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Two women walk back home after taking a bag during the distribution of staple commodities as part of an effort to mobilize voters during the last two days of Egypt's 2018 presidential election, in the working class neighborhoods of Meet Oqba and Ard al-Lewa, located in central Giza, Egypt, March 28, 2018 (photo: Islam Safwat/NurPhoto/Sipa USA)

• IMF Country Focus

Five Things to Know About the Economic Outlook for the Middle East, North Africa, Afghanistan, and Pakistan

May 2, 2018

Non-oil growth is gaining traction in oil-exporting countries, while a fragile recovery continues in oil-importing countries across the Middle East, North Africa, Afghanistan, and Pakistan (MENAP)—according to the IMF’s latest Regional Economic Outlook.

“To take full advantage of the growing global economy, the region should accelerate key economic reforms. The focus should be on improving the investment climate, boosting productivity, and strengthening governance,” said Jihad Azour, Director of the IMF’s Middle East and Central Asia Department.

Here are five key things to know from the IMF report:

• Growth is recovering—but not by enough, and gains are fragile

  
  At 1.7 percent, real GDP growth in 2017 among oil-exporting countries was much weaker than in 2016, reflecting the impact of oil production cuts agreed to in the OPEC+ deal. However, oil exporters continued to see an ongoing and broad-based recovery in non-oil activity, partly as the result of slower fiscal adjustment. As the OPEC+ agreement expires and oil production recovers, growth is projected to accelerate this year and next. Nevertheless, at annual 3.6 percent over 2019-23, the medium-term growth in oil-exporting countries is projected to remain well below its pre-2014 oil shock levels.

  Meanwhile, growth in oil importers reached 4.2 percent in 2017, and is expected to increase to 4.7 percent in 2018, before advancing to about 5 percent in 2019-23.

  However, these levels of growth will not generate sufficient jobs to reduce unemployment—particularly for the nearly 23 percent of the region’s young people who are unemployed.

• Why the region is not fully benefiting from the global recovery

  High or rapidly increasing debt levels have forced countries to take significant measures to reduce deficits, by limiting government spending or mobilizing revenue. These steps will help the region keep its economic house in order, control debt and inflation, and create an environment conducive to sustainable and inclusive growth. However, they can also hold economic growth back.

  Countries in the region also need to integrate further into the global economy and diversify their products and services. This will require greater access to finance for the private sector (especially small and medium-sized enterprises) and upgrading workforce skills.

  Uncertainty surrounding oil prices, rising trade tensions, and the effects of ongoing conflicts and their spillovers have further constrained growth and remain risks going forward.

• Strong fiscal and monetary policies are important, but not sufficient, for growth

  Increased debt levels will limit the extent to which fiscal policy can boost short-term demand. As governments work to bring down their debt to manageable levels, they should look to broaden tax bases and improve the efficiency of spending, including the completion of energy subsidy reforms. This will help address ongoing fiscal challenges and generate savings that could be directed for priority spending, such as health, education, and public investment.

  Strengthening monetary policy credibility will be essential to anchor inflation expectations. Under these circumstances, room to reduce interest rates to spur economic growth will be limited, even if inflation has been moderating. Given their fixed exchange rate regimes, Gulf Cooperation Council countries will need to adjust monetary policy in line with the anticipated increases in policy rates in the United States, which would weigh on growth going forward.

• Accelerating structural reforms is key

  Countries in the region should take advantage of the global recovery to accelerate structural reforms that will reduce their reliance on commodities and help build dynamic private sectors. Reforms should focus on measures that improve the business environment, such as Pakistan’s recent efforts to strengthen its bankruptcy framework. Labor market and education reforms are also needed to boost productivity.

  It will be critical to strengthen governance and transparency to promote inclusive growth in the region. Some countries are taking positive steps in that direction. For instance, Afghanistan recently enacted legislation to criminalize acts of corruption, and anti-corruption laws have taken effect in Morocco, Somalia, and Tunisia.

• Growth must provide opportunities to all
  
  

  Countries should ensure that prosperity is shared by all. The Regional Economic Outlook has identified some encouraging examples already underway. The United Arab Emirates has made important investments in education and innovation, and Iran has developed job-creation programs for young people and women—groups who have too often been left behind in the region. Morocco recently launched a program to improve the quality of education and vocational training, and to raise female labor force participation, while Egypt doubled the budget allocation for public nurseries to help integrate women in the labor force. These actions are commendable, though much more must be done across the region to build on these efforts and accelerate progress.