## Executive Summary — Regional Economic Outlook: Middle East and Central Asia (October 2023)

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### Regional growth and inflation outlook
- Regional growth (ME&CA): projected at 2.0 percent in 2023 and 3.4 percent in 2024.
- MENA region growth: projected to slow to 2.0 percent in 2023 and recover to 3.4 percent in 2024.
  - Drivers of 2023 slowdown: lower oil production in oil exporters, tight policy settings in emerging market and middle-income economies (EM&MIs), and country-specific headwinds.
  - Sudan’s contraction is a key factor in 2023 weakness due to conflict, displacement, and severe economic disruption.
  - Inflation: broadly declining but remains elevated in some economies; high food prices exacerbate food insecurity.
- CCA growth: projected at 4.6 percent in 2023 and 4.2 percent in 2024.
  - Growth remains robust despite moderation as migration, trade, and financial flows from Russia gradually normalize.
  - Medium-term growth expected to slow below historical averages due to structural challenges (poor market-based resource allocation and subpar productivity).
  - Inflation diverging across countries; projected to ease only gradually amid strong domestic demand and continued wage pressures in some countries.

### Key projection assumptions
- Oil price: US$80.49 a barrel in 2023 and US$79.92 a barrel in 2024 (simple average of UK Brent, Dubai Fateh, and West Texas Intermediate).
- Three-month nominal yield on US Treasury bills: 5.3 percent in 2023 and 5.4 percent in 2024.
- Projections based on data through late September 2023 and assume established national policies are maintained.

### Notable regional statistics and forecasts
- Global growth (WEO Oct 2023): 3.0 percent in 2023 and 2.9 percent in 2024 (from 3.5 percent in 2022).
- Average petroleum spot prices assumed: $80.5 per barrel in 2023 and $79.9 per barrel in 2024 (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.
- 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.
- Headline inflation across MENA oil exporters: forecast to average 12.9 percent in 2023 (unchanged from 2022) and 9.4 percent in 2024.

### Country-group and sectoral highlights
- EM&MIs (MENA): growth expected to slow to 3.5 percent in 2023 (from 5.1 percent in 2022); non-oil sectors supporting activity in some GCC countries.
- LICs (MENA): economic activity forecast to contract sharply by 9.3 percent in 2023.
  - Sudan: GDP growth forecast to contract by more than 18 percent in 2023.
  - Somalia: forecast to grow by 2.8 percent in 2023.
  - Djibouti: GDP growth forecast at 5 percent in 2023.
  - Mauritania: projected at 4.5 percent in 2023.
- CCA: GDP growth projected to moderate to 4.6 percent in 2023 and 4.2 percent in 2024; inflation projected to ease to 11 percent on average in 2023 and to 8.3 percent in 2024.

### External and fiscal vulnerabilities
- Oil exporters’ current account surpluses projected to almost halve 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.
- EM&MIs current account deficit: set to narrow from 5.2 percent of GDP in 2022 to 3.7 percent in 2023.
- Public-sector gross 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 could reach up to 38 percent of GDP by 2024 for Egypt and 21 percent of GDP for Pakistan.
  - Required additional issuance: about $175 billion (domestic) and $6 billion (external) in excess of amortization over 2023–24.
- LICs cumulative gross financing needs: about $12 billion until 2028.
- Reserve coverage remains well below standard adequacy metrics for Egypt and Pakistan.

### Risk assessment
- Overall balance of risks: to the downside despite some easing since April.
- Upside risks:
  - Faster global decline in inflation easing central bank pressure.
  - Stronger global demand lifting ME&CA growth.
- Downside risks:
  - Larger slowdown in China or major advanced economies weakening external demand.
  - Escalation of Russia’s war in Ukraine reigniting inflationary pressures and worsening food insecurity.
  - Climate-related shocks (droughts, floods) damaging infrastructure and agricultural output.
  - Debt distress risks from tighter-for-longer global financial conditions.
- Financial system vulnerabilities: prolonged higher interest rates could expose sovereign-bank nexus vulnerabilities and other macrofinancial risks (see Chapter 3).

### Policy priorities and recommendations
- Macroeconomic stance:
  - Where inflationary pressures persist and fiscal/external buffers are depleted, maintain tight macroeconomic policies to re-establish price stability and ensure fiscal and external sustainability.
- Structural reforms:
  - Wide-ranging reforms to support near-term activity and lift long-term potential growth; priority areas: governance, labor markets, and business regulations.
  - Strategic sequencing and packaging of reforms can magnify benefits and ease trade-offs.
  - Reforms should support job creation for the more than 100 million people projected to enter working age over the next decade.
- Financial stability measures:
  - Address vulnerabilities from the sovereign-bank nexus.
  - Establish emergency liquidity tools to reduce risks from prolonged higher interest rates.

### IMF engagement and financing support
- Since the onset of the pandemic, the IMF provided $34 billion in new financing to 15 countries in ME&CA.
- About $6 billion in emergency financing and enhanced emergency financing facilities provided since 2020, including establishing a Food Shock Window.
- Resilience and Sustainability Trust: first Resilience and Sustainability Facility in ME&CA with Morocco amounting to about $1.3 billion.
- Recent IMF program approvals include Armenia (Stand-By Arrangement), Egypt (Extended Fund Facility), Mauritania (Extended Credit Facility and Extended Fund Facility), Morocco (Flexible Credit Line, Resilience and Sustainability Facility), Pakistan (Stand-By Arrangement).

### Sudan humanitarian and migration consequences (Box 1.1)
- Pre-conflict (start of 2023):
  - almost 16 million people needed humanitarian assistance;
  - 11 million people were acutely food insecure.
- Post-April 2023 conflict intensification:
  - UN estimates people needing humanitarian assistance increased by 10 million.
  - A 20 percent increase in food prices between March and June reduced access to sufficient and safe food.
  - More than 20.3 million (42 percent of country’s population) pushed to high levels of acute food insecurity (FAO).
  - UNHCR reported more than 5.3 million displaced as of September; about 1.2 million left the country.
  - Chad and Egypt received 412,000 and 317,000 internationally displaced refugees, respectively; other neighbors received around 70,000 refugees.
  - About 250,000 refugees from South Sudan expected to return home from Sudan.
  - UNHCR estimates cost of response across five receiving countries at $1 billion through December 2023; $266 million funded by September.
  - Overall humanitarian response plan cost increased by $750 million to $2.6 billion; donors had funded about $900 million (about one-third).
- Medium-term implication: significant infrastructure and human capital losses with negative spillovers to neighboring countries and North Africa; donors urged to contribute to relief and efforts to end conflict.

### Trade shifts in the CCA (Box 1.2)
- Increased exports to Russia in 2022 versus 2021:
  - Kyrgyz Republic: exports to Russia rose from 14 percent to 44 percent of total exports.
  - Armenia: 27 percent to 45 percent.
  - Uzbekistan: 12 percent to 17 percent.
- Most CCA countries (excluding Armenia and the Kyrgyz Republic) increased non-energy export share to partners other than Russia in 2022.
- Exports to the EU, United States, China, and rest of the world surged in 2022, widening geographical trade links.

### Structural reform evidence and sequencing (gender and broader reforms)
- Governance reforms: associated with about 6 percent output gain after five years; closing governance gap with EMDEs could raise regional output by about 1.3 percent in the medium term (1 percent CCA to almost 3 percent LICs and FCS).
- Regulatory quality reforms: associated with a 4 percent output increase after five years and labor productivity improvements of about 5.5 percent after five years.
- External sector and credit market reforms: gradually lift investment and output, contributing about 2.5 percent output gains after five years.
- Labor market reforms: limited short-term impact on employment and output; positive effects materialize over time.
- Sequencing and packaging:
  - "First-generation" package (governance, regulatory quality, external sector) can raise output about 3 percent in the year of implementation and accumulate to more than 9 percent after five years—more than doubling gains relative to individual components.
  - Credit market reform implemented after first-generation reforms can increase output by about 2 percent (versus 1.4 percent baseline).
- Country examples:
  - Jordan: credit to private sector rose from 72 percent in 2000 to 88 percent in 2005 after reforms.
  - Saudi Arabia (Vision 2030): female labor force participation rose from 23 percent in 2016 to 28 percent in 2022; non-oil growth averaged 5.3 percent in 2022.

### Macrofinancial risks — "Higher for Longer" (Chapter 3)
- Core inflation above targets in many ME&CA countries prompting prolonged tighter monetary policy with potential unintended financial consequences.
- Corporate sector stress test (2023–24):
  - Share of zombie firms: about 12 percent in 2022.
  - Zombie firms’ median leverage (total liabilities to total assets) at end-2022: 40 percent; non-zombie firms’ median leverage: 20 percent.
  - Average firm profitability could decline to about 3 percent in 2024 (below prepandemic level of 5 percent).
  - Median interest coverage ratio (ICR) estimated to decline from 3.5 to 1.5 at the end of 2024.
  - Share of debt at risk of default increases from about 12 percent of total debt in 2022 to almost 30 percent by 2024.
  - Most vulnerable sectors: transport, capital goods, and food and beverage (sharp increase in zombie firm debt share in food and beverages by 2024).
  - Shock calibration: effective interest rate increased sequentially by 100 basis points per year, reaching an average of more than 8 percent by end-2024 (about 2 percentage points higher than prepandemic levels).
- Banking sector stress tests — scenarios:
  1. Liquidity shock through deposit outflows.
  2. Liquidity shock + 200 basis point increase in interest rates.
  3. Corporate sector stress.
  4. Combined scenario: higher interest rates + corporate sector stress + liquidity shock.
- Banking stress-test findings:
  - Combined scenario produces largest capital losses.
    - Privately owned banks in MENA EM&MIs and Pakistan: capital losses of 16.7 percent.
    - Privately owned banks in the GCC: capital losses of 11.8 percent.
    - State-owned banks: losses about twice as large as privately owned banks in these regions.
  - Tier 1 capital ratio declines (combined scenario):
    - Privately owned banks in MENA EM&MI and Pakistan: decline by 2.6 percentage points.
    - State-owned banks in MENA EM&MI and Pakistan: decline by 4.5 percentage points.
    - In the GCC: Tier 1 ratios decline by 3.7 percentage points for state-owned banks and 2.0 percentage points for privately owned banks.
  - Relative vulnerability: state-owned banks more vulnerable due to lower profitability and higher securities holdings.
- Impact on credit provision and output (combined scenario):
  - Real credit could contract by 4.3 percent in MENA EM&MI and Pakistan over a two-year horizon.
  - Real credit could contract by 3.2 percent in the GCC over a two-year horizon.
  - Median output losses from decline in lending: about 0.5 percent in MENA EM&MI and Pakistan; about 0.5 percent in the GCC.
  - Extreme downside (95th percentile): 1.5 percent output contraction in MENA EM&MI and Pakistan over two years; 0.9 percent contraction in the GCC over two years.
  - CCA adverse-scenario example: a 4.1 percent reduction in real credit could lead to a 0.4 percent decline in output; 95th percentile estimated output declines across CCA countries is 1.3 percent over two years.
- Banking undercapitalization:
  - Relative to Basel III minimums, 18 percent of banks in MENA EM&MI and Pakistan would become undercapitalized in the combined scenario; all banks in the GCC and the CCA would remain above minimum requirements under the combined scenario.
- Policy recommendations to mitigate macrofinancial risks:
  - Strengthen macroprudential frameworks and ramp up use of tools (for example, countercyclical capital buffer).
  - Contain sovereign-bank nexus vulnerabilities; consider targeted measures (for example, capital surcharges on large sovereign bond holdings) where appropriate.
  - Enhance clear and timely communication and issue financial stability reports where needed.
  - Establish emergency liquidity tools and legal/operational frameworks for emergency liquidity assistance.
  - Develop resolution regimes and insolvency procedures to address legacy nonperforming loans and limit zombie firm persistence.
  - Country-specific guidance: guard against foreign liability liquidity stress in GCC; incentivize de-dollarization in the CCA; build buffers and clear mandates for state-owned banks.

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

### Executive Summary ....................................................................................................ix

### Executive Summary

### Regional growth and inflation outlook
- Regional growth for the Middle East and Central Asia (ME&CA) is projected at 2.0 percent in 2023 (down from 5.6 percent last year) and 3.4 percent in 2024.
- MENA region growth: projected to slow to 2.0 percent in 2023 (from 5.6 percent last year) and recover to 3.4 percent in 2024.
  - Drivers of the 2023 slowdown: lower oil production in oil exporters, tight policy settings in emerging market and middle-income economies (EM&MIs), and country-specific headwinds.
  - The conflict in Sudan is causing displacement and severe economic disruption; Sudan’s contraction is a key factor in 2023 weakness.
  - Inflation is declining broadly but remains elevated in some economies, with high food prices exacerbating food insecurity.
- CCA (Caucasus and Central Asia) growth: projected at 4.6 percent in 2023 and 4.2 percent in 2024.
  - Growth remains robust despite moderation as migration, trade, and financial flows from Russia gradually normalize.
  - Medium-term growth is expected to slow to below the historical average due to persistent structural challenges (poor market-based resource allocation and subpar productivity).
  - Inflation is diverging across countries and is projected to ease only gradually amid strong domestic demand and continued wage pressures in some countries.

### Risks to the outlook
- Overall balance of risks remains to the downside despite some easing since April.
- Upside risks:
  - Faster-than-anticipated global decline in inflation could ease central bank pressure to raise rates.
  - Stronger-than-projected global demand could boost ME&CA growth.
- Downside risks:
  - Larger-than-expected slowdown in China or major advanced economies could weaken external demand.
  - Escalation of Russia’s war in Ukraine could reignite inflationary pressures and worsen food insecurity.
  - Climate-related shocks (droughts, floods) could damage infrastructure, agricultural output, and raise food prices.
  - Debt distress risks related to tighter-for-longer global financial conditions.
- Financial system vulnerabilities: prolonged higher interest rates could expose sovereign-bank nexus vulnerabilities and other macrofinancial risks (detailed in Chapter 3).

### Policy priorities and recommendations
- Macroeconomic stance:
  - Where inflationary pressures persist and fiscal/external buffers are depleted, maintain tight macroeconomic policies to re-establish price stability and ensure fiscal and external sustainability.
- Structural reforms to bolster growth and resilience:
  - Wide-ranging structural reforms can support near-term activity and lift longer-term potential growth; they are essential to reconcile tight macro policies with growth objectives.
  - Priority reform areas: governance, labor markets, and business regulations.
  - Strategic sequencing and packaging of reforms can magnify benefits and ease policy trade-offs.
  - Reforms should aim to support job creation for the more than 100 million people projected to enter working age over the next decade.
- Financial stability measures:
  - Address vulnerabilities from the sovereign-bank nexus.
  - Establish emergency liquidity tools to reduce risks to financial systems from a prolonged period of higher interest rates.

### Assumptions relevant to projections
- Working hypotheses used for projections (2023–24):
  - Oil price: US$80.49 a barrel in 2023 and US$79.92 a barrel in 2024 (simple average of UK Brent, Dubai Fateh, and West Texas Intermediate).
  - Three-month nominal yield on US Treasury bills: 5.3 percent in 2023 and 5.4 percent in 2024.
- Projections are based on statistical information available through late September 2023 and assume established national policies are maintained.

*Source: Regional Economic Outlook—Middle East and Central Asia, Executive Summary (October 2023).*

### Executive Summary

### Executive Summary

### Regional Developments and Economic Outlook: Building Resilience and Fostering Sustainable Growth
- Combined effects of global headwinds, domestic challenges, and geopolitical risks weigh on economic momentum across the Middle East and Central Asia (ME&CA); the outlook is highly uncertain.
- Growth trajectories:
  - MENA: growth set to slow in 2023 driven by lower oil production, tight policy settings in emerging market and middle-income economies (EM&MIs), the conflict in Sudan, and other country-specific factors.
  - Caucasus and Central Asia (CCA): migration, trade, and financial inflows following Russia’s war in Ukraine continue to support activity but growth is set to moderate slightly in 2023.
  - Medium term: MENA growth expected to improve in 2024 and 2025 as temporary factors (including temporary oil production cuts) dissipate, but remain subdued amid persistent structural hurdles. CCA growth projected to slow as real and financial inflows from Russia gradually fade and structural challenges remain.
- Inflation: broadly easing in line with global price pressures, though country-specific factors (including buoyant wage growth in some CCA countries and climate-related events) continue to affect inflation.
- Policy implications:
  - Expedite structural reforms to boost growth and strengthen resilience.
  - Maintain tight monetary and fiscal policies in several economies to durably bring down inflation and ensure public debt sustainability.

### A Global Slowdown amid Higher-for-Longer Interest Rates
- Global outlook (October 2023 World Economic Outlook):
  - Global growth projected to fall from 3.5 percent in 2022 to 3.0 percent in 2023 and 2.9 percent in 2024.
- Key global developments:
  - Reopening of China and strong US consumption supported resilient activity in Q1 2023; high-frequency indicators for Q2 show additional weakening in manufacturing, softening services activity, and declining global trade growth.
  - China’s post-pandemic rebound is fading amid continued weakness in the real estate sector and exports.
  - Lending standards have tightened, curtailing credit supply despite receded financial stability concerns in advanced economies.
- Inflation and interest rates:
  - Global headline inflation receding; core inflation declining more gradually and remains above most central bank targets.
  - Major central banks expected to keep policy tighter for longer.
  - 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).
- Commodity price assumptions:
  - Average petroleum spot prices: $80.5 per barrel in 2023 and $79.9 per barrel in 2024 (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
- Summary: resilient domestic demand and strong tourism coexist with headwinds from lower oil production in oil exporters, tight policy settings in EM&MIs, and fragilities and shocks in LICs (e.g., conflict in Sudan). Medium-term growth projected below historical average amid structural constraints.

Growth Is Easing amid Global Headwinds
- Oil sector:
  - Three rounds of deep OPEC+ production cuts (October 2022, April 2023, June 2023) plus additional temporary cuts by Saudi Arabia have reduced oil GDP growth, particularly for GCC countries.
  - Non-oil GDP growth has partially offset oil GDP slowdown, driven by robust manufacturing activity (Oman, Qatar, Saudi Arabia, United Arab Emirates) and surging services (Bahrain, Oman, Saudi Arabia, United Arab Emirates).
  - Iraq: restrictions on foreign currency sales are constraining growth.
- EM&MIs and Pakistan:
  - Average real GDP growth remained at 3.1 percent in Q1 2023 (below a historical average of 4 percent).
  - Growth supported in some countries by tourism (Morocco, Tunisia) and remittances (Morocco); constrained in others by foreign currency rationing and import restrictions (Egypt, Pakistan).

Fragile LICs versus non-fragile LICs
- Fragile LICs: economic conditions deteriorated due to conflicts and climate-related shocks (Sudan, Yemen, Somalia).
- Non-fragile LICs: generally positive performance with increased trade (Djibouti) and robust services activity (Mauritania).

Inflationary Pressures Are Receding but Remain Elevated in Some Countries
- Oil exporters:
  - Inflation easing in most oil-exporting countries in line with global trends; headline and core inflation (month-to-month annualized) returned to prepandemic historical averages in several economies, particularly GCC countries.
  - Elevated inflation persists in some oil exporters: Algeria, Iraq, Islamic Republic of Iran (food components in Algeria; currency depreciation effects in the Islamic Republic of Iran).
- EM&MIs and Pakistan:
  - Headline and core inflation in most EM&MIs returned to near prepandemic historical averages of between 3 and 4 percent, helped by monetary tightening and lower global commodity prices.
  - High inflation remains in Egypt, Pakistan, and Tunisia (monthly inflation well above historical levels).
  - As of July, year-over-year food inflation: above 10 percent in Morocco and Tunisia; above 35 percent in Egypt and Pakistan (droughts in Morocco and Tunisia; lagged impact of exchange rate devaluations in Egypt and Pakistan).
- LICs and food security:
  - Inflation eased in Djibouti and Mauritania since early 2023; remains exceptionally high in Sudan.
  - 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.

The Monetary Tightening Cycle Nears Its End, While Fiscal Positions Are Mixed
- Monetary policy:
  - Pace of tightening has slowed as price pressures recede in several economies.
  - Central banks in dollar-pegged countries (excluding Iraq) hiked policy rates by 100 basis points on average as of August 2023, following the Federal Reserve.
  - Some EM&MIs still raising policy rates in 2023 (Egypt, Morocco, Pakistan).
  - In a few economies, policy interest rates remain below model-based natural rate estimates (Egypt, Pakistan, Tunisia; April 2023 Regional Economic Outlook).
  - Some oil exporters still face inflationary pressures (Algeria, Islamic Republic of Iran).
- Fiscal positions:
  - Non-oil primary balances (percent of non-oil GDP) strengthened in most GCC countries last year (except Saudi Arabia); deteriorated in other oil exporters due to higher public wages (Iraq, Libya) and subsidies (Algeria, Iraq, Libya).
  - Most EM&MIs tightened primary fiscal positions last year amid high debt and elevated borrowing costs despite cost-of-living mitigation outlays.
  - LICs: revenue mobilization weak—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).

Notable External Vulnerabilities Remain for Some EM&MIs
- External funding conditions:
  - Foreign-currency sovereign bond spreads widened substantially for vulnerable EM&MIs after global financial turmoil in early March (Egypt, Pakistan, Tunisia).
  - As of August, sovereign spreads remain distressed (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) at relatively higher costs for vulnerable EM&MIs.
- Domestic financing and sovereign-bank nexus:
  - EM&MIs increased reliance on domestic banks for public debt financing, strengthening the sovereign-bank nexus and reducing bank funding available to the private sector.
- Capital flows and reserves:
  - Portfolio fund outflows from MENA and Pakistan totaled $160 million in Q2 2023, down from $4.5 billion in outflows in 2022.
  - External buffers improved for most EM&MIs in H1 2023 partly due to tourism, remittances (Morocco, Tunisia), and bilateral and multilateral support (Pakistan).
  - International reserve coverage remains well below standard adequacy metrics for Egypt and Pakistan.

### MENA Region and Pakistan Outlook: A Slowdown amid Growing Challenges
- 2023 projections:
  - Growth in the MENA region and Pakistan projected to slow in 2023 due to extended oil production cuts, tight macroeconomic policies in EM&MIs to safeguard stability and debt sustainability, and heightened fragility from ongoing conflicts 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 include a devastating earthquake in Morocco and severe flooding in Libya; projections for Libya in the report do not include the impact of the disaster.
- Medium-term outlook:
  - Prospects expected to rebound in 2024 and continue improving in 2025 as some 2023 drags dissipate.
  - Persistent structural gaps and the decline in oil-related growth imply growth will generally slow and remain modest and below historical averages for most countries.
  - Labor market concerns: large segments face difficulties finding jobs, including youth and women; 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 is Slowing amid a Shift in Composition
- Growth projections and revisions:
  - 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—below prepandemic historical average.
  - 2023 forecasts revised downward from April by 1.1 percentage points due to deeper-than-expected oil production cuts (including Saudi Arabia unilateral cuts) and foreign currency rationing impacts in Iraq.
- Non-oil sector role:
  - Non-oil activity is the main growth driver in GCC countries in 2023 and subsequent years, supported by moderate investment expansion; private consumption remains subdued relative to prepandemic trends.
  - Non-oil growth projected insufficient to offset the decline in oil growth over the medium term because of productivity gaps in the non-oil sector (see Chapter 2), posing challenges for job creation and inclusion.
- Inflation in oil exporters:
  - Headline inflation across MENA oil exporters 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 oil exporters due to ongoing fiscal expansions (Algeria) and sizable exchange rate depreciation (Islamic Republic of Iran).

*International Monetary Fund — Regional Economic Outlook: Middle East and Central Asia (October 2023), Executive Summary*

### 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: Growth, External Positions, and Fiscal Adjustment
- Current account surpluses are projected to almost halve from 14.6 percent of GDP in 2022 to 7.5 percent in 2023 and contract further to 6.7 percent of GDP in 2024.
- Surpluses "will remain in comfortable positions over the medium term (except for Iraq)."
- Several oil exporters are expected to continue consolidating public finances to mitigate the fiscal impact of lower oil revenue and reduce budget sensitivity to oil price volatility.
- Planned consolidation efforts focus on rationalizing current expenditures to free up resources for priority spending, including on social safety nets and infrastructure (Bahrain, Oman, Qatar, Saudi Arabia), while also reducing the fiscal deficit in some (Bahrain, Qatar).
- 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.
- Conversely, an increase in the wage bill (Kuwait, Iraq) and subsidies (United Arab Emirates) is expected to result in a worsening fiscal position in these economies this year.

### EM&MIs: Growth, Inflation, External Balances, and Fiscal Pressures
- Growth in the MENA region’s EM&MIs is expected to slow to 3.5 percent this year (from 5.1 percent in 2022) amid tight macroeconomic policies.
- Country-specific trends:
  - Jordan: growth projected to remain stable.
  - Morocco: growth projected to remain stable or accelerate because of strong tourism and exports and normalization of agricultural activity.
  - Egypt: growth has decelerated in fiscal year 2023 due to foreign currency rationing, production and import impacts, and elevated inflation reducing purchasing power.
  - Pakistan: growth is estimated to have contracted during fiscal year 2023 because of severe flood damage in late 2022, broad-based inflationary pressures, and import curbs.
- Inflation:
  - Egypt: headline inflation peaking at 32.2 percent in 2024 and remaining in double digits through 2027.
  - Pakistan: inflation 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:
  - Current account deficit for EM&MIs is set to narrow from 5.2 percent of GDP in 2022 to 3.7 percent 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 and public debt:
  - Primary fiscal balances are expected to improve in the MENA region’s EM&MIs and Pakistan, reaching prepandemic levels this year, helped 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 are projected to ease gradually from a peak of 90 percent in 2023 to 80 percent in 2025.
- 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 reach up to 38 and 21 percent of GDP by 2024 for Egypt and Pakistan, respectively.
  - These 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 in EM&MIs.

### LICs: Contraction, Heterogeneity, and Financing Constraints
- Economic activity in the MENA region’s LICs is forecast to contract sharply this year (9.3 percent), following a mild contraction in 2022.
- Country-specific projections:
  - Sudan: GDP growth forecast to contract by more than 18 percent in 2023 because of the worsening crisis.
  - Yemen: economy projected to contract by 0.5 percent in 2023 after the truce agreed to in 2022 expired without delivering tangible macroeconomic improvements.
  - Somalia: economy forecast to grow by 2.8 percent in 2023 as drought conditions continue to weigh on the economy.
  - Djibouti: GDP growth forecast at 5 percent in 2023, boosted by the peace agreement in Ethiopia that has spurred port and border traffic.
  - Mauritania: economic growth projected to decelerate but remain at 4.5 percent in 2023.
- External and financing challenges:
  - LICs face current account deficits of more than 5 percent of GDP over 2027–28.
  - Aid flows are a critical source of external and public financing, but LICs face declining official grants over the medium term.
  - Considerable gross financing needs amounting to about $12 billion cumulative until 2028.

### Caucasus and Central Asia (CCA): Growth Momentum, Inflation Dynamics, and Outlook
- Near-term growth:
  - GDP growth in the CCA is projected to moderate to 4.6 percent in 2023 and decline further to 4.2 percent in 2024.
  - This reflects an upward revision of 0.3 percentage point for 2023 relative to April.
- Growth drivers and country divergences:
  - Strong transit trade, inward migration, tourism, and remittances support growth in several countries (Armenia, Georgia, Kazakhstan).
  - Tourist arrivals have surpassed prepandemic levels in Armenia and Georgia.
  - Azerbaijan: production constraints in extractive industries have held back growth.
  - Kyrgyz Republic: easing remittance flows and weaker gold and agricultural production have weighed on activity.
  - Kazakhstan: growth expected to rebound this year supported by strong domestic demand and increased oil production.
  - Azerbaijan and Turkmenistan: projected deceleration or subdued momentum due to capacity constraints in hydrocarbon production and structural challenges.
- External buffers and exchange rates:
  - Reserve accumulation continued in 2023; domestic currencies appreciated, especially in Armenia and Georgia.
- Inflation and monetary policy:
  - Inflation projected to ease to 11 percent on average in 2023 (0.8 percentage point faster than projected in April).
  - Headline inflation in the CCA projected to moderate to 8.3 percent in 2024.
  - Some central banks have loosened policy since the beginning of the year: Armenia, Georgia, Kazakhstan, and Tajikistan reduced policy rates by 50, 75, 25, and 300 basis points, respectively.
  - Easing financial conditions supported a small increase in credit to the private sector in Azerbaijan, Kyrgyz Republic, and Tajikistan.
  - Housing prices have risen in Armenia, Georgia, and Kazakhstan since Q1 2022.
- Fiscal outlook:
  - 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 projected in Kazakhstan, the Kyrgyz Republic, Azerbaijan, and Tajikistan; Georgia expected to maintain gradual consolidation.

### Risks to the ME&CA Outlook
- Upside risks that could lift growth:
  - Faster-than-anticipated global decline in inflation, easing global financing conditions and borrowing costs.
  - Lower-than-expected food prices, reducing fiscal costs and alleviating food insecurity in LICs.
  - Stronger-than-projected global growth (for example, because of additional stimulus measures in China).
  - Continued influx of migrants and foreign exchange to the CCA.
- Downside risks that could worsen the outlook:
  - Larger-than-expected slowdown in China or advanced economies, depressing external demand, tourism, and exports.
  - Escalation of the war in Ukraine, pressuring food, fuel, and fertilizer prices and reigniting inflationary pressures.
  - Materialization of climate-related shocks—especially amid changing El Niño patterns—resulting in persistent drought conditions and floods, affecting infrastructure, agriculture output, and food prices.
- Region-specific downside risks could also materialize (text notes the possibility but does not list additional quantified specifics).

*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 near-term risks and regional outlook
- 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.
- Attendant fiscal tensions could spill over to the private sector through sovereign-bank linkages.
- Deeper spillovers from regional conflicts could worsen financing conditions for MENA region EM&MIs.
- 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, hampering trade and economic activity for oil and gas exporters and importers alike.
- Limited progress in implementing structural reforms would weigh on medium-term prospects and undermine resilience given long-standing structural gaps (chronically limited job creation, high unemployment rates, heavy reliance on volatile commodity markets).

### Structural policies: transforming the economy to increase potential growth and resilience
- Accelerate implementation of comprehensive structural reforms to enhance potential growth, inclusion, diversification, and shock resilience.
- Strengthen governance to foster an environment that promotes private investment:
  - improve government effectiveness and the rule of law;
  - ensure a level playing field between public and private firms by reducing the dominant role of state-owned enterprises;
  - streamline or eliminate burdensome government regulations;
  - enhance financial inclusion, especially of small and medium-sized enterprises;
  - improve general governance.
- Foster financial development by:
  - strengthening regulatory and supervisory frameworks;
  - enforcing property rights and creditor rights;
  - enhancing banking competition, transparency, and information sharing.
- Improve productivity by investing in infrastructure, including transportation and information and communication technologies.
- Promote digitalization to improve inclusion and efficiency and provide job opportunities for youth and women (remote working, online learning, digital finance, e-commerce).
- Reduce barriers to women’s participation in economic life by removing legal and policy barriers that weaken the link between women’s education and employment outcomes.
- Sequence and package reforms: implement “first-generation” reforms—governance, regulatory quality, and external sector reforms—to raise returns from subsequent credit market and labor market reforms.
- Integrate climate change adaptation into policy frameworks and reform agendas:
  - include climate risks and policies in relevant frameworks;
  - adopt measures to boost climate resilience (social protection, health care, education, infrastructure investments);
  - promote a balanced policy mix supporting climate mitigation and sustainable growth;
  - oil exporters should transition toward more diverse and greener energy generation and eliminate energy subsidies.
- Scale up climate-resilient infrastructure investment for LICs and FCS exposed disproportionately to climate change (notably drought impacts on hunger).

### Monetary and financial policies: price stability and financial stability
- Monetary policy should remain focused on price stability; exchange rate flexibility can cushion shocks where consistent with frameworks.
- Strengthen monetary policy frameworks, increase transparency of monetary operations, and ensure central bank independence.
- Policy guidance by country type:
  - Flexible exchange rate + persistent inflationary pressures: monetary policy should remain tight and follow a data-dependent approach; most EM&MIs need to maintain a tight policy stance until signals of sustained disinflation are well-established; in some economies high inflation may require more tightening (Egypt, Pakistan, Tunisia).
  - Inflation near targets and abated underlying pressures: monetary easing can proceed where growth is lackluster; in economies with still-strong demand easing should be cautious (Armenia, Georgia).
  - Fixed exchange rate regimes (GCC, Jordan): any policy interest rate change should be made in accordance with their frameworks.
- Deepen financial sector to strengthen liquidity and spur investment:
  - GCC: guard against unexpected liquidity stress related to foreign liabilities.
  - CCA: adopt 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 and well-defined mandates, and aligning supervisory tools such as stress tests.

### Fiscal policy: rebuilding buffers and protecting the vulnerable
- Tailor fiscal actions to local conditions; ensure social protection systems reach and provide equal access to basic services.
- Target social spending to the most vulnerable; avoid 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;
  - target public investment to develop non-oil sectors and address climate change challenges.
- MENA EM&MIs:
  - strengthen fiscal balances and decisively bring down public-sector debt levels;
  - continue fiscal consolidation mainly by containing current spending on wages and subsidies and, where appropriate, additional revenue mobilization (including removing tax exemptions);
  - adopt credible medium-term fiscal frameworks to build a track record of fiscal discipline;
  - mitigate fiscal risks from state-owned enterprises.
  - Example: publication by Moroccan authorities of a three-year budget plan as part of the annual budget starting from 2023 is cited as an important institutional step.
- MENA LICs and FCS:
  - prioritize stability while easing food insecurity;
  - resolve ongoing conflicts where present as a prerequisite for improving living standards and growth;
  - 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 humanitarian crises.
- All countries should develop fiscal risk management frameworks and collect regular, timely, and comprehensive fiscal data covering the entire public sector.

### IMF support and regional 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 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),
  - Pakistan (Stand-By Arrangement).
- Since 2020, the IMF has provided about $6 billion in emergency financing and enhanced emergency financing facilities to address the food crisis confronting the Fund’s most vulnerable members; this includes establishing a Food Shock Window.
- The IMF created the Resilience and Sustainability Trust to support low-income and vulnerable middle-income countries; recent approval of a Resilience and Sustainability Facility with Morocco amounting to about $1.3 billion is noted as the first in ME&CA.
- The IMF has increased local presence by expanding Resident Representative offices, reopening the Middle East Regional Technical Assistance Center, opening the 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
- Pre-conflict humanitarian needs (start of 2023):
  - almost 16 million people needed humanitarian assistance;
  - 11 million people were acutely food insecure.
- Since conflict intensified in April 2023:
  - United Nations estimates the number of people in Sudan needing humanitarian assistance increased by 10 million.
  - A 20 percent increase in food prices between March and June reduced access to sufficient and safe food.
  - More than 20.3 million (42 percent of country’s population) were pushed to high levels of acute food insecurity, according to the Food and Agriculture Organization.
- Displacement and refugee flows:
  - UNHCR reported more than 5.3 million had been displaced as of September.
  - Of these, about 1.2 million have left the country.
  - Chad and Egypt received the most internationally displaced refugees: 412,000 and 317,000, respectively.
  - Other neighboring countries received around 70,000 refugees.
  - Additionally, about 250,000 refugees from South Sudan are expected to leave Sudan to return to their home country.
- Financial requirements and funding:
  - UNHCR estimates the total cost of the response across the five countries receiving refugees at $1 billion through December 2023.
  - By September, $266 million had been funded.
  - The United Nations Office for the Coordination of Humanitarian Affairs estimates the crisis increased the cost of Sudan’s overall humanitarian response plan by $750 million, raising it to $2.6 billion.
  - As of September, donors had funded about $900 million, about one-third of the response funds needed.
- Medium-term consequences and policy implication:
  - Sudan’s infrastructure and human capital are incurring significant losses that could take years to rebuild.
  - A weakened Sudanese economy would negatively affect neighboring countries and North Africa more broadly over the medium term.
  - Donor countries, both internationally and in the region, should contribute to relief efforts for refugees and continue to use all capacity to end the conflict as soon as possible.

*Source: IMF, Regional Economic Outlook—Middle East and Central Asia, October 2023.*

### Box 1.2. Changing Trade Patterns in the Caucasus and Central Asia

### Box 1.2. Changing Trade Patterns in the Caucasus and Central Asia

### Evolution of trade flows since the start of the war in Ukraine
- Trade patterns in the Caucasus and Central Asia (CCA) changed since the start of the war in Ukraine, with increased trade flows between Russia and several CCA countries for product categories including iron and steel, machinery, chemicals, agriculture products, and energy.
- Country-level export share changes to Russia (2022 versus 2021):
  - The Kyrgyz Republic’s share of exports to Russia increased from 14 percent of total exports in 2021 to 44 percent in 2022.
  - Armenia’s exports to Russia increased from 27 percent in 2021 to 45 percent in 2022.
  - Uzbekistan’s exports to Russia increased from 12 percent in 2021 to 17 percent in 2022.
  - The share of exports to Russia from Azerbaijan, Georgia, and Kazakhstan declined slightly.

### Diversification and shifts in non-Russia trade links
- Most CCA countries (excluding Armenia and the Kyrgyz Republic) increased their non-energy export share to trading partners other than Russia in 2022.
- The rise in non-Russia export shares was concentrated in agriculture products, food, and raw materials (especially metals), aligning with product categories where Russian exports declined the most since the war started.
- From a geographical standpoint, exports to the European Union, the United States, China, and the rest of the world surged in 2022, indicating a broad-based geographical widening of CCA trade links.

### Data caveats and measurement issues
- Official trade statistics may not accurately reflect trade within the Eurasian Customs Union and, therefore, among Armenia, Kazakhstan, the Kyrgyz Republic, and Russia.
- For the Kyrgyz Republic, available data are based on sporadic surveys of exporters and vehicles crossing the border.

### Visual evidence referenced in the source
- Box Figure 1.2.1 documents CCA exports to the rest of the world (change in billions of US dollars, 2022 versus 2019–21 average) for various product categories.
- Box Figure 1.2.2 shows CCA exports by trading partner (percentage change, 2022 versus 2019–21 average) across trading partners including European Union, China, United States, Russia, and rest of the world.
- Notes on figures:
  - Both figures exclude Tajikistan and Turkmenistan because of lack of data.
  - Data for the Kyrgyz Republic do not include gold exports, which declined sharply because of non-war-related reasons.
  - Country abbreviations are International Organization for Standardization (ISO) country codes.

*Prepared by Hasan Dudu. Source: Box 1.2, Regional Economic Outlook—Middle East and Central Asia (October 2023).*

### 1. Gender Gap in Labor Force Participation Rate

### 1. Gender Gap in Labor Force Participation Rate

### Coverage and limitations
- The analysis does not cover structural reforms related to gender due to a lack of variation in the reform series: "Ninety percent of observations are unchanged over time."
- Budina and others (2023) suggest that adopting strategies to reduce gender disparities in other EMDEs could provide a substantial boost to GDP, but this chapter’s empirical exercise does not estimate those effects.

### Definition and method
- Major reforms are defined as episodes for which an annual change in the relevant indicator is at least two standard deviations of the distribution (of annual changes in the relevant indicator across the whole sample). Such major reforms would improve a country’s structural quality from the median to the top 5 percent in the sample.
- The productivity response to reforms was estimated using the local projection method developed by Jordà (2005).

### Empirical findings on governance and related reforms
- Governance reforms:
  - Major governance reforms are associated with the largest output gains among reform areas: about 6 percent after five years.
  - Closing the governance gap with EMDEs could lead to a regional output gain of about 1.3 percent in the medium term, ranging from 1 percent in the CCA to almost 3 percent for LICs and FCS.
  - Output gains in the GCC could be about 3 percent when closing governance gaps relative to advanced economies.
  - Strengthening the rule of law has the potential to increase output by about 6 percent after five years.
- Regulatory quality reforms:
  - Associated with a 4 percent increase in output after five years.
  - Associated with labor productivity improvements of about 5.5 percent after five years.
- Credit market and external sector reforms:
  - External sector and credit market reforms gradually lift investment and output, contributing to about 2.5 percent output gains after five years and significant improvements in labor productivity over the medium term.
- Labor market reforms:
  - Short-term impact on employment and output may be limited; positive effects materialize over time. Baseline effect on employment is statistically insignificant at the 90 percent level, possibly muted by high informality.

### Mechanisms and cross-effects
- Regulatory quality reforms boost investment immediately and yield increasing returns in subsequent years, driving output gains.
- Governance reforms have widespread enabling impacts, including positive effects on employment and labor productivity in the medium term.
- Comprehensive governance reforms have larger effects than narrower, individual governance reforms; implementing governance reforms as a package amplifies impact.

### Scenario analysis: Low growth and limited policy space
- Low-growth scenario:
  - Increasing flexibility of the domestic credit market and improving regulatory quality during weak growth can lead to significantly higher medium-term growth: 1.7 percent and 1.2 percent higher, respectively, than the baseline after five years.
  - Credit market reforms under low growth yield larger gains in investment and labor productivity: 11 and 4 percentage points, respectively, in addition to the baseline effects after five years.
  - Historical examples: Kuwait and the Islamic Republic of Iran improved credit market flexibility in the early 2000s; during 2004–07, Kuwait and the Islamic Republic of Iran’s non-oil growth averaged above 10 and 6 percent, respectively.
- Limited policy space scenario:
  - Credit market reforms when policy space is relatively limited are expected to raise output by 8 percent after five years, compared with just below 3 percent in the baseline.
  - Under limited policy space, larger positive output effects of credit market reforms are achieved primarily through significant increases in investment and substantial boosts in labor productivity.
- External sector reforms tend to have more pronounced effects when implemented during expansionary cycles.

### Sequencing and packaging of reforms
- Prioritizing reforms in areas of relative weakness (for example, governance) yields the largest gains and can facilitate implementation of other reforms.
- A "first-generation" reform package—governance, regulatory quality, and external sector reforms—has a positive impact on the returns from subsequent reforms:
  - Credit market reform implemented after first-generation reforms is estimated to increase output by about 2 percent, surpassing the baseline of 1.4 percent.
  - Labor market reforms implemented after first-generation reforms produce positive outcomes with a more pronounced near-term impact.
- Bundling reforms can produce super-additive effects:
  - The first-generation reform package could raise output by about 3 percent in the year of its implementation, accumulating to more than 9 percent after five years—more than doubling the total output gains compared with implementing its components individually.
- Country examples of packaged reform benefits:
  - Jordan: large-scale trade liberalization and privatization in the early 2000s increased private sector participation; credit to the private sector rose from 72 percent in 2000 to 88 percent in 2005.
  - Morocco: implemented a package including trade liberalization and monetary policy framework reforms to improve social and economic outcomes.
  - Saudi Arabia (Vision 2030 launched in 2016): female labor force participation rose from 23 percent in 2016 to 28 percent in 2022, nearing the 2025 target of 30 percent; access to credit for small and medium enterprises improved with bank loans increasing almost fourfold, from 2 percent to 7.7 percent.

### Policy implications and considerations
- Structural reforms generally provide a boost to output over time, but precise impacts are difficult to estimate and results are subject to uncertainty.
- Reform design and implementation must be tailored to country circumstances (political, social, and economic) to maximize prospects for success.
- Some reforms can yield larger gains when undertaken during periods of constrained policy room or weak growth, offering growth-enhancing options when macro policies need to tighten.

*Source: Regional Economic Outlook—Middle East and Central Asia, October 2023, INTERNATIONAL MONETARY FUND*

### Box  2.1  for  insights  on  Georgia,  Morocco,  and  Saudi  Arabia).  Strong  leadership  and  effective  communication

### Box 2.1. Transformative Tales: Structural Reforms in Georgia, Morocco, and Saudi Arabia

### Overview and general policy implications
- Governance reforms demonstrate a robust and substantial positive effect on economic growth and other macroeconomic indicators and should be prioritized; government effectiveness and the rule of law are particularly influential.
- Targeting regulatory quality and credit market reforms positively affects output by stimulating investment; reducing the state’s intervention in nonessential sectors, streamlining bureaucratic processes, and fostering environments for younger and more innovative firms are emphasized.
- Policymakers can amplify output effects by strategically sequencing and packaging reforms: first-generation reforms—governance, external sector liberalization, and regulatory quality—can yield significant upfront gains, and their combined gross effect tends to be larger when implemented together than individually.
- Addressing distributional effects and protecting vulnerable groups is crucial, especially as external sector liberalization can have a negative effect on employment; pairing external liberalization with active labor market policies (training and reskilling) and strengthening social safety nets is recommended.
- Other supportive actions: enhance labor market flexibility (balanced with worker protection), engage in regional and international trade, ensure access to finance for all segments, and invest in gender-specific reforms (equal access to education and vocational training for women, policies supporting work-life balance and parental leave, and promotion of women’s entrepreneurship and leadership).

### Empirical / methodological notes (as presented)
- The analysis uses responses to a major historical reform defined as two standard deviations of the annual change in the structural index; 90 percent confidence bands are reported.
- A “first-generation reform package” is defined as the sum of one-third of a major historical reform (two standard deviations) on its three components: governance, external sector, and regulatory quality. When implemented together, the combined gross effect is larger than individual components.
- Sources cited for data and indices include Fraser Institute, Economic Freedom database; IMF, World Economic Outlook database; World Bank, World Governance Indicators database; and IMF staff calculations.

### Georgia: anticorruption as gateway for structural transformation
- After the Rose Revolution of 2003, Georgia enacted a zero-tolerance policy toward corruption with strong political commitment and strict compliance.
- Institutional reforms targeted judiciary, tax, customs, electricity distribution, land and property rights registration, and higher education.
- Public sector salaries increased in reformed institutions; standardized university tests addressed problems in university entrance; red tape reduction improved the business environment.
- Tax and customs reforms: a new tax code in 2005 streamlined the system, lowered tax rates, and broadened the tax base by rescinding most tax benefits; a comprehensive customs reform in 2006 eliminated 16 customs bands, replacing them with a zero rate for 86 percent of imports. Expanded tax base, enhanced compliance, and rigorous enforcement offset revenue loss from lower tax rates.
- Outcomes: indicators on corruption, government effectiveness, and regulatory quality rose from lower worldwide ranks to the top 30th percentiles over five years; early successes increased public buy-in and trust. However, governance reforms have been partially reversed in more recent years, highlighting the need for sustained political will.

### Morocco: multiple reform packages and the New Model of Development
- Post-pandemic reforms address lower growth since the mid-2000s, high informality, elevated youth unemployment, and low female labor force participation.
- New Model of Development objectives: boost private sector investment; strengthen human capital accumulation; enhance women’s participation in economic life; improve the social protection system; reinforce governance of public institutions.
- Health reforms: expanding health insurance to all Moroccans and conducting a comprehensive overhaul.
- Social protection reforms: better target support by gradually reducing existing subsidies and extending conditional cash transfers based on the new Unified Social Registry.
- Education reforms: reduce primary school dropout rate, increase primary students’ skills acquisition, and expand access to extracurricular activities.
- Private sector support: reform state-owned enterprises, introduce a new charter of investment, establish the Mohammed VI Fund to finance large infrastructure projects and provide firms with equity or quasi-equity, and strengthen competition.

### Saudi Arabia: Vision 2030 progress and outcomes
- Since the 2016 launch of Vision 2030, Saudi Arabia has diversified across external and real sectors, boosted female workforce participation, and enhanced digitalization despite COVID-19-related slowdown.
- Regulatory and business environment improvements, new laws to promote entrepreneurship, reductions in costs of doing business, and streamlined fees for SMEs have contributed to higher private sector investment and boosted the non-oil sector’s contribution.
- Industrial and trade policy: authorities are enhancing the non-oil industrial base by attracting investment, boosting competitiveness, facilitating trade, and supporting climate policies under the Saudi Green Initiative.
- Labor market and human capital outcomes:
  - Share of Saudis in high-skilled jobs increased from 32 percent in 2016 to 42 percent in 2022, surpassing the 40 percent midterm target for 2025.
  - Female workforce participation in 2022 was already close to meeting the Vision 2030 target of 30 percent, aided by transformative legal and labor market reforms and supported further by gender budgeting.
- Digital economy and governance indicators:
  - Cashless operations expanded from 18 percent in 2016 to 62 percent in 2022.
  - Improvements in the World Bank Human Capital Index rank since 2016; improvements in World Bank government effectiveness rankings and the United Nations E-Government Development Index since 2016.
  - The digital economy outperformed primary targets set for 2023 since the 2019 information and communication technology sector strategy launch.
- Growth performance and outlook:
  - Non-oil growth averaged 5.3 percent in 2022, spurred by strong domestic demand.
  - Non-oil growth is expected to remain robust and above 4 percent in the medium term, supported by sound macroeconomic policies and strong reform momentum.

*Prepared by Anja Baum, Rodrigo Garcia-Verdu, and Karmen Naidoo, with inputs from country teams. Sources as cited in the text.*

### 3. Higher for Longer: What Are

### 3. Higher for Longer: What Are the Macrofinancial Risks?

### Overview and central findings
- Core inflation remains above central bank targets in many ME&CA countries, prompting a prolonged tighter monetary policy stance that could have unintended consequences for financial systems.
- Banking systems in ME&CA would be resilient in an adverse scenario of higher interest rates, corporate sector stress, and rising liquidity pressures, but pockets of vulnerability exist, particularly among state-owned banks.
- Key policy priorities identified: strengthen macroprudential frameworks; contain vulnerabilities from the sovereign-bank nexus; enhance clear and timely communication; establish emergency liquidity tools to stem systemic financial stress; develop resolution regimes to reduce the buildup of zombie firms.

### Channels of risk and amplifying factors
- Higher-for-longer interest rates could:
  - Trigger deterioration in asset quality from interest-rate-sensitive borrowers and reduce bank profitability and credit provision, materially affecting economic growth and financial stability.
  - Reveal hidden vulnerabilities (accounting rules or regulatory treatments can temporarily mask exposures and losses), especially where holdings are concentrated in government bonds.
- Reliance on foreign funding increases vulnerability:
  - Nonresident deposits and other foreign liabilities can reverse suddenly; country examples with greater dependence include GCC (Bahrain, Qatar) and CCA (Georgia).
  - Formal deposit insurance varies across the region and is lacking in some countries.
  - Mitigants include large shares of government deposits and government ownership of major banks (Azerbaijan, Egypt, Saudi Arabia).
- Sovereign-bank nexus risks:
  - Elevated bank holdings of domestic sovereign debt (Algeria, Egypt, Pakistan) expose banks to government interest rate and credit risks.
  - Higher sovereign borrowing costs could fuel debt sustainability concerns, limit access to international financing, and lead domestic banks to increase holdings of government debt, crowding out private credit.
  - Empirically, credit to the private sector is often lower in countries where banks are more exposed to sovereign debt.
- Corporate credit quality risks:
  - State-owned bank performance remains well below prepandemic levels in MENA EM&MIs and Pakistan and, to a lesser extent, in the GCC.
  - Nonperforming loan ratios are mostly contained but are elevated for state-owned banks in MENA EM&MIs and Pakistan.
  - Banks have generally ample liquidity buffers, bolstered by higher oil prices in oil-exporting countries.

### Corporate sector stress test (2023–24) — key statistics and results
- Focus on "zombie" firms: share of zombie firms in the region stood at about 12 percent in 2022.
- Zombie firms’ median leverage (total liabilities to total assets) at end-2022: 40 percent; non-zombie firms’ median leverage: 20 percent.
- Firm profitability projection:
  - Average firm profitability could decline to about 3 percent in 2024, below the prepandemic level of 5 percent.
  - Median interest coverage ratio (ICR) estimated to decline from 3.5 to 1.5 at the end of 2024.
- Debt at risk of default:
  - Share of debt at risk of default increases from about 12 percent of total debt in 2022 to almost 30 percent by 2024.
- Sector vulnerabilities:
  - Transport, capital goods, and food and beverage sectors would be most vulnerable.
  - The median share of zombie firm debt in the food and beverages sector increases particularly sharply by 2024.
- Shock calibration details:
  - Effective interest rate was increased sequentially by 100 basis points per year, reaching an average of more than 8 percent by the end of 2024, about 2 percentage points higher than prepandemic levels.
  - Sector-specific profitability shocks calibrated from earnings paths in the first two years after the global financial crisis, with most sectors experiencing double-digit negative returns.

### Banking sector stress tests — scenarios and assumptions
- Four stress scenarios simulated amid a higher-for-longer interest rate environment:
  1. Liquidity shock through deposit outflows (baseline liquidity vulnerability).
     - Simulated withdrawals comparable to recent FSAPs: withdrawals of 20 percent of resident deposits and 30 percent for foreign deposits and wholesale funding.
  2. Liquidity shock + 200 basis point increase in interest rates.
  3. Corporate sector stress (mapping corporate stress test results to banking provisioning needs).
  4. Combined scenario: higher interest rates + corporate sector stress + liquidity shock.
- Methodological notes:
  - The liquidity shock captures differences in stickiness of funding sources and potential spillovers from global financial turbulence.
  - The 200 basis point interest rate shock captures potential further monetary policy tightening, potential further increase in sovereign spreads relative to the United States, and increases in risk premiums as banks’ creditworthiness deteriorates.
  - In the corporate sector stress, changes in ICR were mapped to default probabilities and it was assumed banks provision fully against increases in nonperforming loans.
  - Capital losses are realized if overall losses exceed net income.

### Banking sector stress test results — key findings and numbers
- Overall resilience:
  - Banking sectors in the GCC and in MENA EM&MIs and Pakistan would remain resilient to individual stress scenarios but could be tested by the combined shock.
  - Banks in the CCA would remain resilient in these scenarios due to relatively high cash buffers from surging profitability, though the CCA is more exposed to foreign exchange risks.
- Scenario-specific results:
  - Liquidity stress alone: losses would be relatively small.
  - Liquidity stress + higher interest rates: losses much larger, particularly for state-owned banks; main drivers are unrealized capital losses on holdings of fixed-income securities, especially long-duration securities (Jordan, Morocco, Saudi Arabia). Countries with lower ex ante capital buffers (Egypt, Morocco) are more exposed.
  - Corporate sector stress: banks have ample buffers in many cases due to relatively high provisioning (Kuwait) and low private sector exposures in countries with strong bank-sovereign nexus (Egypt, Pakistan).
  - Combined scenario: largest capital losses.
    - Privately owned banks in MENA EM&MIs and Pakistan experience capital losses of 16.7 percent.
    - Privately owned banks in the GCC experience capital losses of 11.8 percent.
    - State-owned banks experience losses about twice as large as privately owned banks in these regions.
  - Across all scenarios, losses in the CCA would be negligible because of large cash buffers and high profitability; however, significant vulnerabilities could emerge after an external shock because of high dollarization, borrowers’ unhedged foreign exchange exposures, and foreign exchange funding stress.
- Relative vulnerability:
  - State-owned banks are more vulnerable than privately owned banks in MENA EM&MIs and Pakistan and, to a lesser extent, the GCC, reflecting lower profitability and higher levels of securities holdings (which increase interest rate risk).
  - In the corporate scenario, state-owned banks are slightly less vulnerable because they have a lower share of loans relative to total assets, leading to lower additional provisioning needs.

### Policy recommendations and mitigation measures
- Strengthen macroprudential frameworks to limit systemic build-up of vulnerabilities.
- Contain vulnerabilities from the sovereign-bank nexus by managing sovereign exposures and sovereign financing risks.
- Enhance clear and timely communication to reduce investor uncertainty and risk of sudden funding outflows.
- Establish emergency liquidity tools to stem systemic financial stress, including in contexts with uneven deposit insurance coverage.
- Develop resolution regimes to reduce the buildup of zombie firms and limit long-term drag on productivity and bank balance sheets.

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

### 1. Excess Losses

### 1. Excess Losses

### Excess losses by bank characteristics and region
- Losses measured in excess of net income, as a fraction of Tier 1 regulatory capital, vary across regions and bank types (figure panels described in source).
- Losses tend to be higher for banks with:
  - relatively illiquid balance sheets,
  - low profitability (low RoA; RoA defined as net income over total assets),
  - low provisioning levels,
  - higher leverage,
  - higher market share (market share defined as within-country market share).
- Banks in countries with greater duration of outstanding sovereign bonds face much higher sensitivity to interest rate increases (duration measured at the country level as the weighted average duration of outstanding local currency government bonds).
- Definitions and regional groupings:
  - GCC countries: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.
  - MENA EM&MI and PAK: Egypt, Jordan, Morocco, and Pakistan.
  - CCA: Georgia and Kazakhstan.
  - SOB = state-owned bank (defined as banks with at least 50 percent government ownership).

### Bank undercapitalization and impact on capital ratios
- Relative to Basel III minimum capital requirements, 18 percent of banks in MENA EM&MI and Pakistan would become undercapitalized in the combined scenario.
- By contrast, all banks in the GCC and the CCA would remain above minimum requirements under the combined scenario.
- Aggregate Tier 1 capital ratios would decline by:
  - 2.6 percentage points for privately owned banks in MENA EM&MI and Pakistan,
  - 4.5 percentage points for state-owned banks in MENA EM&MI and Pakistan.
- In the GCC, Tier 1 ratios decline by:
  - 3.7 percentage points for state-owned banks,
  - 2.0 percentage points for privately owned banks.
- Basel III minimum capital requirement referenced: 4.5 percent common equity Tier 1 plus 1.5 percent additional Tier 1 capital and a 2.5 percent capital conservation buffer (sum implied as 8.5 percent). Most countries included in the stress testing exercise require minimum Tier 1 capital higher than 8.5 percent (based on a desk survey).
- Country-specific capital requirements: domestic systemically important banks’ surcharges and other buffers are treated as buffers and not as capital requirements in line with IMF (2023).

### Impact on credit provision and output
- Historical relationship: a 1 percentage point decline in capital ratios has been historically correlated with a contraction in real credit, reaching 1.2 percent after eight quarters.
- Under the combined scenario:
  - Real credit could contract by 4.3 percent in MENA EM&MI and Pakistan over a two-year horizon.
  - Real credit could contract by 3.2 percent in the GCC over a two-year horizon.
- Median output losses from the decline in lending (macroeconomic model results):
  - About 0.5 percent in MENA EM&MI and Pakistan.
  - About 0.5 percent in the GCC.
- Extreme downside risks (95th percentile of estimated output losses across countries):
  - Could be a 1.5 percent output contraction in MENA EM&MI and Pakistan over two years.
  - Could be a 0.9 percent contraction in the GCC over two years.
- CCA adverse-scenario example (Box 3.1): a 4.1 percent reduction in real credit could lead to a 0.4 percent decline in output; the 95th percentile of estimated output declines across CCA countries is 1.3 percent over two years.
- Caveats: The banking stress test does not explicitly model interbank linkages, which could further amplify downward spirals; estimates should be interpreted as lower bounds.

### Macroprudential frameworks: current status and gaps
- Post-global financial crisis, many central banks globally increased macroprudential toolkits, but use in ME&CA has been generally slow.
- Most countries in the region have broad-based tools available (for example, the countercyclical capital buffer) but most have left settings at zero since inception.
- Borrower-based tools for the household sector (for example, caps on debt-service-to-income ratios) have been implemented in most countries, but tools targeting corporate-sector vulnerabilities have been less used.
- Specific gaps noted:
  - Some GCC countries (for example, Saudi Arabia) have not used measures to reduce banks’ foreign currency liquidity risks.
  - Some MENA countries (Algeria, Lebanon, Morocco, Tunisia) have taken fewer actions to reduce risks from domestic systemically important financial institutions.
  - Links between the banking sector and nonbank financial institutions are nascent but should be monitored.

### Policy recommendations to safeguard financial stability
- Strengthen macroprudential frameworks:
  - Ramp up use of broad-based tools (for example, the countercyclical capital buffer) in MENA and Pakistan to prevent sharp credit contractions.
  - In countries with elevated corporate debt-at-risk or prevalence of zombie firms (for example, Kuwait, Jordan, United Arab Emirates), consider borrower-based tools such as caps on debt-service-to-income ratios and loan-to-value ratios.
  - Implement additional measures targeting large domestic systemically important institutions (for example, increased capital surcharges), especially in MENA EM&MI where implementation is lagging.
- In the GCC:
  - Guard against unexpected liquidity stress related to foreign liabilities.
  - Consider tools that account for concentrated nonresident deposit bases in liquidity coverage and net stable funding ratios.
  - Implement enhanced macroprudential foreign exchange measures, such as reserve requirements.
- In the CCA:
  - Continue ongoing macroprudential measures to build resilience across credit cycles amid large inflows from Russia.
  - Incentivize de-dollarization to reduce foreign exchange mismatches and enhance corporate and bank risk management.
- Monitor and address emerging risks in nonbank financial institutions where signs of risk migration appear.
- Mitigate sovereign-bank nexus risks with country-tailored responses:
  - Near term: preserve bank capital where interest rate risk is elevated (for example, Jordan); conduct stress tests that consider multiple channels of the nexus; pay attention to asset classification, provisions, and exposures to interest rate and liquidity risks; consider restricting profit distribution plans where risks are elevated.
  - Medium term: adopt macroeconomic policies that strengthen debt sustainability in countries with limited fiscal space; where bank sovereign bond holdings exceed certain concentration limits (for example, Egypt, Pakistan), consider ways to lessen the sovereign-bank nexus gradually—such as imposing capital surcharges on banks’ sovereign bond holdings above certain thresholds—provided macroeconomic policies are appropriately set.
  - Across all countries: foster a deep and diversified investor base, build adequate buffers at state-owned banks, provide clear mandates, and align supervisory tools (for example, stress tests) with banks’ unique risk profiles.
- Communication and crisis preparedness:
  - Central banks should clearly communicate objectives and policy functions to avoid unnecessary uncertainty; some countries would benefit from issuing financial stability reports.
  - If monetary policy is adjusted for financial stability purposes, clearly communicate the commitment to return inflation to target once stress lessens.
  - Prepare crisis management measures, including emergency liquidity support:
    - Countries where central banks lack explicit authority to provide emergency liquidity assistance (Algeria, Morocco, Oman) should prioritize establishing a clear framework for dealing with liquidity distress.
    - In countries where laws allow emergency liquidity but lack operational directives (Egypt, Jordan, Georgia, Tajikistan), provide specific instructions and internal guidelines for use of facilities, including foreign exchange liquidity.
  - Ensure liquidity support addresses liquidity, not solvency, and interventions:
    - Keep a significant part of risk in the marketplace to minimize moral hazard.
    - Define end dates for interventions.
    - Be parsimonious to avoid conflicting with the monetary policy stance.
    - Price liquidity support appropriately to avoid attracting opportunistic demand.
    - Ensure liquidity support and crisis tools comply with Islamic banking rules in the region.
- Address ex post solvency concerns with robust resolution frameworks:
  - Enhance insolvency procedures to deal with legacy nonperforming loans.
  - Structure resolution regimes to enable swift resolution of nonperforming loans to avoid evergreening, the buildup of impaired legacy assets, the emergence of zombie firms, and the associated drag on aggregate productivity growth.

*Source: INTERNATIONAL MONETARY FUND, October 2023.*

### References

### References

### Key citations
- Acharya, Viral, Matteo Crosignani, Tim Eisert, and Sascha Steffen. 2022. “Zombie Lending: Theoretical, International, and Historical Perspectives.” Annual Review of Financial Economics 14 (1): 21–38.
- Adams, Mark, Hanife Yesim Aydin, Hee Kyong Chon, Anastasiia Morozova, and Ebru Sonbul Iskender. 2022. “Regulating, Supervising, and Handling Distress in Public Banks.” IMF Departmental Paper 22/010, International Monetary Fund, Washington, DC.
- Copestake, Alex, Divya Kirti, and Yang Liu. Forthcoming. “Banks’ Joint Exposure to Market and Run Risk.” IMF Working Paper, International Monetary Fund, Washington, DC.
- Drechsler, Itamar, Alexi Savov, and Philipp Schnabl. 2021. “Banking on Deposits: Maturity Transformation without Interest Rate Risk.” The Journal of Finance 76 (3): 1091–143.
- Damodaran, Aswath. 2023. “Ratings, Interest Coverage Ratios, and Default Spreads.” https://pages.stern.nyu.edu/~adamodar/
- International Monetary Fund (IMF). 2019. “Kuwait: Financial Sector Assessment Program—Financial System Stability Assessment.” IMF Country Report 19/96, Washington, DC.
- International Monetary Fund (IMF). 2021. “Georgia: Financial Sector Assessment Program—Financial System Stability Assessment.” IMF Country Report 21/216, Washington, DC.
- International Monetary Fund (IMF). 2023. “Jordan: Financial Sector Assessment Program—Financial System Stability Assessment.” IMF Country Report 23/140, Washington, DC.
- International Monetary Fund (IMF). Forthcoming. “Stress Testing in Times of Increasing Interest Rates and Beyond.” IMF Department Note, Washington, DC.
- Jiang, Erica Xuewei, Gregor Matvos, Tomasz Piskorski, and Amit Seru. 2023. “Monetary Tightening and US Bank Fragility in 2023: Mark-to-Market Losses and Uninsured Depositor Runs?” NBER Working Paper 31048, National Bureau of Economic Research, Cambridge, MA.
- Jordà, Òscar. 2005. “Estimation and Inference of Impulse Responses by Local Projections.” American Economic Review 95 (1): 161–82.
- Khandelwal, Padamja, Ezequiel Cabezon, Sanan Mirzayev, and Rayah Al-Farah. 2022. “Macroprudential Policies to Enhance Financial Stability in the Caucasus and Central Asia.” IMF Departmental Paper 2022/006, International Monetary Fund, Washington, DC.
- Teodoru, Iulia Ruxandra, and Klakow Akepanidtaworn. 2022. “Managing Financial Sector Risks from the COVID-19 Crisis in the Caucasus and Central Asia.” IMF Departmental Paper 22/005, International Monetary Fund, Washington, DC.

### Note on regional and country recommendations
- The regional and country recommendations are based partially on data from the IMF’s Monetary Operations and Instruments database.
- See Adams and others (2022) for more details on policy proposals related to state-owned banks.

### Box 3.1 — Banking Sector Stress Test for the Caucasus and Central Asia (CCA)
- Contextual features highlighted:
  - Relatively high levels of dollarization, associated exchange rate risks.
  - Strong recent inflows from Russia.
  - Analysis covers Georgia and Kazakhstan due to limitations in recent banking data availability.
- Additional assumptions added to baseline stress test:
  - Inflows from Russia normalize, and profitability returns to its prepandemic average amid a normalization of net foreign currency gains.
  - An adverse external shock triggers a rise by 150 percent in sovereign spreads.
  - Exchange rates depreciate by 30 percent, stressing unhedged corporate and household borrowers.
- Key results and quantified outcomes:
  - CCA banks are resilient in a liquidity stress scenario because of high profitability and cash buffers, with losses of between 4 and 7 percent of regulatory capital.
  - Given significant unhedged foreign exchange exposures, a large currency depreciation would lead to a surge in nonperforming loans among corporations, requiring additional provisioning, with losses rising to 7.3 percent of regulatory capital (Box Figure 3.1.1, panel 1).
  - Combined liquidity and corporate stress could lead to losses as large as 15.3 percent of regulatory capital.
  - Only 1.8 percent of banks (weighted by assets) would become undercapitalized in the combined scenario.
  - Capital ratios would decline by 2.6 percentage points in aggregate, from 17.4 percent to 14.8 percent (Box Figure 3.1.1, panel 2).
  - In the corporate stress scenario, the aggregate Tier 1 capital ratio would drop by 1.2 percentage points.
  - Without currency depreciation, the decline would be negligible even if profitability returns to prepandemic averages (a 44 percent decline from current levels).
- Vulnerabilities and caveats:
  - Vulnerabilities related to dollarization and unhedged foreign exchange borrowers are key drivers of the losses.
  - Foreign exchange liquidity is a potential vulnerability that is not part of the stress test because bank-level data used do not include a breakdown of liquid assets between local currency and foreign currency liquid assets.
  - Teodoru and Akepanidtaworn (2022) highlight that the simultaneous realization of foreign exchange credit and liquidity risks would have compounding effects on the banking sectors in the Caucasus and Central Asia, with the largest and state-owned banks being most vulnerable.
- Prepared by Thomas Kroen.
- The magnitude of the sovereign spread increase (150 percent) is consistent with the external shock scenario in the 2021 Financial Sector Assessment Program for Georgia (IMF 2021).

### Selected Economic Indicators — ME&CA, MENA, MENAP, and CCA (2000–24; Percent of GDP or percent change, year-over-year)
- ME&CA (1,2)
  - Real GDP (percent change, year-over-year): 4.5–2.6 4.3 5.6 2.0 3.4
  - of which non-oil growth: 5.2–2.2 4.6 4.7 2.9 3.4
  - Current Account Balance: 5.7–3.4 3.3 8.6 4.1 3.6
  - Overall Fiscal Balance: 1.2–7.9 –2.6 1.8 –1.1 –1.8
  - Inflation (percent change, year-over-year): 7. 3 10.4 12.8 14.0 18.0 15. 2
- ME&CA oil exporters
  - Real GDP (percent change, year-over-year): 4.5–3.7 4.3 5.7 2.2 3.4
  - of which non-oil growth: 5.6–2.9 4.7 4.4 3.8 3.6
  - Current Account Balance: 8.9–3.3 6.7 14.0 6.9 6.2
  - Overall Fiscal Balance: 3.3–8.5 –1.1 4.8 0.5 0.0
  - Inflation (percent change, year-over-year): 6.8 8.6 11. 0 13. 2 12.9 9. 3
- ME&CA emerging market and middle-income countries (1)
  - Real GDP (percent change, year-over-year): 4.3–0.8 4.6 5.7 2.1 3.2
  - Current Account Balance: –3.4–3.2 –3.6 –4.9 –2.8 –3.2
  - Overall Fiscal Balance: –5.2–7. 3 –6.3 –6.2 –5.7 –7. 6
  - Inflation (percent change, year-over-year): 7.1 8.2 7. 8 11. 5 23.9 24.0
- ME&CA low-income developing countries (2)
  - Real GDP (percent change, year-over-year): 4.4–1.4 2.2 3.2 –0.5 3.9
  - Current Account Balance: 1.1–5.8 –7. 2 –8 .1 –7. 2 –6.6
  - Overall Fiscal Balance: –2.0–3.7 –2.6 –2.8 –4.0 –3.0
  - Inflation (percent change, year-over-year): 13.9 38.6 60.0 37. 6 42.3 30.8

- MENA (1)
  - Real GDP (percent change, year-over-year): 4.2–3.0 4.0 5.6 2.0 3.4
  - of which non-oil growth: 5.2–2.4 4.2 4.4 3.3 3.5
  - Current Account Balance: 6.8–3.6 4.1 10.2 5.2 4.6
  - Overall Fiscal Balance: 1.6–8.4 –2.1 3.0 –0.4 –1.3
  - Inflation (percent change, year-over-year): 7. 2 10.8 14.0 14.4 17. 5 15.0
- MENA oil exporters
  - Real GDP (percent change, year-over-year): 4.3–3.8 4.3 6 .1 2.0 3.4
  - of which non-oil growth: 5.4–3.0 4.6 4.3 3.8 3.6
  - Current Account Balance: 9. 6–3.3 7.1 14.6 7.5 6.7
  - Overall Fiscal Balance: 3.3–8.8 –0.9 5.2 0.6 0 .1
  - Inflation (percent change, year-over-year): 6.7 9.0 11. 3 13.0 12.9 9.4
- MENA emerging market and middle-income countries (1)
  - Real GDP (percent change, year-over-year): 4.2–0.5 3.6 5 .1 3.5 3.5
  - Current Account Balance: –4.0–3.7 –4.8 –5.2 –3.7 –3.9
  - Overall Fiscal Balance: –5.8–7. 4 –6.6 –5.7 –4.8 –8 .1
  - Inflation (percent change, year-over-year): 7.1 6.9 7. 0 11.1 22.1 25.5
- MENA low-income developing countries
  - Real GDP (percent change, year-over-year): 2.2–4.2 0.7 –0.3 –9. 3 1.7
  - Current Account Balance: –3.4–13 .1 –9.0 –13.0 –9.1 –10.0
  - Overall Fiscal Balance: – 3 .1–3.6 –0.3 –2.2 –2.9 –1.5
  - Inflation (percent change, year-over-year): 16.9 89.7 170 . 8 80.4 109. 6 72.4
- MENA excl. conflict-affected states
  - Real GDP (percent change, year-over-year): 4.0–2.3 4.3 5.8 2.7 3.5
  - of which non-oil growth: 5.0–1.7 4.3 4.8 3.7 3.5
  - Current Account Balance: 7. 6–2.5 4.3 10.3 6.0 5.6
  - Overall Fiscal Balance: 2.0– 8 .1 –2.3 2.7 0.2 –0.8
  - Inflation (percent change, year-over-year): 6.8 8.9 10.4 13.0 15.9 14 .1
- MENA excl. fragile and conflict-affected states
  - Real GDP (percent change, year-over-year): 4.0–1.6 3.9 6 .1 2.5 3.4
  - of which non-oil growth: 5.0–1. 2 4.4 4.9 3.8 3.5
  - Current Account Balance: 7. 7–2.2 4.6 10.3 6.0 5.5
  - Overall Fiscal Balance: 1.9–7.9 –2.5 2.6 0 .1 –0.8
  - Inflation (percent change, year-over-year): 6.9 8.4 9. 6 12. 2 15.0 13.8

- MENAP (1,2)
  - Real GDP (percent change, year-over-year): 4.3–2.7 4 .1 5.7 1.7 3.3
  - of which non-oil growth: 5 .1–2.2 4.5 4.6 2.8 3.4
  - Current Account Balance: 6 .1–3.3 3.7 8.9 4.7 4.0
  - Overall Fiscal Balance: 1.1–8.2 –2.5 2.0 –1.1 –1.8
  - Inflation (percent change, year-over-year): 7. 2 10.8 13. 2 14 .1 19.0 16. 2
- Gulf Cooperation Council
  - Real GDP (percent change, year-over-year): 4.2–4.7 3.6 7.9 1.5 3.7
  - of which non-oil growth: 5.9– 4 .1 5.2 5.3 4.3 4.0
  - Current Account Balance: 12.8–1.1 8.9 16.0 9.6 8.8
  - Overall Fiscal Balance: 6.0–8.0 –0.2 6.8 3.5 3.3
  - Inflation (percent change, year-over-year): 2.2 1.3 2.2 3.3 2.6 2.3
- Arab World (1)
  - Real GDP (percent change, year-over-year): 4.5–4.3 3.8 6.0 1.8 3.6
  - of which non-oil growth: 5.5–3.7 4.3 4.6 3.4 3.7
  - Current Account Balance: 7. 4–3.9 4.2 10.8 5.3 4.7
  - Overall Fiscal Balance: 2.4–8.6 –1.9 3.7 0 .1 –0.8
  - Inflation (percent change, year-over-year): 4.8 6 .1 9.1 8.9 12.1 11.7
- Arab World oil exporters
  - Real GDP (percent change, year-over-year): 4.7– 6 .1 4.2 6.8 1.7 3.7
  - of which non-oil growth: 6.0–5.2 4.9 4.6 4 .1 4.0
  - Current Account Balance: 11. 3–3.6 7. 6 15.9 8 .1 7.1
  - Overall Fiscal Balance: 4.7–9. 2 –0.5 6.4 1.5 1.0
  - Inflation (percent change, year-over-year): 3.0 1.3 3.2 4.2 3.6 2.9

- CCA (Selected Economic Indicators, 2000–24)
  - Real GDP (percent change, year-over-year): 6.7–2.0 5.7 4.8 4.6 4.2
  - Current Account Balance: 0.0–3.9 0.6 6.0 0.4 0.6
  - Overall Fiscal Balance: 2.0–5.4 –3.0 0.5 –1.3 –1.4
  - Inflation (percent change, year-over-year): 8.9 7. 3 9. 6 13.0 11. 0 8.3
- CCA oil and gas exporters
  - Real GDP (percent change, year-over-year): 7. 0–3.0 4.5 3.3 3.9 3.6
  - of which non-oil growth: 7. 0– 2.1 5.3 5.3 3.9 3.4
  - Current Account Balance: 0.5–3.7 3 .1 9. 6 2.7 2.7
  - Overall Fiscal Balance: 2.6–5.6 –2.3 1.8 –0.2 –0.7
  - Inflation (percent change, year-over-year): 7. 8 5.9 9. 2 14. 2 12.9 8.5
- CCA emerging market and middle-income countries
  - Real GDP (percent change, year-over-year): 5.9– 6.9 8.5 11.1 6.5 4.9
  - Current Account Balance: –9.0–8.7 –7. 5 –1.9 –3.9 –4.2
  - Overall Fiscal Balance: –1.7– 6.9 –4.6 –1.9 –2.0 –1.9
  - Inflation (percent change, year-over-year): 4.3 3.5 8.6 10.5 2.9 3.3
- CCA low-income developing countries
  - Real GDP (percent change, year-over-year): 6.4 1.4 7. 4 6.0 5.4 5.3
  - Current Account Balance: 1.0–3.0 –5.6 –4.3 –5.9 –4.5
  - Overall Fiscal Balance: 0.0–4.2 –4.9 –3.3 –4.8 –3.8
  - Inflation (percent change, year-over-year): 13.0 11.7 10.7 11.1 9.7 9.4

Sources: National authorities; and IMF staff calculations and projections.

*Prepared from the References and selected figures/tables in the October 2023 chapter.*

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