## BOX 1. THE AMMAN CONFERENCE ON JOBS, GROWTH, AND FAIRNESS

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### I. Regional economic outlook and key challenges — summary findings
- Despite deepening and spreading conflicts and challenging domestic socio-political environments, the Arab Countries in Transition (Egypt, Jordan, Libya, Morocco, Tunisia and Yemen) have broadly maintained macroeconomic stability.
- Economies are not delivering the growth rates needed for a meaningful reduction in unemployment, particularly for youth and women.
- Countries should quickly advance structural reforms to foster higher and more inclusive growth, and continue to strengthen fiscal and external buffers to maintain stability amid heightened uncertainty.
- Coordinated international support is crucial in the form of financing, improved trade access, and capacity building assistance.

### A. Background and recent developments
- A challenging regional and domestic setting:
  - Deepening and spreading conflicts:
    - The violence from the Syrian civil war, now in its fourth year, has spread to Iraq, a new conflict has erupted in Gaza, and Libya has been drawn deeper into a violent struggle among competing groups.
    - The region has to cope with over 11 million displaced people, according to the U.N., many of whom seek a safe haven in neighboring countries.
    - Consequences for budgets, labor markets, social cohesion and security are particularly pronounced in Lebanon and Jordan; Tunisia is affected by spillovers from the conflict in Libya.
  - Difficult socio-political environment:
    - Governments in Jordan and Morocco now have multi-year horizons, and Egypt and Tunisia will conclude parliamentary elections in 2014-15.
    - Political uncertainty is high in Libya and Yemen; investor confidence remains low.
    - ACT governments face challenges in achieving public buy-in for politically sensitive but economically important reforms.
- Macroeconomic stability broadly maintained (ACTs excluding Libya):
  - Growth has remained positive.
  - Inflation is firmly in single digits, except for Egypt.
  - Budget deficits in most countries have begun to decline in 2014.
  - External current account deficits are gradually narrowing and reserve buffers have strengthened.
- Slow and uneven progress with structural reforms:
  - Most ACTs have started or announced ambitious reforms of generalized energy subsidies and other current expenditures to create space for better targeted social protection and higher spending on infrastructure, healthcare, and education.
  - Progress has been uneven across countries; reforms of tax policy, civil service, and public financial management remain quite slow.
  - More attention is needed in banking and financial sectors, governance, business climate, and labor markets.

### B. Short-term outlook
- Growth projections and macro dynamics:
  - Growth in the ACTs (excluding Libya) is likely to be limited to 2½ percent in 2014 and 3-4 percent in 2015.
  - Weak domestic demand and favorable commodity prices are expected to keep inflation relatively stable and, for most countries, in the single digits.
  - Current account deficits should narrow and reserve buffers strengthen.
  - Slow growth will likely cause public debt ratios and debt service obligations to rise from already high levels and financing needs will remain elevated.
  - The projected growth performance remains far below the sustained 6 to 7 percent rates needed to achieve a meaningful reduction in unemployment and improved living conditions for broader populations.
- Risks tilted to the downside:
  - Conflicts and spillovers are the most important downside risk.
  - A spike in oil prices and continued massive inflows of refugees would have a strong negative impact.
  - Further disruption of trade flows or a generalized loss of confidence vis-à-vis the Middle East and North Africa could worsen outcomes.
  - Weaker-than-expected global—in particular European—growth could affect recovery of tourism, exports and foreign investment especially for the Maghreb countries.
  - ACTs should be less affected by a normalization of interest rates in the United States, given limited exposure to international financial markets.

### C. Short-term policy issues — recommended priorities
- Consolidating macroeconomic stability:
  - Fiscal consolidation:
    - Continue with subsidy and safety nets reforms.
    - Intensify revenue reforms to raise tax takes and increase fairness through broadening tax bases and enhancing collection efforts while minimizing effects on consumption.
    - Improve public financial management.
  - External sector policies:
    - Allow more exchange rate flexibility where appropriate.
    - Improve monetary transmission mechanism through expansion of interbank markets.
    - Tighten monetary policy if upside inflationary risks emerge.
- Escaping the unemployment trap:
  - With private investors largely on the sidelines, restoring confidence and reviving private sector-led job creation will take time.
  - Short-term gains in employment could come from more externally financed public investment in infrastructure and basic services.
    - This approach would also provide space for deeper structural reforms.
    - Implementing this agenda requires substantial donor support, credible commitments to reforms by authorities, adequate project-execution capabilities, and significant capacity building assistance.
    - Efforts to maintain debt and fiscal sustainability would need to continue in the medium term.
  - Related quantitative note (from referenced separate report discussed in December 2013):
    - An additional investment of a cumulative five percent of GDP over a five-year horizon could create between 0.4 and 0.8 million permanent jobs across the ACTs.

### D. Medium-term challenges and the inclusive growth agenda
- The inclusive growth imperative:
  - Sustainably higher and more inclusive growth is necessary to address root causes of inequities and social tensions: high unemployment and unequal economic opportunities (especially among youth and women); rural-urban disparities in access to water and basic services; and limited access to credit and procurement contracts for small businesses.
- Key elements of the inclusive growth agenda (priorities to be set by country context):
  - Enhance spending quality and increase fairness in fiscal policy:
    - Continue subsidy reforms and strengthen safety nets.
    - Reorient spending to infrastructure projects to decrease regional disparities.
    - Implement revenue measures to strengthen tax takes while leveling the playing field for small businesses.
    - Improve public financial management.
  - Strengthen the business climate:
    - More efficient business registration processes and better competition policies to boost firm creation.
    - Better insolvency regimes to reduce entrepreneurship risk.
    - Improve credit information systems, collateral regimes, and corporate disclosure requirements to improve access to finance for small- and medium-sized firms.
  - Improve education, training, and labor market policies:
    - Facilitate youth employment by implementing education and vocational training reforms in collaboration with prospective employers to build skills needed by the private sector.
    - Increase incentives for private sector employment relative to public sector jobs.
    - Develop targeted measures for women, such as greater access to child-care and parental leave.
    - Strengthen incentives for firms in the informal economy to enter the formal sector.
    - Review labor market regulations (especially to reduce disincentives for hiring) and better enforce them.

### Conference overview
- Event: “Building the Future: Jobs, Growth, and Fairness in the Arab World.”
- Hosts: IMF jointly with the Arab Fund for Economic and Social Development and the Government of Jordan.
- Date: May 11-12, 2014.
- Participants: Nearly 300 senior policymakers, private sector representatives, civil society, academics, media and IFI representatives.
- Shared priority: Boost employment across the region; translate conference agenda into country-tailored policy recommendations through ongoing Fund dialogue with authorities.

### Main policy debates and consensus findings
- Macroeconomic policies
  - Top priority: a strong and shared vision in each country to guide the economic future.
  - Importance of improving the composition of government spending to achieve more fairness, more efficiency, and more inclusive growth.
- Promoting good governance
  - Transparency and governance require significant improvement in public and private sectors.
  - Recommendations: establish more accountability vis-à-vis citizens, strengthen the judicial system, and build credibility to attract investors.
- Job creation
  - Creating more jobs for youth and women requires a comprehensive reform approach.
  - Key elements: change perception of the state as chief employer; create education systems that lead to productive employment; design labor market regulations that protect workers without unduly constraining employers.
- Improving the business climate
  - Move away from privileged access toward competition.
  - Strong support for streamlining red tape for firm setup, improving access to credit, and implementing less punitive insolvency frameworks.

### Policy recommendations emphasized at the conference
- Increase transparency and better governance
  - Maintain and intensify public financial management reforms and budget transparency efforts.
  - Increase use of online public service solutions to minimize corruption and enhance service delivery efficiency.
  - Invest in enforcement to improve efficiency and fairness of regulations and create a level playing field.
- Role of the international community (support for Arab Countries in Transition, ACTs)
  - Scaling-up external financial support
    - External official disbursements since the onset of the Arab Spring totaled around US$80 billion and have covered only part of transition financing gaps.
    - Larger and more predictable financial support is critical for smoother fiscal consolidation and increased public spending on infrastructure and basic services.
    - Conflicts in the region could lead to additional financing needs beyond current projections.
  - Facilitation of trade and FDI
    - Progress needed on agreements to promote trade, harmonization of trade regulations convergence, and FDI to build market-based recoveries and sustained growth.
  - Capacity building assistance
    - Technical assistance areas: public finance management, social safety nets, civil service, financial sectors (to improve access to finance for small- and- medium-scale enterprises), tax and customs policy and administrations, pensions, education and other social sector policies.
    - Deauville Partnership’s Transition Fund supported 53 projects with a total volume of US$171.8 million as of September 2014.

### IMF engagement and support statistics (as presented)
- Since the start of the Arab Spring, the Fund approved a total of US$ 4.4 billion in disbursing programs for Jordan, Tunisia, and Yemen.
- Morocco supported since July 2014 with a Precautionary and Liquidity Line of US$ 5 billion.
- The Fund stands ready to engage in program discussions with Egypt should authorities request support.
- Capacity development: about 30 technical assistance missions and training to more than 400 participants from the ACTs in various courses so far in 2014.
- Continued regional technical assistance through IMF-Middle East Regional Technical Assistance Center and joint training institute in Kuwait.

### Key statistics from the “Arab Countries in Transition: Financing Needs” table (Est./Proj., Billions of U.S. dollars)
- Current account deficit (excl. official transfers): 2011: 26.1; 2012: 33.4; 2013: 28.4; 2014: 34.0; 2015: 33.0
- External amortization: 2011: 14.3; 2012: 14.3; 2013: 15.5; 2014: 21.5; 2015: 34.4
- External gross financing needs: 2011: 40.3; 2012: 47.7; 2013: 43.9; 2014: 55.5; 2015: 67.4
- Budget deficit (excl. grants): 2011: 37.1; 2012: 47.0; 2013: 56.2; 2014: 61.6; 2015: 57.6
- Public external amortization: 2011: 5.4; 2012: 5.3; 2013: 5.5; 2014: 6.2; 2015: 9.4
- Fiscal financing needs: 2011: 42.5; 2012: 52.3; 2013: 61.7; 2014: 68.7; 2015: 66.9

### Selected actionable priorities for policymakers (synthesized from conference conclusions)
- Anchor fiscal reforms within transparent medium-term fiscal frameworks to guide expectations and sustainability.
- Prioritize reforms that boost employment: education reforms aligned to labor market needs; labor regulation adjustments; remove state-as-employer dependence.
- Improve business climate: streamline firm entry processes, enhance access to credit, modernize insolvency and land laws, and remove privileged access.
- Strengthen governance and transparency: reinforce judicial independence, increase budget and public financial management transparency, deploy e-government solutions.
- Mobilize predictable external financing and donor coordination to support smoother adjustment, infrastructure, and social spending during transitions.
- Scale up capacity building in public financial management, tax/customs administration, social protection, financial sector access for SMEs, and human capital development.

### Morocco — Outlook, Risks, and Policy Priorities
- Current account deficit is expected to continue to improve as a result of:
  - the reduction in the fiscal deficit,
  - improved external demand,
  - lower global energy prices,
  - and the rapid developments of exports from newly developed sectors.
- Risks:
  - A protracted period of slower growth in the advanced trading partners, especially in the euro area, could have sizeable spillovers to growth and the balance of payments.
  - Geopolitical risks in the Middle East as well as in Ukraine/Russia could trigger higher oil prices and put pressure on both the current and fiscal accounts.
  - A surge in global financial market volatility, related to the exit from unconventional monetary policies in large advanced economies, could hamper Morocco’s access to international capital markets and indirectly affect FDI.
  - Pressing social demands in the context of ongoing tensions in the region could slow the pace of reforms.
- Short-term policy issues:
  - Authorities aim to consolidate recent gains and ensure continued macroeconomic stability by rebuilding fiscal and external buffers while moving ahead with reforms to boost competitiveness, growth and employment.
  - The authorities’ plan for fiscal consolidation strikes an appropriate balance among those objectives and is supported by reforms (tax, subsidy, pension, new organic budget law) that will strengthen the fiscal framework and reduce fiscal risks.
- Reforms for inclusive growth:
  - Employment and labor force participation rates have not increased substantially and remain relatively low compared to other emerging markets.
  - Unemployment rate declined from more than 13 percent in 2000 to 9 percent in 2013; youth unemployment remains elevated at 19 percent.
  - Over the past decade about 1.7 million people have moved out of poverty and the poverty rate has decreased by more than 40 percent.
  - Inequality in access to health services remains high, as does gender inequality.
  - Recommended reforms include measures to improve competitiveness, achieve higher potential growth and reduce unemployment:
    - improve the business environment,
    - improve access to finance,
    - strengthen governance and the judicial system,
    - improve functioning of the labor market.
  - Continue initiatives such as the National Initiative for Human Development and education and health programs for the poorest.
  - Fiscal policies aimed at reducing spending on generalized subsidies to create space for investment and social spending to reduce income inequality.
  - Tax policies (including the reduction of tax expenditures) to create more space for social spending and more competitiveness.

### Tunisia — Political Transition, Macroeconomic Developments, and Reform Agenda
- Context and near-term outlook:
  - The holding of legislative and presidential elections in 2014 is expected to reduce political uncertainty and strengthen investor confidence.
  - Tunisia faces timid growth and rising external imbalances that have continued to put pressure on the exchange rate and reserves.
  - Prudent fiscal policy, a tight monetary policy and greater exchange rate flexibility will help reduce higher external and fiscal deficits and anchor inflationary expectations.
  - High youth unemployment and regional disparities are key challenges for more inclusive growth.
  - Key priorities: improving budget composition while protecting the most vulnerable, reducing banking sector vulnerabilities, and advancing reforms to improve the business climate.
  - The fourth review under the IMF’s Stand-by Arrangement (SBA) was completed in August 2014.
- Recent developments:
  - Technocratic government determined to maintain economic stability and pursue structural reforms during 2014.
  - Legislative elections scheduled for October 26, and two rounds of presidential elections planned for end-November and end-December expected to complete the political transition.
  - Five-year economic vision presented at the September “Invest in Tunisia” conference will guide the reform agenda.
  - Weaker oil and gas production slowed growth to 2 percent (y-o-y) in Q2 2014.
  - Inflation remained contained at about 5.6 percent (y-o-y) at end-September.
  - Despite a 10 percent depreciation of the exchange rate since mid-March, the current account deficit continues to widen mostly because of higher energy and food imports.
  - Under-execution in current and capital outlays and strong revenue collection helped contain the end-June fiscal deficit to 1.7 percent of GDP, 1 percentage point of GDP lower than programmed.
  - The fourth review under Tunisia’s two-year SBA arrangement (US$1.7 billion) with the IMF was concluded in August 2014.
- Short-term outlook and projections:
  - Growth is expected to reach 2.4 percent in 2014, driven by some acceleration in manufacturing and services activity.
  - Growth projections for 2015 revised down to 3 percent to reflect weaker-than-expected external demand and remaining investor uncertainty.
  - Tunisia: Selected Economic Indicators, 2011 - 2015 (Percent of GDP, unless otherwise indicated) — Est./Projections
    - GDP growth, percent: 2011: -1.9; 2012: 3.7; 2013: 2.3; 2014: 2.4; 2015: 3.0
    - CPI inflation, period average, percent: 2011: 3.5; 2012: 5.6; 2013: 6.1; 2014: 5.7; 2015: 5.0
    - Central government balance, excl. grants: 2011: -3.5; 2012: -5.7; 2013: -6.2; 2014: -6.4; 2015: -4.6
    - Current account balance: 2011: -7.4; 2012: -8.2; 2013: -8.3; 2014: -7.9; 2015: -6.3
    - Fiscal financing needs, (excl. grants), US$ billion: 2011: 2; 2012: 3.0; 2013: 3.8; 2014: 3.9; 2015: 4.1; 2015 (alt): 2.9
    - External financing needs (excl. grants), US$ billion: 2011: 3; 2012: 10.7; 2013: 11.1; 2014: 12.0; 2015: 11.9; 2015 (alt): 10.0
    - Public debt: 2011: 44.5; 2012: 44.5; 2013: 44.8; 2014: 51.0; 2015: 55.3
    - External debt: 2011: 48.0; 2012: 53.8; 2013: 54.0; 2014: 55.4; 2015: 61.2
    - Reserves in months of imports: 2011: 3.4; 2012: 3.9; 2013: 3.4; 2014: 3.6; 2015: 4.3
  - Inflation expected to continue downward due to moderating international commodity prices and prudent monetary policy.
  - Current account deficit expected to narrow to around 7.9 percent of GDP for 2014, then decline to 6.6 percent of GDP in 2015 because of:
    - lower food imports benefiting from a strong agricultural season,
    - reduced energy imports,
    - a recovery in phosphate and tourism industries.
  - Further fiscal consolidation and greater exchange rate flexibility will contribute to narrowing the current account deficit and boost gross official reserves above 4 months import coverage in 2015.
- Risks:
  - Spillovers from the crisis in Libya—including increased security tensions and refugee inflows—could further undermine economic activity.
  - An upsurge in social unrest ahead of the elections could hinder investment; delays in forming a post-elections government could weigh on reform implementation.
  - A protracted period of slower growth in advanced and emerging market economies—particularly in Europe—or higher commodity prices would further slow economic activity and exacerbate existing imbalances.
- Short-term policy issues:
  - Maintain macroeconomic stability amid difficult domestic and international environment.
  - Further fiscal consolidation over the next few months to help reduce financing constraints and contain external imbalances.
  - Implement a tight monetary policy and a more flexible exchange rate policy to reduce external vulnerabilities, improve price competitiveness, and rebuild foreign exchange buffers.
- Reforms for Inclusive Growth:
  - High unemployment—particularly among the youth: 31.4 percent unemployment rate as of March 2014, with a 40.8 percent rate for women.
  - Low female labor force participation: 27 percent vs. 75 percent for men.
  - Key reforms and actions taken/needed:
    - improve budget composition by controlling the wage bill and reducing energy subsidies while introducing a household support program to protect the most vulnerable and create space for higher capital and social spending;
    - initiate banking reforms—including public bank restructuring and improved regulatory framework—to deepen financial intermediation and increase access to finance;
    - halve the on-shore / off-shore corporate tax difference to create a more level playing field for investors.
    - Additional reforms: revamped investment code, strengthen bankruptcy framework, trade facilitation, strengthen public investment execution, better-targeted social safety nets, tax policy and administration reforms, enhance labor market functioning, improve governance of public enterprises.
  - Agenda offers opportunities to deepen technical assistance in banking, revenue administration, public financial management and expenditure policy.

### Yemen — Security-Linked Economic Challenges and Reform Program
- Context and program support:
  - Difficult political and security negotiations weighed on recent developments.
  - Strong support by the Friends of Yemen, especially Saudi Arabia, and an increase in domestic fuel prices ahead of schedule helped preserve macroeconomic stability.
  - IMF approved on September 2 an Extended Credit Facility (ECF) arrangement to reduce the large fiscal deficit and reorient fiscal policy to pro-growth pro-poor spending by reducing subsidies and increasing social transfers and infrastructure investment.
- Background:
  - Fighting in Sanaa stopped after agreement with the Houthis on September 21; some uncertainty remains regarding implementation of the security annex.
  - National dialogue concluded in early 2014 with agreement to establish a six-region federal state.
  - Parliamentary and presidential elections postponed to 2015.
- Recent developments:
  - Macroeconomic situation relatively stable in 2013 before weakening in first half of 2014.
  - Growth in 2013 recovered to about 4.8 percent—helped by rebound in oil production.
  - Inflation edged up slightly to 11 percent, exchange rate remained stable.
  - Fiscal and current account deficits increased only slightly despite a large decline in grants.
  - Underlying fiscal deficit narrowed substantially, reflecting forced fiscal adjustment triggered by lack of financing and authorities’ determination not to resort to borrowing from the central bank.
  - Macroeconomic balances worsened in early 2014 due to a wave of sabotage activities, leading to pressures on fiscal and external sectors and disruption to economic activity, with GDP growth slowing to about 1.9 percent in 2014.
- Short-term outlook and projections:
  - Outlook depends on political and security situation and reform implementation.
  - Gradual recovery projected for second half of 2014 expected to continue into 2015 and medium term.
  - Fiscal and external positions envisaged to improve gradually over the medium term as a result of structural reforms, recovery of hydrocarbon exports, and improvement in contract prices of LNG exports.
  - Donor support critical; accelerate project disbursements and increase budget support to reduce financing pressures and crowding out of private sector credit and investment.
  - Yemen: Selected Economic Indicators, 2011 - 2015 (Percent of GDP, unless otherwise indicated) — Est./Projections
    - GDP growth, percent: 2011: -12.7; 2012: 2.4; 2013: 4.8; 2014: 1.9; 2015: 4.6
    - CPI inflation, period average, percent: 2011: 19.5; 2012: 9.9; 2013: 11.0; 2014: 9.0; 2015: 11.4
    - General government balance, excl. grants: 2011: -5.7; 2012: -12.4; 2013: -7.8; 2014: -6.8; 2015: -6.0
    - Current account balance, excl. grants: 2011: -5.4; 2012: -7.9; 2013: -4.0; 2014: -2.7; 2015: -2.1
    - Fiscal financing needs, (excl. grants), US$ billion: 2011: 2; 2012: 2.0; 2013: 4.6; 2014: 3.3; 2015: 3.4
    - External financing needs (excl. grants), US$ billion: 2011: 2; 2012: 3.0; 2013: 1.8; 2014: 1.6; 2015: 1.4
    - Public debt: 2011: 45.7; 2012: 47.3; 2013: 48.2; 2014: 50.2; 2015: 50.2
    - External debt: 2011: 18.6; 2012: 17.9; 2013: 16.7; 2014: 17.0; 2015: 17.0
    - Reserves in months of imports: 2011: 3.9; 2012: 5.6; 2013: 4.6; 2014: 3.6; 2015: 4.6
  - Risks:
    - Main downside risks: deterioration in political and security situation or new challenges in political transition, including drafting of the constitution and steps leading to elections.
    - Risk of weakening the reform agenda or reversing recent fuel price increases.
    - Upside: full implementation of the peace agreement with the Houthis, acceleration of disbursements including budget support, and higher LNG prices.
- Short-term policy issues:
  - Immediate priority: contain adverse effects of sabotage of oil and electricity facilities on budget and external position and restructure public expenditure to support growth, job creation, and poverty alleviation.
  - Program envisages a fiscal deficit of about 5.4 percent of GDP compared to 9 percent of GDP estimated under a non-adjustment scenario.
  - Reforms will target improving tax revenue collection, gradually eliminating fuel subsidies, containing the wage bill, and maintaining capital spending relative to GDP at the 2013 level.
  - Monetary policy should remain vigilant, aim at limiting adverse impact of fuel subsidy reforms on inflation, and smooth exchange rate volatility.
- Reforms for inclusive growth:
  - Key medium-term challenges: sustain high growth and job creation, diversify production and export structure from hydrocarbon exports, and put public finances on a more sustainable medium-term footing.
  - Need to rehabilitate hydrocarbon sector and encourage FDI, as well as reform state enterprises.
  - Improved business environment, strengthened bank supervision and financial intermediation, and continued prudent monetary policy critical for spurring private sector credit growth and job creation.
  - Improvements needed in governance and transparency in line with government’s Transition Plan; reforms will benefit SMEs and complement the Social Fund for Development.
  - Improved fiscal space will allow a large increase in Social Welfare Fund transfers to the poor and vulnerable groups.
  - Reforming the civil service would help reduce corruption and enhance public service provision, efficiency, and fairness.
  - Agenda requires further technical assistance in public financial management, fiscal decentralization, financial and capital market development, monetary operations, banking supervision, payment system, economic and financial statistics, and judicial reforms.

*Source: BOX 1. THE AMMAN CONFERENCE ON JOBS, GROWTH, AND FAIRNESS*

### BOX 1. THE AMMAN CONFERENCE ON JOBS, GROWTH, AND FAIRNESS _________________________ 6

### BOX 1. THE AMMAN CONFERENCE ON JOBS, GROWTH, AND FAIRNESS

### I. Regional economic outlook and key challenges — summary findings
- Despite deepening and spreading conflicts and challenging domestic socio-political environments, the Arab Countries in Transition (Egypt, Jordan, Libya, Morocco, Tunisia and Yemen) have broadly maintained macroeconomic stability.
- Economies are not delivering the growth rates needed for a meaningful reduction in unemployment, particularly for youth and women.
- Countries should quickly advance structural reforms to foster higher and more inclusive growth, and continue to strengthen fiscal and external buffers to maintain stability amid heightened uncertainty.
- Coordinated international support is crucial in the form of financing, improved trade access, and capacity building assistance.

### A. Background and recent developments
- A challenging regional and domestic setting:
  - Deepening and spreading conflicts:
    - The violence from the Syrian civil war, now in its fourth year, has spread to Iraq, a new conflict has erupted in Gaza, and Libya has been drawn deeper into a violent struggle among competing groups.
    - The region has to cope with over 11 million displaced people, according to the U.N., many of whom seek a safe haven in neighboring countries.
    - Consequences for budgets, labor markets, social cohesion and security are particularly pronounced in Lebanon and Jordan; Tunisia is affected by spillovers from the conflict in Libya.
  - Difficult socio-political environment:
    - Governments in Jordan and Morocco now have multi-year horizons, and Egypt and Tunisia will conclude parliamentary elections in 2014-15.
    - Political uncertainty is high in Libya and Yemen; investor confidence remains low.
    - ACT governments face challenges in achieving public buy-in for politically sensitive but economically important reforms.
- Macroeconomic stability broadly maintained (ACTs excluding Libya):
  - Growth has remained positive.
  - Inflation is firmly in single digits, except for Egypt.
  - Budget deficits in most countries have begun to decline in 2014.
  - External current account deficits are gradually narrowing and reserve buffers have strengthened.
- Slow and uneven progress with structural reforms:
  - Most ACTs have started or announced ambitious reforms of generalized energy subsidies and other current expenditures to create space for better targeted social protection and higher spending on infrastructure, healthcare, and education.
  - Progress has been uneven across countries; reforms of tax policy, civil service, and public financial management remain quite slow.
  - More attention is needed in banking and financial sectors, governance, business climate, and labor markets.

### B. Short-term outlook
- Growth projections and macro dynamics:
  - Growth in the ACTs (excluding Libya) is likely to be limited to 2½ percent in 2014 and 3-4 percent in 2015.
  - Weak domestic demand and favorable commodity prices are expected to keep inflation relatively stable and, for most countries, in the single digits.
  - Current account deficits should narrow and reserve buffers strengthen.
  - Slow growth will likely cause public debt ratios and debt service obligations to rise from already high levels and financing needs will remain elevated.
  - The projected growth performance remains far below the sustained 6 to 7 percent rates needed to achieve a meaningful reduction in unemployment and improved living conditions for broader populations.
- Risks tilted to the downside:
  - Conflicts and spillovers are the most important downside risk.
  - A spike in oil prices and continued massive inflows of refugees would have a strong negative impact.
  - Further disruption of trade flows or a generalized loss of confidence vis-à-vis the Middle East and North Africa could worsen outcomes.
  - Weaker-than-expected global—in particular European—growth could affect recovery of tourism, exports and foreign investment especially for the Maghreb countries.
  - ACTs should be less affected by a normalization of interest rates in the United States, given limited exposure to international financial markets.

### C. Short-term policy issues — recommended priorities
- Consolidating macroeconomic stability:
  - Fiscal consolidation:
    - Continue with subsidy and safety nets reforms.
    - Intensify revenue reforms to raise tax takes and increase fairness through broadening tax bases and enhancing collection efforts while minimizing effects on consumption.
    - Improve public financial management.
  - External sector policies:
    - Allow more exchange rate flexibility where appropriate.
    - Improve monetary transmission mechanism through expansion of interbank markets.
    - Tighten monetary policy if upside inflationary risks emerge.
- Escaping the unemployment trap:
  - With private investors largely on the sidelines, restoring confidence and reviving private sector-led job creation will take time.
  - Short-term gains in employment could come from more externally financed public investment in infrastructure and basic services.
    - This approach would also provide space for deeper structural reforms.
    - Implementing this agenda requires substantial donor support, credible commitments to reforms by authorities, adequate project-execution capabilities, and significant capacity building assistance.
    - Efforts to maintain debt and fiscal sustainability would need to continue in the medium term.
  - Related quantitative note (from referenced separate report discussed in December 2013):
    - An additional investment of a cumulative five percent of GDP over a five-year horizon could create between 0.4 and 0.8 million permanent jobs across the ACTs.

### D. Medium-term challenges and the inclusive growth agenda
- The inclusive growth imperative:
  - Sustainably higher and more inclusive growth is necessary to address root causes of inequities and social tensions: high unemployment and unequal economic opportunities (especially among youth and women); rural-urban disparities in access to water and basic services; and limited access to credit and procurement contracts for small businesses.
- Key elements of the inclusive growth agenda (priorities to be set by country context):
  - Enhance spending quality and increase fairness in fiscal policy:
    - Continue subsidy reforms and strengthen safety nets.
    - Reorient spending to infrastructure projects to decrease regional disparities.
    - Implement revenue measures to strengthen tax takes while leveling the playing field for small businesses.
    - Improve public financial management.
  - Strengthen the business climate:
    - More efficient business registration processes and better competition policies to boost firm creation.
    - Better insolvency regimes to reduce entrepreneurship risk.
    - Improve credit information systems, collateral regimes, and corporate disclosure requirements to improve access to finance for small- and medium-sized firms.
  - Improve education, training, and labor market policies:
    - Facilitate youth employment by implementing education and vocational training reforms in collaboration with prospective employers to build skills needed by the private sector.
    - Increase incentives for private sector employment relative to public sector jobs.
    - Develop targeted measures for women, such as greater access to child-care and parental leave.
    - Strengthen incentives for firms in the informal economy to enter the formal sector.
    - Review labor market regulations (especially to reduce disincentives for hiring) and better enforce them.

*Source: BOX 1. THE AMMAN CONFERENCE ON JOBS, GROWTH, AND FAIRNESS*

### Box 1. The Amman Conference on Jobs, Growth, and Fairness

### Box 1. The Amman Conference on Jobs, Growth, and Fairness

### Conference overview
- Event: “Building the Future: Jobs, Growth, and Fairness in the Arab World.”
- Hosts: IMF jointly with the Arab Fund for Economic and Social Development and the Government of Jordan.
- Date: May 11-12, 2014.
- Participants: Nearly 300 senior policymakers, private sector representatives, civil society, academics, media and IFI representatives.
- Shared priority: Boost employment across the region; translate conference agenda into country-tailored policy recommendations through ongoing Fund dialogue with authorities.

### Main policy debates and consensus findings
- Macroeconomic policies
  - Top priority: a strong and shared vision in each country to guide the economic future.
  - Importance of improving the composition of government spending to achieve more fairness, more efficiency, and more inclusive growth.
- Promoting good governance
  - Transparency and governance require significant improvement in public and private sectors.
  - Recommendations: establish more accountability vis-à-vis citizens, strengthen the judicial system, and build credibility to attract investors.
- Job creation
  - Creating more jobs for youth and women requires a comprehensive reform approach.
  - Key elements: change perception of the state as chief employer; create education systems that lead to productive employment; design labor market regulations that protect workers without unduly constraining employers.
- Improving the business climate
  - Move away from privileged access toward competition.
  - Strong support for streamlining red tape for firm setup, improving access to credit, and implementing less punitive insolvency frameworks.

### Policy recommendations emphasized at the conference
- Increase transparency and better governance
  - Maintain and intensify public financial management reforms and budget transparency efforts.
  - Increase use of online public service solutions to minimize corruption and enhance service delivery efficiency.
  - Invest in enforcement to improve efficiency and fairness of regulations and create a level playing field.
- Role of the international community (support for Arab Countries in Transition, ACTs)
  - Scaling-up external financial support
    - External official disbursements since the onset of the Arab Spring totaled around US$80 billion and have covered only part of transition financing gaps.
    - Larger and more predictable financial support is critical for smoother fiscal consolidation and increased public spending on infrastructure and basic services.
    - Conflicts in the region could lead to additional financing needs beyond current projections.
  - Facilitation of trade and FDI
    - Progress needed on agreements to promote trade, harmonization of trade regulations convergence, and FDI to build market-based recoveries and sustained growth.
  - Capacity building assistance
    - Technical assistance areas: public finance management, social safety nets, civil service, financial sectors (to improve access to finance for small- and- medium-scale enterprises), tax and customs policy and administrations, pensions, education and other social sector policies.
    - Deauville Partnership’s Transition Fund supported 53 projects with a total volume of US$171.8 million as of September 2014.

### IMF engagement and support statistics (as presented)
- Since the start of the Arab Spring, the Fund approved a total of US$ 4.4 billion in disbursing programs for Jordan, Tunisia, and Yemen.
- Morocco supported since July 2014 with a Precautionary and Liquidity Line of US$ 5 billion.
- The Fund stands ready to engage in program discussions with Egypt should authorities request support.
- Capacity development: about 30 technical assistance missions and training to more than 400 participants from the ACTs in various courses so far in 2014.
- Continued regional technical assistance through IMF-Middle East Regional Technical Assistance Center and joint training institute in Kuwait.

### Key statistics from the “Arab Countries in Transition: Financing Needs” table (Est./Proj., Billions of U.S. dollars)
- Current account deficit (excl. official transfers): 2011: 26.1; 2012: 33.4; 2013: 28.4; 2014: 34.0; 2015: 33.0
- External amortization: 2011: 14.3; 2012: 14.3; 2013: 15.5; 2014: 21.5; 2015: 34.4
- External gross financing needs: 2011: 40.3; 2012: 47.7; 2013: 43.9; 2014: 55.5; 2015: 67.4
- Budget deficit (excl. grants): 2011: 37.1; 2012: 47.0; 2013: 56.2; 2014: 61.6; 2015: 57.6
- Public external amortization: 2011: 5.4; 2012: 5.3; 2013: 5.5; 2014: 6.2; 2015: 9.4
- Fiscal financing needs: 2011: 42.5; 2012: 52.3; 2013: 61.7; 2014: 68.7; 2015: 66.9

### Selected actionable priorities for policymakers (synthesized from conference conclusions)
- Anchor fiscal reforms within transparent medium-term fiscal frameworks to guide expectations and sustainability.
- Prioritize reforms that boost employment: education reforms aligned to labor market needs; labor regulation adjustments; remove state-as-employer dependence.
- Improve business climate: streamline firm entry processes, enhance access to credit, modernize insolvency and land laws, and remove privileged access.
- Strengthen governance and transparency: reinforce judicial independence, increase budget and public financial management transparency, deploy e-government solutions.
- Mobilize predictable external financing and donor coordination to support smoother adjustment, infrastructure, and social spending during transitions.
- Scale up capacity building in public financial management, tax/customs administration, social protection, financial sector access for SMEs, and human capital development.

*Source: Box 1. The Amman Conference on Jobs, Growth, and Fairness (IMF, May 11-12, 2014).*

### 2014. The current account deficit is expected to continue to improve as a result of the reduction in

### 2014. The current account deficit is expected to continue to improve as a result of the reduction in

### Morocco — Outlook, Risks, and Policy Priorities
- Current account deficit is expected to continue to improve as a result of:
  - the reduction in the fiscal deficit,
  - improved external demand,
  - lower global energy prices,
  - and the rapid developments of exports from newly developed sectors.
- Risks:
  - A protracted period of slower growth in the advanced trading partners, especially in the euro area, could have sizeable spillovers to growth and the balance of payments.
  - Geopolitical risks in the Middle East as well as in Ukraine/Russia could trigger higher oil prices and put pressure on both the current and fiscal accounts.
  - A surge in global financial market volatility, related to the exit from unconventional monetary policies in large advanced economies, could hamper Morocco’s access to international capital markets and indirectly affect FDI.
  - Pressing social demands in the context of ongoing tensions in the region could slow the pace of reforms.
- Short-term policy issues:
  - Authorities aim to consolidate recent gains and ensure continued macroeconomic stability by rebuilding fiscal and external buffers while moving ahead with reforms to boost competitiveness, growth and employment.
  - The authorities’ plan for fiscal consolidation strikes an appropriate balance among those objectives and is supported by reforms (tax, subsidy, pension, new organic budget law) that will strengthen the fiscal framework and reduce fiscal risks.
- Reforms for inclusive growth:
  - Employment and labor force participation rates have not increased substantially and remain relatively low compared to other emerging markets.
  - Unemployment rate declined from more than 13 percent in 2000 to 9 percent in 2013; youth unemployment remains elevated at 19 percent.
  - Over the past decade about 1.7 million people have moved out of poverty and the poverty rate has decreased by more than 40 percent.
  - Inequality in access to health services remains high, as does gender inequality.
  - Recommended reforms include measures to improve competitiveness, achieve higher potential growth and reduce unemployment:
    - improve the business environment,
    - improve access to finance,
    - strengthen governance and the judicial system,
    - improve functioning of the labor market.
  - Continue initiatives such as the National Initiative for Human Development and education and health programs for the poorest.
  - Fiscal policies aimed at reducing spending on generalized subsidies to create space for investment and social spending to reduce income inequality.
  - Tax policies (including the reduction of tax expenditures) to create more space for social spending and more competitiveness.

### Tunisia — Political Transition, Macroeconomic Developments, and Reform Agenda
- Context and near-term outlook:
  - The holding of legislative and presidential elections in 2014 is expected to reduce political uncertainty and strengthen investor confidence.
  - Tunisia faces timid growth and rising external imbalances that have continued to put pressure on the exchange rate and reserves.
  - Prudent fiscal policy, a tight monetary policy and greater exchange rate flexibility will help reduce higher external and fiscal deficits and anchor inflationary expectations.
  - High youth unemployment and regional disparities are key challenges for more inclusive growth.
  - Key priorities: improving budget composition while protecting the most vulnerable, reducing banking sector vulnerabilities, and advancing reforms to improve the business climate.
  - The fourth review under the IMF’s Stand-by Arrangement (SBA) was completed in August 2014.
- Background:
  - Technocratic government determined to maintain economic stability and pursue structural reforms during 2014.
  - Legislative elections scheduled for October 26, and two rounds of presidential elections planned for end-November and end-December expected to complete the political transition.
  - Five-year economic vision presented at the September “Invest in Tunisia” conference will guide the reform agenda.
- Recent developments:
  - Weaker oil and gas production slowed growth to 2 percent (y-o-y) in Q2 2014.
  - Inflation remained contained at about 5.6 percent (y-o-y) at end-September.
  - Despite a 10 percent depreciation of the exchange rate since mid-March, the current account deficit continues to widen mostly because of higher energy and food imports.
  - Under-execution in current and capital outlays and strong revenue collection helped contain the end-June fiscal deficit to 1.7 percent of GDP, 1 percentage point of GDP lower than programmed.
  - The fourth review under Tunisia’s two-year SBA arrangement (US$1.7 billion) with the IMF was concluded in August 2014.
- Short-term outlook and projections:
  - Growth is expected to reach 2.4 percent in 2014, driven by some acceleration in manufacturing and services activity.
  - Growth projections for 2015 revised down to 3 percent to reflect weaker-than-expected external demand and remaining investor uncertainty.
  - Table: Tunisia: Selected Economic Indicators, 2011 - 2015 (Percent of GDP, unless otherwise indicated) — Est./Projections
    - GDP growth, percent: 2011: -1.9; 2012: 3.7; 2013: 2.3; 2014: 2.4; 2015: 3.0
    - CPI inflation, period average, percent: 2011: 3.5; 2012: 5.6; 2013: 6.1; 2014: 5.7; 2015: 5.0
    - Central government balance, excl. grants: 2011: -3.5; 2012: -5.7; 2013: -6.2; 2014: -6.4; 2015: -4.6
    - Current account balance: 2011: -7.4; 2012: -8.2; 2013: -8.3; 2014: -7.9; 2015: -6.3
    - Fiscal financing needs, (excl. grants), US$ billion: 2011: 2; 2012: 3.0; 2013: 3.8; 2014: 3.9; 2015: 4.1; 2015 (alt): 2.9
    - External financing needs (excl. grants), US$ billion: 2011: 3; 2012: 10.7; 2013: 11.1; 2014: 12.0; 2015: 11.9; 2015 (alt): 10.0
    - Public debt: 2011: 44.5; 2012: 44.5; 2013: 44.8; 2014: 51.0; 2015: 55.3
    - External debt: 2011: 48.0; 2012: 53.8; 2013: 54.0; 2014: 55.4; 2015: 61.2
    - Reserves in months of imports: 2011: 3.4; 2012: 3.9; 2013: 3.4; 2014: 3.6; 2015: 4.3
  - Inflation expected to continue downward due to moderating international commodity prices and prudent monetary policy.
  - Current account deficit expected to narrow to around 7.9 percent of GDP for 2014, then decline to 6.6 percent of GDP in 2015 because of:
    - lower food imports benefiting from a strong agricultural season,
    - reduced energy imports,
    - a recovery in phosphate and tourism industries.
  - Further fiscal consolidation and greater exchange rate flexibility will contribute to narrowing the current account deficit and boost gross official reserves above 4 months import coverage in 2015.
- Risks:
  - Spillovers from the crisis in Libya—including increased security tensions and refugee inflows—could further undermine economic activity.
  - An upsurge in social unrest ahead of the elections could hinder investment; delays in forming a post-elections government could weigh on reform implementation.
  - A protracted period of slower growth in advanced and emerging market economies—particularly in Europe—or higher commodity prices would further slow economic activity and exacerbate existing imbalances.
- Short-term policy issues:
  - Maintain macroeconomic stability amid difficult domestic and international environment.
  - Further fiscal consolidation over the next few months to help reduce financing constraints and contain external imbalances.
  - Implement a tight monetary policy and a more flexible exchange rate policy to reduce external vulnerabilities, improve price competitiveness, and rebuild foreign exchange buffers.
- Reforms for Inclusive Growth:
  - High unemployment—particularly among the youth: 31.4 percent unemployment rate as of March 2014, with a 40.8 percent rate for women.
  - Low female labor force participation: 27 percent vs. 75 percent for men.
  - Key reforms and actions taken/needed:
    - improve budget composition by controlling the wage bill and reducing energy subsidies while introducing a household support program to protect the most vulnerable and create space for higher capital and social spending;
    - initiate banking reforms—including public bank restructuring and improved regulatory framework—to deepen financial intermediation and increase access to finance;
    - halve the on-shore / off-shore corporate tax difference to create a more level playing field for investors.
    - Additional reforms: revamped investment code, strengthen bankruptcy framework, trade facilitation, strengthen public investment execution, better-targeted social safety nets, tax policy and administration reforms, enhance labor market functioning, improve governance of public enterprises.
  - Agenda offers opportunities to deepen technical assistance in banking, revenue administration, public financial management and expenditure policy.

### Yemen — Security-Linked Economic Challenges and Reform Program
- Context and program support:
  - Difficult political and security negotiations weighed on recent developments.
  - Strong support by the Friends of Yemen, especially Saudi Arabia, and an increase in domestic fuel prices ahead of schedule helped preserve macroeconomic stability.
  - IMF approved on September 2 an Extended Credit Facility (ECF) arrangement to reduce the large fiscal deficit and reorient fiscal policy to pro-growth pro-poor spending by reducing subsidies and increasing social transfers and infrastructure investment.
- Background:
  - Fighting in Sanaa stopped after agreement with the Houthis on September 21; some uncertainty remains regarding implementation of the security annex.
  - National dialogue concluded in early 2014 with agreement to establish a six-region federal state.
  - Parliamentary and presidential elections postponed to 2015.
- Recent developments:
  - Macroeconomic situation relatively stable in 2013 before weakening in first half of 2014.
  - Growth in 2013 recovered to about 4.8 percent—helped by rebound in oil production.
  - Inflation edged up slightly to 11 percent, exchange rate remained stable.
  - Fiscal and current account deficits increased only slightly despite a large decline in grants.
  - Underlying fiscal deficit narrowed substantially, reflecting forced fiscal adjustment triggered by lack of financing and authorities’ determination not to resort to borrowing from the central bank.
  - Macroeconomic balances worsened in early 2014 due to a wave of sabotage activities, leading to pressures on fiscal and external sectors and disruption to economic activity, with GDP growth slowing to about 1.9 percent in 2014.
- Short-term outlook and projections:
  - Outlook depends on political and security situation and reform implementation.
  - Gradual recovery projected for second half of 2014 expected to continue into 2015 and medium term.
  - Fiscal and external positions envisaged to improve gradually over the medium term as a result of structural reforms, recovery of hydrocarbon exports, and improvement in contract prices of LNG exports.
  - Donor support critical; accelerate project disbursements and increase budget support to reduce financing pressures and crowding out of private sector credit and investment.
  - Table: Yemen: Selected Economic Indicators, 2011 - 2015 (Percent of GDP, unless otherwise indicated) — Est./Projections
    - GDP growth, percent: 2011: -12.7; 2012: 2.4; 2013: 4.8; 2014: 1.9; 2015: 4.6
    - CPI inflation, period average, percent: 2011: 19.5; 2012: 9.9; 2013: 11.0; 2014: 9.0; 2015: 11.4
    - General government balance, excl. grants: 2011: -5.7; 2012: -12.4; 2013: -7.8; 2014: -6.8; 2015: -6.0
    - Current account balance, excl. grants: 2011: -5.4; 2012: -7.9; 2013: -4.0; 2014: -2.7; 2015: -2.1
    - Fiscal financing needs, (excl. grants), US$ billion: 2011: 2; 2012: 2.0; 2013: 4.6; 2014: 3.3; 2015: 3.4
    - External financing needs (excl. grants), US$ billion: 2011: 2; 2012: 3.0; 2013: 1.8; 2014: 1.6; 2015: 1.4
    - Public debt: 2011: 45.7; 2012: 47.3; 2013: 48.2; 2014: 50.2; 2015: 50.2
    - External debt: 2011: 18.6; 2012: 17.9; 2013: 16.7; 2014: 17.0; 2015: 17.0
    - Reserves in months of imports: 2011: 3.9; 2012: 5.6; 2013: 4.6; 2014: 3.6; 2015: 4.6
- Risks:
  - Main downside risks: deterioration in political and security situation or new challenges in political transition, including drafting of the constitution and steps leading to elections.
  - Risk of weakening the reform agenda or reversing recent fuel price increases.
  - Upside: full implementation of the peace agreement with the Houthis, acceleration of disbursements including budget support, and higher LNG prices.
- Short-term policy issues:
  - Immediate priority: contain adverse effects of sabotage of oil and electricity facilities on budget and external position and restructure public expenditure to support growth, job creation, and poverty alleviation.
  - Program envisages a fiscal deficit of about 5.4 percent of GDP compared to 9 percent of GDP estimated under a non-adjustment scenario.
  - Reforms will target improving tax revenue collection, gradually eliminating fuel subsidies, containing the wage bill, and maintaining capital spending relative to GDP at the 2013 level.
  - Monetary policy should remain vigilant, aim at limiting adverse impact of fuel subsidy reforms on inflation, and smooth exchange rate volatility.
- Reforms for inclusive growth:
  - Key medium-term challenges: sustain high growth and job creation, diversify production and export structure from hydrocarbon exports, and put public finances on a more sustainable medium-term footing.
  - Need to rehabilitate hydrocarbon sector and encourage FDI, as well as reform state enterprises.
  - Improved business environment, strengthened bank supervision and financial intermediation, and continued prudent monetary policy critical for spurring private sector credit growth and job creation.
  - Improvements needed in governance and transparency in line with government’s Transition Plan; reforms will benefit SMEs and complement the Social Fund for Development.
  - Improved fiscal space will allow a large increase in Social Welfare Fund transfers to the poor and vulnerable groups.
  - Reforming the civil service would help reduce corruption and enhance public service provision, efficiency, and fairness.
  - Agenda requires further technical assistance in public financial management, fiscal decentralization, financial and capital market development, monetary operations, banking supervision, payment system, economic and financial statistics, and judicial reforms.

*Source: IMF staff report excerpt (selected country notes and statistics).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2014/_100914.pdf_