Climate Change

Despite the challenging external environment, the GCC economies have been resilient. Non-hydrocarbon activity has remained robust amid strong domestic demand supported by the reform momentum, limited spillovers from regional, as well as the modest direct impact of higher U.S. tariffs given the exemption of energy products and limited trade ties with the U.S. While external balances narrowed amid oil production cuts and robust imports, the external positions remain overall strong. The economic outlook remains favorable but risks are tilted to the downside amidst elevated global uncertainty. Economic activity will be supported by the unwinding of oil production cuts, the expansion of natural gas production, and strong reform and project implementation facilitated by ample policy buffers. External buffers would remain comfortable despite narrower current account balances driven by higher imports. The near-term risks to the outlook are tilted to the downside, as oil prices could decline and financial conditions tighten amid high uncertainty. Over the medium term, ongoing global structural shifts pose two-sided risks for the GCC economies.

Are Machine Learning (ML) algorithms superior to traditional econometric models for GDP nowcasting in a time series setting? Based on our evaluation of all models from both classes ever used in nowcasting across simulation and six country cases, traditional econometric models tend to outperform ML algorithms. Among the ML algorithms, linear ML algorithm – Lasso and Elastic Net – perform best in nowcasting, even surpassing traditional econometric models in cases of long GDP data and rich high-frequency indicators. Among the traditional econometric models, the Bridge and Dynamic Factor deliver the strongest empirical results, while Three-Pass Regression Filter performs well in our simulation. Due to the relatively short length of GDP series, complex and non-linear ML algorithms are prone to overfitting, which compromises their out-of-sample performance.

This paper provides new cross-country evidence that greater investment in agricultural R&D significantly mitigates the adverse effects of climate variability on crop yields in sub-Saharan Africa. Despite this critical role, only a handful of countries have invested at levels sufficient to reach the thresholds where R&D delivers effective risk adaptation. Our analysis indicates that closing this gap would require an additional US$1–3 billion in annual agricultural research investment across the region.

In this paper we study how aggregate demand surprises affect and propagate to the global economy, with particular attention to their impact on Emerging Market Economies (EMEs). To do so, we introduce a new high-frequency external instrument to identify global demand shocks: the sensitivity of oil futures prices around labor market announcements from the US and the Euro Area, two events that consistently trigger strong revisions in global growth expectations across financial markets. Using a proxy-SVAR framework, our results suggest that a global demand shock has positive effects on world industrial production, reduces oil inventories and global uncertainty, and improves financial conditions. In EMEs, upward revision in macroeconomic outlook leads to higher industrial production and inflation, real exchange rate appreciation, and lower EMBI spreads. When the sample is split between oil-importers and exporters, we observe results consistent with the role of external trade exposure in shaping transmission, heterogeneity in the magnitude and persistence of output, inflation, real exchange rates, and sovereign risk responses. These results are consistent with theoretical expectations and the related literature. Our findings offer a credible empirical strategy for isolating global demand shocks and have direct implications for empirical macroeconomic modeling of emerging market economies.

This paper examines the macro-criticality of water resources in the context of climate change. It summarizes the past and future trends of water scarcity and droughts and proposes a framework to analyze the macro-criticality and role of public sector engagement in the water sector. The paper maps out channels through which water resources affect the macro-fiscal and balance of payments positions and develops an understanding of macro-fiscal exposure based on empirical evidence. It also synthesizes emerging insights from IMF-supported operations and capacity development activities, thereby clarifying the rationale and scope for IMF engagement in water-related policy reforms.

Armenia’s economic performance has been strong despite a series of shocks amid an uncertain global environment. Thanks to the authorities’ agile policies and unforeseen inflows of labor and capital, growth has exceeded historical trends and inflation has been contained, while fiscal and external balances are largely in check. As the exceptional drivers of growth are gradually tapering off, the challenge is to permanently raise Armenia’s economic potential through sound policies and reforms that tackle lingering structural and institutional weaknesses. The initialing of a peace agreement with Azerbaijan in August is a historic breakthrough, which, if ratified by the two countries, would improve regional cooperation and stability.