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### A Global Slowdown amid Higher-for-Longer Interest Rates
- Global growth projected to fall from 3.5 percent in 2022 to 3.0 percent in 2023 and 2.9 percent in 2024 (October 2023 World Economic Outlook).
- Federal funds rate projected to peak at 5.4 percent by the end of 2023 and stay at that level until late 2024 (about 100 basis points higher than expected in April).
- Average petroleum spot prices projected at $80.5 and $79.9 per barrel in 2023 and 2024, respectively (revised up from $73.1 and $68.9 in April).
- Food commodity prices projected to decline by 6.8 percent in 2023 and 1.9 percent in 2024; international food prices remain about 40 percent above prepandemic levels.

### MENA Region and Pakistan: Outlook and Policy Priority
- Combined effects of global headwinds, domestic challenges, and geopolitical risks weigh on economic momentum across ME&CA.
- Growth drivers and headwinds:
  - MENA: Growth set to slow in 2023 driven by lower oil production, tight policy settings in EM&MIs, the conflict in Sudan, and country-specific factors.
  - CCA: Growth set to moderate slightly in 2023 supported by migration, trade, and financial inflows following Russia’s war in Ukraine; growth projected to slow next year and over the medium term as these inflows gradually fade.
- Outlook summary:
  - MENA economic activity expected to improve in 2024 and 2025 as temporary factors (including oil production cuts) dissipate, but growth expected to remain subdued amid persistent structural hurdles.
  - CCA growth projected to slow next year and over the medium term as real and financial inflows from Russia fade and structural challenges persist.
- Policy priority: Expediting structural reforms to boost growth and strengthen resilience; tight monetary and fiscal policies remain essential in several economies to durably bring down inflation and ensure public debt sustainability.

### Growth Developments and Heterogeneity
- Oil-related dynamics:
  - Oil GDP growth slowing after three rounds of deep OPEC+ oil production cuts (October 2022, April 2023, June 2023) and additional temporary cuts by Saudi Arabia.
  - GCC crude oil production cuts drove deceleration in oil GDP growth; non-oil GDP growth partially offset declines.
- Non-oil activity highlights:
  - Robust manufacturing activity in Oman, Qatar, Saudi Arabia, United Arab Emirates.
  - Surging services in Bahrain, Oman, Saudi Arabia, United Arab Emirates.
- Country-specific constraints: Restrictions on foreign currency sales constraining growth in Iraq.
- EM&MI and Pakistan: Average real GDP growth remained lackluster at 3.1 percent in the first quarter of 2023 (below a historical average of 4 percent).
  - Growth upticks supported by strong tourism (Morocco, Tunisia) and robust remittances (Morocco).
  - Slowing growth in some countries reflects foreign currency rationing (Egypt) and import restrictions (Egypt and Pakistan).
- LICs:
  - Fragile LICs deteriorating: Conflict and climate shocks amplify fragilities (Sudan, Yemen, Somalia).
  - Non-fragile LICs showing positive performance: Increased trade (Djibouti) and robust services activity (Mauritania).

### Inflationary Pressures: Patterns and Drivers
- Oil exporters: Inflation easing in most oil-exporting countries; headline and core inflation returned to prepandemic historical averages in several economies, particularly GCC countries.
- Exceptions with elevated inflation: Algeria, Iraq, Islamic Republic of Iran (driven by food in Algeria and currency depreciations in Islamic Republic of Iran).
- EM&MIs and Pakistan:
  - Headline and core inflation in most returned to near prepandemic historical averages of between 3 and 4 percent, but some countries continue to face high inflationary pressures.
  - Monthly inflation remains well above historical levels in Egypt, Pakistan, and Tunisia.
  - As of July, year-over-year food inflation remains above 10 percent in Morocco and Tunisia and above 35 percent in Egypt and Pakistan.
  - Drivers include droughts (Morocco and Tunisia) and lagged impact of exchange rate devaluations on import prices (Egypt and Pakistan).
- LICs:
  - Inflation eased in Djibouti and Mauritania since early 2023.
  - Inflation exceptionally high in Sudan due to past climate shocks, low staple stocks, and ongoing conflict.
  - As of July, more than 45 million people in Djibouti, Mauritania, Somalia, Sudan, and Yemen faced food insecurity—almost 50 percent of their combined populations.

### Monetary, Fiscal, and External Conditions
- Monetary policy:
  - Pace of monetary tightening has slowed as price pressures recede in several economies.
  - Central banks in countries with currencies pegged to the US dollar (excluding Iraq) hiked policy rates by 100 basis points this year on average as of August 2023.
  - Some central banks appear near the end of their tightening cycle; only some EM&MIs raised policy rates in 2023 (Egypt, Morocco, Pakistan).
  - Policy interest rates remain below model-based estimates of natural rates in Egypt, Pakistan, Tunisia (April 2023 Regional Economic Outlook).
- Fiscal positions:
  - Non-oil primary balances (percent of non-oil GDP) strengthened in most GCC countries last year (except Saudi Arabia).
  - Non-oil primary balances deteriorated in other oil exporters due to higher public wages (Iraq, Libya) and subsidies (Algeria, Iraq, Libya).
  - Most EM&MIs continued tightening primary fiscal positions last year amid high debt levels and elevated borrowing costs.
  - LICs: Fiscal revenues as a share of GDP about 12 percent on average, down from about 18 percent 10 years ago, primarily due to revenue erosion in conflict-affected countries (Sudan, Yemen).
- External vulnerabilities:
  - External funding conditions deteriorated for highly indebted countries; foreign-currency sovereign bond spreads widened substantially for vulnerable EM&MIs (Egypt, Pakistan, Tunisia) after global financial turmoil in early March.
  - As of August, sovereign spreads remain at distressed levels (more than 1,000 basis points) for Egypt, Pakistan, and Tunisia.
  - Some MENA countries accessed international markets in H1 2023 (Bahrain, Egypt, Jordan, Morocco, Saudi Arabia, United Arab Emirates) but at relatively higher cost for vulnerable EM&MIs.
  - EM&MIs increased reliance on domestic banks for public debt financing, strengthening the sovereign-bank nexus and reducing funding available to the private sector.
  - Portfolio fund flows: portfolio fund outflows from MENA and Pakistan totaled $160 million in Q2 2023, down from a record $4.5 billion in outflows in 2022.
  - External buffers improved for most EM&MIs during H1 2023 partly because of strong tourism and remittance flows (Morocco, Tunisia) and support from bilateral and multilateral sources (Pakistan); international reserve coverage remains well below standard adequacy metrics, particularly for Egypt and Pakistan.

### Outlook by Country Group
- Oil exporters:
  - Growth projected to slow to 2 percent in 2023 (from 6.1 percent in 2022), improve to about 3.4 percent in 2024, and set below 3 percent in the medium term.
  - Forecasts for 2023 revised downward from April by 1.1 percentage points, reflecting deeper-than-expected oil production cuts and foreign currency rationing impacts in Iraq.
  - Non-oil activity expected to be the main growth driver in GCC countries in 2023 and subsequent years.
  - Inflation across MENA oil exporters forecast to average 12.9 percent in 2023 (unchanged from 2022) and 9.4 percent in 2024.
  - Current account surpluses for oil exporters projected to decline from 14.6 percent of GDP in 2022 to 7.5 percent of GDP in 2023 and to 6.7 percent of GDP in 2024.
  - Non-oil fiscal balances (as a percentage of non-oil GDP) expected on average to improve in 2023 by 5.5 percent and further to 1.8 percent in 2024.
- EM&MIs and Pakistan:
  - Growth expected to slow to 3.5 percent in 2023 (from 5.1 percent in 2022).
  - Egypt decelerated in fiscal year 2023 due to foreign currency rationing and elevated inflation; Pakistan estimated to have contracted in fiscal year 2023.
  - Egypt: headline inflation set to peak at 32.2 percent in 2024 and remain in double digits through 2027.
  - Pakistan: inflation forecast to peak in 2023 but remain elevated in 2024.
  - Current account deficit for EM&MIs set to narrow from 5.2 percent of GDP in 2022 to 3.7 percent of GDP in 2023.
  - Reserve coverage forecast to remain precarious in several countries, averaging about 70 percent of short-term external debt in Egypt, Pakistan, and Tunisia.
  - Public debt-to-GDP ratios projected to ease gradually from a peak of 90 percent in 2023 to 80 percent in 2025.
  - Elevated public-sector gross financing needs: total financing needs over 2023–24 projected at $487 billion—an increase of about $8 billion or 16 percentage points of fiscal revenues since April.
  - Financing needs would require domestic and external debt issuance of about $175 billion and $6 billion in excess of domestic and external debt amortization, respectively, over 2023–24.
  - Country-specific pressures: public gross financing needs reaching up to 38 and 21 percent of GDP by 2024 for Egypt and Pakistan, respectively.
- LICs:
  - Aggregate activity forecast to contract sharply by 9.3 percent in 2023, following a mild contraction in 2022.
  - Country forecasts for 2023:
    - Sudan: GDP growth forecast to contract by more than 18 percent.
    - Yemen: economy projected to contract by 0.5 percent.
    - Somalia: economy forecast to grow by 2.8 percent.
    - Djibouti: GDP growth forecast at 5 percent.
    - Mauritania: growth projected at 4.5 percent.
  - LICs face projected current account deficits of more than 5 percent of GDP over 2027–28.
  - Gross financing needs for LICs amount to about $12 billion cumulative until 2028.
- Caucasus and Central Asia (CCA):
  - Near-term GDP growth projected to moderate to 4.6 percent in 2023 and to 4.2 percent in 2024.
  - 2023 projection reflects an upward revision of 0.3 percentage point relative to April 2023.
  - Inflation: average inflation projected to ease to 11 percent in 2023; headline inflation projected to moderate to 8.3 percent in 2024.
  - Some central banks have begun loosening policy: policy rate reductions since the beginning of the year of 50, 75, 25, and 300 basis points in Armenia, Georgia, Kazakhstan, and Tajikistan, respectively.
  - Overall fiscal positions forecast to worsen by 1.5 percent of GDP on average across the CCA in 2023 and remain broadly unchanged in 2024.

### Risks to the Outlook
- Upside risks:
  - Faster-than-anticipated global decline in inflation could ease global financing conditions and lower borrowing costs in ME&CA.
  - Lower-than-expected food prices would reduce fiscal costs and alleviate food insecurity, especially in LICs.
  - Stronger global growth (for example, additional stimulus in China) could boost external demand.
  - Continued inflows of migrants and foreign exchange to the CCA could further support demand.
- Downside risks:
  - A larger-than-expected slowdown in China or advanced economies would depress external demand, reduce tourism, and curtail exports.
  - Escalation of the war in Ukraine could renew pressure on food, fuel, and fertilizer prices, reigniting inflation and worsening food insecurity.
  - Climate-related shocks—especially amid changing El Niño patterns—could trigger persistent droughts and floods, damaging infrastructure, reducing agricultural output, and raising food prices.
  - Region-specific risks include tighter global financial conditions prompting investor reassessment of lending to highly indebted EM&MIs, worsening debt dynamics and heightening risks of debt distress, and fiscal tensions spilling over to the private sector through the sovereign-bank link.
  - A deterioration of the crisis in Sudan could accelerate migration flows and add to social and economic costs in Egypt.

### Structural and Climate Policy Recommendations
- Structural reforms:
  - Expediting comprehensive structural reforms is critical to solve deep-seated economic challenges, especially where tight macroeconomic policies must be maintained.
  - Strengthen governance to promote private investment: improve government effectiveness and the rule of law; reduce the dominant role of state-owned enterprises; streamline or eliminate burdensome government regulations; enhance financial inclusion, especially for small and medium-sized enterprises.
  - Foster financial development: strengthen regulatory and supervisory frameworks; enforce property and creditor rights; enhance banking competition, transparency, and information sharing.
  - Improve productivity through infrastructure investment, including transportation and information and communication technologies.
  - Promote digitalization to improve inclusion and efficiency and to create job opportunities for youth and women.
  - Reduce barriers to women’s participation in economic life, including removing legal and policy barriers that weaken the link between women’s education and employment outcomes.
  - Sequence reforms: “First-generation” reforms (governance, regulatory quality, external sector) can increase returns from subsequent reforms; credit market and labor market reforms have larger output effects after first-generation reforms are in place.
- Climate change and resilience:
  - Include climate risks and policies in all relevant policy frameworks and structural reform agendas.
  - Emphasize social measures (social protection, health care, education) and infrastructure investments to boost climate resilience.
  - Promote a balanced policy mix to support climate mitigation and more sustainable growth.
  - Oil exporters should transition toward more diverse and greener energy generation and eliminate energy subsidies as a first step.
  - LICs and FCS dependent on agriculture should scale up climate-resilient infrastructure investment.

### Monetary, Financial, and Fiscal Policy Guidance
- Monetary policy:
  - Remain focused on price stability; exchange rate flexibility can help cushion shocks.
  - Strengthen monetary policy frameworks, increase transparency, and ensure central bank independence.
  - Policy guidance by circumstance:
    - Flexible exchange rate + persistent inflation: monetary policy should remain tight and data-dependent (notably Egypt, Pakistan, Tunisia may require more tightening).
    - Where inflation has returned near targets: monetary easing can proceed where growth is lackluster, but cautiously (Armenia, Georgia).
    - Fixed exchange rate regimes: policy interest rate changes should follow existing frameworks (GCC, Jordan).
- Financial sector:
  - Deepen financial sectors to strengthen liquidity and spur investment.
  - Guard against unexpected liquidity stress related to foreign liabilities in some GCC countries.
  - CCA countries would benefit from macroprudential policies incentivizing de-dollarization and enhancing corporate and bank risk management.
  - Improve management of state-owned banks by building adequate buffers, providing clear mandates, and aligning supervisory tools such as stress tests.
- Fiscal policy:
  - Tailor actions to local conditions while ensuring social protection systems reach the most vulnerable.
  - Target social spending to avoid generalized increases in wages, subsidies, and transfers.
  - MENA oil exporters: avoid procyclical spending; diversify fiscal revenue sources; strengthen fiscal risk management; implement credible medium-term fiscal frameworks.
  - MENA EM&MIs: continue fiscal consolidation mainly by containing current spending and, in some cases, increasing revenue mobilization (including by removing tax exemptions).
  - MENA LICs and FCS: ensure stability while easing food insecurity; mobilize domestic fiscal revenues where financing constraints prevent progress toward the Sustainable Development Goals.
  - Fiscal risk management: develop frameworks to identify and assess fiscal risks from commodity price volatility, public-sector guarantees, and natural disasters; collect regular, comprehensive fiscal data.

### IMF Support and Engagement
- Since the onset of the pandemic, the IMF has provided $34 billion in new financing to 15 countries in ME&CA.
- Over the last year, IMF programs were approved for Armenia (Stand-By Arrangement), Egypt (Extended Fund Facility), Mauritania (Extended Credit Facility and Extended Fund Facility), Morocco (Flexible Credit Line, Resilience and Sustainability Facility), and Pakistan (Stand-By Arrangement).
- Since 2020, the IMF has provided about $6 billion in emergency financing and enhanced emergency financing facilities, including establishing a Food Shock Window for easier access to assistance related to food and fertilizers.
- The IMF created the Resilience and Sustainability Trust; the recent approval of a Resilience and Sustainability Facility with Morocco amounting to about $1.3 billion is the first in ME&CA.
- The IMF has increased local presence by expanding Resident Representative offices, reopening its Middle East Regional Technical Assistance Center, opening its Caucasus, Central Asia, and Mongolia Regional Capacity Development Center, and setting up a new regional office in Riyadh, Saudi Arabia.

### Box 1.1 — The conflict in Sudan: migration consequences for North Africa (key figures and impacts)
- At the start of 2023:
  - Almost 16 million people—one-third of the population—needed humanitarian assistance.
  - 11 million people were acutely food insecure.
- Since the conflict intensified in April 2023, the United Nations estimates the number of people in Sudan needing humanitarian assistance increased by 10 million.
- Food prices rose by 20 percent between March and June 2023.
- More than 20.3 million (42 percent of country’s population) were pushed to high levels of acute food insecurity (Food and Agriculture Organization).
- Displacement:
  - More than 5.3 million had been displaced as of September 2023 (UNHCR).
  - About 1.2 million have left the country.
  - Chad and Egypt received 412,000 and 317,000 internationally displaced refugees, respectively; other neighboring countries received around 70,000 refugees.
  - About 250,000 refugees from South Sudan are expected to leave Sudan to return to their home country.
- Economic costs:
  - UNHCR estimates total cost of the response across the five countries receiving refugees at $1 billion through December 2023.
  - By September 2023, $266 million had been funded for that response.
  - The crisis increased the cost of Sudan’s overall humanitarian response plan by an estimated $750 million, raising it to $2.6 billion.
  - As of September 2023, donors had funded about $900 million, about one-third of the response funds needed.
- Medium-term consequences: infrastructure and human capital losses could take years to rebuild; weakened Sudanese economy would negatively affect neighboring countries and North Africa more broadly.

### Box 1.2 — Changing trade patterns in the Caucasus and Central Asia (key trade shifts)
- Since the start of the war in Ukraine, trade patterns in the CCA changed, with increased trade flows between Russia and several CCA countries across iron and steel, machinery, chemicals, agriculture products, and energy.
- Notable export share changes to Russia (2021 to 2022):
  - Kyrgyz Republic: 14 percent to 44 percent.
  - Armenia: 27 percent to 45 percent.
  - Uzbekistan: 12 percent to 17 percent.
- Most CCA countries (excluding Armenia and the Kyrgyz Republic) increased their non-energy export share to trading partners other than Russia in 2022, with rises mainly in agriculture products, food, and raw materials (especially metals).
- Geographical widening: exports to the European Union, the United States, China, and the rest of the world surged, suggesting broad-based geographical diversification of CCA trade links.

*International Monetary Fund, Regional Economic Outlook — Middle East and Central Asia, October 2023.*

### 1. Regional Developments and Economic

### 1. Regional Developments and Economic Outlook: Building Resilience and Fostering Sustainable Growth

### A Global Slowdown amid Higher-for-Longer Interest Rates
- Global growth projected to fall from 3.5 percent in 2022 to 3.0 percent in 2023 and 2.9 percent in 2024 (October 2023 World Economic Outlook).
- Federal funds rate projected to peak at 5.4 percent by the end of 2023 and stay at that level until late 2024 (about 100 basis points higher than expected in April).
- Average petroleum spot prices projected at $80.5 and $79.9 per barrel in 2023 and 2024, respectively (revised up from $73.1 and $68.9 in April).
- Food commodity prices projected to decline by 6.8 percent in 2023 and 1.9 percent in 2024; international food prices remain about 40 percent above prepandemic levels.

### MENA Region and Pakistan: A Complex Road Ahead
- Combined effects of global headwinds, domestic challenges, and geopolitical risks weigh on economic momentum across ME&CA.
- Growth drivers and headwinds:
  - MENA: Growth set to slow in 2023 driven by lower oil production, tight policy settings in EM&MIs, the conflict in Sudan, and country-specific factors.
  - CCA: Growth set to moderate slightly in 2023 supported by migration, trade, and financial inflows following Russia’s war in Ukraine; growth projected to slow next year and over the medium term as these inflows gradually fade.
- Outlook summary:
  - MENA economic activity expected to improve in 2024 and 2025 as temporary factors (including oil production cuts) dissipate, but growth expected to remain subdued amid persistent structural hurdles.
  - CCA growth projected to slow next year and over the medium term as real and financial inflows from Russia fade and structural challenges persist.
- Policy priority: Expediting structural reforms to boost growth and strengthen resilience; tight monetary and fiscal policies remain essential in several economies to durably bring down inflation and ensure public debt sustainability.

### Growth Is Easing amid Global Headwinds (MENA specifics)
- Oil GDP growth slowing after three rounds of deep OPEC+ oil production cuts (October 2022, April 2023, June 2023) and additional temporary cuts by Saudi Arabia.
- GCC crude oil production cuts drove deceleration in oil GDP growth; non-oil GDP growth partially offset declines, supported by:
  - Robust manufacturing activity: Oman, Qatar, Saudi Arabia, United Arab Emirates.
  - Surging services: Bahrain, Oman, Saudi Arabia, United Arab Emirates.
- Country-specific constraints: Restrictions on foreign currency sales constraining growth in Iraq.
- EM&MI and Pakistan: Average real GDP growth remained lackluster at 3.1 percent in the first quarter of 2023 (below a historical average of 4 percent).
  - Growth upticks supported by strong tourism (Morocco, Tunisia) and robust remittances (Morocco).
  - Slowing growth in some countries reflects foreign currency rationing (Egypt) and import restrictions (Egypt and Pakistan).
- Fragile LICs deteriorating: Conflict and climate shocks amplify fragilities (Sudan, Yemen, Somalia).
- Non-fragile LICs showing positive performance: Increased trade (Djibouti) and robust services activity (Mauritania).

### Inflationary Pressures: Easing but Heterogeneous
- Inflation easing in most oil-exporting countries in line with global trends; headline and core inflation returned to prepandemic historical averages in several economies, particularly GCC countries.
- Exceptions with elevated inflation: Algeria, Iraq, Islamic Republic of Iran (driven by food in Algeria and currency depreciations in Islamic Republic of Iran).
- EM&MIs and Pakistan: Headline and core inflation in most returned to near prepandemic historical averages of between 3 and 4 percent, but some countries continue to face high inflationary pressures.
  - Monthly inflation remains well above historical levels in Egypt, Pakistan, and Tunisia.
  - As of July, year-over-year food inflation remains above 10 percent in Morocco and Tunisia and above 35 percent in Egypt and Pakistan.
  - Drivers include droughts (Morocco and Tunisia) and lagged impact of exchange rate devaluations on import prices (Egypt and Pakistan).
- LICs: Inflation dynamics vary; food security remains a widespread concern.
  - Inflation eased in Djibouti and Mauritania since early 2023.
  - Inflation exceptionally high in Sudan due to past climate shocks, low staple stocks, and ongoing conflict.
  - As of July, more than 45 million people in Djibouti, Mauritania, Somalia, Sudan, and Yemen faced food insecurity—almost 50 percent of their combined populations.

### Monetary Tightening, Fiscal Positions, and External Vulnerabilities
- Monetary policy:
  - Pace of monetary tightening has slowed as price pressures recede in several economies.
  - Central banks in countries with currencies pegged to the US dollar (excluding Iraq) hiked policy rates by 100 basis points this year on average as of August 2023.
  - Some central banks appear near the end of their tightening cycle; only some EM&MIs raised policy rates in 2023 (Egypt, Morocco, Pakistan).
  - Policy interest rates remain below model-based estimates of natural rates in Egypt, Pakistan, Tunisia (April 2023 Regional Economic Outlook).
- Fiscal positions:
  - Non-oil primary balances (percent of non-oil GDP) strengthened in most GCC countries last year (except Saudi Arabia).
  - Non-oil primary balances deteriorated in other oil exporters due to higher public wages (Iraq, Libya) and subsidies (Algeria, Iraq, Libya).
  - Most EM&MIs continued tightening primary fiscal positions last year amid high debt levels and elevated borrowing costs.
  - LICs: Fiscal revenues as a share of GDP about 12 percent on average (about half the level of EM&MIs), down from about 18 percent 10 years ago, primarily due to revenue erosion in conflict-affected countries (Sudan, Yemen).
- External vulnerabilities:
  - External funding conditions deteriorated for highly indebted countries; foreign-currency sovereign bond spreads widened substantially for vulnerable EM&MIs (Egypt, Pakistan, Tunisia) after global financial turmoil in early March.
  - As of August, sovereign spreads remain at distressed levels (more than 1,000 basis points) for Egypt, Pakistan, and Tunisia.
  - Some MENA countries accessed international markets in H1 2023 (Bahrain, Egypt, Jordan, Morocco, Saudi Arabia, United Arab Emirates) but at relatively higher cost for vulnerable EM&MIs.
  - EM&MIs increased reliance on domestic banks for public debt financing, strengthening the sovereign-bank nexus and reducing funding available to the private sector.
  - Portfolio fund flows: portfolio fund outflows from MENA and Pakistan totaled $160 million in Q2 2023, down from a record $4.5 billion in outflows in 2022.
  - External buffers improved for most EM&MIs during H1 2023 partly because of strong tourism and remittance flows (Morocco, Tunisia) and support from bilateral and multilateral sources (Pakistan); international reserve coverage remains well below standard adequacy metrics, particularly for Egypt and Pakistan.

### MENA Region and Pakistan Outlook: A Slowdown amid Growing Challenges
- Regional growth projection overview:
  - Growth in the MENA region and Pakistan projected to slow in 2023 due to extended oil production cuts in oil exporters, tight macroeconomic policies in EM&MIs, and heightened fragility in LICs (particularly Sudan).
  - All country groups (oil exporters, EM&MIs, LICs) projected to perform below the emerging market and developing economy average in the rest of the world.
- Recent shocks: Devastating earthquake in Morocco and severe flooding in Libya caused thousands of deaths and damaged infrastructure.
- Medium-term prospects:
  - As some 2023 headwinds dissipate, prospects expected to rebound in 2024 and improve in 2025.
  - Persistent structural gaps and decline in oil-related growth mean growth for most countries projected to slow and remain modest and below historical averages over the medium term.
  - Labor market challenge: More than 100 million young people expected to reach working age in the region in the next decade.
  - Inflation forecast to abate slowly with receding global price pressures; large cross-country differences will persist.

### Oil Exporters: Growth and Inflation Projections
- Growth:
  - Growth in oil exporters projected to slow to 2 percent in 2023 (from 6.1 percent in 2022), improve to about 3.4 percent in 2024, and set below 3 percent in the medium term.
  - Forecasts for 2023 revised downward from April by 1.1 percentage points, reflecting deeper-than-expected oil production cuts and foreign currency rationing impacts in Iraq.
  - Non-oil activity expected to be the main growth driver in GCC countries in 2023 and subsequent years, supported by moderate expansion in investment; private consumption set to remain subdued relative to prepandemic trends.
  - Non-oil growth projected insufficient to offset decline in oil growth over the medium term due to persistent productivity gaps in the non-oil sector, posing challenges for job creation and inclusion.
- Inflation:
  - Across MENA oil exporters, headline inflation forecast to average 12.9 percent in 2023 (unchanged from 2022) and 9.4 percent in 2024.
  - Elevated inflation reflects persistent price pressures in some non-GCC countries because of ongoing fiscal expansions (Algeria) and sizable exchange rate depreciation (Islamic Republic of Iran).

*Prepared by Azhin Abdulkarim, Vizhdan Boranova, Hasan Dudu, Filippo Gori (lead), and Gustavo Ramirez.*

### 1. Regional Developments and Economic Outlook: Building Resilience and Fostering Sustainable Growth

### 1. Regional Developments and Economic Outlook: Building Resilience and Fostering Sustainable Growth

### Oil exporters and fiscal/external positions
- Current account surpluses for oil exporters are projected to decline from 14.6 percent of GDP in 2022 to 7.5 percent of GDP in 2023 and to 6.7 percent of GDP in 2024.
- External positions will weaken but “remain in comfortable positions over the medium term (except for Iraq).”
- Fiscal consolidation is being pursued in several oil exporters to mitigate lower oil revenue and reduce budget sensitivity to oil price volatility, with planned measures focusing on rationalizing current expenditures to free up resources for priority spending including social safety nets and infrastructure (Bahrain, Oman, Qatar, Saudi Arabia).
- Non-oil fiscal balances (as a percentage of non-oil GDP) are expected on average to improve in 2023 by 5.5 percent and further to 1.8 percent in 2024.
- Exceptions: anticipated increases in the wage bill (Kuwait, Iraq) and subsidies (United Arab Emirates) are expected to worsen fiscal positions in these economies in 2023.

### EM&MIs: growth, inflation, external balances, and fiscal pressures
- Growth
  - Growth in the MENA region’s EM&MIs is expected to slow to 3.5 percent in 2023 (from 5.1 percent in 2022).
  - Country divergences: Jordan and Morocco more favorable (growth stable in Jordan; accelerate in Morocco), Egypt decelerated in fiscal year 2023 due to foreign currency rationing and elevated inflation; Pakistan estimated to have contracted in fiscal year 2023 due to flooding, inflationary pressures, and import curbs.
- Inflation
  - Inflationary pressures are expected to ease in most EM&MIs as monetary tightening takes hold.
  - Egypt: headline inflation is set to peak at 32.2 percent in 2024 and remain in double digits through 2027.
  - Pakistan: inflation is forecast to peak in 2023 but remain elevated in 2024.
  - Jordan and Morocco: price pressures projected to continue declining, with inflation nearing prepandemic levels this year (Jordan) or next (Morocco).
- External balances and reserves
  - Current account deficit for EM&MIs is set to narrow from 5.2 percent of GDP in 2022 to 3.7 percent of GDP in 2023.
  - Reserve coverage is forecast to remain precarious in several countries, averaging about 70 percent of short-term external debt in Egypt, Pakistan, and Tunisia.
- Fiscal balances, debt, and financing needs
  - Primary fiscal balances are expected to improve in EM&MIs and Pakistan, reaching prepandemic levels this year, aided by expenditure rationalization (mostly lower subsidies and transfers).
  - Overall fiscal balance is set to improve only by about 1 percent of GDP over 2023–24, reflecting a 2 percent of GDP increase in interest expenses.
  - Public debt-to-GDP ratios projected to ease gradually from a peak of 90 percent in 2023 to 80 percent in 2025.
  - Elevated public-sector gross financing needs: total financing needs over 2023–24 are projected at $487 billion—an increase of about $8 billion or 16 percentage points of fiscal revenues since April.
  - Financing needs would require domestic and external debt issuance of about $175 billion and $6 billion in excess of domestic and external debt amortization, respectively, over 2023–24, likely exacerbating the sovereign-bank nexus.
  - Country-specific financing pressure example: public gross financing needs reaching up to 38 and 21 percent of GDP by 2024 for Egypt and Pakistan, respectively.

### LICs: severe contractions and constrained policy space
- Aggregate activity
  - Economic activity in the MENA region’s LICs is forecast to contract sharply by 9.3 percent in 2023, following a mild contraction in 2022.
  - Heterogeneous outcomes across LICs depending on idiosyncratic and conflict-related factors.
- Country highlights
  - Sudan: GDP growth forecast to contract by more than 18 percent in 2023 due to the worsening crisis.
  - Yemen: economy projected to contract by 0.5 percent in 2023 after the 2022 truce expired without tangible macroeconomic improvements.
  - Somalia: economy forecast to grow by 2.8 percent in 2023 amid ongoing drought conditions.
  - Djibouti: GDP growth forecast at 5 percent in 2023, boosted by the peace agreement in Ethiopia.
  - Mauritania: growth projected at 4.5 percent in 2023 as extractive and agriculture activity moderates.
- External financing and aid
  - LICs face multiple medium-term challenges on external positions: projected current account deficits of more than 5 percent of GDP over 2027–28.
  - Aid flows are critical but official grants are expected to decline over the medium term.
  - Gross financing needs for LICs amount to about $12 billion cumulative until 2028.

### Caucasus and Central Asia (CCA): moderating but still robust growth
- Growth and activity
  - Near-term GDP growth in the CCA is projected to moderate to 4.6 percent in 2023 and to 4.2 percent in 2024.
  - The 2023 projection reflects an upward revision of 0.3 percentage point relative to April 2023 amid more persistent positive impacts from real and financial flows (Armenia, Georgia, Tajikistan, Uzbekistan).
  - Country divergences: Armenia and Georgia decelerating from last year’s double-digit surge; CCA LICs softening due to declines in remittances and weaker gold and agricultural production (Kyrgyz Republic, Tajikistan, Uzbekistan).
  - Oil and gas exporters: Azerbaijan and Turkmenistan projected to decelerate or remain subdued due to capacity constraints; Kazakhstan expected to rebound supported by strong domestic demand and increased oil production.
- External positions
  - External buffers improved in most CCA countries because of high international oil and gas prices for exporters, large trade surpluses in services (Armenia, Georgia), private transfers from Russia, and strong remittance flows.
  - External positions are projected to weaken as private transfers and trade with Russia normalize; Azerbaijan and Kazakhstan forecast to experience sharp current account deteriorations.
- Inflation and monetary policy
  - Inflation eased more quickly than previously expected in 2023; average inflation projected to ease to 11 percent in 2023 (0.8 percentage point faster than April projection).
  - Headline inflation in the CCA projected to moderate to 8.3 percent in 2024.
  - Some central banks have begun loosening policy: policy rate reductions since the beginning of the year of 50, 75, 25, and 300 basis points in Armenia, Georgia, Kazakhstan, and Tajikistan, respectively.
  - Easing financial conditions have supported a modest increase in private sector credit in some countries (Azerbaijan, Kyrgyz Republic, Tajikistan).
- Fiscal positions
  - Public-sector debt remains at manageable levels.
  - Overall fiscal positions are forecast to worsen by 1.5 percent of GDP on average across the CCA in 2023 and remain broadly unchanged in 2024.
  - Expenditure increases are projected in Kazakhstan, the Kyrgyz Republic, Azerbaijan, and Tajikistan; Georgia expected to pursue gradual consolidation supported by strong revenue and fiscal restraint.

### Risks to the ME&CA outlook
- Upside risks
  - Faster-than-anticipated global decline in inflation could reduce required central bank tightening, ease global financing conditions, and lower borrowing costs in ME&CA.
  - Lower-than-expected food prices would reduce fiscal costs and alleviate food insecurity, especially in LICs.
  - Stronger global growth (for example, additional stimulus in China) could boost global trade and external demand for ME&CA exports.
  - Continued inflows of migrants and foreign exchange to the CCA could further support demand.
- Downside risks
  - A larger-than-expected slowdown in China or advanced economies would depress external demand, reduce tourism, and curtail exports.
  - Escalation of the war in Ukraine could renew pressure on food, fuel, and fertilizer prices (for example, through suspension of the Black Sea Grain Initiative), reigniting inflation and worsening food insecurity.
  - Climate-related shocks—especially amid changing El Niño patterns—could trigger persistent droughts and floods, damaging infrastructure, reducing agricultural output, and raising food prices.
- Region-specific risks may also materialize given the heterogeneous country exposures and structural vulnerabilities across ME&CA.

*International Monetary Fund, Regional Economic Outlook — Middle East and Central Asia, October 2023.*

### 1. Regional Developments and Economic Outlook: Building Resilience and Fostering Sustainable Growth

### 1. Regional Developments and Economic Outlook: Building Resilience and Fostering Sustainable Growth

### Major risks and outlook
- Tighter global financial conditions and deeper spillovers from regional conflicts could pose risks amid challenging financing conditions for MENA region EM&MIs.
- Tighter-for-longer global financial conditions could prompt investors to reassess lending to highly indebted EM&MIs, worsening debt dynamics and heightening risks of debt distress.
- Fiscal tensions could spill over to the private sector through the sovereign-bank link (Chapter 3).
- A deterioration of the crisis in Sudan could accelerate migration flows and add to social and economic costs in Egypt (Box 1.1).
- A possible worsening of geoeconomic conditions related to Russia’s war in Ukraine could:
  - adversely impact financial flows, remittances, trade, and economic activity;
  - lead to the introduction of secondary sanctions;
  - cause new disruptions to regional trade infrastructure and linkages, including maritime routes and oil pipelines, affecting oil and gas exporters and importers.

### Structural policies: transforming the economy
- Expediting implementation of comprehensive structural reforms is critical to solving deep-seated economic challenges in ME&CA, especially where tight macroeconomic policies must be maintained (Chapter 2).
- Strengthening governance to promote private investment:
  - Improve government effectiveness and the rule of law to strengthen efficiency and predictability for private sector participants.
  - Ensure a level playing field between public and private firms by reducing the dominant role of state-owned enterprises, streamlining or eliminating burdensome government regulations, enhancing financial inclusion (especially of small and medium-sized enterprises), and improving general governance.
- Foster financial development by:
  - Strengthening regulatory and supervisory frameworks;
  - Enforcing property rights and creditor rights;
  - Enhancing banking competition, transparency, and information sharing (Gigineishvili and others 2023).
- Improve productivity through infrastructure investment, including transportation and information and communication technologies.
- Promote digitalization to improve inclusion and efficiency and to create job opportunities for youth and women via remote working, online learning, digital finance, and e-commerce.
- Reduce barriers to women’s participation in economic life, including removing legal and policy barriers that weaken the link between women’s education and employment outcomes (Cardarelli, Vera-MartÍn, and Lall 2022).
- Sequencing and packaging of reforms matter:
  - “First-generation” reforms (governance, regulatory quality, external sector) can increase returns from subsequent reforms.
  - Credit market and labor market reforms have larger output effects after first-generation reforms are in place.

### Climate change and resilience
- Climate change-related shocks threaten growth prospects across ME&CA and are a key source of socioeconomic risk.
- Effective climate adaptation requires including climate risks and policies in all relevant policy frameworks and structural reform agendas.
- Measures to boost climate resilience should emphasize social measures (social protection, health care, education) and infrastructure investments (Duenwald and others 2022).
- Promote a balanced policy mix to support climate mitigation and more sustainable growth (April 2023 Fiscal Monitor).
- Oil exporters should transition toward more diverse and greener energy generation and eliminate energy subsidies as a first step.
- LICs and fragile and conflict-affected states (FCS) that depend on agriculture are disproportionately exposed to climate change; droughts increase hunger from already elevated levels and call for scaling up climate-resilient infrastructure investment (Jaramillo and others 2023).

### Monetary and financial policies
- Monetary policy should remain focused on price stability; exchange rate flexibility can help cushion shocks.
- Strengthen monetary policy frameworks and increase transparency of monetary policy operations; ensure central bank independence (April 2023 Regional Economic Outlook: Middle East and Central Asia).
- Policy guidance:
  - In countries with a flexible exchange rate and persistent inflationary pressures, monetary policy should remain tight and follow a data-dependent approach. Most EM&MIs would need to maintain a tight policy stance and remain vigilant until signals of sustained disinflation are well-established. In some economies where inflation is high, this may require more monetary policy tightening (Egypt, Pakistan, Tunisia).
  - In countries where inflation has returned to or is near inflation targets and underlying inflationary pressures have abated, monetary easing can proceed where growth is lackluster. Where demand remains strong, easing should be cautious to avoid reigniting price pressures (Armenia, Georgia).
  - In countries with a fixed exchange rate (GCC, Jordan), any policy interest rate change should be made in accordance with their frameworks.
- Financial sector deepening:
  - Reforms to deepen the financial sector would strengthen liquidity and spur investment and growth.
  - In some GCC countries, guard against unexpected liquidity stress related to foreign liabilities.
  - CCA countries would benefit from macroprudential policies and tools that incentivize de-dollarization and enhance corporate and bank risk management.
  - All ME&CA countries should foster a deep and diversified investor base and improve management of state-owned banks by building adequate buffers, providing clear mandates, and aligning supervisory tools such as stress tests (Chapter 3).

### Fiscal policy: strengthening resilience and rebuilding buffers
- Tailor policy actions to local conditions while ensuring social protection systems have sufficient reach and provide equal access to basic services.
- Target social spending toward the most vulnerable segments, avoiding generalized increases in wages, subsidies, and transfers.
- MENA oil exporters:
  - Avoid procyclical spending amid volatile oil prices; boost fiscal buffers.
  - Diversify away from dependence on oil fiscal revenue, strengthen fiscal risk management, and implement credible medium-term fiscal frameworks.
  - Public investments should target development of non-oil sectors and address climate change challenges.
- MENA EM&MIs:
  - Strengthen fiscal balances and bring down public-sector debt levels decisively.
  - Continue fiscal consolidation mainly by containing current spending on wages and subsidies, and in some cases through additional revenue mobilization (including by removing tax exemptions).
  - Adopt credible medium-term fiscal frameworks to build a track record of fiscal discipline. Example: Moroccan authorities’ publication of a three-year budget plan as part of the annual budget starting from 2023.
  - Consider measures to mitigate fiscal risks from state-owned enterprises.
- MENA LICs and FCS:
  - Ensure stability while easing food insecurity; resolving ongoing conflicts is a prerequisite where present.
  - Mobilize domestic fiscal revenues where financing constraints prevent progress toward the Sustainable Development Goals.
  - Target spending to the most pressing social needs (such as acute food insecurity).
  - International community support is essential to mitigate ongoing humanitarian crises.
- Fiscal risk management:
  - Fiscal risks in low- and middle-income MENA countries include commodity price volatility, public-sector guarantees (including to state-owned enterprises), and natural disasters (Boukezia and others 2023).
  - Develop fiscal risk management frameworks, build capacity to identify and assess fiscal risks and their budgetary impact, and collect regular, timely, and comprehensive fiscal data covering the entire public sector.
- CCA countries should maintain a prudent fiscal stance to build buffers and reduce vulnerabilities; fiscal structural reforms such as increasing budget transparency and adopting credible medium-term fiscal frameworks anchored in fiscal rules will help facilitate access to external financing.

### IMF support and engagement
- Since the onset of the pandemic, the IMF has provided $34 billion in new financing to 15 countries in ME&CA.
- Over the last year, IMF programs were approved for Armenia (Stand-By Arrangement), Egypt (Extended Fund Facility), Mauritania (Extended Credit Facility and Extended Fund Facility), Morocco (Flexible Credit Line, Resilience and Sustainability Facility), and Pakistan (Stand-By Arrangement).
- Since 2020, the IMF has also provided about $6 billion in emergency financing and enhanced its emergency financing facilities to address the food crisis facing the Fund’s most vulnerable members, including establishing a Food Shock Window for easier access to financial assistance related to food and fertilizers.
- The IMF created the Resilience and Sustainability Trust to support low-income and vulnerable middle-income countries; the recent approval of a Resilience and Sustainability Facility with Morocco amounting to about $1.3 billion is the first in ME&CA.
- The IMF has increased local presence by expanding Resident Representative offices, reopening its Middle East Regional Technical Assistance Center, opening its Caucasus, Central Asia, and Mongolia Regional Capacity Development Center, and setting up a new regional office in Riyadh, Saudi Arabia.

### Box 1.1 — The conflict in Sudan: migration consequences for North Africa (key figures and impacts)
- At the start of 2023:
  - Almost 16 million people—one-third of the population—needed humanitarian assistance.
  - 11 million people were acutely food insecure.
- Since the conflict intensified in April 2023, the United Nations estimates the number of people in Sudan needing humanitarian assistance increased by 10 million.
- Food prices rose by 20 percent between March and June 2023, contributing to deteriorating food access.
- More than 20.3 million (42 percent of country’s population) were pushed to high levels of acute food insecurity (Food and Agriculture Organization).
- Displacement:
  - The UNHCR reported more than 5.3 million had been displaced as of September 2023.
  - About 1.2 million have left the country.
  - Chad and Egypt received 412,000 and 317,000 internationally displaced refugees, respectively; other neighboring countries received around 70,000 refugees.
  - About 250,000 refugees from South Sudan are expected to leave Sudan to return to their home country.
- Economic costs:
  - UNHCR estimates total cost of the response across the five countries receiving refugees at $1 billion through December 2023.
  - By September 2023, $266 million had been funded for that response.
  - The current crisis increased the cost of Sudan’s overall humanitarian response plan by an estimated $750 million, raising it to $2.6 billion.
  - As of September 2023, donors had funded about $900 million, about one-third of the response funds needed.
- Medium-term consequences: infrastructure and human capital losses could take years to rebuild; weakened Sudanese economy would negatively affect neighboring countries and North Africa more broadly.

### Box 1.2 — Changing trade patterns in the Caucasus and Central Asia (key trade shifts)
- Since the start of the war in Ukraine, trade patterns in the CCA changed, with increased trade flows between Russia and several CCA countries for categories including iron and steel, machinery, chemicals, agriculture products, and energy.
- Notable country-level export share changes to Russia (2021 to 2022):
  - Kyrgyz Republic: 14 percent to 44 percent (share of exports to Russia tripled).
  - Armenia: 27 percent to 45 percent (exports to Russia almost doubled).
  - Uzbekistan: 12 percent to 17 percent (increase of 5 percentage points).
  - Azerbaijan, Georgia, and Kazakhstan: share of exports to Russia declined slightly.
- Most CCA countries (excluding Armenia and the Kyrgyz Republic) increased their non-energy export share to trading partners other than Russia in 2022, with rises mainly in agriculture products, food, and raw materials (especially metals).
- Geographical widening: exports to the European Union, the United States, China, and the rest of the world surged, suggesting broad-based geographical diversification of CCA trade links.

*Prepared by IMF staff; October 2023.*

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_Source: https://www.imf.org/-/media/files/publications/reo/mcd-cca/2023/october/english/ch1.pdf_