As Commodity Prices Surge Again, MENA Countries Can Draw Lessons from the Past

IMF News, December 7, 2022

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Canonical URL: As Commodity Prices Surge Again, MENA Countries Can Draw Lessons from the Past

Publication date: December 7, 2022.
Authors: Filippo Gori (Economist) and Jeta Menkulasi (Senior Economist), IMF Middle East and Central Asia Department.
The current commodity price boom affects MENA commodity exporters and importers differently: exporters benefit from improved terms of trade, importers suffer from higher imported energy and food prices.
The current shock is occurring against a global and regional backdrop that is distinct from previous episodes.

Past responses by MENA emerging market and middle‑income economies to commodity price surges involved increased government spending that often persisted for years, leaving countries more indebted and less resilient to future shocks.
Oil exporters historically increased spending during oil price upswings and then faced abrupt budget adjustments when prices fell.
With weak social safety nets, policymakers typically relied on subsidies, tax cuts, and public wage increases to offset real income losses.
These policies were poorly targeted. For example:
- The bottom 40 percent of the population in Egypt, Jordan, Lebanon, Mauritania, Morocco, and Yemen received less than 20 percent of funds spent on subsidies for diesel and gasoline.
Fiscal expansions were hard to reverse, creating more rigid government budgets and a cycle of reliance on costly fiscal interventions.

Policymakers have again used subsidies and tax cuts to shield economies, but the response in 2022 has been more restrained compared with past episodes.
Compared with 2008 and 2011 upswings, subsidies in 2022 are projected to increase by roughly 50 percent of their peak during these past episodes for:
- the region’s oil exporters, and
- emerging market and middle‑income economies.
Reasons for the more cautious response include:
- limited fiscal space in emerging market and middle‑income economies,
- improved targeted support in some countries,
- progress on subsidy reform.
Specific policy actions observed:
- Jordan, Mauritania, Morocco, Pakistan, Saudi Arabia, Tunisia, and the United Arab Emirates have allowed domestic gasoline prices to increase.
- Most oil exporters have saved their oil profits so far.

The outlook is highly uncertain. Key risks include:
- commodity prices remaining high for longer,
- tighter and volatile financing conditions,
- a sharper‑than‑expected slowdown in external demand.
If not managed properly, price shocks could threaten social stability.
Oil exporters may face pressures to spend surpluses on measures that are difficult to reverse once oil prices fall, such as public sector hiring and wage increases.

Break the unsustainable cycle of higher, untargeted government spending and instead prioritize measures focused on the neediest to cushion eroded real incomes.
Enact reforms to improve resilience to future commodity price shocks, including:
- gradually removing regressive energy subsidies while strengthening social safety nets to enhance equity and create fiscal space for pro‑growth capital spending;
- transitioning toward a greener and more efficient energy utilization to reduce energy dependency and exposure to oil price fluctuations;
- bolstering revenue mobilization through tax reforms to increase fiscal space for oil importers and diversify revenue away from hydrocarbons for oil exporters.
Enhance governance and public financial management by:
- improving transparency and accountability;
- moving toward medium‑term fiscal frameworks;
- adopting fiscal rules.
These actions aim to prevent costly and untargeted fiscal expansions of the past and to create fiscal space to enhance social spending.

Source: Filippo Gori and Jeta Menkulasi, "As Commodity Prices Surge Again, MENA Countries Can Draw Lessons from the Past", December 7, 2022, IMF.