A Repeat of the Past? Fiscal Implications of Commodity Price Surges in the Middle East and North Africa
High international food and fuel prices are exacerbating fiscal pressures in the Middle East and North Africa (MENA) at a time when countries face tightening global financial conditions and extraordinary uncertainty, while policy space is reduced from the pandemic. During past episodes of rising commodity prices, policymakers responded swiftly to mitigate their impact. However, responses often lacked targeting and prior planning, resulting in adverse fiscal and distributional impacts, including (1) large and persistent fiscal loosening, (2) increased budget rigidity, and (3) diminished budget equity, all combined with (4) a lack of offsetting fiscal adjustment. These responses heightened debt sustainability risks for oil importers and led to procyclical fiscal policies in oil exporters, followed by abrupt fiscal adjustments when oil prices fell. While most MENA countries have once again resorted to similar policy responses as in the past, particularly generalized price subsidies, they have done so at a smaller scale. This reflects both a more limited fiscal space and past progress—albeit yet unfinished—with subsidy reform. While countries foresee some fiscal expansion in 2022 compared to prewar expectations, they are expected to continue their subsequent adjustment paths. As the global outlook remains challenging and downside risks extraordinary, it will be important for policymakers in the region to consider (1) cost-effective measures to address the pressures from rising food and fuel prices and (2) reforms to enhance fiscal resilience, including reduced dependency on fuel, ahead of the next commodity cycle.
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