## 1. Regional Developments and Economic Outlook: Safeguarding Macroeconomic Stability amid Continued Uncertainty ## Source details **Canonical URL:** [1. Regional Developments and Economic Outlook: Safeguarding Macroeconomic Stability amid Continued Uncertainty](https://www.imf.org/-/media/files/publications/reo/mcd-cca/2023/april/english/text.pdf) ## Other formats - [Markdown version](/-/media/files/publications/reo/mcd-cca/2023/april/english/text.pdf.md) - [Structured JSON version](/-/media/files/publications/reo/mcd-cca/2023/april/english/text.pdf.json) --- ### Global environment and macro-financial risks - Global growth and assumptions: - Global growth moderated from 3.4 percent in 2022 to a projected 2.8 percent in 2023 and is projected to accelerate to 3.1 percent in 2024. - Projections based on statistical information available through late March 2023. - Market and financial risks: - Financial market turmoil triggered by stress in the banking sector in the United States and Europe in mid-March raised financial stability risks. - Global financial conditions tightened sharply in March, with credit spreads widening and equity prices falling after easing since October. - April 2023 Global Financial Stability Report and April 2023 World Economic Outlook inform the assessment that forceful policy actions so far appear to have contained systemic risks, conditional on the turmoil being contained going forward. - Inflation and commodity outlook: - Core inflation has remained persistently high despite some easing of headline inflation late in 2022. - Average petroleum spot prices estimated at $74.20 per barrel in 2023 and $70 in 2024 (down from $85.50 and $80.20, respectively, in October 2022). - Oil futures curves point to prices decreasing toward $62.70 by 2028. - Food commodity prices expected to decline by 4.9 percent in 2023 and 2.5 percent in 2024 (compared with October’s forecast of declines of 5.8 and 2.0 percent, respectively). - Assumed financial parameters in projections: - Price of oil (working hypothesis for projections): US$73.13 a barrel in 2023 and US$68.90 a barrel in 2024. - Six-month London interbank offered rate (LIBOR) on US dollar deposits assumed to average 5.4 percent in 2023 and 4.9 percent in 2024. - Caveats: - Report does not include the April 2023 OPEC+ oil production cuts. - Assumptions are working hypotheses rather than forecasts; uncertainties add to the margin of error in projections. ### Middle East, North Africa, and Pakistan: recent performance and near-term outlook - 2022 performance and drivers: - Real GDP growth in MENA: 5.3 percent in 2022 (an upward revision of 0.3 percentage point from October), up from 4.3 percent in 2021. - Strong performance of oil exporters (Bahrain, Libya, Qatar, Saudi Arabia, the United Arab Emirates) and some oil importers (Jordan, Mauritania, Morocco, Tunisia); strong rebound in oil production for oil exporters. - Domestic demand supported by tourism rebound (Jordan, Morocco, Qatar, Saudi Arabia), strong remittance flows (Egypt, Jordan, Morocco, Pakistan), and expansion in real lending (approximately 10 percent in Egypt in H2 2022). - Near-term outlook and transmission channels: - ME&CA economies expected to go through a soft patch in 2023 reflecting tight policies, OPEC+-related curbs in oil production, and fallout from recent financial conditions deterioration. - Inflation projected to remain persistent; CCA outlook depends heavily on monetary tightening in trading partners, private transfers, and migrant inflows from Russia. - Distributional and fiscal/financial pressures: - Macroeconomic instability and conflict continue to pose challenges in LICs and FCS amid ongoing cost-of-living crisis and worsening food insecurity. - Debt, financing needs, and inflation remain high in EM&MIs reflecting pandemic fallout and Russia’s war in Ukraine. ### Regional growth, inflation, and labor market highlights - Growth and components: - Regional growth: 5.3 percent in 2022; projected 3.1 percent in 2023; projected 3.4 percent in 2024. - Oil exporters: real GDP growth expected to slow from 5.7 percent in 2022 to 3.1 percent in 2023; non-oil GDP forecast to expand about 3.7 percent in 2023. - MENA EM&MIs: growth projected to slow from 5.1 percent in 2022 to 3.4 percent in 2023. - Country specifics: Egypt growth forecast 6.6 percent in 2022 to 3.7 percent in 2023; Pakistan 6.0 percent in 2022 to 0.5 percent in 2023. - LICs: GDP growth forecast to rebound from a contraction of 0.6 percent in 2022 to 1.3 percent in 2023 and to 3 percent in 2024. - Inflation: - Headline inflation: 14.8 percent in 2022; set to remain unchanged at 14.8 percent in 2023; decline to about 11 percent in 2024 (upward revision of about 2.5 percentage points for both years since October). - Pakistan: inflation projected to more than double to about 27 percent in 2023. - GCC headline inflation expected to drop from 3.3 percent in 2022 to 2.9 percent in 2023 and 2.3 percent in 2024. - LICs headline inflation declining from 83 percent in 2022 to about 46 percent in 2023 and 35 percent in 2024 (reflecting Sudan above 100 percent in 2022 and about 70 percent in 2023). - Labor markets: - Employment growth lackluster in Jordan, Morocco, Tunisia; healthy rise in GCC (Bahrain, Oman, Saudi Arabia) partly from migrant employment rebound. - Unemployment rates inched up or remained steady, staying above pre-pandemic levels in late 2022 (Jordan, Morocco, Tunisia). ### Fiscal positions, public debt, and financing needs - Fiscal balances and debt dynamics: - GCC: non-oil primary balances broadly unchanged in 2022 relative to 2021 despite an average increase in oil revenues of about 4 percentage points of GDP. - Non-GCC oil exporters (Iraq, Libya): ran procyclical fiscal policy with significant deterioration in non-oil primary balances. - Oil importers: primary fiscal deficits (excluding grants) improved on average in most MENA EM&MIs in 2022 relative to 2021 (except Egypt). - Pakistan undertook a sizable fiscal expansion in 2022. - Higher inflation was main factor containing public debt in most MENA EM&MIs and Pakistan in 2022; public debt-to-GDP ratios rose in Pakistan and Tunisia. - Public gross financing needs and external financing: - Public gross financing needs forecast to decrease from about $520 billion over 2021–22 to about $470 billion over 2023–24. - External financing expected to contribute about 12 percent of total sources on average. - External financing needs for MENA EM&MIs and Pakistan projected to decline from about $132 billion in 2022 to $123 billion in 2023 (about 212 percent and 171 percent of gross international reserves, respectively). - Oil exporters’ current account surpluses set to decline by about $250 billion (about 8 percentage points of GDP) between 2022 and 2024, remaining about 4.7 percent of GDP in 2024. - MENA EM&MIs’ current account deficits expected to narrow from 5.1 percent of GDP in 2022 to about 4 percent of GDP in 2024 on average. - LICs’ aggregate current account deficit projected to widen from 9 percent of GDP in 2022 to about 11 percent of GDP in 2023. ### Financial sector and sovereign-bank nexus - Banking sector indicators: - Median return on assets ranged between 1 percent and 1.4 percent as of end-2022, up from about 0.8 percent in 2020. - Capitalization: GCC at 17 percent; MENA EM&MIs at 15.3 percent. - Nonperforming loan ratios: 3.2 percent (GCC) and 5.3 percent (MENA EM&MIs) on average; some emerging markets recorded as high as 11.1 percent. - Sovereign-bank exposures: - Banking system’s exposure to government bond holdings ranges from 6.8 percent to 44 percent of total banking system assets. - Continued reliance on domestic bank financing (except in Tunisia) risks exacerbating sovereign-bank nexus given exposures exceeding 50 percent of bank assets at end-2022 in some EM&MIs and Pakistan. - Market pressures and flows: - Sovereign bond spreads widened and borrowing costs increased sharply on net in many EM&MIs (Lebanon, Pakistan, Tunisia). - Government bond yields across the region higher than end-2021 by about 130 to 3,000 basis points. - Portfolio fund inflows: $1.2 billion in first two months of 2023 after a record $4.5 billion in outflows in 2022. - Notable issuances: Morocco $2.5 billion; Jordan $1.25 billion; Egypt $1.5 billion sukuks in late February. ### External vulnerabilities and outlook by country group - External balances and projections: - MENA EM&MIs current account deficits deteriorated from 4.7 percent of GDP to about 5 percent of GDP on average in 2022. - Pakistan current account deficit rose from 0.8 percent of GDP to 4.6 percent of GDP in 2022. - Oil exporters: large current account surpluses amid high hydrocarbon prices. - Outlook by group: - Regional growth projected to decelerate from 5.3 percent in 2022 to 3.1 percent in 2023 before increasing to 3.4 percent in 2024. - Medium-term: EM&MI growth projected to accelerate to 4.4 percent in 2024 (MENA EM&MIs) and 3.5 percent in Pakistan if policy and structural reforms are sustained. ### Policy trade-offs and recommendations - Monetary and fiscal calibration: - Calibrate policy mix carefully to reduce core inflation without triggering financial stress and excessive tightening. - Tight monetary and fiscal policies amid tight global financial conditions call for careful sequencing and calibration. - Fiscal support and debt sustainability: - Continue targeted fiscal support to vulnerable groups while preserving debt sustainability and financial stability. - Phase out poorly targeted subsidies gradually and strengthen social safety nets. - Fiscal consolidation anchored on a downward debt path, supported by revenue mobilization and expenditure containment for EM&MIs. - Primary fiscal deficits projected to decline by about 3 percentage points of GDP on average between 2022 and 2025 for EM&MIs. - Interest expenses for EM&MIs projected to increase by about 1 percentage point of GDP on average over 2022–2025. - Financial stability vigilance: - Monitor spillovers from global banking stress; be prepared to act to contain systemic risks. - Strengthen resolution regimes and crisis management frameworks. - Structural reforms: - Accelerate reforms to bolster potential growth and resilience: reduce state-owned enterprises’ role, level the playing field, lift red tape, liberalize labor markets, and promote private sector development. - Ramp up diversification and decarbonization: invest in renewable energy and climate-resilient infrastructure and raise effective carbon rates (including phasing out subsidies). - IMF engagement: - Since January 2020, IMF approved $29.3 billion of new financing for ME&CA countries. - New IMF instruments: Resilience and Sustainability Trust; Food Shock Window. - IMF expanded resident representation and regional engagement, including a new regional office in Riyadh. *International Monetary Fund, Regional Economic Outlook—Middle East and Central Asia, May 2023* --- ### Caucasus and Central Asia (CCA): recent developments, outlook, and risks ### 2022 drivers and recent performance - Growth and composition: - CCA economies grew by 4.8 percent in 2022. - Country growth range: 12.6 percent in Armenia; 3.2 percent in Kazakhstan; 1.8 percent in Turkmenistan. - Positive contributors: - Large inflows of income, capital, migrants, and private transfers from Russia. - Higher energy commodity prices benefiting oil-exporting external balances. - Better-than-expected harvest in Russia supporting food imports. ### Inflation, wages, and monetary/fiscal stance - Inflation dynamics: - Overall inflation remained in double digits in 2022. - Headline inflation declined in Armenia, Georgia, and Tajikistan since mid-2022; rose in Kazakhstan and the Kyrgyz Republic; flattened in Uzbekistan; began to moderate slowly in Azerbaijan but remained in double digits in early 2023. - Imported inflation significant where imports from Russia are high; 20–30 percent depreciation versus the ruble in 2022 contributed. - Wages and pass-through: - Nominal wage growth surpassed inflation in most countries. - Empirical estimates: wage rises have about a 50 percent pass-through to core inflation, peaking at 11 quarters. - Fiscal and monetary stance: - Primary fiscal positions improved significantly in 2022 in most CCA countries; exceptions: Kyrgyz Republic and Tajikistan with loosening. - Monetary policy since August 2022: Armenia, Azerbaijan, Kazakhstan raised policy rates; Kyrgyz Republic, Tajikistan, Uzbekistan lowered rates; others on hold. - Monetary stance assessed as appropriately tight or neutral in most CCA countries. ### Financial sector and trade links - Financial indicators: - Median return on assets at 3.9 percent in 2022 (up from 1.1 percent since 2020). - Tier 1 capital ratios at 16.7 percent (8.1 percentage points above regulatory minimums). - Nonperforming loan ratios at 4.4 percent on average in 2022. - Customer deposits and long-term funding make up more than 90 percent of total funding in most banks. - Structural vulnerabilities: lower loan-loss provisioning, foreign exchange exposures, currency mismatches, and declining but widespread dollarization. - Trade links: - Trade with Russia increased for Armenia, Georgia, Tajikistan, Uzbekistan. - Share of trade with the Eurasian Economic Union increased for some members (Armenia, Kazakhstan, the Kyrgyz Republic). ### Outlook and projections - Growth projections: - GDP growth projected to decelerate to 4.2 percent in 2023 before rebounding to 4.5 percent in 2024. - Kazakhstan expected to accelerate to 4.3 percent from 3.2 percent in 2022 as oil production normalizes and Tengiz oil field expansion becomes operational. - Inflation projections: - Regional inflation projected to ease to 11.8 percent in 2023 and 8.5 percent in 2024 from 13 percent in 2022. - CCA emerging markets: inflation expected to decelerate to 6.4 percent in 2023 and 4.0 percent in 2024 from 10.5 percent in 2022. - LICs: inflation set to remain at 11 percent in 2023 before declining to 9.3 percent in 2024. - Oil exporters: inflation set to ease to 13 percent in 2023 and 8.7 percent in 2024 from 14.3 percent in 2022. ### Risks and scenarios - Downside risks: - Global financial sector instabilities, tighter-for-longer global financial conditions, escalation of the war in Ukraine, more entrenched inflation expectations, climate change–related shocks, and worsening food security. - CCA-specific: sharper contraction of the Russian economy, bad harvests, reversal of foreign exchange inflows, disruptions of the Caspian Pipeline Consortium pipeline. - Upside possibilities: - Resilient and rising inflows, continued skilled migrant influx from Russia, and diversification of trade routes could boost demand and productivity but may raise overheating risks. - Policy and reform risks: - Delays or backtracking in reform implementation could weaken medium-term growth and deepen vulnerabilities. - Social and humanitarian concern: - Fragile LICs face protracted conflict, drought, political crisis, and lack of financing; food insecurity worsened—about 19 million in Yemen and about 6 million in Somalia estimated to have experienced acute food insecurity in 2022. ### Policy recommendations for CCA and ME&CA - Overall approach: - Safeguard macroeconomic stability through tight monetary and fiscal policies while being mindful of financial stability risks; accelerate structural reforms to bolster potential growth, resilience, and inclusion. - Monetary policy: - Where inflationary pressures persist and stance is loose, consider tighter monetary policy (Egypt, Pakistan, Tunisia). - Where stance is tight or neutral and inflation has peaked, remain data dependent and avoid loosening prematurely (example: Armenia, Georgia). - Countries with currency pegs should follow US monetary policy and consider additional macroprudential measures. - Strengthen central bank communication and transparency; develop surveys of inflation expectations. - Financial sector and macroprudential measures: - Strengthen supervisory frameworks, resolution regimes, crisis management, and governance and risk management in banks. - Use macroprudential measures in fixed exchange rate regimes to strengthen pass-through from policy rates to financial conditions. - Fiscal policy: - Prioritize targeted and temporary support where fiscal space permits; phase out poorly targeted subsidies and expand social safety nets. - Oil exporters: manage oil revenue carefully; avoid expanding current expenditures; continue non-oil revenue mobilization and wage bill rationalization. - Improve fiscal institutions and adopt credible medium-term fiscal frameworks and fiscal rules. - Structural reform priorities: - Promote private sector development, reduce SOE dominance, liberalize labor markets, foster trade diversification, invest in renewable energy and climate-resilient infrastructure, and phase out inefficient subsidies. - International support: - LICs and FCS require international community support to prevent humanitarian crises and to address acute food insecurity and poverty. *International Monetary Fund, Regional Economic Outlook—Middle East and Central Asia, May 2023* --- ### 2. Monetary Policy: Where Does the Middle East and Central Asia Stand? ### Key messages and framework - Monetary policy responses to the 2021–22 surge in inflation varied widely across ME&CA. - For many countries using a policy rate, the current stance is appropriately tight or neutral; further tightening needed in others. - Monetary policy implementation is undermined in several countries by lack of coordination with fiscal policy or fiscal dominance. - Transmission stronger in float/managed regimes than in pegs; operates mainly through exchange rate channel; credit channel relatively weak. - Strengthening frameworks, fostering financial development, increasing exchange rate flexibility, using macroprudential policies, and reducing quasi-monetary/quasi-fiscal activities of state-owned banks would enhance transmission. ### Instruments, recent actions, and coordination - Instruments: - Two-thirds of ME&CA central banks use a policy rate. - Nearly three-quarters use reserve requirements on domestic currency liabilities; slightly more than half use reserve requirements on foreign currency liabilities. - Recent actions (2021–22): - Most central banks raised policy rates; some raised reserve requirements (seven on domestic currency liabilities; four on foreign currency liabilities). - Tools used to mop up liquidity: central bank securities, selling government securities, reverse repos, and FX interventions. - Communication: almost two-thirds publish a communiqué after decisions; few provide forward guidance. - Specific action: Egypt raised required reserve ratio from 14 percent to 18 percent in September 2022. - Coordination issues: - Lack of coordination and fiscal dominance present in about half of ME&CA countries. - Incidence of fiscal dominance increased over past two years. ### Assessing stance: natural rates and benchmarks - Definitions and methods: - Short-term natural policy rate = real natural rate + one-year-ahead inflation expectations (WEO). - Long-term terminal rate = real natural rate + five-year-ahead inflation expectations (WEO). - Natural rates estimated with a small semistructural open economy model and a TVP-VAR. - Findings: - Point estimates suggest stance appropriately tight or neutral in many countries in early 2023. - Monetary policy remains loose (policy interest rate below natural policy rates) and may need further tightening in Egypt, Pakistan, Tunisia. - Natural rate estimates subject to significant uncertainty. ### Monetary policy transmission: exchange rate and bank lending channels - Transmission lags and magnitudes: - Peak effects on quarterly inflation occur between one and three quarters after a monetary shock. - Inflation reaches half of the peak impact about four to 11 quarters after the shock; year-over-year lags about four to six quarters (peak) and six to 13 quarters (half-peak). - Exchange rate channel: - Following a surprise tightening, large nominal exchange rate appreciation observed within same quarter. - For float/managed regimes, a 100 basis point monetary shock leads to almost 2 percent annualized appreciation in the nominal exchange rate. - On average, 40 percent of the peak impact on inflation from monetary shocks is driven by the exchange rate. - Appreciation amplifies inflation decline and shortens transmission lags under flexible/managed regimes. - Bank lending channel: - Fixed exchange rate countries: 100 basis point US tightening leads at peak to: - 81 basis points higher asset rates. - 66 basis points higher liability rates. - 3.2 percent reduction in real credit growth. - Pass-through peaks after eight to 10 quarters; year-ahead responses about 30 basis points. - Oil price effects: pass-through into asset/liability rates more than 20 basis points stronger at an oil price of $65 per barrel compared with $82 per barrel; higher oil prices attenuate pass-through into real credit growth. - For floaters: asset/liability pass-through peaks at 60 and 34 basis points; for managed peggers: 28 and 22 basis points. - Credit growth response economically small and statistically insignificant except for Pakistan. - Weaker transmission partly reflects lower financial development and larger footprint of state-owned banks. ### Policy recommendations (2.5) - General guidance: - Maintain vigilance; calibrate and communicate monetary policy in a data-dependent manner to prevent de-anchoring of inflation expectations. - Specific recommendations: - Where stance tight/neutral and inflation peaked (example: Armenia, Georgia), remain data dependent and avoid premature loosening. - Currency pegs: follow US monetary policy and consider macroprudential policies (lower loan-to-value and debt-to-income ratios) if asset price appreciation or loose conditions occur. - Where stance loose and inflation persists (Egypt, Pakistan, Tunisia), consider tighter monetary policy to stabilize inflation and expectations. - Address fiscal dominance and fiscal imbalances to make monetary policy more effective; until then, monetary policy may need to tighten more. - Where high oil prices dampen bank-lending channel (energy exporters), complement policy rate with other monetary or macroprudential tools. - Central banks tightening further should monitor financial stability risks and system vulnerabilities. - Strengthening transmission and frameworks: - Develop inflation expectations surveys. - Strengthen lending channel: deepen interbank markets, develop secondary markets for government securities with broad maturities, promote de-dollarization. - Allow greater exchange rate flexibility to act as shock absorber. - Improve coordination between monetary, financial, and fiscal policies; phase out quasi-fiscal activities and subsidized lending by state-owned banks. - Use macroprudential measures in fixed exchange rate regimes and enhance central bank communications and transparency of operations and FX interventions. ### Empirical and aggregate indicators (selected) - ME&CA (selected): - Real GDP (annual growth) 4.5–2.7 4.6 5.3 2.9 3.5 - of which non-oil growth 5.3–2.7 5.3 4.5 3.2 3.7 - Inflation (year average; percent) 7.2 10.4 12.8 14.3 15.9 12.0 - MENA (selected): - Real GDP (annual growth) 4.2–3.1 4.3 5.3 3.1 3.4 - of which non-oil growth 5.2–3.0 5.2 4.0 3.6 3.7 - Inflation (year average; percent) 7.1 10.9 13.9 14.8 14.8 11.1 - CCA (selected): - Real GDP (annual growth) 6.7–2.1 5.6 4.8 4.2 4.5 - Inflation (year average; percent) 8.9 7.4 9.6 13.0 11.8 8.5 *Source: International Monetary Fund, Regional Economic Outlook—Middle East and Central Asia, May 2023* ### 1. Regional Developments and Economic Outlook: Safeguarding Macroeconomic Stability amid Continued ### 1. Regional Developments and Economic Outlook: Safeguarding Macroeconomic Stability amid Continued Uncertainty ### Global environment and macro-financial risks - Global growth trajectory and assumptions: - Global growth moderated from 3.4 percent in 2022 to a projected 2.8 percent in 2023 and is projected to accelerate to 3.1 percent in 2024. - Projections are based on statistical information available through late March 2023. - Recent sources of global risk and market stress: - Financial market turmoil triggered by stress in the banking sector in the United States and Europe in mid-March has raised financial stability risks. - Global financial conditions tightened sharply in March, with credit spreads widening and equity prices falling after easing since October. - April 2023 Global Financial Stability Report and April 2023 World Economic Outlook inform the assessment that forceful policy actions so far appear to have contained systemic risks, conditional on the turmoil being contained going forward. - Inflation and commodity price outlook: - Core inflation has remained persistently high despite some easing of headline inflation late in 2022. - Average petroleum spot prices are estimated at $74.20 per barrel in 2023 and $70 in 2024 (down from $85.50 and $80.20, respectively, in October 2022). - Oil futures curves point to prices decreasing toward $62.70 by 2028. - Food commodity prices are expected to decline by 4.9 percent in 2023 and 2.5 percent in 2024 (compared with October’s forecast of declines of 5.8 and 2.0 percent, respectively). - Assumed financial parameters used in projections: - Price of oil (working hypothesis for projections): US$73.13 a barrel in 2023 and US$68.90 a barrel in 2024. - Six-month London interbank offered rate (LIBOR) on US dollar deposits assumed to average 5.4 percent in 2023 and 4.9 percent in 2024. - Caveats: - The report does not include the April 2023 OPEC+ oil production cuts. - The assumptions are working hypotheses rather than forecasts; uncertainties add to the margin of error in projections. ### Middle East, North Africa, and Pakistan: recent performance and near-term outlook - 2022 performance and near-term risks: - The economies of the Middle East and Central Asia (ME&CA) proved resilient in 2022 despite a series of global shocks. - Real GDP growth in MENA was upgraded for 2022 because of stronger-than-expected growth in many oil-exporting economies (Bahrain, Libya, Qatar, Saudi Arabia, the United Arab Emirates) and some oil importers (Jordan, Mauritania, Morocco, Tunisia). - Outlook for 2023–24 and channels of transmission: - MENA economies and Pakistan are expected to go through a soft patch in 2023, reflecting: - Tight policies in many countries to restore macroeconomic stability. - OPEC+-related curbs in oil production. - Fallout from the recent deterioration in financial conditions. - Inflation is projected to remain persistent. - The CCA outlook depends heavily on external factors: the impact of monetary tightening, growth in main trading partners, the pace of private transfers, and inflows of migrants from Russia. - Distributional and fiscal/financial pressures: - Macroeconomic instability and conflict will continue to pose challenges in low-income countries (LICs) and fragile and conflict-affected states (FCS) amid an ongoing cost-of-living crisis that is exacerbating food insecurity. - Debt, financing needs, and inflation will remain high in the region’s EM&MIs, reflecting the economic fallout from the pandemic and Russia’s war in Ukraine. ### Policy trade-offs and recommendations - Monetary and fiscal policy calibration: - Policymakers need to calibrate the policy mix carefully to reduce core inflation without triggering financial stress and excessive tightening. - Tight monetary and fiscal policies across the region amid tight global financial conditions call for careful sequencing and calibration of actions. - Fiscal support and debt sustainability: - Continue to provide targeted fiscal support to vulnerable groups while preserving debt sustainability and financial stability. - Financial stability vigilance: - Heightened global financial stability risks (banking sector stress in advanced economies) increase downside risks for the region; authorities should monitor spillovers and be prepared to act to contain systemic risks. - Structural reforms: - Accelerate structural reforms to bolster potential growth and enhance resilience given reduced space from tight macro policies and tighter global financial conditions. ### Key numerical inputs and assumptions highlighted in the text - Global growth: 3.4 percent in 2022; projected 2.8 percent in 2023; projected 3.1 percent in 2024. - Petroleum spot prices: $74.20 per barrel in 2023; $70 in 2024; previously $85.50 and $80.20 (October 2022). - Oil futures: decrease toward $62.70 by 2028. - Food commodity prices: expected decline of 4.9 percent in 2023 and 2.5 percent in 2024 (October forecasts: declines of 5.8 and 2.0 percent). - Projections assume oil averages US$73.13 a barrel in 2023 and US$68.90 a barrel in 2024. - Projections assume six-month LIBOR averages 5.4 percent in 2023 and 4.9 percent in 2024. - Projections based on information available through late March 2023. *Source: Regional Economic Outlook—Middle East and Central Asia, May 2023, International Monetary Fund.* ### 5.3 percent in 2022 (an upward revision of 0.3 percentage point from October), up from 4.3 percent in ### 5.3 percent in 2022 (an upward revision of 0.3 percentage point from October), up from 4.3 percent in 2021, ### Regional growth overview - Real GDP growth in the MENA region: 5.3 percent in 2022 (an upward revision of 0.3 percentage point from October), up from 4.3 percent in 2021. - Key drivers of the 2022 acceleration: - Strong performance of oil exporters (especially Gulf Cooperation Council [GCC] economies) and Egypt. - Strong domestic demand despite negative impacts of higher prices on households’ purchasing power and firms’ production costs. - Strong rebound in oil production for oil exporters. - Domestic demand components supporting growth: - Tourism rebound and hotel occupancy rates surpassing pre-pandemic levels in many countries (Jordan, Morocco, Qatar, Saudi Arabia). - Remittance flows remained strong in mid-2022 in most EM&MIs (Egypt, Jordan, Morocco, Pakistan). - Real lending to private sector expanded in some EM&MIs, with double-digit growth in some countries (approximately 10 percent in Egypt), partly reflecting subsidized lending initiatives in H2 2022. - Labor market dynamics: - Labor market conditions stopped deteriorating in 2022, but structural rigidities hampered meaningful recovery in EM&MIs. - Employment growth remained lackluster in H2 2022 in Jordan, Morocco, Tunisia; continued to rise at a healthy pace in GCC countries (Bahrain, Oman, Saudi Arabia) partly due to rebounding migrant employment. - Unemployment rates inched up or remained broadly steady in most EM&MIs, staying above pre-pandemic levels in late 2022 (Jordan, Morocco, Tunisia). ### Inflationary developments - Headline inflation showed signs of peaking at the end of 2022 but remained persistently high for EM&MIs and LICs. - Oil exporters (Bahrain, Iraq, Kuwait, Oman, Qatar, Saudi Arabia): - Headline and core inflation remain relatively lower than elsewhere due to subsidies and caps, currency pegs to the US dollar, and limited food share in CPI baskets; appeared to have peaked in the last months of 2022. - EM&MIs with rising inflation: Egypt, Morocco, Pakistan, Tunisia (not Jordan) — partly reflecting past exchange rate depreciations, elevated food prices, and broadening price pressures including services amid loose monetary policy (Egypt, Pakistan, Tunisia). - Regional inflation projections: - Headline inflation: 14.8 percent in 2022; set to remain unchanged at 14.8 percent in 2023; decline to about 11 percent in 2024 (upward revision of about 2.5 percentage points for both years since October). - Pakistan: inflation projected to more than double to about 27 percent in 2023. - GCC: headline inflation expected to drop from 3.3 percent in 2022 to 2.9 percent in 2023 and 2.3 percent in 2024. - LICs: headline inflation declining from 83 percent in 2022 to about 46 percent in 2023 and 35 percent in 2024 (reflecting Sudan above 100 percent in 2022 and about 70 percent in 2023). ### Monetary stances and fiscal positions - Monetary policy: - Central banks tightened policy through end-2022 in response to high inflation and exchange rate pressures (Egypt, Mauritania, Morocco, Pakistan, Tunisia). - Countries with currencies pegged to the US dollar (GCC economies, Jordan) hiked policy rates broadly in line with the Federal Reserve, pushing real rates into positive territory. - For some MENA EM&MIs (including Egypt and Tunisia) and Pakistan, policy interest rates remained below model-based estimates of natural rates at end-2022 (see Chapter 2). - Fiscal positions: - GCC countries: non-oil primary balances (percent of non-oil GDP) broadly unchanged in 2022 relative to 2021 despite a substantial increase in oil revenues (about 4 percentage points of GDP on average); primary current expenditures broadly stable (except Kuwait and Saudi Arabia reflecting higher capital expenditures). - Non-GCC oil exporters (Iraq, Libya): ran procyclical fiscal policy with significant deterioration in non-oil primary balances. - Oil importers: primary fiscal deficits (excluding grants) improved on average in most MENA EM&MIs in 2022 relative to 2021 (except Egypt) due to higher tax revenues partly offset by mitigation policies for rising commodity prices; interest expenses broadly stable (about 4 percent of GDP on average). - Pakistan: undertook a sizable fiscal expansion in 2022. - LICs: primary fiscal positions deteriorated in most countries because of higher commodity prices. - Debt dynamics: - Higher inflation was the main factor containing public debt in most MENA EM&MIs and Pakistan in 2022. - Debt ratios declined slightly in Egypt and Jordan as higher nominal GDP growth more than offset interest costs. - Public debt-to-GDP ratios continued to rise in Pakistan and Tunisia due to still-large overall fiscal deficits and exchange rate depreciations, offsetting erosion from high inflation. ### Financial sector and sovereign-bank nexus - Banking sector performance: - Median return on assets ranged between 1 percent and 1.4 percent as of end-2022, up from about 0.8 percent in 2020. - Capitalization: GCC at 17 percent; MENA EM&MIs at 15.3 percent—both well above regulatory minimums. - Nonperforming loan ratios: 3.2 percent (GCC) and 5.3 percent (MENA EM&MIs) on average; some emerging markets recorded as high as 11.1 percent (mainly legacy NPLs). - Funding structure: most banks depend on customer deposits and long-term funding; a few rely on wholesale funding and foreign depositors. - Sovereign-bank nexus: tightened due to the public sector’s increased reliance on domestic bank financing during the pandemic. - Banking system’s exposure to government bond holdings ranges from 6.8 percent to 44 percent of total banking system assets. ### External vulnerabilities and financing conditions - Current account dynamics: - MENA EM&MIs current account deficits deteriorated from 4.7 percent of GDP to about 5 percent of GDP on average in 2022. - Pakistan: current account deficit rose from 0.8 percent of GDP to 4.6 percent of GDP in 2022 due to rising import bills. - LICs: relatively stable current account deficit at 9 percent of GDP on average in 2022, with improvements in Sudan offset by deteriorations elsewhere. - Oil exporters: large current account surpluses amid high hydrocarbon prices. - Financial market pressures: - Slight easing of financial pressures since October 2022 was reversed by global tightening in March amid global banking turmoil. - Sovereign bond spreads widened and borrowing costs increased sharply on net in many EM&MIs (Lebanon, Pakistan, Tunisia) relative to October 2022. - Jordan and Morocco: spreads widened in wake of turmoil but remain lower than in October 2022. - Government bond yields across the region higher than end-2021 by about 130 to 3,000 basis points. - Portfolio fund inflows: $1.2 billion in first two months of 2023 after a record $4.5 billion in outflows in 2022. - Notable issuances: Morocco $2.5 billion; Jordan $1.25 billion; Egypt $1.5 billion sukuks in late February (region’s EM&MIs largely did not take advantage of early-2023 Eurobond market respite). - Exchange rate pressures and reserve losses significant, with sharp depreciations in some EM&MIs (Egypt, Pakistan) since October 2022; modest receding in others (especially Morocco benefiting from a two-year Flexible Credit Line arrangement in April). ### Outlook by country group and near-term projections - Regional projection summary: - Growth in the MENA region projected to decelerate from 5.3 percent in 2022 to 3.1 percent in 2023 before increasing slightly to 3.4 percent in 2024. - Inflation is projected to be more persistent in EM&MIs and LICs than previously expected. - Fiscal and external vulnerabilities expected to remain elevated in EM&MIs given still-high debt levels and projected large gross public financing needs and current account deficits. - Oil exporters: - Real GDP growth expected to slow from 5.7 percent in 2022 to 3.1 percent in 2023 (and broadly maintain that pace in 2024) as growth driver shifts to nonhydrocarbon activities reflecting agreed oil production cuts. - Non-oil GDP forecast to expand about 3.7 percent in 2023, broadly unchanged from 2022. - MENA EM&MIs: - Growth projected to slow from 5.1 percent in 2022 to 3.4 percent in 2023. - Egypt: growth forecast to decelerate from 6.6 percent in 2022 to 3.7 percent in 2023 due to tight financing, past exchange rate depreciation, high inflation, and weak external demand. - Pakistan: growth expected to slow from 6.0 percent in 2022 to 0.5 percent in 2023 because of macroeconomic challenges, flood damage, inflationary pressures, and tighter monetary/financial conditions. - Morocco: growth set to increase in 2023 mainly due to a rebound in agricultural output; nonagricultural sector expected to remain weak. - Jordan and Tunisia: activity projected to remain subdued in 2023 and 2024 given weakening trading-partner growth, spillovers from the war in Ukraine, tighter financial conditions, and restrictive fiscal policies. - Medium-term: EM&MI growth projected to gradually accelerate in 2024 (to 4.4 percent in MENA EM&MIs and 3.5 percent in Pakistan) if policy and structural reforms are sustained. - Low-income countries (LICs): - GDP growth forecast to rebound from a contraction of 0.6 percent in 2022 to 1.3 percent expansion in 2023 and to 3 percent in 2024. - Outlook mixed across LICs with country-specific idiosyncratic factors (debt distress in Djibouti; extractive sector developments and tight macro policies in Mauritania). - Fragile LICs face protracted conflict (Yemen), drought (Somalia), political crisis and lack of financing (Sudan); food insecurity worsened—about 19 million in Yemen and about 6 million in Somalia estimated to have experienced acute food insecurity in 2022. ### Disinflation process and fiscal outlook - Disinflation: - Inflationary pressures expected to be more persistent than envisioned in October, with headline inflation set to remain at 14.8 percent in 2023 and fall to about 11 percent in 2024. - Drivers of disinflation in 2024: lower commodity prices, easing supply chain disruptions, and slowing activity due to tighter fiscal and monetary policy stances. - Fiscal outlook and vulnerabilities: - Fiscal positions expected to improve over next two years and medium term as consolidation measures are required to lower elevated public debt levels, especially in EM&MIs. - Most oil exporters expected to continue consolidating public finances; however, some remain highly exposed to oil price volatility with breakeven fiscal prices projected above April 2023 WEO oil price forecasts by 2025 (Algeria, Bahrain, Iraq). - EM&MIs (especially Egypt, Jordan, Tunisia) and Pakistan expected to undertake meaningful fiscal consolidation, including subsidy reforms (Egypt, Morocco, Pakistan, Tunisia). - Primary fiscal deficits projected to decline by about 3 percentage points of GDP on average between 2022 and 2025 for EM&MIs (context of IMF-supported or announced programs for some countries). - Tighter financial conditions will partly offset fiscal efforts, with interest expenses for EM&MIs projected to increase by about 1 percentage point of GDP on average over 2022–2025. - Overall, public debt-to-GDP ratios expected to decline in the medium term in most EM&MIs, reflecting erosion of the real value of public debt from persistent inflation (Egypt, Pakistan, Tunisia) and growth recovery. *Regional Economic Outlook—Middle East and Central Asia. INTERNATIONAL MONETARY FUND • May 2023* ### 1. Regional Developments and Economic Outlook: Safeguarding Macroeconomic Stability amid Continued Uncertainty ### 1. Regional Developments and Economic Outlook: Safeguarding Macroeconomic Stability amid Continued Uncertainty ### Public financing and external balances: current picture - Public gross financing needs are forecast to decrease slightly from about $520 billion over 2021–22 to about $470 billion over 2023–24, reflecting lower primary deficits and relatively smaller domestic amortization that will offset higher interest payments. - External financing is expected to contribute a small portion (about 12 percent of total sources on average) to these needs; continued reliance on domestic bank financing (except in Tunisia) risks exacerbating the sovereign-bank nexus given very high exposure of banks to sovereign debt in some MENA EM&MIs and Pakistan (more than 50 percent of bank assets at the end of 2022). - Oil exporters’ current account surpluses are set to decline by about $250 billion (about 8 percentage points of GDP) between 2022 and 2024, but will remain relatively large at about 4.7 percent of GDP in 2024. - MENA EM&MIs’ current account deficits are expected to narrow from 5.1 percent of GDP in 2022 to about 4 percent of GDP in 2024 on average because of lower commodity prices, rebounding tourism, resilient remittances, and fiscal consolidation. - LICs’ aggregate current account deficit is projected to widen from 9 percent of GDP in 2022 to about 11 percent of GDP in 2023, mainly reflecting a slump in Yemen’s goods exports and normalization in Sudan’s imports. - External financing needs for MENA EM&MIs and Pakistan are projected to decline from about $132 billion in 2022 to $123 billion in 2023 (about 212 percent and 171 percent of gross international reserves, respectively). - With reduced access to international markets for many EM&MIs, GCC governments have stepped in to meet some external financing needs through direct budget and balance of payment supports, grants, loans, and foreign direct investment. ### Caucasus and Central Asia (CCA): recent developments and 2022 drivers - Two parallel currents: continued post-pandemic rebound and spillovers from the war in Ukraine (impacting global commodity prices). - Positive 2022 contributors: - Large inflows of income, capital, migrants, and private transfers from Russia (supporting services and remittances). - Higher energy commodity prices benefiting oil-exporting countries’ external balances. - Better-than-expected harvest in Russia helping sustain food imports and mitigate some food security concerns. - Growth in 2022: - CCA economies grew by 4.8 percent in 2022. - Country growth rates ranged from 12.6 percent in Armenia to 3.2 percent in Kazakhstan and 1.8 percent in Turkmenistan. - In response to capital inflows from Russia, several recipient countries’ banks increased liquid assets abroad (Armenia, Georgia) rather than lending in foreign exchange domestically. Net foreign direct investment inflows rose across the region by about 1 percentage point of GDP on average from 2021, more than offsetting portfolio outflows. ### Inflation, wages, and monetary/fiscal stance in CCA - Inflation dynamics: - Overall inflation remained in the double digits in 2022 because of elevated global commodity prices and wage pressures; ruble appreciation generated substantial imported food inflation in most CCA countries. - Since mid-2022, headline inflation has declined in Armenia, Georgia, and Tajikistan; continued rising in Kazakhstan and the Kyrgyz Republic; flattened in Uzbekistan; and begun to moderate slowly in Azerbaijan but remained in the double digits in early 2023. - Imported inflation has been significant where imports from Russia are high; 20–30 percent depreciation versus the ruble in 2022 contributed to this. - Wages: - Nominal wage growth has surpassed inflation in most countries, pointing to potential price-wage spirals. - Empirical estimates suggest wage rises have a persistent impact on core inflation in CCA countries, with about a 50 percent pass-through peaking at 11 quarters following the shock. - Fiscal and monetary policy: - Primary fiscal positions improved significantly in 2022 in most CCA countries due to revenue performance and current expenditure restraint; exceptions include the Kyrgyz Republic and Tajikistan where substantial loosening occurred. - Monetary policy since August 2022: Armenia, Azerbaijan, and Kazakhstan raised policy rates; the Kyrgyz Republic, Tajikistan, and Uzbekistan lowered rates (Tajikistan after a decline in inflation); others remained on hold. The monetary stance is assessed to be appropriately tight or neutral in most CCA countries. ### Financial sector and trade links - Financial system indicators: - Median return on assets at 3.9 percent in 2022, up from 1.1 percent since 2020. - Tier 1 capital ratios at 16.7 percent, 8.1 percentage points above regulatory minimum thresholds. - Nonperforming loan ratios at 4.4 percent on average in 2022. - Customer deposits and long-term funding make up more than 90 percent of total funding in most banks. - Structural vulnerabilities remain: comparatively lower loan-loss provisioning, foreign exchange exposures, currency mismatches amid still widespread though declining dollarization. - Trade: - Trade with Russia has increased for several CCA countries (Armenia, Georgia, Tajikistan, Uzbekistan), even after accounting for higher prices associated with Russian energy imports. - Share of trade with the Eurasian Economic Union has increased for some members (Armenia, Kazakhstan, the Kyrgyz Republic). ### Outlook: growth and inflation projections for CCA and region - Growth: - Cross-border transfers and migrant inflows are expected to decelerate significantly in 2023, worsening current account balances (by an average of 1.5 and 3 percent of GDP for EM&MIs and LICs, respectively). - Decline in oil prices will weaken current account balances for oil exporters by an average of 5.4 percent of GDP. - GDP growth is projected to decelerate to 4.2 percent in 2023 before a slight rebound to 4.5 percent in 2024. - Kazakhstan’s overall growth is expected to accelerate to 4.3 percent from 3.2 percent in 2022 as oil production normalizes and the expansion of the Tengiz oil field becomes operational. - Inflation: - Regional inflation is projected to ease to 11.8 percent in 2023 and 8.5 percent in 2024 from 13 percent in 2022, with heterogeneity across countries. - CCA emerging markets: inflation expected to decelerate sharply to 6.4 percent in 2023 and 4.0 percent in 2024 from 10.5 percent in 2022; Armenia and Georgia expected to reach their inflation target by 2025. - LICs: inflation set to remain at 11 percent in 2023 before declining to 9.3 percent in 2024. - Oil exporters: inflation set to ease only slowly—to 13 percent in 2023 and 8.7 percent in 2024 from 14.3 percent in 2022—as price pressures remain elevated in Kazakhstan because of high wage growth. ### Risks and scenarios - Downside risks dominate: - Global financial sector instabilities could depress global growth and ME&CA external demand, increase volatility in oil prices, and add pressures to borrowing costs and sovereign debt sustainability. - Tighter-for-longer global financial conditions could prompt reassessments of debt sustainability in many MENA EM&MIs, push vulnerable economies toward debt distress, spur capital outflows, exchange rate depreciation pressures, and financial stress. - Escalation of the war in Ukraine could cause high volatility in commodity markets, shortages, and renewed price increases for energy, food, and fertilizers, fueling additional inflationary pressures across ME&CA. - More entrenched inflation expectations, persistent core inflation, and price-wage spirals could de-anchor expectations, prompting more monetary tightening and further dampening activity. - Climate change–related risks (severe heat waves, droughts, floods) can meaningfully affect agricultural output, activity, food security, and poverty, especially in LICs and FCS. - Food security deterioration can stoke social tensions and weigh on growth, particularly in MENA LICs and EM&MIs with limited fiscal space and high dependency on energy and food imports. - CCA-specific risks: - A sharper-than-forecast contraction of the Russian economy, a bad harvest, reversal in foreign exchange inflows, or lengthy disruptions of the Caspian Pipeline Consortium pipeline and regional supply chains could hamper activity. - Upside possibilities: - Resilient and rising inflows to CCA economies, continued influx of skilled migrants from Russia, and changing regional trade patterns and diversification of trade routes could boost demand and productivity, though they may raise near-term overheating risks. - Policy and reform risks: - Delays and backtracking in reform implementation, especially in EM&MIs, could weaken medium-term growth, exacerbate pandemic scarring, and worsen vulnerabilities. - Deepening fragmentation could lead to restrictions on cross-border flows, supply disruptions, rising input costs, financial instability, and hinder multilateral responses. ### Policy recommendations - Overall approach: - Stay the course to safeguard macroeconomic stability through tight monetary and fiscal policies while being mindful of financial stability risks; accelerate structural reforms to bolster potential growth, resilience, and inclusion. - Monetary policy principles: - In countries where inflationary pressures continue and the stance is loose, consider tighter monetary policy (Egypt, Pakistan, Tunisia). - Where the stance is tight or neutral and inflation has peaked, central banks should remain data dependent and avoid loosening prematurely until clear signs show core inflation on a downward trajectory. - Communication emphasis: enhance communication strategies and increase transparency of monetary operations, including the range of additional instruments (reserve requirements), to anchor market expectations. *International Monetary Fund, Regional Economic Outlook—Middle East and Central Asia, May 2023* ### 1. Regional Developments and Economic Outlook: Safeguarding Macroeconomic Stability and Continued Uncertainty ### 1. Regional Developments and Economic Outlook: Safeguarding Macroeconomic Stability and Continued Uncertainty ### Monetary Policy and Financial Sector Transmission - Strengthening monetary policy frameworks and central bank independence is critical to bolstering central bank credibility, activating the relatively weak bank lending channel, and improving policy transmission (Chapter 2). - Reforms to deepen the financial sector should: - Allow for a greater role of the policy rate as the key transmission instrument by strengthening the lending channel and relying less on exchange rate management. ### Preserving Financial Stability - The region’s banking sector: - Weathered the pandemic well—profitability has recovered, and liquidity and capital buffers are high. - Risks and supervisory priorities: - Central banks should be mindful of financial stability risks amid heightened global financial stress and closely monitor financial system vulnerabilities that could arise from continued monetary tightening. - Bank supervisors should ensure banks have governance and risk management commensurate with their risk profile, including adequate supervisory capital and liquidity stress tests. - Strengthen resolution regimes and crisis management frameworks. ### Fiscal Policy: Targeted Support, Debt Sustainability, and Buffers - Constraints and near-term priorities: - Elevated debt levels, support measures to address the cost-of-living crisis, and higher debt servicing costs imply a constrained fiscal space for many EM&MIs. - The forecast decline in oil prices will diminish revenues for oil exporters. - Where fiscal space permits, countries should prioritize targeted and temporary support, with cash transfers to protect the most vulnerable from still-high energy and food prices. - Poorly targeted subsidies should be phased out gradually and social safety nets strengthened and expanded. - Recommendations for oil exporters: - Manage oil revenue carefully, avoid expanding current expenditures, and improve budget transparency. - Fiscal efforts should address climate change, the energy transition, and economic diversification by continuing non-oil revenue mobilization with reforms to increase the efficiency of tax collections and wage bill rationalization. - Fiscal consolidation guidance for EM&MIs: - Continue fiscal consolidation anchored on a downward debt path, supported by revenue mobilization (including removing tax exemptions) and expenditure containment measures such as refraining from untargeted subsidies and wage bill expansions. - CCA countries need to maintain a prudent fiscal stance to build buffers, given the risk of a sudden reversal in war-related positive spillovers. - Improve fiscal institutions—particularly budget process transparency—and adopt credible medium-term fiscal frameworks, including fiscal rules, to ease the burden of adjustment, facilitate access to external financing, and reduce fiscal vulnerabilities on a lasting basis (October 2019 Regional Economic Outlook: Middle East and Central Asia). - Low-income countries and fragile and conflict-affected states: - The lack of fiscal space to protect the vulnerable in LICs and FCS demands the international community’s support and global cooperation to prevent a humanitarian crisis as acute food insecurity and poverty persist. ### Structural Policies to Raise Potential Growth - Rationale: - Tight monetary and fiscal policies, though necessary, can weigh on growth; structural reforms are important to raise potential growth by bolstering private sector development and increasing the benefits from trade. - Private sector reforms: - Bolster private sector development to maximize potential growth, attract investment, and facilitate job creation. - Examples of reforms: reducing state-owned enterprises’ outsize role, leveling the playing field across economic agents, lifting red tape, and liberalizing the labor market. - GCC countries are progressively investing in the MENA region and Pakistan in energy infrastructure, renewable energy, health care, and agriculture (Box 1.1). - Trade policy and resilience: - Rethink trade policy to improve resilience: diversify partners and products, and reduce trade restrictions that are distortive and exacerbate global price pressures. - In the CCA region, dislocation of trade routes and supply chain disruptions following the war in Ukraine highlight the importance of partner diversification. - Diversification and decarbonization: - Ramp up diversification and decarbonization by investing public resources in renewable energy sources and climate-resilient infrastructure and enacting measures that raise the effective carbon rate (including by phasing out subsidies). - Cross-country cooperation can support the effectiveness of a country’s climate policy; international cooperation is crucial to address binding capacity and funding bottlenecks (Anderson and others 2022; Duenwald and others 2022). ### IMF Engagement and Financial Support - IMF financing since January 2020: - The IMF has approved $29.3 billion of new financing for ME&CA countries, including recent programs for Armenia (Stand-By Arrangement), Egypt (Extended Fund Facility), Mauritania (Extended Credit Facility and Extended Fund Facility), and Morocco (Flexible Credit Line). - New instruments and facilities: - The IMF established the Resilience and Sustainability Trust to support low-income and vulnerable middle-income countries in addressing longer-term challenges, including climate change through the Resilience and Stability Facility. - The IMF enhanced its emergency lending toolkit with the newly approved Food Shock Window to allow easier financial access for countries facing food-related balance of payment pressures. - Capacity development and presence: - The IMF has expanded Resident Representative offices, reopened its Middle East Regional Technical Assistance Center, and set up a new regional office in Riyadh to strengthen regional engagement. - Upcoming engagement: - The upcoming IMF–World Bank Annual Meetings in Marrakech in the fall of this year will provide a platform for wide-ranging policy discussions on challenges facing the region and the world. ### Box 1.1 — GCC Financial Footprint in MENA and Pakistan (Key Figures and Findings) - Official financing and debt relief: - During 2018–22, GCC countries provided about $54 billion in balance of payments and budget financing to MENA EM&MIs and Pakistan. - GCC debt relief to MENA countries (Djibouti, Mauritania, Somalia) and Pakistan totaled about $1.3 billion at the end of 2022. - In response to higher international food prices, GCC members committed humanitarian support including through a $10 billion package launched by the Arab Coordination Group. - Foreign direct investment: - GCC countries’ FDI into MENA economies and Pakistan was estimated at $55 billion in 2021 (about 1.6 percent of GDP), an increase of 85 percent since 2011. - Morocco received $13 billion in inward FDI in 2021 (the largest share). - Remittances and external support: - Inward remittances in countries with strong ties to the GCC (Egypt, Jordan, Pakistan, and to some extent Lebanon) rose in 2021 and remained high in the first half of 2022, helping alleviate pressure on external accounts and the cost-of-living crisis. ### Box 1.2 — Unexpected Spillovers from the War in Ukraine (Key Findings and Risks) - Remittance inflows in 2022: - Net money transfers from Russia to Armenia, Georgia, and Azerbaijan increased more than fivefold year over year in 2022, reaching 17, 8, and 3 percent of GDP, respectively. - Tajikistan and Uzbekistan saw a doubling of net remittances, with the increase ranging from 13 to 23 percent of GDP. - Net remittances inflows to the Kyrgyz Republic declined by about 6 percentage points of GDP in 2022. - Financial stability implications: - Nonresident deposits increased by 4 to 8 percentage points of GDP in Armenia, Georgia, and Uzbekistan, reaching 6 to 18 percent of GDP and similar values as a percent of total banking system assets. - Banks have so far boosted liquidity buffers and hedged against potential flight risk rather than intermediating these funds into domestic lending. - Migration and price pressures: - War-related immigrant inflows range between 50,000 and 150,000, comprising up to 5 percent of host country populations in Armenia, Georgia, Kazakhstan, and Uzbekistan. - Rental prices rose by more than 20 percent year over year in real terms by the end of 2022 in affected markets, exacerbating high-inflation environments. - Trade reconfiguration: - The share of Kyrgyz Republic exports to Russia doubled, rising from 14 percent of total exports in 2021 to 34 percent in the first nine months of 2022, increasing exposure to a potential worsening of the war and a sharper Russian contraction and deeper sanctions. ### Box 1.3 — Impact of Global Financial Turmoil on ME&CA (Key Findings) - Direct exposures and market moves: - Direct exposure to Silicon Valley Bank was nil and to Credit Suisse was limited for ME&CA banks. - Equity markets declined across most of the region, with Egypt, Jordan, Oman, Pakistan, and Qatar experiencing the largest declines (data refers to March 15, 2023). - Bank equities were most affected in Egypt, Gulf Cooperation Council financial hubs, and Pakistan. - Bond spreads widened significantly for Pakistan, Tunisia, and to a lesser extent in Egypt. - Some Central Asian currencies (Kazakhstan, the Kyrgyz Republic) weakened with the Russian ruble; other currencies broadly gained on US dollar weakness. - Potential stress scenarios: - Further global financial turbulence could strain private and public sector funding, especially in countries with large debt burdens. - Capital flow reversals and reduced external market access would increase reliance on domestic bank financing, exacerbating bank-sovereign interlinkages. - Banking systems could face liquidity risks, forced asset sales, capital losses, undercapitalization, declining lending, eroding asset quality, and lower growth. - In highly dollarized economies, capital outflows and weaker currencies could heighten credit risk and balance sheet strains. - Sustained oil price volatility could weigh on oil exporters’ external and fiscal balances and undermine financial market conditions; prolonged global policy uncertainty could depress consumer and investor sentiment and economic activity. *Source: International Monetary Fund, Regional Economic Outlook—Middle East and Central Asia, May 2023.* ### 2. Monetary Policy: Where Does the ### 2. Monetary Policy: Where Does the Middle East and Central Asia Stand? ### Key messages and overview - The monetary policy response of Middle East and Central Asian (ME&CA) countries to the 2021–22 surge in inflation has varied widely. - For many countries using a policy rate, the current stance is appropriately tight or neutral, but it needs further tightening in others. - Monetary policy implementation is undermined in several countries by lack of coordination with fiscal policy or fiscal dominance. - Monetary policy transmission is stronger in countries with floating or managed exchange rate regimes than in those with a peg; it operates mainly through the exchange rate channel, while the credit channel is relatively weak. - Strengthening monetary policy frameworks, fostering financial development, increasing exchange rate flexibility, using macroprudential policies, and reducing quasi-monetary and quasi-fiscal activities of state-owned banks would enhance transmission and lower the economic costs of disinflation. ### Monetary policy instruments and recent actions - Main instruments: policy interest rates and reserve requirements. - Two-thirds of ME&CA central banks use a policy rate to signal their stance. - Nearly three-quarters of central banks use reserve requirements on domestic currency liabilities. - Slightly more than half use reserve requirements on foreign currency liabilities. - Recent actions (2021–22 and up to latest data): - Most central banks raised policy rates over the past two years, by varying degrees. - While most central banks kept reserve requirement rates near their 2021 first-half averages, seven raised reserve requirement rates on domestic currency liabilities and four on foreign currency liabilities during 2021–22 (many changes were the unwinding of COVID-19 measures). - Central banks have acted to mop up excess liquidity via issuing central bank securities, selling government securities, reverse repurchase agreements, and FX market interventions (selling foreign currency). - Limited use of macroprudential tools; about half of central bank actions were related to unwinding pandemic-related measures. - Communication: almost two-thirds of central banks publish a communiqué after monetary policy decisions; only a few provide forward guidance on interest rates. - Specific example: Egypt raised the required reserve ratio from 14 percent to 18 percent in September 2022 for monetary policy purposes. - Coordination issues: - Lack of coordination between monetary and fiscal policies and fiscal dominance are present in about half of ME&CA countries. - The incidence of fiscal dominance increased in several countries over the past two years (pandemic, Russia’s war in Ukraine, tighter external financing). ### Assessing the monetary policy stance: natural rates and benchmarks - Purpose: assess whether current policy rates are above/below natural levels (short-term natural policy rate and long-term terminal rate) and whether actions translated into tighter domestic financial conditions. - Definitions and methods: - Short-term natural policy rate = real natural rate + one-year-ahead inflation expectations from World Economic Outlook databases. - Long-term terminal rate = real natural rate + five-year-ahead inflation expectations from World Economic Outlook databases. - Natural rates estimated with: (1) a small semistructural open economy model jointly estimating natural rates, potential output, and equilibrium exchange rate; and (2) a time-varying parameter vector autoregression (TVP-VAR). - Findings on stance: - Point estimates suggest the monetary policy stance was appropriately tight or neutral in many countries in early 2023. - Monetary policy remains loose (policy interest rate below natural policy rates) and may need further tightening in some countries: Egypt, Pakistan, Tunisia. - Once short-term inflation pressures are contained, policy interest rates—currently well above estimates of terminal rates—will eventually converge to lower levels. - Caveats: - Natural rate estimates are subject to significant uncertainty and are difficult to measure in real time. ### How recent tightening compares with peers and earlier responses - Benchmarking approach: - Two monetary policy reaction benchmarks: (1) ME&CA historical policy reaction over the last two decades as estimated by a monetary policy rule; (2) an emerging market and developing economy (EMDE) benchmark based on five large Latin American inflation targeters (Brazil, Chile, Colombia, Mexico, Peru). - Results: - Countries with an inflation-targeting regime and conventional peggers show positive monetary rule residuals since 2021, indicating policy rate increases larger than in comparable past shocks. - In inflation-targeting countries (all in the Caucasus and Central Asia), the rise in policy rates was also consistent with the EMDE benchmark, reflecting improved frameworks and commitment to fighting inflation. - Countries with other frameworks (Egypt, Tunisia) increased interest rates consistent with historical norms and less than the EMDE benchmark, suggesting less reactivity to inflation developments—likely due to trade-offs with debt sustainability. ### Financial conditions and transmission - Financial conditions index (FCI): - A monthly nominal FCI was estimated for 14 ME&CA countries using indicators across money, debt, and equity markets and external factors. - Evolution of conditions: - Financial conditions in ME&CA have tightened since the end of 2021, though with significant heterogeneity across countries. - Financial conditions tightened in recent weeks following bank stress episodes in a few advanced economies. - The FCI co-moves positively with policy interest rates; tightening driven mainly by a sharp rise in overall interest rates and changing global factors. - Relationship between policy rate increases and financial conditions: - Positive but dispersed across the region, reflecting: - Diverse central bank instruments used to tame inflation. - Heterogeneity in monetary transmission channels, including magnitude and timing of interest rate pass-through. - Implications: - The extent to which monetary tightening transmits to financial conditions matters for demand and ultimately for inflation. - Weak credit channels and limited use of other transmission-enhancing tools constrain central banks’ ability to control inflation without higher economic costs. *International Monetary Fund. May 2023. Regional Economic Outlook—Middle East and Central Asia (chapter 2).* ### 2. Monetary Policy: Where Does the Middle East and Central Asia Stand? ### 2. Monetary Policy: Where Does the Middle East and Central Asia Stand? ### 2.4. The Monetary Policy Transmission Mechanism in ME&CA - Monetary policy tightening reduces inflation and output, with heterogeneity across exchange rate regimes. - Peak effects on quarterly inflation occur between one and three quarters after a monetary shock. - Inflation reaches half of the peak impact about four to 11 quarters after the shock. - For year-over-year inflation, these lags are about four to six quarters (peak) and six to 13 quarters (half-peak). ### Is the Exchange Rate Channel Functioning? - Following a surprise monetary policy tightening, a large appreciation of the nominal exchange rate was observed for all countries in the sample within the same quarter as the tightening. - For countries with a floating or managed exchange rate, a 100 basis point monetary policy shock leads to an appreciation in the nominal exchange rate of almost 2 percent on an annualized basis. - In a structural vector autoregression framework, on average, 40 percent of the peak impact on inflation from monetary policy shocks is driven by the exchange rate. - Local projection estimates indicate that in countries with flexible or managed exchange rate regimes, inflation tends to decline by a larger magnitude when the exchange rate also appreciates following a contractionary monetary policy shock; transmission lags tend to be shorter under this amplifying effect. ### Is the Bank Lending Channel Functioning? - Method: local projection methods with quarterly bank-level data for a panel of countries in the region. - In countries with fixed exchange rates: - A 100 basis point US monetary tightening leads at the peak to: - 81 basis points higher asset rates (proxy for effective lending rates). - 66 basis points higher liability rates (proxy for effective deposit rates). - A reduction of 3.2 percent in real credit growth. - The transmission operates with sizable lags: in the year following a 100 basis point tightening, asset and liability rates rise by approximately 30 basis points on average; peak responses are reached after eight to 10 quarters. - Oil price effects: - The pass-through of a 100 basis point US interest rate rise into domestic asset and liability rates is more than 20 basis points stronger at an oil price of $65 per barrel compared with an $82 oil price. - Higher oil prices attenuate the pass-through into real credit growth. - For managed peggers and floaters: - Asset and liability rate pass-through peaks at 60 and 34 basis points for floaters (28 and 22 basis points for managed peggers), respectively, for a 100 basis point rise in the policy interest rate. - The response of credit growth is economically small and statistically insignificant for all countries except Pakistan. - Transmission is weaker on average, partly reflecting lower levels of financial development and a larger footprint of state-owned banks in some countries. ### Putting It Together: Where to Next? - Interest rate increases since 2020 have acted to reduce inflation for all countries examined, with larger reductions among countries with greater exchange rate flexibility (Armenia, Georgia, Kazakhstan, Pakistan). - Inflation has continued to rise in Egypt, Pakistan, and Tunisia; comparisons of current policy interest rates relative to natural policy rate estimates suggest further interest rate increases are needed to stabilize inflation in these cases. - The high level of policy interest rates relative to terminal rates at the end of 2022 can be expected to continue putting downward pressure on inflation throughout 2023. - The extent of short-term policy adjustments will depend on the evolution of inflation and inflation expectations, past policy changes, and domestic and global conditions. ### 2.5. Policy Recommendations - General guidance: - Heightened uncertainty requires close vigilance; calibrate and communicate monetary policy in a data-dependent manner to prevent inflation expectations from becoming de-anchored. - Specific recommendations: - Where the policy stance is tight or neutral and inflation appears to have peaked (for example, Armenia and Georgia), central banks should remain data dependent and not start loosening until there are clear signs that core inflation is on a downward trajectory. - Countries with a currency peg should continue following US monetary policy and consider additional macroprudential policies (for example, lower loan-to-value and debt-to-income ratios) in case of significant asset price appreciation or if financial conditions remain loose or loosen. - Where the policy stance is loose and inflationary pressures persist (for example, Egypt, Pakistan, and Tunisia), tighter monetary policy should be considered to stabilize inflation and inflation expectations. - Where there is fiscal dominance or lack of coordination between monetary and fiscal policy, policymakers need to address fiscal imbalances so that monetary policy can become an effective tool to stabilize inflation; until then, monetary policy will need to be tightened more than if fiscal policy were acting in coordination. - Where high oil prices dampen the bank-lending channel (energy exporters), the policy rate will need to be complemented with other monetary or macroprudential tools. - Across the region, and especially in countries tightening policy further, central banks should be mindful of financial stability risks and closely monitor financial system vulnerabilities that could arise from increasing interest rates. - Strengthening frameworks and transmission: - Develop surveys of inflation expectations given the lack of such data in most ME&CA countries. - Strengthen the lending channel by developing the financial sector: promote well-functioning and highly liquid interbank markets for reserves, develop secondary markets for government securities with a broad range of maturities, and promote measures to de-dollarize highly dollarized financial systems. - Facilitate greater exchange rate flexibility to allow the exchange rate to act as a shock absorber and improve monetary policy efficiency. - Improve coordination of monetary policy with financial and fiscal policies; state-owned commercial banks should operate on a level playing field with private banks, and the use of state-owned banks for monetary or fiscal purposes should be avoided (for example, through phasing out quasi-fiscal activities and subsidized lending). - Use macroprudential measures in countries with fixed exchange rate regimes to help strengthen the link between changes in the policy rate and financial conditions, which is important for Caucasus and Central Asia countries experiencing large capital inflows and for Gulf Cooperation Council countries experiencing rapid asset price appreciation. - Enhance central bank communications and increase the transparency of monetary operations and foreign exchange interventions. *Source: 2. Monetary Policy: Where Does the Middle East and Central Asia Stand? — May 2023, INTERNATIONAL MONETARY FUND.* ### 2. Monetary Policy: Where Does the Middle East and Central Asia Stand? ### 2. Monetary Policy: Where Does the Middle East and Central Asia Stand? ### ME&CA: Selected Economic Indicators, 2000–24 - ME&CA (1,2) - Real GDP (annual growth) 4.5–2.7 4.6 5.3 2.9 3.5 - of which non-oil growth 5.3–2.7 5.3 4.5 3.2 3.7 - Current Account Balance 5.8–3.0 3.3 7.5 3.6 2.1 - Overall Fiscal Balance 1.4–7.9–2.5 1.4–1.5–2.2 - Inflation (year average; percent) 7.2 10.4 12.8 14.3 15.9 12.0 - ME&CA oil exporters - Real GDP (annual growth) 4.5–3.9 4.7 5.4 3.2 3.2 - of which non-oil growth 5.6–3.7 5.8 4.0 3.7 3.5 - Current Account Balance 8.9–2.8 6.5 12.5 6.5 4.3 - Overall Fiscal Balance 3.3–8.5–1.0 4.3 0.2–0.6 - Inflation (year average; percent) 6.7 8.7 11.0 13.6 12.1 8.7 - ME&CA emerging market and middle-income countries (1) - Real GDP (annual growth) 4.2–0.8 4.6 5.6 2.4 4.1 - Current Account Balance –3.6–3.1–3.5–4.8–3.5–3.5 - Overall Fiscal Balance –5.4–7.3–6.3–6.2–6.6–7.2 - Inflation (year average; percent) 7.1 8.2 7.8 11.5 21.5 17.1 - ME&CA low-income developing countries (2) - Real GDP (annual growth) 4.4–1.4 4.3 3.1 3.5 4.3 - Current Account Balance 1.0–5.1–6.8–4.8–6.8–6.4 - Overall Fiscal Balance –2.0–3.8–2.8–2.7–2.7–2.5 - Inflation (year average; percent) 13.9 38.9 67.0 38.1 24.7 19.4 ### MENA: Selected Economic Indicators, 2000–24 - MENA (1) - Real GDP (annual growth) 4.2–3.1 4.3 5.3 3.1 3.4 - of which non-oil growth 5.2–3.0 5.2 4.0 3.6 3.7 - Current Account Balance 6.8–3.3 4.2 9.0 4.5 2.7 - Overall Fiscal Balance 1.6–8.4–2.0 2.5–1.0–1.7 - Inflation (year average; percent) 7.1 10.9 13.9 14.8 14.8 11.1 - MENA oil exporters - Real GDP (annual growth) 4.3–4.1 4.7 5.7 3.1 3.0 - of which non-oil growth 5.5–3.9 5.9 3.8 3.7 3.5 - Current Account Balance 9.6–2.9 7.2 13.0 6.9 4.6 - Overall Fiscal Balance 3.3–8.9–0.8 4.6 0.4–0.5 - Inflation (year average; percent) 6.6 9.0 11.0 13.5 12.0 8.7 - MENA emerging market and middle-income countries (1) - Real GDP (annual growth) 4.1–0.5 3.6 5.1 3.4 4.4 - Current Account Balance –4.0–3.7–4.7–5.1–4.1–4.1 - Overall Fiscal Balance –5.8–7.4–6.6–5.6–6.9–7.1 - Inflation (year average; percent) 7.1 6.8 7.1 11.2 19.1 14.9 - MENA low-income developing countries - Real GDP (annual growth) 2.2–4.1 0.6–0.6 1.3 2.9 - Current Account Balance –3.5–12.0–8.4–8.8–10.5–9.8 - Overall Fiscal Balance –3.2–3.8–0.2–1.7–2.1–1.8 - Inflation (year average; percent) 17.1 9.2 175.9 83.2 45.9 35.0 - MENA excl. conflict-affected countries - Real GDP (annual growth) 4.3–2.7 3.9 5.6 2.9 3.3 - of which non-oil growth 5.3–2.7 5.2 4.2 3.4 3.6 - Current Account Balance 6.8–3.2 4.3 9.1 4.6 2.7 - Overall Fiscal Balance 1.6–8.2–2.2 2.5–1.1–1.8 - Inflation (year average; percent) 7.1 10.9 14.1 14.9 15.0 11.2 - MENA excl. fragile states and conflict-affected countries - Real GDP (annual growth) 3.9–1.7 3.9 5.7 2.9 3.3 - of which non-oil growth 5.1–1.4 4.5 4.5 3.5 3.6 - Current Account Balance 7.6–2.3 4.4 9.5 4.9 3.4 - Overall Fiscal Balance 1.9–7.9–2.4 2.3–0.9–1.5 - Inflation (year average; percent) 6.8 8.4 9.6 12.6 13.9 10.7 ### MENAP, GCC, and Arab World aggregates - MENAP (1,2) - Real GDP (annual growth) 4.3–2.8 4.5 5.4 2.7 3.4 - of which non-oil growth 5.2–2.7 5.3 4.3 3.1 3.7 - Current Account Balance 6.4–3.0 3.8 7.8 3.9 2.3 - Overall Fiscal Balance 1.3–8.2–2.4 1.6–1.5–2.3 - Inflation (year average; percent) 7.1 10.8 13.2 14.4 16.4 12.5 - Gulf Cooperation Council - Real GDP (annual growth) 4.2–4.7 3.5 7.7 2.9 3.3 - of which non-oil growth 5.9–4.1 5.2 4.9 4.2 3.9 - Current Account Balance 12.8–1.1 8.6 15.2 8.6 6.5 - Overall Fiscal Balance 6.0–8.0 0.0 6.0 2.4 1.6 - Inflation (year average; percent) 2.3 1.3 2.2 3.3 2.9 2.3 - Arab World (1) - Real GDP (annual growth) 4.5–4.5 4.2 5.9 3.3 3.7 - of which non-oil growth 5.5–4.2 5.4 4.4 3.9 4.0 - Current Account Balance 7.4–3.5 4.3 9.4 4.8 2.8 - Overall Fiscal Balance 2.4–8.6–1.8 3.1–0.5–1.2 - Inflation (year average; percent) 4.8 6.1 9.1 8.9 9.9 7.7 - Arab World oil exporters - Real GDP (annual growth) 4.7–6.5 4.7 6.7 3.4 3.4 - of which non-oil growth 6.0–6.1 6.4 4.2 4.2 3.9 - Current Account Balance 11.3–3.2 7.7 14.0 7.6 5.0 - Overall Fiscal Balance 4.8–9.2–0.3 5.7 1.2 0.3 - Inflation (year average; percent) 3.0 1.3 3.2 4.2 3.9 2.8 ### CCA: Selected Economic Indicators, 2000–24 - CCA - Real GDP (annual growth) 6.7–2.1 5.6 4.8 4.2 4.5 - Current Account Balance –0.2–3.0–0.6 5.8 1.1 0.5 - Overall Fiscal Balance 2.0–5.4–3.0 0.1–1.6–1.4 - Inflation (year average; percent) 8.9 7.4 9.6 13.0 11.8 8.5 - CCA oil and gas exporters - Real GDP (annual growth) 7.0–3.0 4.5 3.3 3.8 4.1 - of which non-oil growth 7.0–2.1 5.3 5.2 3.4 3.2 - Current Account Balance 0.2–2.4 1.5 8.6 3.1 2.5 - Overall Fiscal Balance 2.6–5.6–2.3 1.4–1.1–0.8 - Inflation (year average; percent) 7.7 5.9 9.2 14.3 13.0 8.7 - CCA emerging market and middle-income countries - Real GDP (annual growth) 5.9–6.9 8.5 11.1 4.6 5.0 - Current Account Balance –9.1–8.6–7.5–1.7–3.0–3.8 - Overall Fiscal Balance –1.7–6.9–4.6–1.9–2.1–1.9 - Inflation (year average; percent) 4.3 3.5 8.6 10.5 6.4 4.0 - CCA low-income developing countries - Real GDP (annual growth) 6.4 1.2 7.3 6.0 5.1 5.2 - Current Account Balance 1.0–3.0–5.5–1.1–4.0–4.1 - Overall Fiscal Balance 0.0–4.3–5.0–3.6–3.1–3.1 - Inflation (year average; percent) 13.0 11.7 10.7 11.1 11.0 9.3 *Source: IMF staff calculations and projections (data and notes as presented in the source PDF).* --- _Source: https://www.imf.org/-/media/files/publications/reo/mcd-cca/2023/april/english/text.pdf_