Middle East, North Africa Vulnerable to Rising Fiscal Risks

IMF Blog, June 11, 2023

Source details

Authors: Antoinette M. Sayeh, Mahmoud Harb, Jacques Charaoui
Date: June 11, 2023
Central message: Stronger fiscal risk management can reduce budgetary surprises and allow the region to plan better for development.
Regional focus: the “MENAPEG” region — economies in the Middle East, North Africa and Pakistan but excludes high-income Gulf countries.

Small fiscal risks occur in countries every year.
Larger shocks that cause debt to increase by an average of 12 percent of gross domestic product occur, on average, once every eight years.
Damage from natural disasters alone is around $2 billion annually.

Volatile economic growth, with higher growth volatility than other parts of the world.
High reliance on resource revenue among hydrocarbon exporters such as Algeria, Iraq, and Libya.
Pervasive universal energy and food subsidies across the region that expose budgets to commodity price fluctuations.
State ownership of non-financial corporations and banks generating contingent liabilities when negative events occur (examples: public electric or water utility companies requiring government assistance).
Financially weak state-owned enterprises (SOE) requiring regular government cash injections due to quasi-fiscal activities (selling below market rates, creating jobs).
Contingent liabilities arising from public-private partnerships (PPPs), e.g., PPP contracts that require government compensation if collections fall short (as in toll road projects).
Exposure to rare extreme events with large fiscal consequences: natural and climate disasters (e.g., catastrophic floods in Pakistan in 2022), extreme droughts in North Africa, social conflict and instability that disrupt economic activity, destroy infrastructure, create additional spending needs, weaken institutional capacity, and displace populations.

Improve data collection:
- Systematically collect financial information on SOEs, guarantees, PPPs, and other sources of contingent liabilities to enable transparent assessment of fiscal risks.
Deepen analysis:
- Deploy modeling techniques such as fiscal stress tests once sufficient data is available to assess probability and potential impact of risks.
Adopt mitigation measures:
- Use direct controls, for example, well-calibrated ceilings on the issuance of government guarantees.
- Use indirect measures to discourage risky activities, such as charging fees to beneficiaries of guarantees.
Build fiscal resilience:
- Create buffers for unexpected expenditures.
- Use medium-term fiscal frameworks with well-defined debt and deficit anchors.
Implement economic and governance reforms:
- Stronger macroeconomic frameworks to lessen growth volatility.
- Governance reforms and asset divestment to moderate contingent liabilities or lower the odds of their materialization.
- Improve budget processes to reduce the likelihood of surprises.

The IMF offers a range of tools and capacity development projects to support national authorities in strengthening their ability to analyze and manage fiscal risks.

Fiscal risks in Middle Eastern and North African countries cannot be fully avoided given various uncertainties.
Better risk awareness and stronger fiscal risk management will reduce budgetary surprises and provide firmer ground for long-term development policies.

Source: Middle East, North Africa Vulnerable to Rising Fiscal Risks, Antoinette M. Sayeh, Mahmoud Harb, Jacques Charaoui, June 11, 2023.