## Regional Developments and Economic Outlook: Mounting Challenges, Decisive Times

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### 1.1 A Major Deterioration in Global Conditions
- Global GDP growth revised to 3.2 percent in 2022 and 2.7 percent in 2023 (0.4 and 0.9 percentage points lower, respectively, than projected in April).
- A global slowdown is underway and the risk of a recession has increased markedly.
- Commodity price dynamics:
  - Food prices projected to increase by 14.2 percent year over year in 2022.
  - Wheat prices remain about 80 percent above their average level in 2019.
  - Oil prices: US$98.19 a barrel in 2022 (Assumptions); $98.2 per barrel forecast for the full year.
  - Oil prices are 41.2 percent higher than in 2021; this increase is 13.2 percentage points lower than forecast in April.
- Global financial conditions:
  - IMF’s Global Financial Conditions Index has continued increasing since March 2022 and is now at its highest level since September 2020.
  - Tightening for emerging markets (excluding China) is far above that for advanced economies.
  - Global risk aversion has increased: lower equity valuations, wider emerging market sovereign bond spreads, and increasing portfolio outflows from emerging markets.
- Policy-rate and financing assumptions:
  - Six-month LIBOR on US dollar deposits assumed to average 2.5 percent in 2022 and 4.8 percent in 2023.

### 1.2 Middle East and Central Asia: Continued Recovery in Early 2022, but with Higher Inflation and Tighter Financing Conditions
- Overall assessment:
  - Economic activity in ME&CA held up well in the first half of 2022, with a continued recovery from the COVID-19 shock.
  - EM&MIs and LICs face curtailed access to market financing; oil exporters are buffered by still-high energy prices.
  - The adverse impact of Russia’s war in Ukraine on the CCA has been milder than expected so far, but substantial risks remain due to strong ties with Russia.
- Recovery indicators and employment:
  - Median output for oil exporters and EM&MIs continued to expand into 2022:Q1.
  - High-frequency indicators for 2022:Q2 signaled resilience in Kazakhstan, Qatar, Saudi Arabia, United Arab Emirates; industrial production expanded in Egypt, Jordan, Kyrgyz Republic, Pakistan, Saudi Arabia, West Bank and Gaza.
  - Median employment (for oil exporters and EM&MIs) surpassed end-2019 levels in the second half of 2021; region’s employment in 2022:Q1 remained below levels implied by prepandemic trends.
  - Unemployment remained elevated in MENA: women 22 percent and youth 32 percent.
- Climate and disaster shocks:
  - Pakistan floods affected 33 million people — 1 out of 7 Pakistanis — with significant impacts on schools, transportation infrastructure, and crops; likely to impact growth beyond projections.
- Inflation and terms-of-trade:
  - Headline inflation (weighted average, July 2022): MENA 15.1 percent year over year; CCA 13.5 percent year over year.
  - Food prices are the main driver and inflation is becoming more widespread across categories.
  - Net commodity terms-of-trade gain for oil exporters during the first half of 2022 was about 6 percent of GDP; oil importers (EM&MIs and LICs) lost roughly 0.5 percent of GDP over the same period.

### Key statistics and short-term projections (preserved exactly)
- Global GDP growth: 3.2 percent (2022), 2.7 percent (2023).
- Food prices projected increase: 14.2 percent year over year in 2022.
- Oil price assumptions/forecasts: US$98.19 a barrel in 2022 (Assumptions); $98.2 per barrel forecast for the full year.
- Oil prices: 41.2 percent higher than in 2021; increase is 13.2 percentage points lower than forecast in April.
- Wheat prices: about 80 percent above their average level in 2019.
- Six-month LIBOR on US dollar deposits: 2.5 percent in 2022 and 4.8 percent in 2023 (assumed).
- IMF Global Financial Conditions Index: at its highest level since September 2020 (statement).
- MENA headline inflation (weighted average, July 2022): 15.1 percent year over year.
- CCA headline inflation (July 2022): 13.5 percent year over year.
- Pakistan floods: 33 million people affected — 1 out of 7 Pakistanis.
- MENA unemployment (groups): women 22 percent; youth 32 percent.
- Net commodity terms-of-trade: oil exporters gain about 6 percent of GDP; oil importers lost roughly 0.5 percent of GDP (first half of 2022).

### 1.3 Policy Priorities and Trade-offs
- Immediate priorities for all countries:
  - Restore price stability to address the cost-of-living crisis.
  - Protect vulnerable groups through targeted support.
  - Ensure food security.
- Policy trade-offs:
  - EM&MIs and LICs must preserve debt sustainability and financial stability while addressing inflation and protecting vulnerable households.
  - Limited policy space raises urgency for structural reforms to bolster growth and make economies more resilient, sustainable, diversified, and inclusive.
- Opportunities for oil exporters:
  - Maximize benefits of the oil windfall by building buffers and advancing diversification plans.
- CCA-specific guidance:
  - Carefully assess magnitude and durability of initial spillovers from the war in Ukraine and adjust policy mix accordingly.

### 2. Oil Exporters — External, Fiscal, Financial, and Growth Dimensions
- External accounts and terms-of-trade:
  - 2021 current account surpluses in oil-exporting countries: CCA average 0.9 percent of GDP; MENA average 4.6 percent of GDP.
  - Current account surpluses for oil exporters increased in Azerbaijan, Bahrain, Iran amid high commodity prices.
- Foreign exchange reserves and exchange rates:
  - Since the start of the war in Ukraine, nominal effective exchange rates have depreciated by nearly 15 percent in Pakistan and 10 percent in Egypt.
  - After initial losses, nominal effective exchange rates in CCA countries appreciated since March 2022.
  - July 2022 data point to downward pressure on foreign exchange reserves in some countries, including Egypt, Morocco, and Pakistan.
- Fiscal balances and public debt:
  - By end-2021, fiscal balances in all country groups had improved compared to their 2020 levels.
  - Non-oil primary fiscal balances in oil-exporting countries returned to near prepandemic outturns.
  - Public debt-to-GDP ratio increased in MENA EM&MIs from 84 percent in 2020 to 92 percent in 2021.
  - Over 2022–26, higher oil prices relative to October 2021 projections imply a cumulative windfall of about $1 trillion for oil-exporting economies.
  - Governments in GCC countries are expected, on average, to save about 33 percent of oil revenues.
- Financial conditions and sovereign borrowing:
  - Regional issuance: $3.65 billion from January to September 2022, down from $30.1 billion over the same months a year earlier.
  - Sovereign Eurobonds maturing in 2022 across the region: $24.5 billion (about one-third in EM&MIs).
  - International investors pulled out $3.8 billion since July 2021, more than half ($2.2 billion) since February 2022.
  - As many central banks raised interest rates, ex ante real rates turned positive in the CCA but remained negative in most MENA countries and Pakistan.
- Growth and inflation outlook (selected):
  - Real GDP in MENA forecast: 5.0 percent in 2022 (unchanged from April), up from 4.1 percent in 2021.
  - Oil exporters: 5.2 percent in 2022 (following 4.5 percent growth in 2021).
  - MENA EM&MIs: 4.9 percent in 2022 (upward revision of 0.5 percentage points from April).
  - Pakistan fiscal year 2022 growth projected at 6 percent.
  - LICs: 0.8 percent in 2022 (a 0.3 percentage point downward revision from April).
  - Growth projections for 2023: MENA 3.6 percent; oil-exporting countries 3.5 percent; MENA EM&MIs 3.9 percent; LICs gradual recovery in 2023 and over the medium term.
  - Headline inflation for MENA (excluding Sudan): 12.1 percent in 2022 (1.7 percentage point higher than 2021 and 1.1 percentage point above the April forecast) and 11.2 percent in 2023—an upward revision of 2.6 percentage points.
  - Pakistan’s inflation foreseen to be in double-digit territory in 2022−23, with upward revisions from April.
- External financing needs and regional support:
  - Average current account surplus for oil exporters (GCC countries): increase from 4.6 percent of GDP (8.2 percent) in 2021 to 9.7 percent of GDP (16.7 percent) in 2022—an additional surplus of $275 billion ($208 billion)—before receding to 7.8 percent of GDP (13.7 percent) in 2023.
  - EM&MIs current account deficits projected roughly at 5 percent of GDP in 2022, declining slightly to 4.4 percent in 2023.
  - LICs aggregate current account deficit projected to widen from 7.7 percent of GDP in 2021 to 9.3 percent in 2022 before shrinking to 8.3 percent in 2023.
  - External financing needs of MENA EM&MIs and Pakistan: from 109 percent of gross international reserves ($232 billion) in 2021 to 242 percent in 2022 ($275 billion) before receding to 163 percent in 2023 ($265 billion).
  - Arab Coordination Group launched a food security action plan with an initial $10 billion package.
  - GCC countries pledged $41 billion to Egypt, Jordan, Pakistan, and Yemen in official support and investments, disbursing or rolling over more than $22 billion to date.
  - Remittances from the GCC could grow in the range of 1.9 percent to 3.4 percent annually over the medium term (based on De and others (2019) estimates of elasticity between 0.6 and 1.1).

### Fiscal pressures, debt, and interest costs (near term)
- Tighter borrowing conditions expected to raise interest expenses by 0.4 percent of GDP on average in 2023 compared to 2022, and up to 1.3 percent of GDP for Egypt.
- Public debt-to-GDP ratios set to increase slightly in 2022 relative to 2021 due to still-elevated primary deficits and valuation effects, before easing in 2023.
- Despite higher interest rates, debt pressures are mitigated by still-negative interest rate-growth differentials for most MENA EM&MIs and Pakistan.
- Higher interest payments and increased reliance on short-term financing in some EM&MIs (Egypt, Pakistan, Tunisia) will raise public gross financing needs to $550 billion over 2022−23 ($22 billion above gross financing needs over 2020−21).
- Gross financing needs expected to reach an annual average of 33 and 22 percent of GDP for Egypt and Pakistan, respectively, over 2022−23.
- EM&MIs and LICs average interest bills: 1.2 percent of GDP in 2022−23 (unchanged from 2021).
- Public debt trajectories forecast to improve slightly:
  - Oil exporters: from 22.6 percent of GDP in 2021 to 19.8 percent of GDP in 2022.
  - EM&MIs: from 54.1 percent of GDP to 45.0 percent of GDP.
  - LICs: from 39.1 percent of GDP to 37.2 percent of GDP.

### Real activity, inflation, remittances, and external balances in CCA
- CCA real GDP growth expected to slow to 3.8 percent in 2022 from 5.6 percent in 2021.
- Upgrades to 2022 growth: LICs +2.0 percentage points; EM&MIs +5.6 percentage points relative to April projections (reflecting revised Russia forecasts and unexpected inflows).
- Real GDP growth in 2023 foreseen at 4.0 percent (downgraded by 0.2 percentage point relative to April).
- Medium-term growth projected at about 3.5 percent.
- Inflation expected to accelerate from 9.2 percent in 2021 to 12.9 percent in 2022 and remain elevated at 10.5 percent in 2023 (upward revisions of 2.2 and 1.9 percentage points).
- Remittances—mainly from Russia—have historically offset food price increases; projected slowdown in Russia raises risks to remittance flows.
- Average current account surplus for CCA oil exporters expected to increase from 0.9 percent in 2021 to 8.3 percent in 2022, before subsiding to 7.3 percent.

### Key downside risks and financial conditions
- Balance of risks weighted heavily to the downside amid a confluence of shocks.
- Upside risks: larger-than-expected moderation in food commodity prices; greater-than-expected decline in oil prices for EM&MIs and LICs.
- Downside risks:
  - Protracted war in Ukraine and broadened sanctions could reduce exports of oil, gas, food, and fertilizers, causing shortages and higher international prices.
  - Inflation expectations de-anchoring could add about 0.2 percentage point to inflation, on average, for a 1-percentage-point increase in five-years-ahead inflation expectations.
  - Disinflationary policies could be more costly than expected due to high dollarization, shallow financial markets, maturing monetary policy frameworks, and nascent credibility.
  - If China’s slowdown persists, commodity prices could fall, diminishing buffers for oil exporters.
  - Higher food prices and shortages could lead to food insecurity and social unrest, particularly in 2023.
  - Tighter-than-expected financial conditions could trigger debt and external stress: high levels of external public debt falling due in 2022−23 for EM&MIs (about twice as much each year on average as in 2019) indicate high near-term refinancing risks.
  - Faster-than-expected tightening in US monetary policy (300 basis points increase in the 10-year US Treasury yield in 2022 relative to 2021) could lower portfolio inflows to the region by nearly $18 billion (about 3 percent of the region’s external financing needs).
  - Current WEO projections entail a rise in the 10-year US Treasury yield of about 180 and 300 basis points through 2022 and 2023, respectively, from 2021; a frontloaded scenario implies an additional 120-basis-point rise above current projections for 2022.

### Downside scenario impacts and fragmentation risk
- Under a downside scenario (higher oil prices negative for importers, tighter global financial conditions, deeper slowdown in China, global deceleration), real GDP for the MENA and CCA regions is estimated to decline by 0.9 and 2.2 percentage points in 2023, respectively.
- World economic fragmentation could magnify risks via changes in trade, FDI, and financial flows, reducing effectiveness of climate cooperation; the CCA region’s medium-term outlook depends heavily on the degree of fragmentation given close ties to Russia and trade linkages to Europe and China.

### Policy priorities and recommendations (condensed)
- Near-term priorities for all countries:
  - Maintain or restore price stability while protecting the vulnerable.
  - Respond to tightening global financial conditions while ensuring financial stability.
  - Ensure food and energy security and manage pandemic-related risks.
- Fiscal and social policy:
  - Preserve fiscal sustainability while ensuring social stability in EM&MIs and LICs.
  - Maximize oil windfall benefits and progress diversification in oil exporters.
  - Strengthen medium-term fiscal frameworks; target adjustments at inefficient expenditures; enhance efficiency of social protection, education, and health spending.
  - Boost domestic revenues by eliminating widespread tax exemptions and inefficient tax incentives and strengthening revenue administrations.
  - Where fiscal consolidation is not feasible and debt sustainability is at risk, consider debt operations.
- Monetary and exchange-rate policy:
  - Tighten monetary policy where inflation is broad-based and expectations rise above targets.
  - Adopt an overall tighter fiscal stance with support targeted to those in need to aid disinflation while supporting social cohesion.
  - For countries with pegged exchange rates, withdraw monetary accommodation as advanced economies tighten policy to contain inflation and protect pegs.
  - Over the longer horizon, strengthen monetary policy frameworks: focus monetary policy on domestic price stability, strengthen central bank autonomy, reduce dollarization, enhance communication and transparency of monetary operations and foreign exchange interventions, and return inflation to targets.
- Food security and international action:
  - Take decisive global and regional action to prevent a major food crisis: lift trade restrictions and excess storage reserves, facilitate trade, improve access to fertilizers and natural gas, provide trade financing, invest in supply chain capabilities, and invest in climate resilient agriculture.
  - Donors and international agencies should prioritize grants and concessional loans and close World Food Programme funding shortfalls for vulnerable LICs and fragile states.
- Financial stability measures:
  - Central banks with flexible exchange rates should let currencies depreciate and raise policy rates as needed to control inflationary pressures.
  - Monitor balance-sheet effects in highly dollarized economies and intervene in FX markets to mitigate disorderly conditions when necessary.
  - Calibrate macroprudential policies where bank exposures to vulnerable sectors are high and reform insolvency frameworks ahead of expected firm failures.

### Structural reform priorities for inclusive and resilient growth
- Redesign tax systems to increase fiscal revenues and make them more equitable (broaden tax bases and increase tax progressivity).
- Reduce informality via well-designed tax policies to boost productivity and facilitate inclusion of women and youth in labor markets.
- Foster private sector development: ease entry of new firms, reform state-owned enterprises, improve access to financial services for SMEs, reduce red tape and corruption, and lower cost of doing business.
- Step up digitalization to foster efficiency, inclusion, and resilience; scale up investments in new technologies.
- Take measures to adapt to the climate challenge, ensure energy and water security, and engineer a smooth transition to more diverse and less carbon-intensive economies.

### IMF support and instruments
- Since the start of the pandemic, the IMF has provided $21.3 billion in financing to the ME&CA region.
- Since the beginning of the war in Ukraine, IMF Executive Board approved a new financing arrangement for Georgia and augmentations to existing arrangements for Jordan and Pakistan.
- Toolkit enhancements:
  - New food shock window to allow easier access for countries facing food and fertilizer-related balance of payments pressures.
  - Resilience and Sustainability Trust operationalized to support low-income and vulnerable middle-income countries in building resilience to external shocks and address longer-term challenges.
- IMF coordination with World Bank, WTO, WFP, FAO, and other multilateral development banks and organizations to confront food insecurity.

### Boxed findings — Food security and CCA-specific impacts (highlights)
- Food security: four factors straining availability and affordability—surge in global food commodity prices; dependency on wheat and fertilizer imports from Russia and Ukraine; generally low storage and strategic reserves; soaring external borrowing costs.
- Domestic food inflation recently reached 15 percent or more in Algeria, Armenia, Azerbaijan, Egypt, Georgia, Kazakhstan, the Kyrgyz Republic, Pakistan, and Uzbekistan; 12 percent in Somalia.
- Wheat reserves in low-income countries (Mauritania, Somalia, Sudan, Yemen) fell to three months of consumption or less.
- CCA impact: adverse impact of the war in Ukraine milder than initially expected due to near-term resilience of Russian growth, unexpected money transfers, open trade routes, continuing financial flows, and existing arrangements; large increases in arrivals from Russia (Armenia: arrivals from Russia increased by 200 percent in the first quarter of 2022 compared to the same period in 2021).

### 2. A REPEAT OF THE PAST? Fiscal implications of commodity price surges — key findings and policy guidance
- Pass-through and historical patterns:
  - Global food commodity prices have risen by 80 percent since 2019.
  - Domestic food price inflation ranged from 6 to 49 percent among the MENA region’s oil importers and from 7 to 24 percent among oil exporters.
  - International crude oil prices increased by 63 percent since 2019.
  - Domestic gasoline prices increased by 26 percent on average for oil importers and 12 percent on average for oil exporters.
  - Implied average pass-through for domestic gasoline prices for oil importers: 41 percent (compared with about 15 percent during 2007−14).
- Lessons from past episodes:
  - Past responses often involved generalized subsidies and resulted in large and persistent fiscal loosening, increased budget rigidity, diminished budget equity, and lack of offsetting fiscal adjustment.
  - Subsidies and transfers peaked on average in 2012 and were more persistent in oil exporters.
  - In 2010, price subsidies in the MENA region and Pakistan amounted to 7.8 percent of GDP on average; 15 percent of this amount (1.2 percent of GDP) reflected the cost of food subsidies.
- Current surge and fiscal costs:
  - In 2021, energy subsidies averaged 1.5 percent of GDP among oil importers and 5.8 percent of GDP among oil exporters.
  - Food subsidies in 2021 reached as high as 1.5−2 percent of GDP for Algeria, Egypt, and Tunisia.
  - In 2022, automatic increases of existing energy and food subsidies—and introduction of new ones—projected to cost an additional 0.8 and 0.3 percentage point of GDP on average, respectively.
  - For some countries, additional fiscal cost of energy subsidies in 2022 expected to range from 1.7−3 percent of GDP (Iraq, Mauritania, Tunisia).
  - The additional cost of food subsidies in 2022 expected to reach about 1 percent of GDP for Iraq and Tunisia.
  - Estimated average fiscal cost of recently announced measures (including increases in subsidies and other new measures): in the range of 0.8–1.3 percent of GDP.
- Near-term policy recommendations:
  - Implement targeted cash transfer programs where social safety nets are stronger.
  - Expand less-targeted in-kind food transfers temporarily and tailor them to poor households.
  - Use mobile phone network data to improve humanitarian assistance targeting and deliver transfers.
  - Consider self-targeted food price subsidies judiciously if targeted assistance is difficult to implement swiftly and food security risks are high.
  - Refrain from costly and regressive price subsidies on fuels; allow international energy prices to pass through gradually to preserve fiscal space.
  - Prevent tax cuts and blanket exemptions; implement VAT refunds for low-income households while transitioning to a single VAT rate.
  - Introduce sunset clauses alongside all new measures.
  - Avoid expansionary fiscal policies that fuel domestic inflationary pressures or increase debt and financing pressures.
- Medium-term recommendations:
  - Complete energy subsidy reforms paired with robust social safety nets and targeted compensation.
  - Move to automatic adjustment mechanisms of energy pricing and pair subsidy reform with targeted compensation.
  - Enhance energy efficiency and reduce overconsumption, energy waste, and smuggling.
  - Bolster revenue mobilization: remove inequitable tax exemptions and incentives, strengthen tax administration, and improve tax progressivity.
  - Adopt risk-management strategies (hedging, longer-term contracts, put options) and enhance governance and public financial management.
  - Set up ring-fenced stabilization funds and medium-term fiscal frameworks and fiscal rules to decouple fiscal policy from oil price swings.

### 3. War in Ukraine: Risks to Poverty and Inequality in the Caucasus and Central Asia (CCA)
- Simulated regional impacts (based on WEO changes between October 2021 and October 2022, excluding Azerbaijan and Turkmenistan):
  - Poverty rates estimated to increase by 1.1 percentage points on average in 2023 relative to prewar estimates.
  - Inequality estimated to increase by 0.7 percent on average in 2023.
  - Regional averages under the scenario: poverty rate reaching 17 percent and Gini coefficient reaching 0.33 in 2023.
  - Real household consumption estimated to decline by about 2 percentage points on average compared with prewar projections.
- Remittances and household welfare:
  - Remittances account for between 10 and 30 percent of GDP for Armenia, Georgia, the Kyrgyz Republic, Tajikistan, and Uzbekistan.
  - Remittances from Russia to CCA countries estimated to contract in the range of about 4−10 percent by 2023 and about 5−13 percent by 2026 (percent deviation from October 2021 WEO projections, nominal).
  - Remittances disproportionately benefit poorer households; share of poor households receiving remittances: about 15 percent in the Kyrgyz Republic to 5 percent in Georgia for the bottom third.
  - Remittances as a share of income for poorer remittance-receiving households: about 71 percent in Tajikistan to 28 percent in the Kyrgyz Republic.
- Fiscal costs and social protection gaps:
  - Cost of moving all households below the $3.65 per day poverty line to the poverty line: 2.1 percent of GDP in Tajikistan and 1.3 percent of GDP in Uzbekistan.
  - Food subsidies that offset rising food prices in simulations cost 1.4 percent of GDP on average.
  - Fiscal cost of moving all households in poverty to the $3.65 per day poverty line would cost 0.8 percent of GDP on average across countries.
  - Social protection systems need improvements in coverage, targeting, adequacy, and efficiency; stronger systems required to mitigate war-related impacts.
- Policy recommendations for CCA:
  - Target poor and vulnerable segments rather than rely on generalized subsidies.
  - Use targeted cash transfers where social safety nets are stronger; allow prices to adjust where feasible.
  - For countries with underdeveloped safety nets: allow gradual price adjustment, expand effective programs, and leverage digital delivery (smart cards, mobile money).
  - If food security is acute, consider temporary reallocation toward food price subsidies or direct distribution while maintaining budget neutrality; deploy policies to support food supply (finance for grain and fertilizer imports, increase storage capacity).
  - Prepare for potential persistent decline in remittances: expand social safety nets, prepare for return migration, and improve targeting to reduce fiscal costs.
  - Strengthen social protection systems post-pandemic: ramp up means testing, build single social registries, and deepen financial inclusion for electronic payments.

### Financial stability, exchange rates, and banking sector risks
- In highly dollarized economies and those with high shares of foreign-currency-denominated debt (Armenia, Georgia, Kyrgyz Republic, Tajikistan, Uzbekistan; Armenia, Tunisia), monitor balance-sheet effects of exchange rate movements closely.
- Volatility may require central bank FX intervention to mitigate disorderly markets.
- With rising interest rates:
  - Banks may gain higher net income but face higher default risks as loan origination declines.
  - Macroprudential calibration needed where bank exposures to vulnerable sectors are high.
- Insolvency framework reforms would be particularly valuable ahead of potential firm failures.

### Key aggregated indicators (selected lines from ME&CA, MENA, CCA tables; percent or percent of GDP preserved as reported)
- ME&CA (selected):
  - Real Gdp (annual growth) 4.6 1.7–2.7 4.5 5.0 3.6
  - Inflation (year average; percent) 7.1 7.7 10.5 12.9 13.8 13.1
- MENA (selected):
  - Real Gdp (annual growth) 4.4 1.0–3.1 4.1 5.0 3.6
  - Inflation (year average; percent) 6.9 8.1 10.9 14.2 14.2 12.4
- CCA (selected):
  - Real Gdp (annual growth) 6.9 4.1–2.1 5.6 3.8 4.0
  - Inflation (year average; percent) 9.1 6.6 7.5 9.2 12.9 10.5

*Source: Regional Economic Outlook: Middle East and Central Asia, October 2022 (chapter "Regional Developments and Economic Outlook: Mounting Challenges, Decisive Times").*

### 1. Regional Developments and Economic Outlook: Mounting Challenges, Decisive Times 1

### Regional Developments and Economic Outlook: Mounting Challenges, Decisive Times

### 1.1 A Major Deterioration in Global Conditions
- Global GDP growth revised to 3.2 percent in 2022 and 2.7 percent in 2023 (0.4 and 0.9 percentage points lower, respectively, than projected in April).
- A global slowdown is underway and the risk of a recession has increased markedly.
- Commodity price dynamics:
  - Food prices projected to increase by 14.2 percent year over year in 2022.
  - Wheat prices remain about 80 percent above their average level in 2019.
  - Oil prices: assumed/forecast values in the report include US$98.19 a barrel in 2022 (Assumptions) and a statement that oil prices are forecast at $98.2 per barrel for the full year.
  - Oil prices are 41.2 percent higher than in 2021; this increase is 13.2 percentage points lower than forecast in April.
- Global financial conditions:
  - The IMF’s Global Financial Conditions Index has continued increasing since March 2022 and is now at its highest level since September 2020.
  - Tightening for emerging markets (excluding China) is far above that for advanced economies.
  - Global risk aversion has increased, with lower equity valuations, wider emerging market sovereign bond spreads, and increasing portfolio outflows from emerging markets.
- Policy-rate and financing assumptions:
  - Six-month LIBOR on US dollar deposits assumed to average 2.5 percent in 2022 and 4.8 percent in 2023.

### 1.2 Middle East and Central Asia: Continued Recovery in Early 2022, but with Higher Inflation and Tighter Financing Conditions
- Overall assessment:
  - Economic activity in ME&CA held up well in the first half of 2022, with a continued recovery from the COVID-19 shock.
  - EM&MIs and LICs face curtailed access to market financing; oil exporters are buffered by still-high energy prices.
  - The adverse impact of Russia’s war in Ukraine on the CCA has been milder than expected so far, but substantial risks remain due to strong ties with Russia.
- Recovery indicators:
  - Median output for oil exporters and EM&MIs continued to expand into 2022:Q1, though at a slowing pace.
  - High-frequency indicators for 2022:Q2 suggested resilience: PMI signaled continued non-oil growth in Kazakhstan, Qatar, Saudi Arabia, United Arab Emirates; industrial production expanded in Egypt, Jordan, Kyrgyz Republic, Pakistan, Saudi Arabia, West Bank and Gaza.
  - Hotel occupancy rates and international flight arrivals maintained recovery in July 2022.
- Employment:
  - Median employment (for oil exporters and EM&MIs) surpassed end-2019 levels in the second half of 2021.
  - Region’s employment in 2022:Q1 remained below levels implied by prepandemic trends.
  - Unemployment remained elevated in MENA: women 22 percent and youth 32 percent.
- Climate and disaster shocks:
  - Pakistan floods affected 33 million people — 1 out of 7 Pakistanis — with significant impacts on schools, transportation infrastructure, and crops; likely to impact growth beyond projections.
- Inflation:
  - Headline inflation reached a weighted average of 15.1 percent year over year in MENA in July 2022 and 13.5 percent in the CCA in July 2022.
  - Food prices remain the main driver, with evidence that inflation is becoming more widespread across categories and products.
  - For some countries with Consensus Forecasts, current-year inflation expectations have increased (Egypt, Pakistan), while medium-term expectations remain contained relative to end-2021 levels.
- Terms-of-trade and external/fiscal divergence:
  - Net commodity terms-of-trade gain for oil exporters during the first half of 2022 was about 6 percent of GDP.
  - Oil importers (EM&MIs and LICs) lost roughly 0.5 percent of GDP over the same period.
  - These shifts imply sizable implications for external and fiscal accounts and for poverty and inequality.

### Key Statistics and Projections (preserved exactly as reported)
- Global GDP growth: 3.2 percent (2022), 2.7 percent (2023).
- Food prices projected increase: 14.2 percent year over year in 2022.
- Oil price assumptions/forecasts: US$98.19 a barrel in 2022 (Assumptions); $98.2 per barrel forecast for the full year (text).
- Oil prices: 41.2 percent higher than in 2021; increase is 13.2 percentage points lower than forecast in April.
- Wheat prices: about 80 percent above their average level in 2019.
- Six-month LIBOR on US dollar deposits: 2.5 percent in 2022 and 4.8 percent in 2023 (assumed).
- IMF Global Financial Conditions Index: at its highest level since September 2020 (statement).
- MENA headline inflation (weighted average, July 2022): 15.1 percent year over year.
- CCA headline inflation (July 2022): 13.5 percent year over year.
- Pakistan floods: 33 million people affected — 1 out of 7 Pakistanis.
- MENA unemployment (groups): women 22 percent; youth 32 percent.
- Net commodity terms-of-trade: oil exporters gain about 6 percent of GDP; oil importers lost roughly 0.5 percent of GDP (first half of 2022).

### 1.3 Policy Priorities and Trade-offs
- Immediate priorities for all countries:
  - Restore price stability to address the cost-of-living crisis.
  - Protect vulnerable groups through targeted support.
  - Ensure food security.
- Policy trade-offs:
  - EM&MIs and LICs face pronounced trade-offs: need to preserve debt sustainability and financial stability while addressing inflation and protecting vulnerable households.
  - Limited policy space in many countries raises urgency for structural reforms to bolster growth and to make economies more resilient, sustainable, diversified, and inclusive.
- Opportunities for oil exporters:
  - Maximize benefits of the oil windfall by building buffers and advancing diversification plans.
- CCA-specific guidance:
  - Carefully assess magnitude and durability of initial spillovers from the war in Ukraine and adjust policy mix accordingly.

*Source: Regional Economic Outlook: Middle East and Central Asia, October 2022 (chapter "Regional Developments and Economic Outlook: Mounting Challenges, Decisive Times").*

### 1. Oil Exporters

### 1. Oil Exporters

### External accounts and terms-of-trade
- In 2021, current account balances registered surpluses in oil-exporting countries in both the CCA and MENA regions: an average of 0.9 and 4.6 percent of GDP, respectively.
- Available data suggest these trends continued into the first quarter of 2022, with current account surpluses for oil exporters increasing in Azerbaijan, Bahrain, Iran amid high international commodity prices and exports.
- Figure references indicate country-specific net commodity terms-of-trade developments for January–July 2022 (percent of GDP, weighted by PPP GDP).

### Foreign exchange reserves and exchange rates
- Since the start of the war in Ukraine, nominal effective exchange rates have depreciated by nearly 15 percent in Pakistan and 10 percent in Egypt.
- After initial losses, nominal effective exchange rates in CCA countries have appreciated since March 2022, partly reflecting increased money transfers to the region after Russia’s invasion of Ukraine.
- Data for July 2022 point to downward pressure on foreign exchange reserves in some countries, including Egypt, Morocco, and Pakistan.
- Figure 1.6 reports foreign exchange reserves, January–August 2022 (Billions of US dollars), with country-level reserve changes presented.

### Fiscal balances and public debt
- By end-2021, fiscal balances in all country groups had improved compared to their 2020 levels.
- Non-oil primary fiscal balances in oil-exporting countries returned to near prepandemic outturns.
- Primary fiscal balances in EM&MIs remained vulnerable and below prepandemic outturns.
- Public debt ratios as a share of GDP subsided in 2021, except in MENA EM&MIs, where the average public debt-to-GDP ratio increased from 84 percent in 2020 to 92 percent in 2021.
- Over 2022–26, higher oil prices relative to October 2021 projections imply a cumulative windfall of about $1 trillion for oil-exporting economies.
- Governments in GCC countries are expected, on average, to save about 33 percent of oil revenues.

### Financial conditions and sovereign borrowing
- Financial conditions tightened sharply for EM&MIs, particularly those with weaker fundamentals (October 2022 Global Financial Stability Report).
- Foreign-currency sovereign bond spreads widened substantially in several MENA EM&MIs (Egypt, Tunisia) and Pakistan, and to some extent in CCA EM&MIs (Armenia, Georgia); spreads remained stable in GCC countries since the onset of the war.
- The region issued just $3.65 billion from January to September 2022, down from $30.1 billion over the same months a year earlier.
- This shortfall contrasts with $24.5 billion in sovereign Eurobonds maturing in 2022 across the region, about one-third of which are in EM&MIs.
- Countries have been filling financing gaps with official bilateral, multilateral, and domestic financing.
- International investors pulled out $3.8 billion since July 2021, more than half ($2.2 billion) since February 2022.
- As many central banks (most CCA countries, Egypt, Mauritania, Pakistan, Tunisia) raised interest rates, ex ante real rates turned positive in the CCA but remained negative in most MENA countries and Pakistan.
- In countries with pegs to the US dollar (GCC countries, Jordan), policy rates increased with or closely followed US Federal Reserve rate hikes.

### Growth and inflation outlook (ME&CA; focus on MENA and oil exporters)
- Real GDP in MENA is forecast to grow 5.0 percent in 2022, unchanged from April, and up from 4.1 percent in 2021.
- Oil exporters: economies growing at 5.2 percent in 2022 (following 4.5 percent growth in 2021).
- MENA EM&MIs: real GDP growth forecast at 4.9 percent in 2022, an upward revision of 0.5 percentage points from April.
- Pakistan’s fiscal year 2022 growth projected at 6 percent.
- LICs: growth expected to remain weak at 0.8 percent in 2022 (a 0.3 percentage point downward revision from April).
- Growth projections for 2023:
  - MENA: 3.6 percent in 2023, unchanged relative to April.
  - Oil-exporting countries: 3.5 percent in 2023.
  - MENA EM&MIs: 3.9 percent in 2023.
  - LICs: gradual recovery in 2023 and over the medium term; continued challenges from high food prices and food insecurity.
- Headline inflation for MENA (excluding Sudan) is expected to be 12.1 percent in 2022 (1.7 percentage point higher than 2021 and 1.1 percentage point above the April forecast) and 11.2 percent in 2023—an upward revision of 2.6 percentage points.
- Pakistan’s inflation is foreseen to be in double-digit territory in 2022−23, with upward revisions from April.
- Over the medium term, inflation is expected to moderate as commodity prices ease, growth decelerates, and fiscal and monetary stances tighten.

### External financing needs and regional support
- The average current account surplus for oil exporters (for GCC countries) is expected to increase from 4.6 percent of GDP (8.2 percent) in 2021 to 9.7 percent of GDP (16.7 percent) in 2022—an additional surplus of $275 billion ($208 billion)—before receding to 7.8 percent of GDP (13.7 percent) in 2023.
- In EM&MIs, current account deficits are projected to remain roughly at their 2021 levels (about 5 percent of GDP) in 2022, before declining slightly to 4.4 percent of GDP in 2023.
- LICs: aggregate current account deficit projected to widen from 7.7 percent of GDP in 2021 to 9.3 percent in 2022 before shrinking slightly to 8.3 percent in 2023.
- External financing needs of MENA EM&MIs and Pakistan will increase from 109 percent of gross international reserves ($232 billion) in 2021 to 242 percent in 2022 ($275 billion) before receding to 163 percent in 2023 ($265 billion).
- GCC countries and associated financial institutions are stepping in to help fill higher financing requirements, including addressing food security concerns.
- The Arab Coordination Group has launched a food security action plan with an initial $10 billion package.
- GCC countries have pledged in total $41 billion to Egypt, Jordan, Pakistan, and Yemen in official support and investments, disbursing or rolling over more than $22 billion to date.
- Robust non-oil growth in GCC countries is expected to continue supporting remittance flows to the broader region; remittances from the GCC could grow in the range of 1.9 percent to 3.4 percent annually over the medium term (based on De and others (2019) estimates of elasticity between 0.6 and 1.1).

*Source: IMF staff calculations and figures from the Regional Economic Outlook: Middle East and Central Asia (October 2022).*

### 2023. This reflects past progress in subsidy reform,

### text - 2023. This reflects past progress in subsidy reform,

### Fiscal pressures, debt, and interest costs
- Tighter domestic and external borrowing conditions are expected to raise interest expenses by 0.4 percent of GDP on average in 2023 compared to 2022, and up to 1.3 percent of GDP for Egypt.
- Public debt-to-GDP ratios are set to increase slightly in 2022 relative to their 2021 levels due to still-elevated primary deficits in most countries and valuation effects from exchange rate depreciation in some countries, before easing in 2023.
- Despite higher interest rates, debt pressures are mitigated by still-negative interest rate-growth differentials, reflecting reliance on concessional official financing and relatively lower-costly domestic debt for most MENA EM&MIs and Pakistan.
- Higher interest payments and increased reliance on short-term financing in some EM&MIs (Egypt, Pakistan, Tunisia) will raise public gross financing needs to $550 billion over 2022−23 ($22 billion above gross financing needs over 2020−21).
- Gross financing needs are expected to reach an annual average of 33 and 22 percent of GDP for Egypt and Pakistan, respectively, over 2022−23.
- EM&MIs and LICs continue to benefit from relatively lower interest bills (an average of 1.2 percent of GDP in 2022−23, unchanged from 2021), reflecting their reliance on concessional financing from bilateral and multilateral partners.
- Public debt trajectories are forecast to improve slightly for:
  - oil exporters: from 22.6 percent of GDP in 2021 to 19.8 percent of GDP in 2022;
  - EM&MIs: from 54.1 percent of GDP to 45.0 percent of GDP during the same period;
  - LICs: from 39.1 percent of GDP to 37.2 percent of GDP.

### Real activity, inflation, and remittances in CCA
- CCA economies performed strongly in the first half of 2022 (Armenia, Georgia, Kazakhstan, the Kyrgyz Republic, Tajikistan, Uzbekistan).
- Real GDP growth is expected to slow to 3.8 percent in 2022 from 5.6 percent in 2021.
- Growth forecasts were upgraded by 2.0 and 5.6 percentage points in LICs and EM&MIs, respectively, relative to April projections.
- Upgrades reflect: an upward revision to Russia’s real GDP growth forecast (up 5.1 percentage points from April); unexpected inflows (relocation of workers and firms, money transfers) fueling consumption (Armenia, Azerbaijan, Georgia, Uzbekistan); resilient trade including ruble settlement (Armenia) and Trans-Caspian Route shipments (Azerbaijan, Georgia); and fiscal stimulus in some countries (Kazakhstan, Tajikistan).
- Factors boosting 2022 growth are expected to fade; real GDP growth in 2023 is foreseen to be downgraded by 0.2 percentage point relative to April, to 4.0 percent.
- Over the medium term, growth is projected at about 3.5 percent, in line with emerging market and developing economies, but significantly below the historical average of almost 7 percent.
- Inflation is expected to accelerate from 9.2 percent in 2021 to 12.9 percent in 2022 and remain elevated at 10.5 percent in 2023, an upward revision of 2.2 and 1.9 percentage points in 2022 and 2023, respectively.
- Remittances—mainly from Russia—have historically offset food price increases, but projected slowdown in Russia raises risks to sustained remittance flows with potential implications for poverty and inequality in the region.

### External accounts and current balances
- Higher oil prices and spillovers from the war in Ukraine are dominating external account developments.
- The average current account surplus for CCA oil exporters is expected to increase sharply from 0.9 percent in 2021 to 8.3 percent in 2022, before subsiding to 7.3 percent 2022 April WEO Current.
- In oil-importing countries (EM&MIs and LICs), the current account deficit is expected to narrow to 4.4 percent of GDP in 2022 from 6.1 percent in 2021, before widening slightly to about 5.0 percent from 2023 onwards.
- External financing needs are projected to increase in 2022 for Armenia, Georgia, and the Kyrgyz Republic, but narrow for Uzbekistan.

### Key downside risks and financial conditions
- The balance of risks is weighted heavily to the downside amid a confluence of shocks.
- Upside risks include a larger-than-expected moderation in food commodity prices (resumption of Ukrainian grain exports) and, for EM&MIs and LICs, a greater-than-expected decline in oil prices.
- Protracted war in Ukraine and broadened sanctions on Russia could reduce exports of oil, gas, food, and fertilizers, causing shortages, higher and more volatile international prices, and a significant deceleration in Europe.
- Inflation expectations de-anchoring could feed into higher inflation—about 0.2 percentage point, on average, for a 1-percentage-point increase in five-years-ahead inflation expectations—and create a vicious circle of higher expectations and actual inflation.
- Disinflationary policies could be more costly than expected due to high dollarization, shallow financial markets, maturing monetary policy frameworks, and nascent credibility—weakening the sensitivity of aggregate demand to policy rate changes and potentially requiring large policy rate increases that risk recession.
- If China’s slowdown persists, it could reduce commodity prices, diminishing buffers for oil exporters.
- Higher food prices and shortages could lead to food insecurity and social unrest, particularly in 2023; rising fertilizer costs amid low strategic reserves could risk the 2023 agricultural harvest.
- Tighter-than-expected financial conditions could trigger debt and external stress and financial stability risks:
  - High levels of external public debt falling due in 2022−23 for the region’s EM&MIs (about twice as much each year on average as in 2019) indicate high near-term refinancing risks.
  - Further tightening could translate into higher government debt service costs, worsen debt dynamics, and force reliance on shorter-term domestic financing, crowding out private credit and exacerbating sovereign-bank linkages.
  - Faster-than-expected tightening of US monetary policy, resulting in a total increase of 300 basis points in the 10-year US Treasury yield in 2022 relative to 2021, could lower portfolio inflows to the region by nearly $18 billion (about 3 percent of the region’s external financing needs).
  - Current WEO projections entail a rise in the 10-year US Treasury yield of about 180 and 300 basis points through 2022 and 2023, respectively, from 2021. A risk scenario where the full projected tightening is frontloaded in 2022 implies an additional 120-basis-point rise in the 10-year US Treasury yield above current projections for 2022.

### Downside scenario impacts and fragmentation risk
- Under a downside scenario of higher oil prices (negative shock for all countries but oil exporters), tighter global financial conditions, a deeper slowdown in China, and global deceleration (October 2022 World Economic Outlook), real GDP for the MENA and CCA regions is estimated to decline by 0.9 and 2.2 percentage points in 2023, respectively.
- World economic fragmentation could magnify risks through changes in trade, FDI, and financial flows, and reduce effectiveness of cooperation on climate change; the CCA region’s medium-term outlook depends heavily on the degree of fragmentation given close ties to Russia and trade linkages to Europe and China.

### Policy priorities and recommendations
- Near-term priorities for all countries: maintain or restore price stability while protecting the vulnerable, respond to tightening global financial conditions while ensuring financial stability, ensure food and energy security, and manage lingering pandemic-related risks.
- Preserve fiscal sustainability while ensuring social stability in EM&MIs and LICs; maximize oil windfall benefits and progress diversification in oil exporters.
- Securing price stability:
  - Tighten monetary policy where inflation is broad-based and expectations rise above targets.
  - Adopt an overall tighter fiscal stance with support targeted to those in need to aid disinflation while supporting social cohesion.
  - For countries with pegged exchange rates, withdraw monetary accommodation as advanced economies tighten policy to contain inflation and protect pegs.
  - Over the longer horizon, strengthen monetary policy frameworks by: (1) focusing monetary policy on domestic price stability and strengthening central bank autonomy; (2) reducing dollarization by developing financial markets and institutions; (3) enhancing communication and transparency of monetary operations and foreign exchange interventions; (4) focusing on returning inflation to targets to anchor expectations.
- Tackling food insecurity:
  - Take decisive global and regional action to prevent a major food crisis in 2022 and beyond, including lifting trade restrictions and excess storage reserves, trade facilitation measures, improving access to fertilizers and natural gas, trade financing, and supply chain capabilities, and investing in climate resilient agriculture.
  - Donors and international agencies should prioritize grants and concessional loans and close World Food Programme funding shortfalls for vulnerable LICs and fragile states.
- Protecting the vulnerable while ensuring debt sustainability:
  - Strengthen medium-term fiscal frameworks to anchor confidence; target adjustments at inefficient expenditures while enhancing efficiency of social protection, education, and health spending.
  - Boost domestic revenues by eliminating widespread tax exemptions and inefficient tax incentives and strengthening revenue administrations.
  - Where fiscal consolidation is not feasible and debt sustainability is at risk, consider debt operations.
  - Oil exporters should build buffers, keep fiscal reform momentum, and avoid procyclical spending that is hard to reverse.
- Responding to tightening global financial conditions:
  - Central banks with flexible exchange rates should let currencies depreciate and raise policy rates as needed to control inflationary pressures.

*International Monetary Fund | October 2022*

### 1. REGIONAL dEvELOpMENTs ANd ECONOMIC OUTLOOK: MOUNTING ChALLENGEs, dECIsIvE TIMEs

### 1. REGIONAL dEvELOpMENTs ANd ECONOMIC OUTLOOK: MOUNTING ChALLENGEs, dECIsIvE TIMEs

### Financial stability, exchange rates, and banking sector risks
- In highly dollarized economies (Armenia, Georgia, Kyrgyz Republic, Tajikistan, Uzbekistan) and those with high shares of foreign-currency-denominated debt (Armenia, Tunisia), balance-sheet effects of exchange rate movements should be monitored carefully.
- Volatility may require central banks to intervene in the foreign exchange market to mitigate disorderly market conditions.
- With rising interest rates:
  - Banks will gain from higher net income but may suffer losses as loan origination declines and default rates rise.
  - Where bank exposures to sectors with rising vulnerabilities are high, deft calibration of macroprudential policies will be needed to support financial stability.
- Firm failures may increase given the worsening economic outlook and erosion of already-weak profit margins, implying reforms to insolvency frameworks would be particularly valuable ahead.

### Structural reform priorities for inclusive and resilient growth
- With macroeconomic policies focused on addressing the cost-of-living crisis and preserving fiscal sustainability, accelerating structural reforms is urgent to mitigate adverse effects on growth and bolster a sustainable and inclusive recovery.
- Reform priorities include:
  - Redesigning tax systems to increase fiscal revenues and make them more equitable, including by broadening tax bases and increasing tax progressivity (Verdier and others 2022).
  - Reducing informality, including through well-designed tax policies, to boost productivity and facilitate inclusion of women and youth in labor markets (Cardarelli, Vera Martin, and Lall, 2022).
  - Fostering private sector development by easing entry of new firms, eliminating barriers, and preventing existing ones from scaling up; this requires reforming state-owned enterprises, improving access to financial services for small and medium enterprises, reducing red tape and corruption, and lowering the cost of doing business in the region.
  - Stepping up digitalization to foster efficiency, inclusion, and resilience by broadening coverage of digitalization and internet connectivity and scaling up investments in new technologies.
  - Taking measures to adapt to the climate challenge, ensure energy and water security, and engineer a smooth transition toward more diverse and less carbon-intensive economies (Duenwald and others 2022). The recent floods in Pakistan are cited as a reminder.

### IMF support and instruments
- Since the start of the pandemic, the IMF has provided $21.3 billion in financing to the ME&CA region.
- Since the beginning of the war in Ukraine, the IMF Executive Board has approved a new financing arrangement for Georgia and augmentations to existing arrangements for Jordan and Pakistan.
- Toolkit enhancements:
  - A new food shock window—recently approved by IMF Board—to allow easier access for countries facing food and fertilizer-related balance of payments pressures.
  - The new Resilience and Sustainability Trust, recently operationalized, to support low-income and vulnerable middle-income countries in building resilience to external shocks and address longer-term challenges, including climate change and pandemic preparedness.
- The IMF is coordinating with the World Bank, World Trade Organization, World Food Programme, Food and Agricultural Organization, and other multilateral development banks and international organizations to confront food insecurity.

### Box 1.1 — Food Security in the Middle East and Central Asia: key findings
- Four factors straining availability and affordability of basic food staples:
  1. Surge in global food commodity prices over the past two years.
  2. Countries’ dependency on wheat and fertilizer imports from Russia and Ukraine.
  3. Generally low storage and strategic reserves.
  4. Soaring external borrowing costs.
- Import diversification efforts noted for Egypt, Jordan, Morocco, Tunisia; evidence of food shortages in others.
- Specific country impacts:
  - Somalia: large share of population estimated to be experiencing high levels of acute food insecurity due to severe drought compounded by global food supply disruptions.
  - Sudan: fertilizer shortages have contributed to food insecurity, with wheat production falling by roughly one-third from 2021 to 13 percent below the five-year average.
- Wheat reserves:
  - Low-income countries (Mauritania, Somalia, Sudan, Yemen) have seen wheat reserves fall to three months of consumption or less.
  - Countries with limited access to financing and drought or low domestic harvest (Djibouti, Somalia, Sudan) rely on international aid to secure staple food imports.
- Food inflation has accelerated across the region; recent domestic food inflation rates reached:
  - 15 percent or more in Algeria, Armenia, Azerbaijan, Egypt, Georgia, Kazakhstan, the Kyrgyz Republic, Pakistan, and Uzbekistan.
  - 12 percent in Somalia.
- Risks:
  - Soaring fertilizer and fuel prices may hamper capacity to scale up domestic production and adversely impact future harvest yields.
  - Current export restrictions on food and fertilizers (Egypt, Kazakhstan, Kyrgyz Republic, Pakistan) could broaden supply shortages and increase prices, affecting affordability for low- and middle-income countries with large vulnerable populations.
- Note: Despite receding in recent months, global food prices remain higher than their 2021 levels. The July agreement between Russia and Ukraine to facilitate Ukrainian grain exports could improve supply worldwide and soften cereal prices further.

### Box 1.2 — The Impact of Russia’s War in Ukraine on Caucasus and Central Asia (CCA): key findings
- To date, the adverse impact of Russia’s war in Ukraine on the CCA region has been milder than initially expected, reflecting:
  - Near-term resilience of Russian economic growth.
  - Unexpected money transfers and policy measures to avoid secondary sanctions.
  - Open trade routes, continuing financial flows (many nonsanctioned Russian banks), and existing arrangements (Eurasian Customs Union membership, long-term gas contracts) mitigating higher food and energy price impacts.
- Postpandemic recovery appears to continue in oil-importing countries; relocation of businesses and individuals from Russia may have played a significant role.
- Money transfers into several CCA countries (Armenia, Azerbaijan, Georgia, Uzbekistan) have increased significantly; such transfers may signal capital movements, including from returning expatriates, and have contributed to growth in banking deposits and local currencies, reversing initial postwar losses against the US dollar in Armenia, Georgia, the Kyrgyz Republic, and Tajikistan.
- Armenia specifics:
  - Number of arrivals from Russia increased by 200 percent in the first quarter of 2022 compared to the same period in 2021 and 50 percent compared to prepandemic levels.
  - Hotel occupancy rates are at record highs.
- Georgia specifics:
  - Reported arrivals from Russia increased compared to 2021 but remain lower than in 2018−19.
  - Arrivals from Belarus and Kazakhstan increased by 114 percent and 36 percent, respectively, in the first half of 2022 compared to the same period prepandemic.
- Uncertainty remains whether relocations are temporary or permanent; medium-term impacts on host economies and new business formation are unclear.
- The war in Ukraine is a multidimensional risk requiring proactive and agile policy responses; spillover risks related to inflation, food security, and external financing loom large. If the war persists and leads to widening sanctions or shifting geopolitical alliances, economic ties between the CCA region and Russia could come under pressure with possible adverse implications.

### MENA fiscal pressures and policy lessons from past commodity price surges
- High international food and fuel prices are exacerbating fiscal pressures in MENA amid tightening global financial conditions and reduced policy space from the pandemic.
- Past policy responses to rising commodity prices often lacked targeting and prior planning, resulting in:
  1. Large and persistent fiscal loosening.
  2. Increased budget rigidity.
  3. Diminished budget equity.
  4. Lack of offsetting fiscal adjustment.
- These responses heightened debt sustainability risks for oil importers and led to procyclical fiscal policies in oil exporters, followed by abrupt fiscal adjustments when oil prices fell.
- Current behavior: most MENA countries have resorted to similar responses, particularly generalized price subsidies, but at a smaller scale reflecting more limited fiscal space and past (yet unfinished) subsidy reform.
- Policy recommendations:
  - Consider cost-effective measures to address pressures from rising food and fuel prices.
  - Implement reforms to enhance fiscal resilience, including reduced dependency on fuel, ahead of the next commodity cycle.

### Commodity price upswing, heterogeneity, and macroeconomic context (Chapter 2 highlights)
- Commodity prices have risen sharply since mid-2020 due to surging postpandemic demand and supply-side constraints; the war in Ukraine has exacerbated price pressures.
- The current commodity price upswing is broadly comparable to 2008 and 2011 in magnitude and comovement across energy, food, and agricultural inputs, with food prices reaching record levels in the current episode.
- Although energy and food prices are expected to decline over the next two years, there is significant uncertainty; the episode might last longer than previous ones.
- Distinct global and cyclical position:
  - Global financial conditions for emerging markets are significantly tighter than in past episodes, reflecting higher international and domestic interest rates and higher risk premiums associated with elevated debt or ties to Russia and Ukraine.
  - Debt levels are also 25−40 percentage points of GDP higher than in past episodes, intensifying fiscal pressures for emerging markets in the MENA region.
  - Limited fiscal space coincides with growth that is substantially lower than before the 2008 commodity price surge for several countries (Egypt, Jordan, Tunisia) but broadly similar to before the 2011 episode.
- Terms-of-trade heterogeneity:
  - Commodity exporters and importers face opposite terms-of-trade shocks.
  - Oil exporters registered considerable improvements.
  - Emerging market oil importers—especially Jordan, Lebanon, Morocco, and Tunisia—have seen the largest terms-of-trade deteriorations since May 2020.
  - In low-income countries, terms of trade improved for Sudan and Yemen (reflecting gold and crude oil exports, respectively) and deteriorated for Djibouti and Mauritania.
  - The current commodity price increase is associated with larger terms-of-trade movements than in previous episodes.

*International Monetary Fund | October 2022*

### 2. A REpEAT Of ThE pAsT? fIsCAL IMpLICATIONs Of COMMOdITy pRICE sURGEs IN ThE MIddLE EAsT ANd NORTh AfRICA

### 2. A REpEAT Of ThE pAsT? fIsCAL IMpLICATIONs Of COMMOdITy pRICE sURGEs IN ThE MIddLE EAsT ANd NORTh AfRICA

### Varying Degrees of Pass-Through to Domestic Prices
- Global food commodity prices have risen by 80 percent since 2019.
- Domestic food price inflation ranged from 6 to 49 percent among the MENA region’s oil importers and from 7 to 24 percent among oil exporters.
- International crude oil prices increased by 63 percent since 2019.
- Domestic gasoline prices in the region increased by 26 percent on average for oil importers and 12 percent on average for oil exporters.
- For the region’s oil importers, the implied average pass-through for domestic gasoline prices is 41 percent, compared with about 15 percent during 2007−14.

### Lessons from Past Episodes of Commodity Price Surges
- Time window considered: from 2005 (three years before the 2008 commodity price peak) to 2016 (five years after the 2011 commodity price peak).
- Fiscal balances presented are not cyclically adjusted due to one-off events and structural breaks.
- Fiscal responses were associated with persistent fiscal expansions in both oil importers and exporters, reflecting procyclical policies for the latter.
- Adjustment that followed was generally insufficient, resulting in:
  - Diminished future fiscal space for oil importers.
  - At times abrupt adjustment for oil exporters with sharp cuts when oil prices fell.
- Higher spending proved difficult to reverse, increasing budget rigidity and resulting in low-quality fiscal adjustment, with public investment typically bearing the brunt.
- Social protection relied mainly on subsidies and public employment, was inefficient, and led to growing reliance on costly interventions with limited protection of the vulnerable.

### Historical Fiscal Responses and Outcomes
- MENA emerging market oil-importers experienced a steady and synchronized deterioration in primary balances since 2008, bottoming out in 2012 with a cumulative expansion of 3 percentage points of GDP.
- Egypt, Jordan, and Tunisia experienced larger cumulative deterioration, reaching about 5−6 percentage points of GDP.
- Primary balances improved but did not return to pre-oil price surge levels for six years on average after the 2011 shock.
- For oil-exporting countries, fiscal stances expanded after 2008, notably among GCC countries; Kuwait, Oman, and the United Arab Emirates saw the sharpest deteriorations in non-oil primary balances.
- Subsidies and transfers for MENA emerging markets peaked on average in 2012—having increased by 3 percentage points of GDP since 2007—and declined thereafter.
- Subsidies were more persistent in oil exporters, increasing by 6 percentage points of GDP at their peak in 2014.
- In 2010, price subsidies in the MENA region and Pakistan amounted to 7.8 percent of GDP on average; 15 percent of this amount (1.2 percent of GDP) reflected the cost of food subsidies.
- The wage bill in some countries increased substantially:
  - On average, the wage bill increased by 1 percentage point of GDP at its peak for the region’s emerging markets, reaching up to 4 percentage points in Tunisia in 2017 from its 2010 level.
  - For oil exporters, the sustained wage bill expansion that began in 2010 lasted for more than five years, reaching 15.4 percent of non-oil GDP on average for GCC countries and Algeria, and up to 33 percent for Kuwait.

### Targeting Inefficiencies and Distributional Impacts
- Generalized price subsidies and tax exemptions were less effective in reaching vulnerable populations and are costly.
- Studies found the bottom 40 percent of the population in Egypt, Jordan, Lebanon, Mauritania, Morocco, and Yemen received between 5 and 20 percent of overall fiscal transfers for diesel and gasoline subsidies.
- Food subsidies were somewhat better targeted: the bottom 40 percent received, for example, between 30 and 60 percent of wheat-related subsidies.
- VAT exemptions intended to help vulnerable households tended to be poorly targeted.
- Empirical evidence in the chapter shows a statistically stronger increase in subsidies following a large positive shock to oil prices in MENA countries with lower targeting of social protection programs.
- Similar evidence is found for countries where inequality is above the regional average.

### Subsequent Fiscal Adjustment: Insufficient and Low Quality
- Because expanded current expenditure was reversed only gradually and revenues took longer to recover, fiscal adjustment in oil-importing countries relied heavily on cuts to capital expenditures.
- Cuts to capital spending were insufficient to offset the cost of prior fiscal expansions.
- Public debt increased markedly: rising by 18 percentage points of GDP on average in MENA emerging markets between 2008 and 2015.
- Reduced public investment widened infrastructure gaps and weighed on economic growth, particularly for oil-importing countries.
- The mid-2014 collapse of oil prices triggered abrupt fiscal adjustment in oil-exporting countries through substantial cuts to capital expenditure and energy subsidy reforms across all GCC countries.
- Since 2018 some GCC countries added excise taxes (Qatar) and VAT (Bahrain, Oman, Saudi Arabia, UAE), but these efforts did not reverse the preceding expansion, driving an increase in net public debt of about 30 percentage points of GDP on average between 2008 and 2018.
- Costly and ineffective tax exemptions, generalized wage increases and subsidies, and resulting cuts to infrastructure spending reduced fiscal space and governments’ ability to deliver adequate public services; social spending lags peer groups in levels and socioeconomic outcomes.

### Current Surge in Commodity Prices: Fiscal Implications and Policy Responses (Aftermath of the War in Ukraine)
- Countries limited pass-through to domestic prices through generalized price subsidies and, in some cases, tax cuts; first line of defense has often been automatic increases in existing subsidies.
- In 2021, energy subsidies amounted to 1.5 percent of GDP on average among oil importers and 5.8 percent of GDP on average among oil exporters.
- Food subsidies in 2021 were less costly, reaching as high as 1.5−2 percent of GDP for Algeria, Egypt, and Tunisia.
- In 2022, the automatic increase of existing energy and food subsidies—and the introduction of new ones—is projected to cost an additional 0.8 and 0.3 percentage point of GDP on average, respectively.
- For some countries, the additional fiscal cost of energy subsidies in 2022 is expected to range from 1.7−3 percent of GDP (Iraq, Mauritania, Tunisia).
- The additional cost of food subsidies in 2022 is expected to reach about 1 percent of GDP for Iraq and Tunisia.
- In 2022 subsidies are projected to increase by less than in past episodes—roughly 50 percent of their peak between 2008 and 2013 for the region’s oil exporters and emerging markets—reflecting past subsidy reforms and limited fiscal space.
- Several countries allowed an upward adjustment in domestic gasoline prices: Jordan, Mauritania, Morocco, Pakistan, Saudi Arabia, Tunisia, UAE.
- Recent tax cuts have focused on food-related consumption taxes such as VAT (Oman, West Bank and Gaza), excises on fuel (Pakistan), and customs duties (Iraq, Morocco, Saudi Arabia, West Bank and Gaza).
- MENA countries have also introduced targeted measures to mitigate the impact of higher food and energy prices on the vulnerable.

*International Monetary Fund | October 2022*

### 1. MENA OE2. MENA OI

### 1. MENA OE2. MENA OI

### Existing Food and Energy Subsidies
- Figure 2.9 presents "MENA + Pakistan: Existing Food and Energy Subsidies (Percent of GDP, 2021)" with country-level data points and groupings (OEEM&MILIC, ALG, LBY, IRQ, KWT, SAU, UAE, OMN, PAK, TUN, MAR, WBG, EGY, JOR, SDN, MRT, YEM).  
- Note: For oil exporters, food and energy subsidies include budget and off-budget operations. Country abbreviations are International Organization for Standardization country codes. EM&MI = emerging market and middle-income economies; LIC = low-income country; MENA = Middle East and North Africa; OE = oil exporter; OI = oil importer.

### Recently Announced Measures in Response to Higher Energy and Food Prices
- Figure 2.11 ("MENA EM&MI + Pakistan: Recently Announced Measures in Response to Higher Energy and Food Prices") reports the number and types of measures across countries, including:
  - Trade restrictions
  - Wages and pensions
  - Other/unspecified spending
  - Other revenue measures (income taxes and other revenue measures)
  - Customs duties
  - Vouchers/utilities bill discount
  - Reduction in consumption taxes (VAT and excise)
  - Non-fiscal other measures
  - Cash transfers
  - New price freeze/price subsidies
- The estimated average fiscal cost of these policy responses, including increases in subsidies (existing and new) and other new measures, is in the range of 0.8–1.3 percent of GDP.
- Most measures have been announced as temporary. For oil importers these measures are generally in the remit of the general government; for most oil exporters they tend to be off budget, raising transparency concerns.

### Fiscal Outlook: Near-Term Weakening and Medium-Term Effects
- The war in Ukraine and policy responses are expected to weaken primary balances in 2022 in most MENA countries and Pakistan relative to prewar projections (Figure 2.12).
- For MENA emerging markets and Pakistan, primary balances are projected to worsen compared to prewar expectations but remain unchanged from 2021 on average.
- Worsening reflects higher primary current spending—primarily in Pakistan and Tunisia—due to higher subsidies and other measures, partially offset by lower capital expenditures. In Egypt, cuts to other current expenditures offset higher subsidies.
- Among low-income countries, Mauritania, Somalia, and Sudan are projected to loosen their primary balances both relative to prewar projections and 2021, reflecting higher energy and food subsidies and, in Sudan, lower-than-expected revenues due to political instability.
- Among oil exporters:
  - Most GCC countries have not expanded their non-oil primary balances and continue consolidation into 2022.
  - Algeria, Iraq, Qatar, and UAE are expected to have a looser fiscal stance in 2022 compared to 2021, reflecting higher subsidies (Algeria, Iraq, UAE) and higher wages (Algeria, Qatar, UAE).
- The 2022 fiscal expansion is expected to carry over the medium term, with weaker primary balances by 2026 vis-à-vis prewar expectations (Figure 2.13). Despite loosening, all MENA emerging markets are expected to continue adjustment paths at a slower pace.
- Among oil exporters, GCC countries are expected to save about 20 percent of total revenues on average (or 33 percent of oil revenues) despite expected declines in oil prices over the medium term—a significantly higher saving rate relative to past episodes. Among non–GCC countries, Algeria’s government savings rates are projected to fall sharply, whereas Iraq is expected to save about one-quarter of its oil revenues (Figure 2.14).

### Substantial Risks Surrounding the Outlook
- The outlook entails substantial risks, including:
  - Higher-for-longer commodity prices
  - Tighter and more volatile financial conditions
  - A deeper global slowdown
- Historical episodes show social stability in MENA emerging markets can be tenuous when commodity prices rise. For oil exporters, large oil revenues carry the risk of fiscal profligacy, though this has not occurred in most countries so far.
- A combination of downside risks could result in pressures on the fiscal outlook similar to historical outcomes following commodity price surges, when social instability and higher-for-longer oil prices inflicted larger-than-initially-expected pressures on fiscal accounts (Figure 2.15).
- There is a risk that public entities such as state-owned enterprises and sovereign wealth funds spend oil windfalls, raising the need for greater transparency and oversight.

### Near-Term Policy Recommendations: Cushion the Impact of Inflation on the Vulnerable
- Implement targeted cash transfer programs as the first line of defense in countries with relatively well-targeted social safety nets (for example, Morocco, Pakistan, and Tunisia).
- Expand less-targeted in-kind food transfers temporarily and tailor them to the needs of poor households.
- Use mobile phone network data to improve humanitarian assistance targeting and deliver transfers, including to informal workers.
- Consider self-targeted food price subsidies judiciously if targeted assistance is difficult to implement swiftly and food security risks are high.
- Refrain from costly and regressive price subsidies on fuels; allow international energy prices to pass through gradually to preserve fiscal space, particularly important for oil importers.
- Consider temporary shielding measures when well-targeted programs cannot be rolled out quickly, such as:
  - Uniform lump-sum utility bill discounts
  - Focused subsidy support for fuels mainly consumed by the poor (for example, propane gas)
  - Lifeline electricity tariffs (reduced rates for a first block of electricity consumption)
- Prevent tax cuts and blanket exemptions; instead, implement VAT refunds for low-income households while gradually transitioning to a single VAT rate.
- Introduce sunset clauses alongside all new measures (including expanded existing measures) to ensure phasing out when commodity prices return to previous levels.
- Avoid expansionary fiscal policies that fuel domestic inflationary pressures, worsen intergenerational equity, or increase debt and financing pressures. For oil-exporting economies, contain nonsocial current spending increases; avoid expansions to public wage bills and pensions that undermine fiscal sustainability.

### Medium-Term Policy Recommendations: Build Resilience to Future Shocks
- Complete energy subsidy reforms in conjunction with a more robust social safety net:
  - Move to an automatic adjustment mechanism of energy pricing.
  - Pair subsidy reform with targeted compensation to protect vulnerable households as subsidies are reduced.
  - Use fiscal space created by subsidy reform to finance higher safety net coverage and progrowth capital spending.
  - Examples of progress: Tunisia (expanding coverage of social safety nets) and Saudi Arabia (improving targeting by establishing a social registry).
- Enhance energy efficiency to reduce overconsumption, energy waste, and smuggling associated with artificially low domestic energy prices.
- Bolster revenue mobilization through tax reforms to increase fiscal space in oil importers and diversify revenue away from hydrocarbons in oil exporters by:
  - Removing inequitable tax exemptions and incentives
  - Strengthening tax administration
  - Improving tax progressivity

*Source: International Monetary Fund | October 2022*

### 2. A REpEAT Of ThE pAsT? fIsCAL IMpLICATIONs Of COMMOdITy pRICE sURGEs IN ThE MIddLE EAsT ANd NORTh AfRICA

### 2. A REpEAT Of ThE pAsT? fIsCAL IMpLICATIONs Of COMMOdITy pRICE sURGEs IN ThE MIddLE EAsT ANd NORTh AfRICA

### Adopting risk-management strategies
- Commodity price cycles and the volatility surrounding them are here to stay.
- Use of hedging financial instruments, including long-term fixed-price contracts (Bacon and Kojima 2008), can help mitigate volatility.
- Risk management requires considerable knowledge of financial instruments and appropriate institutional frameworks (Daniel 2001).
- Practical country approaches:
  - Countries with limited experience can start with shorter-term contracts and gradually extend contract durations to avoid locking in unfavorable price levels (for example, Jordan’s long-term natural gas contract).
  - Some oil exporters use put options to set a minimum price on oil exports (for example, Mexico’s “Hacienda hedge”), which can be costly with a high option premium but allows benefiting from upside risks and proves effective at reducing sovereigns borrowing cost (Ma and Valencia 2018).

### Continuing to enhance governance and public financial management
- Greater fiscal transparency and accountability, including of public entities outside the general government, could help improve spending efficiency (IMF 2021a) and contain risks and fiscal costs stemming from state-owned enterprises in the region (IMF 2021b).
- Moving toward a medium-term fiscal framework and adopting fiscal rules can:
  - help reduce budget rigidity,
  - decouple fiscal policy from oil price swings,
  - reduce fiscal procyclicality for oil exporters, and
  - improve intergenerational equity by saving a portion of oil windfalls during oil price upswings.
- Setting up a ring-fenced stabilization fund could help ensure enough flexibility for countercyclical fiscal policies, including boosting social spending in response to adverse shocks.

### War in Ukraine: headline regional impacts and simulations
- The war in Ukraine risks raising poverty by about 1 percentage point and inequality by about 1 percent, and reducing real household consumption by about 2 percentage points, on average (based on simulations using microdata from household budget surveys).
- The poorest countries in the region are expected to bear the brunt of the impact on poverty, which could increase by about twice the regional average.
- About half a million more people in the region are estimated to have entered extreme poverty during 2020–21 (pandemic-related estimate).

### Inflation and food security risks
- Inflation had been rising across the region during 2021; the war’s impact on global food and energy prices contributed to a marked deterioration in the inflation outlook.
- Higher inflation is expected to be driven primarily by surging food prices.
- Higher food prices could:
  - worsen inequality and poverty rates for vulnerable groups,
  - adversely affect food affordability and security, and
  - raise risks associated with social unrest.
- Empirical magnitudes and sensitivities:
  - The average share of the population living in extreme poverty (with income below the World Bank’s poverty line of $1.9 per day) declined from about 33 percent in 2000 to less than 5 percent in 2019.
  - More than 40 percent of the region’s population was living on less than $5.5 per day in 2019.
  - Inequality as measured by the Gini coefficient had decreased since 2000 but remained broadly stable at about 0.32 over the last decade.
  - Food shares in the lowest decile of the income distribution range from about 70 percent for Tajikistan to about 40 percent for Georgia.
  - When headline inflation is 10 percent (nominal household income assumed to adjust with headline inflation) and food and nonfood inflation range between 0 and 20 percent, poverty rates and inequality deteriorate when food inflation rises relative to nonfood inflation (microsimulation framework based on Deaton 1989).
  - Poverty in the Kyrgyz Republic is the most sensitive to relative price changes; inequality is most sensitive in Armenia; poverty and inequality are least sensitive in Kazakhstan.

### Remittances: importance, projected losses, and cushioning role
- Remittances currently account for between 10 and 30 percent of GDP for Armenia, Georgia, the Kyrgyz Republic, Tajikistan, and Uzbekistan.
- Russia is the most important source of remittances for most countries, particularly the Kyrgyz Republic and Tajikistan.
- Based on Russia’s projected GDP losses since the war’s onset (comparing the October 2022 and October 2021 World Economic Outlooks):
  - Remittances from Russia to CCA countries are estimated to contract in the range of about 4−10 percent by 2023 (percent deviation from October 2021 WEO projections, nominal).
  - Remittances from Russia to CCA countries are estimated to contract in the range of about 5−13 percent by 2026 (percent deviation from October 2021 WEO projections, nominal).
- Historical responsiveness:
  - A 1 percent increase in domestic food prices led to a 0.8 percent increase in remittances for households in the bottom quintile of the income distribution and an increase of about 0.6 (as estimated in the chapter) — indicating remittances helped offset the impact of past surges in food prices for vulnerable households.
- Risks:
  - Lower growth in Russia, pressures on the ruble, restrictions on payment systems, and a global slowdown could hamper remittances in the future.
  - Declines in remittances of the magnitudes projected could worsen poverty and inequality and deeply affect households that rely heavily on them as a source of income and consumption.

### Policy implications and priorities for the vulnerable
- Mitigating the war’s potential impact on the vulnerable will be a key priority for policymakers and will require stronger social safety nets.
- Understanding heterogeneity of the war’s impacts across households and countries would help design policy support programs better toward the most in need.

*International Monetary Fund | October 2022*

### 3. WAR IN UKRAINE: RIsKs TO pOvERTy ANd INEqUALITy IN ThE CAUCAsUs ANd CENTRAL AsIA

### 3. WAR IN UKRAINE: RIsKs TO pOvERTy ANd INEqUALITy IN ThE CAUCAsUs ANd CENTRAL AsIA

### Remittances and household welfare
- Remittances disproportionately benefit poorer households:
  - Share of poor households receiving remittances: about 15 percent in the Kyrgyz Republic to 5 percent in Georgia for the bottom third of income distributions.
  - Remittances as a share of income for poorer remittance-receiving households: about 71 percent in Tajikistan to 28 percent in the Kyrgyz Republic.
- Response to food price shocks:
  - Remittances rise for two quarters after a food price shock and dissipate after about a year (local projection analysis).
  - The effect of remittances on more affluent households is small and not statistically significant.
- Counterfactual and exclusion scenarios:
  - Excluding remittances from household incomes increases inequality by about 3.4 percent and poverty rates by about 5.7 percentage points on average; total consumption per capita would decline by about 11 percent on average.
  - Using estimated counterfactual incomes (propensity score matching): without migration and with counterfactual incomes replacing remittances, inequality would be about 2 percent higher, and poverty rates would increase by almost 2.7 percentage points; total consumption per capita would decline by about 4 percent on average.
- Caveats:
  - Impacts from removing remittances are upper bounds because remittances substitute income migrants would have earned at home.
  - Estimated income declines would be larger if returning migrants face delays in finding jobs or lower wages because of increased labor supply.

### Early months of the war: household perceptions and remittance volatility
- Survey evidence (monthly World Bank phone surveys covering Kazakhstan, the Kyrgyz Republic, Tajikistan, and Uzbekistan through July 2022):
  - In July, 86 percent of households surveyed in Kazakhstan said that rising prices are one of the country’s most serious challenges.
  - More than 90 percent reported that prices are rising too quickly for the items they commonly buy.
  - Measures tied to food affordability (e.g., ability to buy enough food for all family members) deteriorated across the region in 2022; reported reduction in food consumption observed in Tajikistan.
- Primary use of remittances in 2022 for remittance-receiving households:
  - Share used to purchase food ranged from nearly half in the Kyrgyz Republic and Uzbekistan to 80 percent in Tajikistan.
- Remittance dynamics:
  - Significant increase in money transfers to several CCA countries in recent months with outsize contributions from Russia compared with past year averages (Armenia, Azerbaijan, Georgia, Uzbekistan) that cannot be explained by regular flows.
  - Early months of the war: personal transfers contracted but then surged, partly reflecting the ruble’s sizable strengthening against Central Asian currencies.
  - Migration disruptions were short-lived; between March and July, the share of households with a migrant rose for the Kyrgyz Republic, Tajikistan, and Uzbekistan. The share of households with a member considering migration fell in the Kyrgyz Republic and Tajikistan.

### Simulated impacts and projections (2023)
- Scenario method:
  - Simulations use changes to World Economic Outlook projections between October 2021 and October 2022 for all countries in the region except Azerbaijan and Turkmenistan. Remittance declines from Russia calibrated by country shares and estimated impact of projected decline in Russia’s nominal GDP.
- Regional averages and aggregate impacts:
  - Poverty rates are estimated to increase by 1.1 percentage points on average in 2023 relative to prewar estimates.
  - Inequality is estimated to increase by 0.7 percent on average in 2023.
  - Poverty rate reaching 17 percent and Gini coefficient reaching 0.33 in 2023 (regional averages under the scenario).
  - The war is estimated to reduce real household consumption in the region by about 2 percentage points on average compared with prewar projections.
- Country heterogeneity:
  - Largest projected increases in poverty: Kyrgyz Republic and Tajikistan (around twice the regional average).
  - Lower impacts on poverty in more affluent countries: Georgia, Kazakhstan, and to a lesser extent, Armenia.
  - Drivers:
    - Relatively high food price inflation is the largest contributor to poverty across most countries (except Uzbekistan, which has a relatively large downward revision to growth).
    - Declines in remittance flows estimated to have relatively large impacts for Armenia, the Kyrgyz Republic, and Tajikistan.
  - Largest impacts on inequality expected in Armenia and the Kyrgyz Republic (primarily due to high food price inflation) and in Tajikistan (mainly due to the decline in remittances).

### Fiscal costs of eradicating poverty and social protection gaps
- Fiscal cost estimates:
  - Cost of moving all households below the $3.65 per day poverty line to the poverty line reaches 2.1 percent of GDP in Tajikistan and 1.3 percent of GDP in Uzbekistan.
  - Food subsidies that offset rising food prices in the simulations are estimated to cost 1.4 percent of GDP on average.
  - The fiscal cost of moving all households in poverty to the $3.65 per day poverty line would cost 0.8 percent of GDP on average across countries.
- Regional baseline statistics:
  - The average poverty rate is 18 percent, and Gini coefficient is 0.34 across the three countries included in the specific analysis referenced.
- Social safety net performance and gaps (coverage, targeting, adequacy, efficiency):
  - Social protection compares favorably to other emerging economies for most countries in the region, particularly in Georgia and, to a lesser extent, Armenia, but there is room to improve coverage, targeting, adequacy, and efficiency across all countries.
  - Achieving poverty eradication requires significant improvements in both coverage and targeting of existing social safety nets.

### Policy recommendations to mitigate risks
- Target poor and vulnerable segments in a targeted manner rather than generalized subsidies:
  - Allow prices to adjust freely where possible; avoid generalized food and energy price subsidies except as last resort because they are costly and inefficient.
- Use targeted cash transfers where social safety nets are stronger:
  - Offset impacts of higher food and energy costs on living standards with targeted cash transfers to the most vulnerable or those at particular risk from shortages.
  - Countries with limited fiscal space could reprioritize spending or pursue concessional financing or grants to ensure debt sustainability.
- For countries with underdeveloped safety nets:
  - Allow gradual price adjustment to reflect international price developments where expansion of coverage is not feasible.
  - Expand most effective programs and leverage digital methods (smart cards, mobile money) to identify eligible households and deliver benefits efficiently.
- If food security is acute and other options exhausted:
  - Consider temporary reallocation toward food price subsidies or direct distribution of staple foods while maintaining budget neutrality.
  - Deploy policies to support food supply (finance for grain and fertilizer imports, increase storage capacity).
- Address potential persistent decline in remittances:
  - Expand social safety nets to fill gaps if remittances decline.
  - Prepare for potential return migration with implications for domestic labor markets and social support.
  - Improve targeting to reduce fiscal costs and protect the most vulnerable.
- Strengthen social protection systems post-pandemic:
  - Ramp up means testing and revisit program design and eligibility where targeting is insufficient; eliminate untargeted support.
  - Build stronger systems to identify eligible beneficiaries (single social registry) and keep information current to deliver timely support.
  - Deepen financial inclusion to enable electronic payments to remote areas to enhance efficiency and transparency.

*Italic: International Monetary Fund | October 2022*

### 3. WAR IN UKRAINE: RIsKs TO pOvERTy ANd INEqUALITy IN ThE CAUCAsUs ANd CENTRAL AsIA

### 3. WAR IN UKRAINE: RIsKs TO pOvERTy ANd INEqUALITy IN ThE CAUCAsUs ANd CENTRAL AsIA

### Social protection and transfers
- Efforts to identify eligible citizens who are not receiving social benefits should be strengthened.
- Coordination among government agencies to streamline application procedures is important.
- Reference to policy tool: “Digital Solutions for Direct Cash Transfers in Emergencies.” (IMF COVID-19 Special Series cited in source.)

### Key statistics and projections — ME&CA: Selected Economic Indicators, 2000–23 (Percent of GDP, unless otherwise indicated)
- ME&CA (1,2)
  - Real Gdp (annual growth) 4.61.7–2.74.55.03.6
  - of which non-oil growth 5.62.8–2.65.14.23.5
  - Current account balance 6.30.4–2.52.47.25.7
  - Overall fiscal balance 1.7–3.2–7.8–3.20.2–0.7
  - Inflation (year average; percent) 7.17.710.512.913.813.1
- ME&CA oil exporters
  - Real Gdp (annual growth) 4.60.5–3.84.54.93.5
  - of which non-oil growth 5.92.4–3.45.53.63.4
  - Current account balance 9.42.5–2.24.39.67.8
  - Overall fiscal balance 3.7–2.0–8.2–2.41.90.5
  - Inflation (year average; percent) 6.76.18.711.112.611.4
- ME&CA emerging market and middle-income countries (1,3)
  - Real Gdp (annual growth) 4.43.7–0.94.55.43.7
  - Current account balance –3.4–5.3–3.2–3.3–4.6–4.2
  - Overall fiscal balance –5.2–6.7–7.3–6.5–6.4–5.8
  - Inflation (year average; percent) 6.88.38.27.811.213.9
- ME&CA low-income developing countries (2)
  - Real Gdp (annual growth) 4.42.9–1.44.33.23.8
  - Current account balance 1.8–5.6–4.8–6.6–6.3–6.2
  - Overall fiscal balance –1.7–4.4–3.8–3.0–3.1–2.7
  - Inflation (year average; percent) 12.919.539.369.542.625.9

### Key statistics and projections — MENA: Selected Economic Indicators, 2000–23 (Percent of GDP, unless otherwise indicated)
- MENA (1)
  - Real Gdp (annual growth) 4.41.0–3.14.15.03.6
  - of which non-oil growth 5.52.6–2.84.93.93.5
  - Current account balance 7.31.1–2.63.07.55.9
  - Overall fiscal balance 1.9–3.1–8.2–3.00.7–0.6
  - Inflation (year average; percent) 6.98.110.914.214.212.4
- MENA oil exporters
  - Real Gdp (annual growth) 4.40.1–4.04.55.23.5
  - of which non-oil growth 5.82.3–3.65.53.63.4
  - Current account balance 10.12.8–2.14.69.77.8
  - Overall fiscal balance 3.8–2.3–8.4–2.41.80.4
  - Inflation (year average; percent) 6.66.39.111.412.411.4
- MENA emerging market and middle-income countries (1)
  - Real Gdp (annual growth) 4.43.9–0.53.64.93.9
  - Current account balance –3.8–5.9–3.7–4.4–4.5–4.1
  - Overall fiscal balance –5.6–6.5–7.4–6.8–6.0–6.6
  - Inflation (year average; percent) 6.59.66.97.110.610.6
- MENA low-income developing countries
  - Real Gdp (annual growth) 2.4–0.6–4.10.60.83.0
  - Current account balance –3.0–9.6–11.2–7.7–9.3–8.3
  - Overall fiscal balance –2.7–6.4–3.8–0.6–2.1–1.6
  - Inflation (year average; percent) 14.533.493.2184.095.748.7
- MENA excl. conflict-affected countries
  - Real Gdp (annual growth) 4.41.3–2.63.75.33.3
  - of which non-oil growth 5.62.9–2.54.94.03.4
  - Current account balance 7.31.0–2.52.97.55.9
  - Overall fiscal balance 2.0–3.4–8.0–3.20.6–0.8
  - Inflation (year average; percent) 6.88.311.014.214.112.5
- MENA excl. fragile states and conflict-affected countries
  - Real Gdp (annual growth) 4.11.2–1.63.75.33.3
  - of which non-oil growth 5.42.8–1.14.24.23.4
  - Current account balance 8.11.7–1.82.87.25.6
  - Overall fiscal balance 2.4–3.5–7.8–3.30.0–1.3
  - Inflation (year average; percent) 6.67.98.49.711.511.6
- MENAP (1,2,3)
  - Real Gdp (annual growth) 4.41.3–2.84.35.13.6
  - of which non-oil growth 5.52.7–2.55.04.23.5
  - Current account balance 6.80.7–2.42.77.55.9
  - Overall fiscal balance 1.6–3.5–8.0–3.20.2–0.9
  - Inflation (year average; percent) 6.97.810.913.413.913.4
- Gulf Cooperation Council
  - Real Gdp (annual growth) 4.31.0–4.53.16.53.6
  - of which non-oil growth 6.22.5–3.64.54.03.7
  - Current account balance 13.55.5–1.28.216.713.7
  - Overall fiscal balance 6.8–1.7–8.9–0.67.36.0
  - Inflation (year average; percent) 2.6–1.51.22.23.62.6
- Arab World (1)
  - Real Gdp (annual growth) 4.61.8–4.44.05.43.9
  - of which non-oil growth 5.82.9–4.05.04.13.8
  - Current account balance 8.01.4–3.64.210.98.6
  - Overall fiscal balance 2.7–2.8–9.1–2.33.62.6
  - Inflation (year average; percent) 4.73.56.29.39.47.4

### Key statistics and projections — CCA: Selected Economic Indicators, 2000–23 (Percent of GDP, unless otherwise indicated)
- CCA
  - Real Gdp (annual growth) 6.94.1–2.15.63.84.0
  - Current account balance –0.0–2.0–3.6–1.04.83.8
  - Overall fiscal balance 2.20.1–5.4–3.10.61.0
  - Inflation (year average; percent) 9.16.67.59.212.910.5
- CCA oil and gas exporters
  - Real Gdp (annual growth) 7.33.0–3.04.52.63.8
  - of which non-oil growth 7.43.9–2.15.33.53.2
  - Current account balance 0.1–0.5–3.20.98.37.3
  - Overall fiscal balance 2.81.1–5.6–2.32.12.6
  - Inflation (year average; percent) 8.04.76.18.614.111.1
- CCA emerging market and middle-income countries
  - Real Gdp (annual growth) 5.96.1–7.08.48.23.8
  - Current account balance –9.3–6.5–8.6–7.3–6.5–6.1
  - Overall fiscal balance –1.7–1.1–6.9–4.6–1.8–1.9
  - Inflation (year average; percent) 4.53.43.58.610.46.4
- CCA low-income and developing countries
  - Real Gdp (annual growth) 6.45.81.17.35.14.5
  - Current account balance 1.9–6.0–3.0–5.6–3.5–4.3
  - Overall fiscal balance 0.8–3.2–4.3–5.1–4.0–3.5
  - Inflation (year average; percent) 12.912.311.710.711.010.6

*International Monetary Fund | October 2022*

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_Source: https://www.imf.org/-/media/files/publications/reo/mcd-cca/2022/october/english/text.pdf_