Seeding Fiscal Transformation in the Arab World
IMF News, February 11, 2024
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- Published: February 11, 2024
Overview and context
- Speech: The Managing Director’s Keynote Speech, Eighth Annual Arab Fiscal Forum in Dubai, UAE, February 11, 2024.
- Theme: Planting the “seed” of fiscal transformation—creating durable fiscal space to meet reconstruction needs, strengthen resilience, and deliver opportunities for growing populations amid economic challenges, geopolitical tension, and conflict.
- Regional leadership noted: Ministers from the region will steer the direction of the World Bank and IMF; Minister Al Hussaini as Chair of the Development Committee and Minister Al-Jadaan as Chair of the IMFC.
Economic outlook and near-term developments
- Global outlook:
- Growth exceeded expectations in 2023.
- Global headline inflation is expected to fall in 2024.
- Medium-term growth prospects remain anemic “around 3 percent,” compared to the historical average of “about 3.8 percent.”
- Potential upside from developments in artificial intelligence, but risks from uneven readiness.
- “Roughly 40 percent of jobs” are exposed to AI—both globally and in the Arab world.
- Middle East and North Africa (MENA) near-term:
- Expected GDP growth: “2.9 percent this year”—higher than last year, but below October projections.
- Factors weighing on growth: short-term cuts in oil production, the Gaza-Israel conflict, and tight monetary policies.
- Among exporters: slow non-hydrocarbon growth; declining oil demand a medium-term headwind.
- Net energy importers: historically high debt and borrowing needs, limited access to external financing.
- Economic impact of conflict:
- Gaza: activity dropped “80 percent from October through December compared with a year earlier.”
- West Bank: activity dropped “22 percent.”
- Broader impacts: tourism affected, potential fiscal pressures (higher social safety net and defense spending), rising freight costs, and reduced Red Sea transit volumes—PortWatch data show transit volumes “down by nearly 50 percent this year.”
- Statement: “Only a durable peace and political solution will fundamentally change” the Palestinian economy’s dire outlook.
- Risks: Exceptional uncertainty; further widening of the conflict would aggravate economic harm.
Key fiscal priorities and policy recommendations
- Central objective: Create fiscal space—likened to growing a resilient tree (the Ghaf).
- Mobilize revenues:
- Expand tax capacity via stronger institutions, better-designed frameworks, and more robust revenue collection.
- Tax policy notes:
- Multiple countries have improved VAT systems.
- Morocco has expanded personal income taxes to make them more progressive.
- “11 Arab countries have already joined the global minimum corporate tax agreement.”
- UAE’s federal corporate income tax rate of “9 percent became effective last year.”
- For non-commodity exporters: reduce exemptions and limit preferential rates (example: Tunisia).
- Revenue sources: “Up to 50 percent of the region’s tax revenue comes from customs and other indirect taxes.”
- Compliance measures: Jordan and Saudi Arabia promoting electronic invoicing.
- Eliminate regressive energy subsidies:
- A paper to be launched shows phasing out explicit energy subsidies could save “$336 billion in the region”—equivalent to “Iraq’s and Libya’s economies combined.”
- Benefits: fiscal savings, reduced pollution, and improved social spending—a “triple dividend.”
- Successful examples: Egypt, Jordan, and Morocco implemented comprehensive subsidy reform plans with public communications, phased price increases, and targeted cash support.
- Improve performance of state-owned enterprises (SOEs):
- Observation: Arab-world SOEs own a lot—assets “exceeding 50 percent, and even 100 percent of GDP in some countries.”
- Example: Oman instituting more robust governance, accountability, and financial management with planned divestments.
- Outcome cited: SOE debt dropped “from 41 percent of GDP in 2021 to 30 percent in 2022.”
- Prepare for technological change:
- Invest in upskilling workers and improving internet access in low-income countries to prepare for AI.
- Develop national AI strategies and clear regulations; IMF’s AI Preparedness Index ranks the Emirates in the top tier.
- Regional solidarity:
- Continued strong support from Gulf Cooperation Council countries is critical.
- Collaboration and solidarity within the region will benefit transformation efforts.
Expected outcomes and scenarios
- Short-term: New revenue and more efficient spending provide fiscal space to maintain debt sustainability and build resilience against shocks.
- Long-term: Fiscal space enables implementation of a new social contract to accelerate transformation toward more inclusive, green, and digital economies.
- Risks to outcomes: Continued conflict escalation, limited access to external financing for net importers, and uneven readiness for AI could impede progress.
IMF engagement, support, and capacity development
- Financial support and instruments:
- The IMF has made available “roughly $64 billion in liquidity and reserves to the MENA region since the pandemic began, including $8 billion in the last year.”
- “$1.6 billion is from our newest instrument—the Resilience and Sustainability Trust—to help Morocco and Mauritania transition to greener economies.”
- With the World Bank, the IMF provided “$4.5 billion in debt relief for Somalia.”
- Capacity development and presence:
- The IMF has ramped up capacity development throughout the region.
- A new IMF office in Riyadh is strengthening presence and partnerships with Arab institutions.
- Commitments: Continued policy advice, technical assistance, and long-term engagement—“we’re here for the long haul.”
Closing message
- Metaphor: Fiscal transformation as a resilient tree (the Ghaf)—durable, adaptable, and a symbol of stability and peace.
- Call to action: Plant seeds now—of growth, cooperation, peace, and prosperity—to achieve transformational and inclusive economic outcomes.
- Closing phrase: “Shukran.”
Source: Managing Director’s Keynote Speech, Eighth Annual Arab Fiscal Forum, Dubai, UAE, February 11, 2024.