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The economies of the Middle East and North Africa (MENA) region are expected to grow 5.5% this year – the fastest rate since 2016 – followed by a slowdown in growth to 3.5% in 2023. But that growth is in inconsistent across the region. As countries still struggling to overcome the ongoing impact of the COVID-19 pandemic face fresh shocks from higher oil and food prices fueled by the war in Ukraine, rising global interest rates and slowdowns in the United States , China and China were caused the euro area.
The World Bank’s latest economic update, entitled “A New Mindset: Greater transparency and accountability in the Middle East and North Africa‘ notes that while oil-exporting countries in the region benefit from high hydrocarbon prices, oil-importing nations face different circumstances. Oil importers face increased burdens and risks from higher import bills, particularly for food and energy, and tighter fiscal space as they spend more on price subsidies to cushion the pain of price increases for their populations.
“All countries in the MENA region have to adapt to significantly higher prices for food and other imports, especially if they lead to an increase in public debt or to currency devaluations,” said Ferid Belhaj, Vice President of the World Bank for the MENA region. “What countries need now is smart governance to weather the storm and start rebuilding after multiple shocks on top of the pandemic.”
The twice-yearly report says responsive governance will help countries meet these challenges more effectively now and lay the foundations for long-term growth. Each MENA Economic Update has a specific focus, and this report examines how reforms that increase transparency and accountability in public institutions can foster a sustainable economic recovery. Countries desperately need systems that allow government bureaucracies to measure outcomes, align accountability, experiment, and learn from those outcomes.
“The transition to greater data transparency and accountability is a game changer for the region; it can help countries identify and act on what is working and what needs improvement,” saidRoberta Gatti, World Bank chief economist for the MENA region. “It will help them manage risk and chart progress towards a more sustainable and inclusive future. Not only are the potential benefits great, but the reforms needed to put institutions on a learning path are within reach.“
The bank’s analysis predicts divergent growth paths in the region. Gulf Cooperation Council (GCC) countries are on track to grow 6.9% in 2022, buoyed by high hydrocarbon revenues, slowing to 3.7% in 2023 as hydrocarbon prices ease. Emerging oil exporters are forecast to see trends like those of the GCC, but at lower levels – with growth expected to rise to 4.1% in 2022, led by Iraq, before falling back to 2.7% in 2023. Developing oil-importing countries are expected to grow further by 4.5% in 2022 and 4.3% in 2023. However, the slowdown in growth in Europe poses a particular risk as this group of countries is more reliant on trade with the eurozone – particularly with the North African oil importers closest to Europe: Tunisia, Morocco, and Egypt.
Across the region, policymakers have introduced measures – notably price controls and subsidies – to drive the domestic price of certain commodities, such as food and energy, below the global price. The report notes that this has resulted in inflation being kept lower in MENA than in other regions. In Egypt, for example, average annual inflation for the period March to July 2022 was 14.3%, but would have been 18.4%, 4.1 percentage points higher had the authorities not intervened.
Some governments have made cash payments to poorer households – a more efficient way of helping the poor cope with rising prices than general market subsidies, which lower prices for everyone, including the rich. For Egypt, cutting average inflation by the equivalent of 4.1 percentage points with a subsidy on food and energy prices that benefits the entire population costs 13.2 times more than raising prices and serving only the poorest 10 percent of the population to support households with cash transfers.
Governments will incur additional costs as they increase subsidies and remittances to mitigate the damage to their people’s living standards from higher food and energy prices. For the GCC and the oil-exporting developing countries, this is not of major concern at this time. Unexpected increases in government revenues from the rise in hydrocarbon prices have significantly expanded their fiscal space and will result in budget surpluses for most oil exporters in 2022 – even after additional spending on inflation-mitigating programs.
Aspiring oil importers, however, are not so fortunate and must cut other spending, find new revenue, or increase deficits and debt to fund anti-inflation programs and other additional spending. Additionally, as global interest rates rise, the debt service burden for oil importers will increase as they have to pay a higher interest rate on both new debt they incur and existing debt they refinance, weighing on countries’ debt sustainability over time – especially for countries with already high levels of debt, such as Jordan, Tunisia and Egypt.