## Executive Summary

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---

### Economic developments and outlook
- Regional resilience in 2025: MENAP and CCA regions "remained generally robust in 2025" and "largely avoided the direct fallout from higher US tariffs and global trade disruptions," with recent regional geopolitical tensions having "only a limited and short-term impact."
- MENAP specifics:
  - MENAP oil exporters benefited from increased oil production as "the unwinding of OPEC+ cuts accelerated."
  - MENAP oil importers gained from "robust demand sustained by low energy prices, strong remittances, and buoyant tourism."
- CCA specifics:
  - "Growth in the CCA region continued to exceed expectations, driven by solid domestic demand, credit expansion, and hydrocarbon exports."
- Financial and prices:
  - "Despite relatively tight monetary policy stances, financial market conditions remain supportive."
  - Sovereign spreads have "narrowed," nominal exchange rates "depreciated," and "several countries successfully accessed international financial markets."
  - Inflation diverged: "easing across most MENAP economies" due to falling food and energy prices; "rising in many CCA countries because of strong demand and imported price pressures."
- Near-term outlook and projections:
  - MENAP: "GDP growth in the MENAP region is expected to strengthen gradually, supported by higher oil output, resilient local demand, and ongoing reforms."
  - CCA: "growth is projected to slow to a more sustainable pace."
  - Inflation: "projected to ease in most countries, helped by lower projected energy prices and projected tightening of fiscal policy stances, on account of progress in mobilizing revenues and rationalizing spending, including through subsidy reforms."
- Global context and projections:
  - "Global growth is projected to slow slightly, from 3.3 percent in 2024 to 3.2 percent in 2025 and 3.1 percent 2026."
  - "Advanced economies are projected to grow at 1.6 percent during 2025–26, with the United States at about 2 percent, and the euro area growing at 1.2 percent."
  - "Growth in emerging markets and developing economies is projected to moderate from 4.3 percent in 2024 to 4.2 percent in 2025."
  - "Global inflation is expected to decline to 4.2 percent in 2025 and 3.7 percent in 2026."

### Risks
- Key downside risks (verbatim):
  - "Lower global demand remains a key risk, together with a tightening of global financial conditions."
  - "Fiscal concerns and stronger-than-projected inflationary pressures in key advanced economies could result in higher borrowing costs, affecting countries with greater government financing needs and banking sectors heavily exposed to government debt."
  - "Both regions also remain vulnerable to renewed geopolitical tensions and increasing frequency and severity of climate-related shocks, which could both disrupt economic activity and undermine stability."
- Upside possibility:
  - "A faster-than-expected resolution of conflicts and a more aggressive implementation of long-standing structural reforms could provide a meaningful boost to growth across both regions."
- Note on delayed effects:
  - "Although MENAP and CCA economies have so far weathered high global uncertainty relatively well, delayed adverse effects cannot be ruled out."

### Policy priorities and recommendations
- Overarching priorities:
  - "Build buffers, strengthen policy frameworks, and accelerate structural reforms."
  - "The current growth momentum offers a valuable opportunity to bolster fiscal and external buffers, particularly in economies where these are limited."
- Institutional and policy actions:
  - Strengthen medium-term fiscal policy frameworks "to better anchor long-term fiscal sustainability."
  - Enhance monetary institutional frameworks "to improve policy effectiveness and predictability, which can help better anchor inflation expectations."
  - Advance structural reforms "aimed at economic diversification and private sector development" to seize opportunities and lift medium-term growth prospects.
- Additional emphasis:
  - "In addition to prudent policies, strengthening economic resilience to negative shocks may require institutional adjustments."

### Assumptions, conventions, and data vintage
- Oil price and US Treasury assumptions (described as "working assumptions rather than forecasts"):
  - "the price of oil will average US$68.92 a barrel in 2025, US$65.84 a barrel in 2026, and US$67.26 in 2030;"
  - "the three-month nominal yield on the US Treasury bills will average 4.3 percent in 2025, 3.7 percent in 2026, and 2.9 in 2030."
- Projections framing:
  - "These are working assumptions rather than forecasts, and the uncertainties surrounding them add to the margin of error that would, in any event, be involved in the projections."
  - "The 2025−30 data in the figures and tables are projections."
  - "Unless otherwise noted, these projections are based on statistical information available through end September 2025."

*International Monetary Fund — Regional Economic Outlook: Middle East and Central Asia (October 2025).*

---

### 1. Regional Developments and Economic Outlook: Resilience amid Uncertainty: Will It Last?

### Recent developments and trade
- MENAP and CCA showed resilience in 2025 despite geopolitical tensions (including a short-lived conflict between the Islamic Republic of Iran and Israel in June).
- Merchandise export and tariff context:
  - Merchandise export value from MENAP emerging market and middle-income economies (Jan–May 2025 vs same period last year): +8.0 percent.
  - The 90-day pause on US tariffs expired after April 2; effective US tariff rates for most MENAP and CCA economies converged to a range of 10–15 percent by end-September, with exceptions (Algeria, Iraq, Kazakhstan, Pakistan, Tunisia).
  - US share of total merchandise trade for these regions: about 4.5 percent.
  - Oil products are exempted from the new US tariffs; short-term partial equilibrium estimates suggest limited direct impact on merchandise exports.

### Oil production, prices, and external balances
- OPEC+ and production:
  - OPEC+ fully unwound the 2.2 million barrels per day (mb/d) in voluntary cuts introduced in November 2023.
  - Oil production in GCC countries rose by 968,000 b/d between February and June, and by an additional 158,000 b/d between June and August 2025.
  - Production in MENAP non-GCC economies remained flat due to capacity constraints, conflicts, and sanctions.
  - In September 2025, OPEC+ announced a phased rollback of production cuts from the tranche introduced in April 2023.
- Oil prices:
  - Aside from a temporary spike related to the Iran–Israel tensions in mid-June, oil prices have generally remained within the $60–$70 range since mid-2025.
  - Baseline oil price projection summary (from later text): projected to average around $69 per barrel in 2025, falling to $66 in 2026 and remaining at that level through 2030; 2024 average was $79 per barrel.

### External balances, remittances, tourism, and financial conditions
- Remittances and tourism:
  - Remittances accelerated in 2025 in MENAP, particularly in Egypt and Pakistan.
  - In CCA, remittances increased in Kyrgyz Republic, Tajikistan, Uzbekistan; plateaued but elevated in Armenia, Georgia.
  - Tourism inflows rebounded in Egypt, Morocco, Tunisia.
- Financial conditions:
  - Gross inflows into bonds and equities generally rebounded across MENAP and CCA.
  - Sovereign spreads continued to narrow.
  - Cumulative bond issuance in MENAP and CCA as of September 2025: exceeded $36.8 billion, nearly matching full-year total for 2024 and surpassing the average of the past three years.
  - Nominal effective exchange rates generally weakened; private sector credit growth remained robust.

### Inflation and growth developments
- Inflation divergence:
  - By July 2025, headline inflation had fallen in most MENAP economies; Islamic Republic of Iran an outlier with rising inflation.
  - In nearly all CCA countries, headline inflation was higher by July 2025 compared to end-2024 (except Turkmenistan).
- Growth projections and revisions:
  - MENAP GDP growth projected to reach 3.2 percent in 2025 (up from 2.1 percent in 2024); upgrade of 0.6 percentage point compared to May.
  - MENAP oil production projection: 25.7 mb/d in 2025 (200,000 b/d higher than projected in May 2025; 400,000 b/d above 2024).
  - CCA growth projections raised to 5.6 percent for 2025 (2024: 5.5 percent); May upgrade: 0.7 percentage point.
  - Pakistan’s growth projected to increase to 3.6 percent in 2026.
  - GCC growth projected to accelerate to about 4.1 percent in 2026–27 before moderating to about 3.4 percent thereafter.
  - Medium-term: Non-GCC oil exporters expected to hover around 2.6 percent; CCA to slow to around 4 percent over medium term.

### Conflict, humanitarian conditions, and peace developments
- Peace and humanitarian notes:
  - Lebanon: ceasefire with Israel in place since November 2024; reconstruction needs remain.
  - Syria: political transition; more than half a million refugees and over 1.2 million internally displaced people returned.
  - Yemen: ceasefire agreement with the United States has held since May 2025.
  - Sudan: number of people in need rose sharply in 2025 vs previous year.
  - Gaza: by end-July 2025 more than 64,000 fatalities recorded and over three-quarters of structures damaged or destroyed.

### Key statistics (exact figures)
- MENAP GDP growth: 3.2 percent in 2025 (up from 2.1 percent in 2024); May upgrade: 0.6 percentage point.
- CCA GDP growth: 5.6 percent in 2025 (2024: 5.5 percent); May upgrade: 0.7 percentage point.
- MENAP oil production projection: 25.7 mb/d in 2025 (200,000 b/d higher than projected in May 2025; 400,000 b/d above 2024).
- OPEC+ voluntary cuts unwound: 2.2 mb/d introduced in November 2023.
- GCC oil production increases: +968,000 b/d (Feb–June 2025); +158,000 b/d (June–Aug 2025).
- Oil price range since mid-2025: $60–$70 per barrel.
- Effective US tariff rates range by end-September: 10–15 percent for most countries.
- US share of total merchandise trade for these regions: about 4.5 percent.
- Merchandise export value change (MENAP EM&MI, Jan–May 2025 vs same period last year): +8.0 percent.
- Cumulative bond issuance in MENAP and CCA as of September 2025: exceeded $36.8 billion.
- Gaza fatalities by end-July 2025: more than 64,000.
- Refugee/IDP returns to Syria: more than half a million refugees and over 1.2 million internally displaced people returned.

*International Monetary Fund — Regional Economic Outlook: Middle East and Central Asia (October 2025).*

---

### 2. Boosting Economic Recovery after Conflict: Patterns and Policies

### Overview and data
- Scope: post-conflict recovery analysis for MENAP, CCA, and other regions using Uppsala Conflict Data Program’s Georeferenced Events Database (1989–2024).
- Conflict and post-conflict definitions:
  - Conflict intensity threshold: > 25 deaths per million population in a given year.
  - Post-conflict episode: intensity falls below 25 per million for at least two consecutive years.
- Sample (1989–2024): 121 total post-conflict episodes
  - 20 in the MENAP region
  - 8 in the CCA region
  - 93 in other regions

### Recovery outcomes and stylized facts
- Five-year post-conflict GDP per capita growth (average):
  - MENAP: less than 1 percent
  - CCA: 4.8 percent
  - Rest of the world: 2.2 percent
- Success criteria:
  - Successful if: (1) GDP per capita returns to pre-conflict projected path (IMF WEO) within five years, and (2) peace is sustained over those five years.
  - Only about one-third of episodes in MENAP and CCA and the rest of the world can be categorized as successful.
- Stylized macro outcomes:
  - Successful recoveries (rest of world excluding MENAP/CCA): output exceeded pre-conflict projected trends by about 12 percent on average within five years.
  - Successful recoveries (MENAP and CCA): output exceeded pre-conflict projected trends by about half a percent on average.
  - Failed recoveries (MENAP and CCA): output fell 17 percent below trend.
  - Failed recoveries (rest of world): output fell 3 percent below trend.
  - Investment and consumption rebounds in successful recoveries (MENAP and CCA): real gross capital formation up nearly 75 percent on average within five years; real consumption rebound 25 percent.

### Macroeconomic stabilization, financing, and institutions (quantified associations)
- Macroeconomic volatility:
  - Higher macroeconomic volatility in first five years of peace reduces likelihood of success.
  - A jump from the 25th to the 75th percentile of macroeconomic volatility is associated with a more than 25 percent drop in the odds ratio of success.
- Financial openness and social spending:
  - Greater financial openness over first five years of peace (Chinn-Ito index improvements) associated with higher likelihood of success.
  - Social spending estimated effects (average during first five years post-conflict, percent of GDP):
    - Each additional 1 percent of GDP spent on social protection: associated with 15 percent higher odds ratios of successful recovery.
    - Each additional 1 percent of GDP spent on health: associated with 42 percent higher odds ratios of successful recovery.
    - Each additional 1 percent of GDP spent on housing and community: associated with 119 percent higher odds ratios of successful recovery.
- Financing and debt relief:
  - Debt restructuring during conflict or within five years after onset of peace associated with an over 50 percent higher estimated probability of successful recovery versus no restructuring.
  - IMF capacity development: average of about 56 capacity development missions over five years in both successful and failed post-conflict cases.
- Institutions:
  - A 1 standard-deviation improvement in institutional quality during first five years of peace (comparable to moving from the 10th to the 75th percentile) is associated with roughly double the odds ratio of successful recovery.

### Case study lessons (Iraq, Rwanda, Somalia, Afghanistan)
- Iraq:
  - IMF role in coordinating support and enabling debt relief; Paris Club stock of debt reduced by 80 percent in three phases (contingent on IMF programs).
  - Recurring security challenges and oil price shocks can derail recovery.
- Rwanda:
  - Early institutional reforms and fiscal consolidation enabled stabilization and donor confidence.
  - 27 key reforms between 1997 and 2004; reached HIPC decision point in 2000; qualified for Multilateral Debt Relief Initiative in 2006 resulting in external debt reduction exceeding $1 billion.
- Somalia:
  - More than 100 structural measures since 2016 under IMF-supported programs.
  - 2023 debt relief of $4.5 billion under HIPC restored external sustainability.
  - Progress contingent on sustained domestic commitment and predictable international support.
- Afghanistan:
  - Currency reform and reduction of monetary financing contributed to stabilization; IMF technical assistance instrumental.

### Policy implications and priorities
- Three core priorities:
  - Macroeconomic stabilization (immediate priority).
  - Securing external financing—including international support and debt relief.
  - Strengthening institutions and governance.
- Practical guidance:
  - Well-coordinated donor assistance within fiscal frameworks enhances effectiveness.
  - Sequencing matters: stabilization yields quicker improvements; institutional and structural reforms take longer.
  - Political stability is essential to sustain reform momentum.
  - International institutions provide catalytic support beyond financing via capacity development and coordination.

### Quantitative regional indicators (selected, year-over-year percent change unless otherwise indicated)
- Middle East and North Africa Region, Afghanistan, and Pakistan (MENAP): Real GDP Growth: 2.1 3.2 3.7 3.7; Current Account Balance (percent of GDP): 2.9 1.6 1.2 1.1; Overall Fiscal Balance (percent of GDP): –2.3 –2.9 –2.8 –1.4; Inflation (period average): 15.2 11.2 9.8 6.4
- MENAP Oil Exporters: Real GDP Growth: 2.5 3.0 3.4 3.0; Non-oil GDP Growth: 4.0 2.9 2.9 3.1; Current Account Balance (percent of GDP): 5.2 3.4 2.9 2.9; Overall Fiscal Balance (percent of GDP): –1.0 –1.5 –1.4 –0.7; Inflation (period average): 8.5 10.1 10.0 6.8
- Gulf Cooperation Council (GCC): Real GDP Growth: 2.2 3.9 4.3 3.4; Non-oil GDP Growth: 4.3 3.8 3.6 3.6; Current Account Balance (percent of GDP): 7.1 4.9 4.3 3.7; Overall Fiscal Balance (percent of GDP): 1.8 0.8 0.9 1.2; Inflation (period average): 1.6 1.7 2.0 2.0
- MENAP Non-GCC Oil Exporters: Real GDP Growth: 2.9 1.8 2.2 2.6; Non-oil GDP Growth: 3.6 1.7 1.9 2.5; Current Account Balance (percent of GDP): 0.8 –0.3 –0.6 0.8; Overall Fiscal Balance (percent of GDP): –7.6 –7.1 –7.2 –5.5; Inflation (period average): 17.9 21.8 21.6 13.8
- MENAP Oil Importers: Real GDP Growth: 1.6 3.5 4.1 4.7; Current Account Balance (percent of GDP): –3.8 –3.3 –3.6 –3.3; Overall Fiscal Balance (percent of GDP): –5.9 –6.9 –6.5 –3.2; Inflation (period average): 26.5 13.1 9.4 5.7
- MENAP Emerging Market and Middle-Income Economies: Real GDP Growth: 2.3 3.6 4.1 4.7; Current Account Balance (percent of GDP): –3.5 –3.1 –3.3 –3.1; Overall Fiscal Balance (percent of GDP): –6.2 –7.3 –6.7 –3.3; Inflation (period average): 24.9 11.8 8.4 5.4
- MENAP Low-Income Countries: Real GDP Growth: –6.2 2.2 5.6 4.9; Current Account Balance (percent of GDP): –7.6 –5.4 –7.3 –6.1; Overall Fiscal Balance (percent of GDP): –1.9 –2.3 –3.1 –2.2; Inflation (period average): 47.9 39.7 28.6 11.1
- Middle East and North Africa (MENA): Real GDP Growth: 2.1 3.3 3.7 3.6; Current Account Balance (percent of GDP): 3.2 1.7 1.3 1.3; Overall Fiscal Balance (percent of GDP): –1.9 –2.6 –2.6 –1.3; Inflation (period average): 14.2 12.2 10.3 6.4
- Caucasus and Central Asia (CCA): Real GDP Growth: 5.5 5.6 4.7 4.0; Current Account Balance (percent of GDP): –1.4 –2.0 –3.0 –3.3; Overall Fiscal Balance (percent of GDP): –1.1 –2.4 –2.4 –1.7; Inflation (period average): 6.7 8.6 8.0 5.3

*International Monetary Fund, October 2025.*

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

### Executive Summary

### Economic developments and outlook
- Regional resilience in 2025: MENAP and CCA regions "remained generally robust in 2025" and "largely avoided the direct fallout from higher US tariffs and global trade disruptions," with recent regional geopolitical tensions having "only a limited and short-term impact."
- MENAP specifics:
  - MENAP oil exporters benefited from increased oil production as "the unwinding of OPEC+ cuts accelerated."
  - MENAP oil importers gained from "robust demand sustained by low energy prices, strong remittances, and buoyant tourism."
- CCA specifics:
  - "Growth in the CCA region continued to exceed expectations, driven by solid domestic demand, credit expansion, and hydrocarbon exports."
- Financial and prices:
  - "Despite relatively tight monetary policy stances, financial market conditions remain supportive."
  - Sovereign spreads have "narrowed," nominal exchange rates "depreciated," and "several countries successfully accessed international financial markets."
  - Inflation diverged: "easing across most MENAP economies" due to falling food and energy prices; "rising in many CCA countries because of strong demand and imported price pressures."
- Near-term outlook and projections:
  - MENAP: "GDP growth in the MENAP region is expected to strengthen gradually, supported by higher oil output, resilient local demand, and ongoing reforms."
  - CCA: "growth is projected to slow to a more sustainable pace."
  - Inflation: "projected to ease in most countries, helped by lower projected energy prices and projected tightening of fiscal policy stances, on account of progress in mobilizing revenues and rationalizing spending, including through subsidy reforms."
- Global context and projections (preserve original figures exactly):
  - "Global growth is projected to slow slightly, from 3.3 percent in 2024 to 3.2 percent in 2025 and 3.1 percent 2026."
  - "Advanced economies are projected to grow at 1.6 percent during 2025–26, with the United States at about 2 percent, and the euro area growing at 1.2 percent."
  - "Growth in emerging markets and developing economies is projected to moderate from 4.3 percent in 2024 to 4.2 percent in 2025."
  - "Global inflation is expected to decline to 4.2 percent in 2025 and 3.7 percent in 2026."

### Risks
- Key downside risks (verbatim framing and emphasis):
  - "Lower global demand remains a key risk, together with a tightening of global financial conditions."
  - "Fiscal concerns and stronger-than-projected inflationary pressures in key advanced economies could result in higher borrowing costs, affecting countries with greater government financing needs and banking sectors heavily exposed to government debt."
  - "Both regions also remain vulnerable to renewed geopolitical tensions and increasing frequency and severity of climate-related shocks, which could both disrupt economic activity and undermine stability."
- Upside possibility:
  - "A faster-than-expected resolution of conflicts and a more aggressive implementation of long-standing structural reforms could provide a meaningful boost to growth across both regions."
- Note on delayed effects:
  - "Although MENAP and CCA economies have so far weathered high global uncertainty relatively well, delayed adverse effects cannot be ruled out."

### Policy priorities and recommendations
- Overarching priorities:
  - "Build buffers, strengthen policy frameworks, and accelerate structural reforms."
  - "The current growth momentum offers a valuable opportunity to bolster fiscal and external buffers, particularly in economies where these are limited."
- Specific institutional and policy actions:
  - Strengthen medium-term fiscal policy frameworks "to better anchor long-term fiscal sustainability."
  - Enhance monetary institutional frameworks "to improve policy effectiveness and predictability, which can help better anchor inflation expectations."
  - Advance structural reforms "aimed at economic diversification and private sector development" to seize opportunities and lift medium-term growth prospects.
- Additional emphasis:
  - "In addition to prudent policies, strengthening economic resilience to negative shocks may require institutional adjustments."

### Assumptions, conventions, and data vintage (exact figures preserved)
- Oil price and US Treasury assumptions (described as "working assumptions rather than forecasts"):
  - "the price of oil will average US$68.92 a barrel in 2025, US$65.84 a barrel in 2026, and US$67.26 in 2030;"
  - "the three-month nominal yield on the US Treasury bills will average 4.3 percent in 2025, 3.7 percent in 2026, and 2.9 in 2030."
- Projections framing:
  - "These are working assumptions rather than forecasts, and the uncertainties surrounding them add to the margin of error that would, in any event, be involved in the projections."
  - "The 2025−30 data in the figures and tables are projections."
  - "Unless otherwise noted, these projections are based on statistical information available through end September 2025."

*Source: Executive Summary, Regional Economic Outlook—Middle East and Central Asia, October 2025.*

### 1. Regional Developments and Economic Outlook: Resilience amid Uncertainty: Will It Last?

### 1. Regional Developments and Economic Outlook: Resilience amid Uncertainty: Will It Last?

### Recent developments: economic resilience amid high uncertainty and conflicts
- Despite ongoing global uncertainty and renewed geopolitical tensions, including a short-lived conflict between the Islamic Republic of Iran and Israel in June, MENAP and CCA economies have shown resilience so far in 2025.
- MENAP oil exporters benefited from the faster-than-expected unwinding of OPEC+ voluntary production cuts, whereas lower oil prices helped oil importers.
- In the CCA region, growth continued to outperform expectations, driven by robust domestic demand and strong hydrocarbon output among oil exporters, while inflation accelerated.
- Heightened tensions from trade disputes and regional conflicts have not had a major impact on MENAP and CCA merchandise trade so far in 2025; between January and May, merchandise export value from MENAP emerging market and middle-income economies increased by 8.0 percent year-on-year.

### Trade and tariffs
- The 90-day pause on US tariffs expired after being announced on April 2; effective US tariff rates for most MENAP and CCA economies had converged to a range of 10–15 percent by end-September, with notable exceptions (Algeria, Iraq, Kazakhstan, Pakistan, Tunisia).
- The regions’ low exposure to the US market limits the overall impact: the US accounts for only about 4.5 percent of their total merchandise trade.
- Oil products are exempted from the new US tariffs; short-term partial equilibrium estimates suggest limited direct impact on merchandise exports.

### Oil production and prices
- OPEC+ fully unwound the 2.2 million barrels per day (mb/d) in voluntary cuts introduced in November 2023.
- Oil production in GCC countries rose by 968,000 b/d between February and June, and by an additional 158,000 b/d between June and August 2025.
- Production in MENAP non-GCC economies remained flat because of capacity constraints, ongoing conflicts, and international sanctions.
- In September 2025, OPEC+ announced the start of another phased rollback of production cuts from the tranche introduced in April 2023.
- Aside from a temporary spike related to the Iran–Israel tensions in mid-June, oil prices have generally remained within the $60–$70 range since mid-2025.

### External balances, remittances, tourism, and financial conditions
- Robust remittances and tourism inflows are sustaining external balances in several MENAP and CCA countries.
  - Remittances accelerated in 2025 in MENAP, particularly in Egypt and Pakistan, contributing to current account improvements.
  - In the CCA, total inward remittances have generally increased since the onset of the war in Ukraine and have continued to grow in several countries (Kyrgyz Republic, Tajikistan, Uzbekistan); in others (Armenia, Georgia) remittances plateaued but remain elevated.
  - Tourism inflows rebounded in some MENAP economies (Egypt, Morocco, Tunisia).
- Overall financial conditions remained supportive in 2025 despite neutral to tight monetary policy stances:
  - Gross inflows into bonds and equities generally rebounded across MENAP and CCA.
  - Sovereign spreads continued to narrow, falling below pre-pandemic averages in some cases.
  - As of September 2025, cumulative bond issuance in the MENAP and CCA regions exceeded $36.8 billion, nearly matching the full-year total for 2024 and surpassing the average of the past three years.
  - Nominal effective exchange rates generally weakened in many countries.
  - Private sector credit growth remained robust in many economies, partly driven by large-scale investment projects tied to diversification and infrastructure.

### Inflation developments
- Inflation trends diverged across regions:
  - By July 2025, headline (year-over-year) inflation had fallen in most MENAP economies, remaining relatively low or close to targets or historical averages, reflecting lower food and energy prices and tight monetary policy stances.
  - The Islamic Republic of Iran remained an outlier with rising inflation due to exchange rate pressures, loose monetary and fiscal policies, and international sanctions.
  - In Egypt, inflation eased from previous highs but remained elevated because of pass-through from ongoing supply shocks, currency depreciation, and energy price adjustments.
  - In nearly all CCA countries, headline inflation was higher by July 2025 compared to end-2024 (except Turkmenistan); drivers included one-off electricity tariff reforms (Kyrgyz Republic), imported inflation mainly from Russia (Kazakhstan, Kyrgyz Republic), and demand pressures (Kazakhstan, Kyrgyz Republic).
- Outlook for inflation:
  - Inflation in the MENAP region is expected to remain subdued or decline gradually in 2025–26, reflecting lower food and energy prices and conservative fiscal and monetary policy stances.
  - In CCA economies, inflation is projected to rise in 2025 because of continued strong demand pressures, before beginning to decelerate in 2026.

### Growth outlook and projections
- Upward revisions since May reflect stronger oil production, progress on structural reforms, and improved agricultural production.
- MENAP:
  - GDP growth is projected to reach 3.2 percent in 2025, up from 2.1 percent in 2024, an upgrade of 0.6 percentage point compared to May.
  - Oil production in the MENAP region is projected to reach 25.7 mb/d in 2025, 200,000 b/d higher than projected in May 2025 and 400,000 b/d above 2024 levels.
  - Medium-term projections point to a gradual acceleration in MENAP because of payoffs from structural reforms and macroeconomic stabilization efforts; Pakistan’s growth is projected to increase to 3.6 percent in 2026.
  - In the GCC, growth is projected to accelerate to about 4.1 percent in 2026–27 before moderating to about 3.4 percent thereafter.
- CCA:
  - Growth projections raised to 5.6 percent for 2025, slightly above last year’s 5.5 percent and 0.7 percentage point higher than the May projection.
  - Upgrades reflect stronger hydrocarbon production (Kazakhstan) and strong domestic demand fueled by credit growth and fiscal expansion (Armenia, Georgia, Kazakhstan, Kyrgyz Republic).
  - Medium-term outlook: growth expected to moderate as the region returns to potential after recent rapid expansion.

### Conflict, peace developments, and humanitarian conditions
- Some progress toward peace in a few countries has begun to lay groundwork for recovery:
  - Lebanon: ceasefire with Israel in place since November 2024 offers hope for reconstruction despite recent airstrikes and severe economic damage.
  - Syria: a political transition has opened new economic prospects; more than half a million refugees and over 1.2 million internally displaced people have returned, increasing humanitarian needs.
  - Yemen: progress on the 2023 UN peace road map has stalled, but a ceasefire agreement with the United States has held since May 2025.
- Humanitarian crises remain severe in several countries:
  - Sudan: the number of people in need of assistance rose sharply in 2025 compared to the previous year.
  - Gaza: by end-July 2025 more than 64,000 fatalities had been recorded and over three-quarters of structures were either damaged or destroyed.

### Key statistics and exact figures cited
- MENAP GDP growth: 3.2 percent in 2025 (up from 2.1 percent in 2024); May upgrade: 0.6 percentage point.
- CCA GDP growth: 5.6 percent in 2025 (2024: 5.5 percent); May upgrade: 0.7 percentage point.
- MENAP oil production projection: 25.7 mb/d in 2025 (200,000 b/d higher than projected in May 2025; 400,000 b/d above 2024).
- OPEC+ voluntary cuts unwound: 2.2 mb/d introduced in November 2023.
- GCC oil production increases: +968,000 b/d (Feb–June 2025); +158,000 b/d (June–Aug 2025).
- Oil price range since mid-2025: $60–$70 per barrel.
- Effective US tariff rates range for most countries by end-September: 10–15 percent.
- US share of total merchandise trade for these regions: about 4.5 percent.
- Merchandise export value change (MENAP EM&MI, Jan–May 2025 vs same period last year): +8.0 percent.
- Cumulative bond issuance in MENAP and CCA as of September 2025: exceeded $36.8 billion.
- Gaza fatalities by end-July 2025: more than 64,000.
- Refugee/IDP returns to Syria: more than half a million refugees and over 1.2 million internally displaced people returned.

*International Monetary Fund — Regional Economic Outlook: Middle East and Central Asia (October 2025).*

### 1. Regional Developments and Economic Outlook: Resilience amid Uncertainty: Will It Last?

### 1. Regional Developments and Economic Outlook: Resilience amid Uncertainty: Will It Last?

### Growth outlook and regional projections
- Non-GCC oil exporters: medium-term growth expected to hover around 2.6 percent.
- CCA: growth projected to slow gradually to around 4 percent over the medium term.
- GCC economies: growth stabilizes at robust rates (textual description; no single aggregate growth rate provided).

### External positions and current accounts
- Weighted current account surplus of GCC economies: expected to narrow from 7.1 percent of GDP in 2024 to about 3.7 percent in 2030.
- Revisions: an upward revision of about 2.5 percentage points of GDP for 2025–26—largely reflecting higher oil production.
- Algeria: current account deficit expected to widen in the near term.
- Iraq: external position projected to improve over the medium term because of fiscal consolidation and a gradual increase in oil exports.
- MENAP oil importers (near term 2025): current account deficit expected to widen slightly in Morocco and Tunisia; broadly stable in Jordan.
- Medium term external positions:
  - Strengthen gradually in Jordan and Egypt (exports benefit from normalization of regional trade and sustained tourism inflows).
  - Deteriorate moderately in Morocco (rising investment-related imports ahead of the FIFA 2030 World Cup) and Tunisia (projected weaker export dynamism).
- MENAP LICs: external positions expected to weaken over the medium term in Djibouti, Somalia, and Sudan for specific large import/reconstruction/grant reasons.
- CCA oil exporters: current account deficits projected to widen near and medium term because of lower hydrocarbon prices and declining oil and gas production.
- Tajikistan: external balances expected to weaken as remittances normalize with easing labor demand in destination countries.
- Reserve coverage: across most MENAP and CCA countries, reserve import coverage is expected to decline; GCC and CCA oil exporters projected to maintain substantial external reserves.

### Inflation dynamics
- MENAP GCC economies: inflation expected to remain stable and moderate, averaging about 2 percent over the forecast horizon.
- Non-GCC oil exporters: inflation expected to decline but remain relatively high; Islamic Republic of Iran: annual inflation projected to reach 45 percent by the end of 2025.
- MENAP oil importers:
  - Jordan: inflation projected to remain low.
  - Egypt: inflation projected to fall from elevated levels (waning effects of past currency depreciation and energy price hikes).
  - Tunisia: inflation expected to decelerate only slightly owing to continued monetary financing of fiscal deficits.
  - Pakistan: inflation decelerated this year but expected to increase in 2026 due to normalization of food and energy prices and phasing out of short-term electricity subsidies.
- Conflict-affected economies (Lebanon, Sudan): significant inflationary pressures expected to moderate with macroeconomic stabilization.
- CCA region: after increasing in 2025 in all countries except Uzbekistan, inflation projected to fall slowly as domestic demand slows on tighter fiscal policy stances.
  - Turkmenistan: inflation expected to gradually pick up and stabilize at 8 percent.
  - Tajikistan: inflation projected to rise gradually but remain within the 5 ±2 percent target range over the forecast horizon.

### Fiscal stance and public finances
- MENAP: fiscal policy stance projected to be contractionary overall.
- CCA: some fiscal consolidation expected to begin in most countries from 2026 onward.
- MENAP oil exporters: non-oil primary fiscal balances set to strengthen via spending rationalization (Algeria, Kuwait, Oman, Saudi Arabia) and non-hydrocarbon revenue mobilization (Iraq), resulting in a negative fiscal impulse.
- MENAP oil importers: cyclically adjusted primary fiscal balances projected to improve via tax policy/administration reforms (Egypt, Jordan, Morocco, Pakistan) and energy subsidy reforms (Egypt, Morocco, Pakistan).
- MENAP LICs: fiscal stance expected to improve in Djibouti and Mauritania; primary fiscal balances expected to deteriorate in Sudan (reconstruction spending) and Somalia (lower external grants).
- CCA: fiscal stances generally expansionary in 2025 but expected to turn contractionary from 2026 onward (driven by declining capital expenditures in Azerbaijan and fiscal reforms boosting non-oil revenue in Kazakhstan).
  - Exceptions: Kyrgyz Republic and Tajikistan, where fiscal policy projected to remain expansionary in the medium term due to higher capital spending.

### Key risks and shock channels
- Downside tilt: risks to the outlook remain tilted to the downside; lagged negative impacts from high global uncertainty are possible.
- Global uncertainty impact: IMF analysis shows a 1 standard deviation shock to the World Uncertainty Index is associated with average output losses in the MENAP and CCA regions peaking at about 2.5 percent two years after the shock.
- Global financial tightening channel:
  - Higher-for-longer interest rates could affect countries with high government financing needs and banking sectors exposed to sovereign risk.
  - Vulnerable banking/sectors noted: Algeria, Egypt, Pakistan (banks hold relatively large shares of sovereign bonds).
- Real estate concerns: rapidly rising real estate prices in some GCC economies amid rapid credit growth and high valuations; data limitations for property indices (Bahrain, Kuwait) and transaction consistency (Qatar).
- US dollar exchange rate moves:
  - A sharper-than-projected depreciation of the US dollar: for oil importers with more exchange rate flexibility, appreciation of local currencies could ease inflation and external conditions.
  - For oil exporters pegged to the US dollar, weakness in local currencies could improve non-oil export competitiveness but raise import costs and imported inflation.
  - Example: approximately 80 percent of Saudi Arabia’s imports are invoiced in US dollars.
  - A sudden reversal (US dollar appreciation) could deter capital and financial inflows and compound reduced official grants.
- Oil price uncertainty:
  - Baseline: oil prices projected to average around $69 per barrel in 2025, falling to $66 in 2026 and remaining at that level through 2030; 2024 average was $79 per barrel.
  - Downside: faster rebound in OPEC+ production plus weaker demand could push prices below baseline, hurting oil exporters’ fiscal and external positions.
  - Upside: escalation of geopolitical tensions or additional sanctions on Russian and Iranian exports could drive prices higher, benefiting exporters but challenging importers with fuel subsidies/high energy intensity.
- Conflict and long-run costs:
  - Severe conflicts impose long-lasting costs: output per capita remains, on average, about 10 percent below pre-conflict trend a decade after the start of a severe conflict.
  - Bordering economies: per capita output drops immediately by about 1.5 percent and a further 6 percent over 10 years.
- CCA exposure to war in Ukraine: risks tied to timing and nature of any peace agreement, sanctions on Russia could hurt tourism, trade, remittances, investment, and fuel currency depreciation/inflation; protracted scenarios could bring temporary demand/support but heighten financial integrity and legal risks.

### Upside scenarios and opportunities
- Faster-than-assumed reform implementation in many MENAP economies could yield stronger gains than in the baseline.
- Swift, lasting conflict resolution could accelerate reconstruction under enhanced regional and international cooperation.
- CCA medium-term growth could exceed projections if spillovers from the war in Ukraine and multiyear infrastructure projects prove more enduring.
- A peace agreement between Armenia and Azerbaijan could enable greater regional cooperation and integration.

### Policy recommendations: build buffers, strengthen resilience, and seize opportunities
- Maintain cautious macroeconomic policies prioritizing buffer building alongside bold structural reforms.
- Fiscal policy: conservative/negative fiscal impulse stance appears appropriate given expected growth acceleration in many MENAP economies and return to potential in CCA.
- Monetary policy: maintain tight monetary policy where persistent inflationary pressures exist until inflation expectations align with targets.
- Institutional strengthening: some countries need enhanced institutional fiscal and monetary frameworks to better anchor long-term fiscal and inflationary expectations.
- Financial sector: robust financial sector frameworks and targeted macroprudential measures are crucial to contain emerging risks and safeguard financial stability.
- Structural reforms: pursue economic diversification and private sector development to capitalize on changing global opportunities.
- Technology adoption: accelerate adoption of artificial intelligence (AI) to support income convergence, coupled with accompanying policies (text ends mid-sentence on necessary accompanying policies).

*International Monetary Fund, October 2025.*

### 1. Regional Developments and Economic Outlook: Resilience amid Uncertainty: Will It Last?

### 1. Regional Developments and Economic Outlook: Resilience amid Uncertainty: Will It Last?

### Fiscal positions, public debt, and rebuilding fiscal buffers
- Fiscal positions in MENAP and CCA economies have generally improved since the pandemic, in line with the rebound in growth.
- In some cases, fiscal deficits remain above pre-pandemic levels: Armenia, Libya, Tunisia.
- Public debt is projected to rise over the medium term in: Algeria, Bahrain, Iraq.
- Public debt is projected to stabilize at, or modestly decline from, relatively high levels in: Egypt, Jordan, Morocco, Tunisia.
- Rebuilding fiscal buffers requires a credible process of fiscal consolidation calibrated to the business cycle and investment needs, while minimizing burdens on the most vulnerable.
- Recommended fiscal measures:
  - Mobilize fiscal revenues (e.g., narrowing tax gaps, reducing informality).
  - Rationalize current spending, with priorities including better control of elevated public wage bills and more targeted, efficient income support and social protection programs (examples cited: recently implemented in Egypt and Morocco).
  - Improve fiscal frameworks to better anchor long-term fiscal expectations; MENAP and CCA lag other emerging markets on the IMF’s Fiscal Rule Strength Index.
- Empirical link highlighted:
  - Countries with strong fiscal rules—legally grounded, transparent, well-monitored and enforced, and resilient to shocks—tend to experience lower sovereign risk premiums, expanding fiscal space and enabling stronger countercyclical fiscal responses.

### Monetary policy and central bank independence
- Medium-term inflation is projected to remain elevated—and above target levels—in a few MENAP and CCA economies (Egypt, Kazakhstan, Tunisia), warranting a restrictive monetary policy stance.
- In countries where inflation is projected to converge toward central bank targets, a return to a neutral or accommodative stance should be carefully calibrated.
- For fixed exchange rate regimes, monetary policy must remain consistent with maintaining the peg.
- For more flexible exchange rates, monetary easing should be contingent on clear evidence that inflation expectations are firmly anchored.
- Across regimes, monetary policy decisions should be communicated clearly and transparently, with emphasis on safeguarding actual and perceived central bank independence.
- Risks of compromising central bank independence:
  - Compromising independence leads to higher inflation and risk premiums, eventually requiring a more prolonged period of tight monetary policy to re-anchor expectations.
  - Risks are amplified when monetary decisions are perceived as motivated by efforts to lower public financing needs.
- Forthcoming IMF research (Gershenson and others forthcoming) finds:
  - A 1 standard deviation improvement in central bank independence in the MENAP region could lead to a cumulative decline in inflation of between 0.5 and 0.75 percentage point (compared to the baseline) after four years.
- Financial stability considerations:
  - Close monitoring of the impact of potential tighter financial conditions on bank asset quality.
  - Authorities should be ready to recalibrate macroprudential policies and continue strengthening supervisory and regulatory frameworks.

### Exchange rate flexibility and shock absorption
- Given the risk of more frequent global shocks, exchange rate flexibility may play a greater role in cushioning shocks to economic activity.
- Staff empirical analysis (Box 1.3) shows:
  - The effectiveness of exchange rate flexibility as a shock absorber is greater as countries deepen financial markets and diversify away from commodities.
  - Adoption of a credible inflation targeting monetary policy regime with more flexible exchange rates could reduce output losses associated with an adverse global scenario in both MENAP and CCA economies.

### Structural reforms to build resilience and seize trade and AI opportunities
- Recent reforms supporting growth include:
  - Tax and energy sector measures in Pakistan.
  - Energy price reform in Uzbekistan.
  - Diversification agendas in Jordan, Morocco, and Saudi Arabia.
- Areas requiring further progress:
  - Private Sector Development:
    - Remove market barriers limiting entry for new firms and constraining small business/startup growth.
    - Reduce dominant role of state-owned enterprises, streamline burdensome regulations, enhance financial inclusion (especially for SMEs), and improve governance.
  - Trade Diversification:
    - Tackling structural barriers to deeper integration to diversify export markets and improve regional connectivity.
    - Forthcoming IMF research (Rayner and others forthcoming) shows a package of reforms for North Africa (improving trade logistics, fostering nearshoring, promoting trade liberalization, strengthening business environment) would boost North Africa’s real exports by 10 percent after 5 years.
  - AI Preparedness:
    - Emerging markets and LICs in MENAP and CCA lag GCC economies and peers in other regions on AI preparedness (index ranges 0 to 1; source: Cazzaniga and others 2024).
    - Gap driven by shortcomings in digital infrastructure, regulation, and innovation.
    - Rapid progress in digital infrastructure, regulation, and innovation is needed to avoid widening the income gap with advanced economies.
  - Labor Market Reforms:
    - IMF research suggests AI adoption could reduce job opportunities for young people; MENAP and CCA already have much higher youth unemployment rates compared to peers.
    - Policy responses: invest in human capital, implement more effective active labor market policies, update labor codes to encourage flexible job formats, provide targeted support for young job seekers.

### Recovery in economies emerging from conflict
- Successful economic recovery requires swift progress on:
  - Macroeconomic stabilization:
    - Reduce volatility in real output growth and inflation to increase odds of successful recovery.
    - Monetary measures: currency reform, elimination of monetary financing, rebuilding foreign exchange reserves.
    - Fiscal measures: control expenditure, boost domestic revenue mobilization to create space for reconstruction and social spending (protection of basic services, humanitarian aid).
  - Adequate Financing:
    - Securing sufficient financing is key; debt relief can free resources for rebuilding and help restore investor/donor confidence.
    - Support from international financial institutions, including the IMF, can be catalytic by unlocking further resources and strengthening policy frameworks.
  - Institutional and Governance Improvements:
    - Strengthened government effectiveness and accountability improves public service delivery, supports structural reform implementation, and ensures efficient use of resources.
    - Financing targeted to healthcare, infrastructure, and social protection can help jumpstart activity and improve living conditions.

### IMF engagement and support in the MENAP and CCA regions
- Since 2020, the IMF has approved $55.7 billion in financing for countries across MENAP and the CCA.
- $21.4 billion has been approved since early 2024 for programs in: Egypt (augmentation under the Extended Fund Facility, EFF, and a Resilience and Sustainability Facility, RSF), Jordan (EFF and RSF), Morocco (Flexible Credit Line), and Pakistan (EFF and RSF).
- Technical assistance and capacity development:
  - More than 385 technical assistance and capacity development projects across 31 countries in these regions, amounting to $36.8 million during fiscal year 2024/25.
- The IMF’s strong regional presence (resident representative offices, technical assistance centers, and office in Riyadh) supports close engagement on the ground.
- Coordination with the World Bank and regional partners to support recovery in conflict-affected states through policy advice, financial assistance, and capacity development.

### Box 1.1 — Caucasus and Central Asia: Growth Beyond Recovery (key findings)
- The CCA region experienced accelerated GDP growth over the past four years, exceeding projections; geopolitical realignments and the war in Ukraine reshaped the regional landscape.
- Factors contributing to growth include sustained inflow of skilled migrants (mainly from Russia), surges in financial capital inflows supporting credit growth, boosted infrastructure investment, and greater regional integration.
- Structural shifts have occurred in allocation of capital, labor, and entrepreneurship; some CCA economies are emerging as “adjustment hubs” attracting investment and talent.
- Potential output analysis (production function approach; capital via perpetual inventory method; labor via participation rates, NAIRU, and average hours worked; TFP as residual) indicates:
  - Regional weighted average potential growth rose from 4.2 percent in 2018–21 to 4.8 percent in 2022–25.
  - Oil-importing economies: potential growth increased from 5.0 to 6.1 percent, primarily driven by gains in total factor productivity due to inflows of high-quality capital and labor concentrated in IT and capital-intensive industries.
  - Oil-exporting economies: only modest improvements in potential growth, constrained by reliance on resource sectors and limited structural flexibility.

*Source: IMF, Regional Economic Outlook — Middle East and Central Asia (October 2025).*

### 1. Regional Developments and Economic Outlook: Resilience amid Uncertainty: Will It Last?

### 1. Regional Developments and Economic Outlook: Resilience amid Uncertainty: Will It Last?

### Fiscal rules, sovereign spreads, and resilience to global shocks
- Strong fiscal frameworks can anchor private sector expectations and indirectly contribute to lower sovereign spreads and higher credit ratings (Acalin and others 2025; Badinger and Reuter 2017; Sawadogo 2020; Islamaj, Penaloza, and Sommers 2024).
- Regional prevalence of formal fiscal rules:
  - Only one-quarter of economies in the MENAP and CCA regions have formal operational fiscal rules.
  - Two-thirds in emerging market and developing economies have formal operational fiscal rules.
  - Over 80 percent in advanced economies have formal operational fiscal rules.
- Fiscal Rule Strength:
  - MENAP and CCA regions are generally behind other regions on the IMF’s Fiscal Rule Strength Index; Georgia is the only exception.
  - A strong (weak) fiscal rule is defined as a score in the top (bottom) third of the Fiscal Rule Strength Index distribution.
- Empirical association with sovereign spreads:
  - Countries with “strong” fiscal rules typically enjoy lower sovereign spreads by about 400 basis points compared to those with weak or no fiscal rules.
  - Differences in spreads are also determined by government effectiveness (control of corruption/government effectiveness scores), the size of economic buffers, and debt levels.
  - Large buffers can explain why some GCC countries have better creditworthiness despite lacking formal fiscal rules.
- Impact on macroeconomic response to global shocks:
  - Empirical local projections (Jordà 2005) on a global panel over the past three and a half decades estimate how real output responds to adverse global shocks captured by a 1 standard deviation rise in the GDP-weighted World Uncertainty Index (equivalent to a jump from the 10th to 50th percentile of the historical distribution).
  - Economies in the top one-third of the Fiscal Rules Strength Index experience smaller output losses one year after an adverse global shock compared to those with weak or no fiscal rules.
  - After a global shock, economies with weaker fiscal frameworks exhibit:
    - Smaller decreases in the primary balance (more limited countercyclical policy response).
    - A significant increase in borrowing costs (higher spreads).
- Data and identification notes:
  - Sample used for sovereign spread regression: 57 countries over the period of 1996–2021.
  - Regression specification includes fixed effects and a control for global financial market volatility, with clustered standard errors.
  - Hollow bars in Box Figure 1.2.1 indicate associations not statistically significant at the 10 percent level.
  - Black lines in Box Figure 1.2.2 represent the 90 percent confidence interval.
  - An asterisk (*) denotes a statistically significant difference between groups.

### Monetary policy frameworks, exchange rate regimes, and shock transmission
- Regional stance and de facto regimes:
  - MENAP countries show a strong preference for exchange rate stability.
  - MENAP oil exporters commonly use pegged exchange rate regimes; GCC countries favor more open capital accounts.
  - MENAP oil importers typically use managed exchange rate regimes with less open capital accounts, preserving some monetary autonomy.
  - CCA countries lean toward greater monetary autonomy and more open capital accounts.
  - About half of MENAP and CCA countries operate under some form of de facto peg (IMF AREAER 2023 mapping).
  - Recent years show a gradual shift toward greater exchange rate flexibility, but most countries continue to favor managed regimes.
- Heterogeneous effects of exchange rate regimes:
  - Empirical analysis shows exchange rate regimes matter for adjustment to global uncertainty shocks, conditional on financial development and export diversification.
  - For economies with higher levels of financial market development and diversified exports:
    - A floating exchange rate regime is associated with a significant reduction in output losses after an adverse global shock compared to fixed/managed regimes.
  - For economies with low financial development and concentrated exports:
    - There is no discernible difference in impacts between fixed and floating regimes.
  - Strong (weak) financial market development and high (low) export diversification are defined relative to the global median.
  - A local projections approach is used; regressions include country fixed effects, two lags of shock, two lags of the dependent variable, and controls for conflict shocks, natural disasters, epidemics, Federal Reserve fund rates, and global oil prices.
- Model-based scenario using MCDMOD (Flexible System of Global Models):
  - A model-based analysis suggests adoption of credible inflation targeting regimes with flexible exchange rates could mitigate adverse output effects of global shocks for MENAP and CCA economies compared to current arrangements.
  - The adverse global shock scenario is drawn from the April 2025 World Economic Outlook and assumes higher trade barriers, global divergence (lower productivity in Europe, weaker demand in China, and a higher fiscal deficit in the United States), higher global uncertainty and tighter financial conditions.
  - The Flexible Exchange Rate (ER) scenario assumes all MCD countries switch from current ER regimes to flexible ER regimes.
  - Results are presented as Real GDP percentage change from baseline, averaged over the first two years, separately for MENAP and CCA.
  - The analysis abstracts from the transitional questions of how to move to more flexible exchange rate arrangements while maintaining or enhancing policy credibility.

### Key empirical magnitudes and specifications (numeric fidelity)
- Sovereign spreads: difference of about 400 basis points associated with “strong” vs. weak/no fiscal rules.
- Uncertainty shock definition: 1 standard deviation increase in the GDP-weighted World Uncertainty Index (equivalent to a jump from the 10th to 50th percentile).
- Regression sample and period for spreads: 57 countries, 1996–2021.
- Statistical notes:
  - Strong (weak) fiscal rule: top (bottom) third of Fiscal Rule Strength Index distribution.
  - Confidence intervals and significance markers used in figures: 90 percent confidence interval; 10 percent significance threshold; asterisk (*) denotes statistically significant differences between groups.

### Policy implications and interpretation
- Strengthening fiscal frameworks and adopting credible medium-term fiscal frameworks and fiscal rules can:
  - Bolster credibility of official projections.
  - Anchor private sector expectations of future fiscal policy.
  - Indirectly compress sovereign spreads and improve creditworthiness, which can provide additional fiscal space to respond to adverse global shocks.
- Exchange rate and monetary policy considerations:
  - Choice of exchange rate regime should account for countries’ levels of financial market development and export diversification.
  - Economies with well-developed financial markets and diversified exports could benefit from more flexible exchange rates combined with credible inflation targeting to reduce output losses from global shocks.
  - For economies with weak financial markets and concentrated exports, pegging may continue to support macroeconomic stability, and there may be limited gains from exchange rate flexibility.
- Transition considerations:
  - Model-based benefits from flexible ER and inflation targeting assume credibility; transitioning to these regimes requires careful sequencing and institutional support to preserve or enhance policy credibility.

*Prepared by IMF authors as presented in Boxes 1.2 and 1.3 of "Regional Developments and Economic Outlook: Resilience amid Uncertainty: Will It Last?" (October 2025), International Monetary Fund.*

### 2. Boosting Economic Recovery after

### 2. Boosting Economic Recovery after Conflict: Patterns and Policies

### Introduction
- Economic recovery from conflict requires restoring macroeconomic stability, rebuilding institutions, and securing resources for reconstruction.
- The chapter analyzes post-conflict recoveries using novel statistical analyses and selected case studies, focusing on the Middle East and North Africa, Afghanistan, and Pakistan (MENAP) and Caucasus and Central Asia (CCA) regions.
- Key policy dimensions examined: (1) macroeconomic stabilization, (2) access to financing including international support and debt relief, and (3) improvements in institutional quality.
- The chapter builds a dataset of post-conflict recovery episodes and distinguishes “successful” and “unsuccessful” recoveries.

### Assessing the Duration and Resilience of Post-Conflict Recoveries
- Data source: Uppsala Conflict Data Program’s Georeferenced Events Database (covering 1989–2024).
- Conflict definition: conflict intensity > 25 deaths per million population in a given year.
- Post-conflict episode definition: conflict intensity falls below 25 per million population for at least two consecutive years.
- Sample of post-conflict episodes (1989–2024): 121 total episodes
  - 20 in the MENAP region
  - 8 in the CCA region
  - 93 in other regions
- Peace duration and fragility
  - Peace tends to be shorter and more fragile in the MENAP region; probability of sustaining peace falls below 50 percent after 10 years.
  - MENAP conflicts are on average more intense than CCA and the rest of the world (conflict intensity measured as average annual per-capita conflict-related deaths per million).
- Five-year post-conflict GDP per capita growth (average)
  - MENAP: less than 1 percent
  - CCA: 4.8 percent
  - Rest of the world: 2.2 percent
- Classification of successful recoveries
  - Successful if: (1) GDP per capita returns to pre-conflict projected path (IMF WEO) within five years, and (2) peace is sustained over those five years.
  - Result: Only about one-third of the episodes in the MENAP and CCA regions and the rest of the world can be categorized as successful.
- Stylized macroeconomic comparisons (successful vs failed)
  - During conflict (five years before conflict end), output lags pre-conflict trend for all economies; MENAP and CCA further behind than elsewhere.
  - After conflict:
    - Successful recoveries (rest of the world excluding MENAP/CCA): output exceeded pre-conflict projected trends by about 12 percent on average.
    - Successful recoveries (MENAP and CCA): output exceeded pre-conflict projected trends by about half a percent on average.
    - Failed recoveries (MENAP and CCA): output fell 17 percent below trend.
    - Failed recoveries (rest of the world): output fell 3 percent below trend.
  - Investment and consumption dynamics (MENAP and CCA)
    - Successful recoveries: real gross capital formation up by nearly 75 percent on average within five years of conflict ending; real consumption rebound 25 percent.
    - Failed recoveries: investment growth typically does not turn positive until the fourth year; consumption lags significantly.
  - Rest of the world five-year rebounds (successful recoveries): real gross capital formation up 50 percent; real consumption up 20 percent.
  - Successful recoveries also show greater increases in gross remittances, net exports, and official development assistance in grants within the first five years after conflict.
- Factors associated with recovery outcomes (bivariate observations)
  - Prior conflict characteristics: recoveries more likely to be successful when prior conflict is shorter, less intense, and not a civil war.
  - Fiscal allocation: success is more common when governments allocate greater fiscal resources to restoring public order and safety after conflict.
  - Security: fragile peace or persistent security threats raise reconstruction costs and deter investment (case study evidence: Afghanistan).
  - International support and governance: higher levels of grant-based official development assistance and stronger governance after conflict are associated with better outcomes.
  - Differences between successful and failed recoveries in MENAP and CCA tend to be larger on average than in the rest of the world across most characteristics.

### Conditions and Policies Supporting Post-Conflict Recovery (Multivariate Analysis)
- Method: logistic regressions with binary dependent variable (successful = 1, unsuccessful = 0).
- Explanatory variables capture: (1) macroeconomic stabilization, (2) financing and international support, (3) structural policies and institutions. Controls include prior conflict duration and intensity.
- Results are associational and suggestive, not causal.

### Macroeconomic Stabilization
- Rationale: Stabilizing the economy early after conflict lowers uncertainty, builds confidence, and supports rebound of investment and consumption—especially important where institutions and financial markets are weak.
- Measure: first principal component of volatilities in real output growth and inflation across post-conflict episodes as a measure of macroeconomic volatility.
  - Output growth volatility: average squared deviation of real per-capita GDP growth relative to its mean in the first five years of peace.
  - Inflation volatility: average squared deviation of CPI inflation relative to a 5 percent benchmark in the first five years of peace.
- Key quantitative association
  - Economies experiencing higher macroeconomic volatility in the first five years of peace are less likely to achieve a successful recovery.
  - An increase equivalent to a jump from the 25th to the 75th percentile of macroeconomic volatility across post-conflict cases is associated with a more than 25 percent drop in the odds ratio of success.
- Interpretation note: Estimated probability of success conditional on macroeconomic volatility is derived from a logistic regression that controls for conflict duration and intensity.

*Italic line: Chapter prepared by Faris Abdurrachman, Vizhdan Boranova, Serpil Bouza (co-lead), Bronwen Brown, Hannah Brown, Muhammad Ejaz, Radhika Goyal, Borislava Mircheva (co-lead), Thomas Piontek, Bilal Tabti, and Subi Suvetha Velkumar.*

### 2. Boosting Economic Recovery after Conflict: Patterns and Policies

### 2. Boosting Economic Recovery after Conflict: Patterns and Policies

### Macroeconomic stabilization
- A shift toward greater financial openness over the first five years of peace is significantly associated with a higher likelihood of success; measured by changes in the Chinn-Ito index of capital account openness.
- Financial openness improvements reflect actions such as lowering restrictions on capital and current account transactions, unifying multiple exchange rates, and reducing surrender requirements for export proceeds.
- Public spending on social protection and health supports macroeconomic stabilization by delivering basic public and social services that help maintain social cohesion, promote inclusion, and support lasting peace.
- Estimated effects of social spending (average during the first five years post-conflict, measured as percent of GDP):
  - Each additional 1 percent of GDP spent on social protection is associated with 15 percent higher odds ratios of a successful recovery.
  - Each additional 1 percent of GDP spent on health is associated with 42 percent higher odds ratios of a successful recovery.
  - Each additional 1 percent of GDP spent on housing and community is associated with 119 percent higher odds ratios of a successful recovery.
- Case evidence:
  - Afghanistan: currency reform and reined-in monetary financing curbed inflation; introduction of the Afghani in 2002 stabilized the exchange rate and reduced multiple-currency dominance.
  - Rwanda: unification of parallel exchange markets supported stabilization.

### Financing and international support
- Conflict-affected states often face severe debt vulnerabilities and damaged productive capacity that constrain resource mobilization once peace is restored.
- External financial support from international donors and creditors—through debt relief, grants, or concessional financing—can expand fiscal space and boost recovery efforts.
- Debt restructuring findings:
  - Cases where restructuring occurred during the conflict or within five years after the onset of peace are associated with an over 50 percent higher estimated probability of a successful recovery compared with cases without any restructuring.
  - Note: other unobserved factors (for example, commitment to structural reforms, governance improvements, sounder policies) may also drive the incidence of restructuring agreements.
- Non-financial support matters:
  - Weak absorptive capacity in post-conflict economies makes sequencing of structural reforms important.
  - IMF capacity development and institution-building support have been extensive, with an average of about 56 capacity development missions over five years in both successful and failed post-conflict recovery cases.
  - Largest shares of assistance: fiscal and financial sector issues, followed by legal frameworks and data systems.
- Case evidence:
  - Afghanistan: significant debt relief and donor assistance freed resources; IMF technical assistance was instrumental in building monetary and fiscal institutions.
  - Rwanda: fiscal space from debt relief and additional external aid flows was used to safeguard productive investments.

### Institutions and structural reforms
- Stronger institutions and better governance at the onset of peace increase the likelihood of successful recovery.
- Measured relationships:
  - Economies with stronger institutional quality (average of the Worldwide Governance Indicators) at the onset of a post-conflict episode are more likely to recover successfully.
  - A 1 standard-deviation improvement in overall institutional quality during the first five years of peace—comparable to moving from the 10th to the 75th percentile—is associated with roughly double the odds ratio of a successful recovery.
  - Most impactful gains are in government effectiveness, voice and accountability, political stability, and—to a certain extent—control of corruption.
- Structural reforms are an important part of recovery:
  - Afghanistan focused on strengthening fiscal and monetary institutions.
  - Rwanda implemented reforms to improve governance, including privatization of state-owned entities.

### Quantifying roles of policies
- The three categories of policy-related drivers analyzed are: macroeconomic stabilization, financing and international support, and institutions and structural reforms.
- Variation in macroeconomic stabilization efforts and financing support (captured by macroeconomic volatility, social spending, and debt restructuring episodes) account for the bulk of the policy-related variation in the odds of success; institutions and structural reforms (captured by initial institutional quality) account for the rest.
- No major differences were found in the relative contribution of these factors across MENAP, the CCA, and the rest of the world, suggesting lessons from other regions are relevant for MENAP and CCA economies.

### Lessons from case studies (Afghanistan, Iraq, Rwanda, Somalia)
- Four important lessons highlighted by case studies:
  - Well-coordinated donor assistance—especially when mobilized within the economy’s fiscal frameworks—can enhance the impact of external support (Afghanistan); formal operational donor coordination mechanisms may increase aid effectiveness (Somalia).
  - Economic stabilization efforts must be accompanied by structural reforms aimed at improving governance and economic liberalization (Rwanda).
  - Maintaining political stability is essential to sustain reform momentum (Rwanda) and to avoid relapsing into conflict (Afghanistan).
  - International institutions play a role beyond financing by coordinating international support and providing technical assistance (Iraq); IMF assistance helped rebuild Afghanistan’s fiscal and monetary institutions.
- Caveats from cases:
  - Success is not guaranteed—overlapping adverse shocks (Iraq) and persistent security challenges (Afghanistan, Iraq, Somalia) can derail recovery.
  - Continued technical assistance and engagement supported long-term reconstruction and institutional development in Rwanda.

### Policy implications and conclusions
- Three core priorities emerge from the statistical analysis:
  - Macroeconomic stabilization (immediate priority).
  - Securing external financing—including international support and debt relief.
  - Strengthening institutions.
- Additional practical takeaways:
  - Well-coordinated donor assistance can enhance external support effectiveness.
  - Sequencing of policy actions matters; stabilization typically provides more immediate improvements to the economic environment, while institutional and structural reforms take longer to manifest benefits.
  - Political stability is essential to maintain reform momentum.
  - International institutions matter beyond financing through support for institution building and technical assistance.
- Political economy and operational design issues remain important and can affect recovery durability; external shocks to global demand, trade policies, and financing conditions may interact with policies and their design, particularly in fragile economies—issues for future research.

*International Monetary Fund, October 2025.*

### 2. Boosting Economic Recovery after Conflict: Patterns and Policies

### 2. Boosting Economic Recovery after Conflict: Patterns and Policies

### Case studies: Iraq, Rwanda, Somalia
- Iraq
  - IMF role: coordinating international support, providing financial and technical assistance, and helping authorities build a sound macroeconomic framework and institutional capacity for fiscal and monetary policies.
  - IMF-supported programs established a strong track record of reform commitment, paving the way for substantial debt relief.
  - The stock of debt held by Paris Club creditors was reduced by 80 percent in three phases, contingent on the successful approval and completion of IMF programs.
  - External shocks—especially fluctuations in oil prices—and prolonged security challenges repeatedly tested the authorities’ resolve to maintain macroeconomic stability.
  - Key lesson: recurring security challenges in resource-dependent states can prolong conflict, derail reform, and hinder a durable recovery.

- Rwanda (1990–98)
  - Recovery highlights the importance of early institutional reform in post-conflict settings.
  - After adopting a new constitution in 2003, authorities pursued a sequenced structural reform agenda prioritizing fiscal consolidation and institution building before broader market liberalization.
  - Between 1997 and 2004, 27 key reforms were implemented, including efforts to strengthen budget transparency, reduce the state’s economic footprint through privatization, and introduction of a system of foreign exchange auctions that helped the central bank achieve a market-clearing exchange rate without excess volatility.
  - Reforms enabled macroeconomic stabilization and regaining control over public finances.
  - Improved governance supported by creation of a centralized bureau to implement donor-financed aid projects and increased spending in socially-productive sectors (rural and agricultural transformation, human development, and institutional capacity) anchored donor confidence and paved the way for debt relief.
  - Rwanda reached the Heavily Indebted Poor Countries decision point in 2000 and qualified for the Multilateral Debt Relief Initiative in 2006, resulting in external debt reduction exceeding $1 billion.
  - Takeaways:
    - Establishing strong fiscal institutions and governance frameworks early provides a stable foundation for recovery.
    - A firm commitment to reform creates a durable foundation for recovery by sustaining reform momentum coupled with continued political stability, international support, and strong local ownership.

- Somalia (1989–Ongoing)
  - Path from state collapse to gradual rebuilding shaped by domestic reform commitment and sustained international engagement.
  - The 2008 Djibouti Agreement and the 2012 Provisional Constitution established a federal framework enabling renewed external support and space for state-building.
  - Since 2016, Somalia implemented more than 100 structural measures under IMF-supported programs, alongside reforms supported by the World Bank and other partners.
  - Areas of reform: tax policy and administration, public financial management, debt management, financial regulation and supervision, anti-money laundering and countering the financing of terrorism, governance, and statistics.
  - Tangible outcomes: improved revenue mobilization, modernized public financial management processes, strengthened central bank capacity, and greater transparency and accountability.
  - A major milestone in 2023: $4.5 billion in debt relief under the Heavily Indebted Poor Countries Initiative, restoring external sustainability and unlocking further financing.
  - Donor contributions to the Somalia Country Fund were instrumental in ensuring the IMF’s sustained provision of capacity development support.
  - Illustrative lessons: fragile and conflict-affected states can progress toward stability and development, but this requires strong domestic commitment, predictable international support, carefully sequenced reforms, and long-term adaptability; progress remains contingent on continued reform ownership and adaptation to shocks.

### Patterns and policy-relevant findings
- Institutional sequencing and early reforms
  - Prioritizing fiscal consolidation and institution building before market liberalization (Rwanda example) can stabilize the macroeconomy and restore donor confidence.
- Role of international support and debt relief
  - IMF coordination of international support, conditional IMF programs, and phased debt relief (Iraq: Paris Club debt reduced by 80 percent in three phases) can unlock recovery pathways.
  - Large-scale debt relief can restore external sustainability and unlock financing (Somalia: $4.5 billion HIPC relief in 2023).
- Importance of reform ownership and sequencing
  - Strong domestic ownership of reform strategies and carefully sequenced structural measures (Somalia: more than 100 measures since 2016) are central to achieving durable outcomes.
- Vulnerability of resource-dependent and fragile states
  - Resource dependence and recurring security challenges can derail reforms and prolong conflict (Iraq lesson).
- Donor coordination and governance
  - Centralized mechanisms to implement donor-financed projects and increased spending in socially-productive sectors can anchor donor confidence and facilitate debt relief (Rwanda experience).

### Selected quantitative outcomes and milestones (from case studies)
- Iraq: Paris Club creditors’ stock of debt reduced by 80 percent in three phases (contingent on IMF program approval and completion).
- Rwanda:
  - 27 key reforms implemented between 1997 and 2004.
  - Reached HIPC decision point in 2000.
  - Qualified for Multilateral Debt Relief Initiative in 2006, resulting in external debt reduction exceeding $1 billion.
- Somalia:
  - Implemented more than 100 structural measures since 2016 under IMF-supported programs.
  - 2023 debt relief of $4.5 billion under the Heavily Indebted Poor Countries Initiative.

### Selected regional indicators (year-over-year percent change, unless otherwise indicated)
- Middle East and North Africa Region, Afghanistan, and Pakistan (MENAP)
  - Real GDP Growth: 2.1 3.2 3.7 3.7
  - Current Account Balance (percent of GDP): 2.9 1.6 1.2 1.1
  - Overall Fiscal Balance (percent of GDP): –2.3 –2.9 –2.8 –1.4
  - Inflation (period average): 15.2 11.2 9.8 6.4
- MENAP Oil Exporters
  - Real GDP Growth: 2.5 3.0 3.4 3.0
  - Non-oil GDP Growth: 4.0 2.9 2.9 3.1
  - Current Account Balance (percent of GDP): 5.2 3.4 2.9 2.9
  - Overall Fiscal Balance (percent of GDP): –1.0 –1.5 –1.4 –0.7
  - Inflation (period average): 8.5 10.1 10.0 6.8
- Gulf Cooperation Council (GCC)
  - Real GDP Growth: 2.2 3.9 4.3 3.4
  - Non-oil GDP Growth: 4.3 3.8 3.6 3.6
  - Current Account Balance (percent of GDP): 7.1 4.9 4.3 3.7
  - Overall Fiscal Balance (percent of GDP): 1.8 0.8 0.9 1.2
  - Inflation (period average): 1.6 1.7 2.0 2.0
- MENAP Non-GCC Oil Exporters
  - Real GDP Growth: 2.9 1.8 2.2 2.6
  - Non-oil GDP Growth: 3.6 1.7 1.9 2.5
  - Current Account Balance (percent of GDP): 0.8 –0.3 –0.6 0.8
  - Overall Fiscal Balance (percent of GDP): –7.6 –7.1 –7.2 –5.5
  - Inflation (period average): 17.9 21.8 21.6 13.8
- MENAP Oil Importers
  - Real GDP Growth: 1.6 3.5 4.1 4.7
  - Current Account Balance (percent of GDP): –3.8 –3.3 –3.6 –3.3
  - Overall Fiscal Balance (percent of GDP): –5.9 –6.9 –6.5 –3.2
  - Inflation (period average): 26.5 13.1 9.4 5.7
- MENAP Emerging Market and Middle-Income Economies
  - Real GDP Growth: 2.3 3.6 4.1 4.7
  - Current Account Balance (percent of GDP): –3.5 –3.1 –3.3 –3.1
  - Overall Fiscal Balance (percent of GDP): –6.2 –7.3 –6.7 –3.3
  - Inflation (period average): 24.9 11.8 8.4 5.4
- MENAP Low-Income Countries
  - Real GDP Growth: –6.2 2.2 5.6 4.9
  - Current Account Balance (percent of GDP): –7.6 –5.4 –7.3 –6.1
  - Overall Fiscal Balance (percent of GDP): –1.9 –2.3 –3.1 –2.2
  - Inflation (period average): 47.9 39.7 28.6 11.1
- Middle East and North Africa (MENA)
  - Real GDP Growth: 2.1 3.3 3.7 3.6
  - Current Account Balance (percent of GDP): 3.2 1.7 1.3 1.3
  - Overall Fiscal Balance (percent of GDP): –1.9 –2.6 –2.6 –1.3
  - Inflation (period average): 14.2 12.2 10.3 6.4
- Caucasus and Central Asia (CCA)
  - Real GDP Growth: 5.5 5.6 4.7 4.0
  - Current Account Balance (percent of GDP): –1.4 –2.0 –3.0 –3.3
  - Overall Fiscal Balance (percent of GDP): –1.1 –2.4 –2.4 –1.7
  - Inflation (period average): 6.7 8.6 8.0 5.3

*Source: INTERNATIONAL MONETARY FUND, October 2025 (text unit: "2. Boosting Economic Recovery after Conflict: Patterns and Policies").*

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_Source: https://www.imf.org/-/media/files/publications/reo/mcd-cca/2025/october/english/text.pdf_