in the region was 2 percent of GDP in 2020.
  - LICs relied on official and central bank financing; official creditors hold about 80 percent of government debt in LICs, with about 45 percent of external government debt owed to non–Paris Club creditors.
  - International support included $1.7 billion in IMF financing to LICs in the region and $3.9 billion from other official donors; additional relief came from the DSSI, the IMF’s Catastrophe Containment and Relief Trust, and HIPC relief in Somalia.
- Policy implications to address legacy risks:
  - Credible medium-term fiscal and debt management strategies are needed to reduce financing risks, address elevated debt burdens, and entrench financial stability.
  - Policy actions to develop domestic capital markets and mitigate banks’ overexposure to the sovereign would reduce banks’ crowding out of private financing and support recovery.

*International Monetary Fund | April 2021*

### 1. Government Debt Structure by Creditor

### 1. Government Debt Structure by Creditor

### Key empirical findings on debt, banks, and financing sources
- 2020 public gross financing sources and structure:
  - Middle East and Central Asia’s emerging markets: overall public gross financing needs of $1,070 billion during 2021–22, to be covered by $862 billion from domestic creditors and $208 billion from external sources.
  - Low-income countries (LICs) in the region: public gross financing needs projected at $29 billion during 2021–22, up from $27 billion in 2018–19.
- Average public gross financing needs during 2021–22:
  - Expected to remain higher than 15 percent of GDP in most of the Middle East and Central Asia’s emerging markets.
  - Median external debt amortization is low (about 4 percent of GDP).
  - Domestic amortization is elevated in some countries, rising higher than 15 percent of GDP in Bahrain, Egypt, and Pakistan.
- Reliance on domestic banks:
  - Domestic banks are projected to provide the bulk of financing for emerging market needs (domestic funding of $862 billion versus external $208 billion).
  - Continued heavy reliance on domestic banks risks crowding out private sector credit, especially where bank exposure to sovereign debt is high.
- Bank exposure and recent changes:
  - Bank claims on the public sector (general government and SOEs) are reported as percent of total banking system assets; country-level changes for 2013–20 show increases in several countries (figure indicates pronounced exposure increases in some cases).
  - Lebanon: bank claims include claims on the Central Bank as a share of total banking system assets.

### Stress scenario and shock magnitudes considered
- Combined shocks examined:
  - Faster-than-expected tightening of global financial conditions: yields (domestic and external) shocked by 200 basis points; rollover shock assuming only one-half of maturing external bonds are rolled over during 2021–22.
  - Delayed fiscal adjustment: planned fiscal consolidation delayed by one year (adjustment in 2021 shifts to 2022).
- Simulated impacts:
  - Under the combined scenario, average public gross financing needs during 2021–22 would increase by about 3 percent of GDP (about half of the pandemic’s impact on public gross financing needs in ME&CA emerging markets in 2020).
  - Assuming additional budgetary needs are funded by domestic banks, four governments (Egypt, Oman, Pakistan, Tunisia) would absorb an additional 10 to 23 percent of banks’ assets as government debt during 2021–22.
  - Such an outcome would intensify sovereign-bank linkages, further reducing banks’ capacity to lend to the private sector.

### Tabled 2021–22 financing aggregates (IMF staff estimates)
- Overall Public Gross Financing Needs and Sources ($, billions):
  - ME&CA-EMs: $1,070 overall; gross domestic sources $862; gross external sources $208
  - of which: GCC: $248 overall; $130 domestic; $118 external
  - ME&CA-LICs: $29 overall; $11 domestic; $19 external
- Memorandum items:
  - ME&CA: $1,100 overall; $873 domestic; $227 external
  - MENA: $919 overall; $735 domestic; $185 external
  - CCA: $27 overall; $15 domestic; $11 external

### Financing risks and macro-financial linkages
- Public gross financing needs are projected to increase during 2021–22 compared to pre-pandemic expectations (2018–19 baseline of $784 billion for ME&CA emerging markets rising to $1,070 billion for 2021–22).
- Rollover and refinancing risks of domestic debt are high given elevated domestic amortization in some countries.
- Prolonged recovery and corporate sector scarring could increase nonperforming loans, reducing banks’ capacity to fund private sector and potentially leading to monetary financing in a few countries—raising fiscal dominance concerns.
- Lebanon’s experience is cited as an example where amplified sovereign-bank interlinkages can derail macro, financial, and fiscal stability.

### Policy implications and recommended reforms
- Fiscal and debt management:
  - Implement policies and reforms to reduce elevated public gross financing needs and over time mitigate concentration of bank exposure to the sovereign.
  - Underpin actions with a strong medium-term debt management strategy and a clear, transparent communication plan with market participants.
  - Coordinate debt management, monetary, fiscal, and financial sector regulatory authorities to form a common view on domestic financial markets’ absorption capacity and the impact of policy measures on sovereign borrowing ability.
  - Countries with market access should proactively mitigate rollover and refinancing risks, including by engaging in liability management operations as needed.
- Domestic capital markets and investor base development:
  - Address structural excess bank liquidity that inhibits money market development and promotes buy-and-hold strategies.
  - Increase domestic savings, particularly in long-term instruments.
  - Establish deep and liquid secondary markets and develop larger benchmark government securities along the yield curve.
  - Expand the investor base by targeting large and heterogeneous investors, expand nonbank financing sources (including institutional investors and retail participation), and offer an array of instruments (floating rate, inflation-linked, Islamic bonds (sukuk), green securities).
  - Attract nonresident participation, particularly in longer-term instruments, supported by liquid secondary markets and inclusion of local currency government bonds in flagship global indices.
- Financial sector measures:
  - Continue supporting credit while mitigating banks’ overexposure to the sovereign.
  - Encourage banks to recognize upfront losses but give time to rebuild capital buffers to avoid further crowding out private credit.
  - Enhance transparency and disclosure to foster market discipline and reduce excessive sovereign holdings.
  - Over the medium term, prioritize stronger bank and sovereign balance sheets, improve governance, and develop alternative opportunities for banks to diversify lending (including financial inclusion).
  - Consider introducing time-variant “through-the-cycle” risk weights and capital requirements that increase with sovereign concentration on banks’ balance sheets to contain the sovereign-bank nexus while minimizing procyclical effects.
- Support for LICs and fragile states:
  - Provide additional assistance to ensure progress toward the Sustainable Development Goals through concessional resources (particularly grants) and debt relief under the DSSI.
  - Countries facing significant difficulties servicing debt could benefit from timely and orderly restructuring of commercial and bilateral debt, supported by the Common Framework for Debt Treatments on a case-by-case basis.

*Source: https://www.imf.org/-/media/files/publications/reo/mcd-cca/2021/april/english/text.pdf*

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_Source: https://www.imf.org/-/media/files/publications/reo/mcd-cca/2021/april/english/text.pdf_