1. The Middle East and North Africa (MENA) region is rich in natural resources, labor, and entrepreneurial endowments with a large GDP and population. Its countries vary, in some cases considerably, in economic size, population, public/private sector balances, and financial and natural resources.

2. MENA countries have made important economic gains in recent years. The structure of most economies has been strengthened by reforms in the financial sector, exchange and payments systems, and public finances. Inflation has been lowered in a number of countries and foreign assets, while reduced, remain significant.

3. Despite important achievements, the MENA region is yet to exploit fully its considerable economic potential. This is most evident in low per capita income growth, underexploited regional trade and investment opportunities, and the low share of resident financial holdings invested within the region.

4. As is widely recognized by policymakers in the region, poor economic diversification, insufficiently responsive economic policies, and adverse external developments constrain most countries' ability to exploit more fully their economic potential. The long-standing Arab-Israeli conflict and other political uncertainties have also discouraged investment.

5. The need to progress further in addressing impediments to sustained high economic growth and financial stability is accentuated by the current outlook for the region's external environment. Prospects for the terms of trade and the demand for labor services are such that the region cannot expect major windfall gains. In contrast, the eventual achievement of a comprehensive, just, and durable Arab-Israeli peace, as well as growing economic integration with the European Union, gives promise of gains if the overall economic and financial environment is appropriate.

6. Several countries in the region have made significant progress in adjustment and reform, while others lag behind. Despite these differences, countries in the region may be thought of as confronting eight policy challenges: intensifying privatization and deregulation, reforming public finances, improving the functioning of labor markets, strengthening human resources, enhancing domestic and foreign investments, improving financial intermediation, liberalizing external trade and payments, and ensuring a supportive fiscal, monetary, and exchange rate policy mix.

7. Fulfilling this agenda is not easy and the stakes are high. The institutional framework and human capabilities must be strengthened. Certain countries also require timely disbursements of foreign assistance on appropriate terms to support their domestic policy efforts.

8. The potential for significant gains is accompanied by the possibility of short-term costs as economies adjust to more efficient structures that promise high sustained economic growth, reduce vulnerability to adverse external developments, and allow countries to benefit from the changes in the world economy. The costs may be minimized through proper planning and sequencing of policies, with the remaining elements alleviated by well-targeted social safety net provisions.

9. With appropriate policies, prospects are good for a reinvigoration of the region's economic growth and development, as individual country developments are reinforced by welfare-enhancing region-wide effects. As a result, all countries in the region would be in a better position to exploit their considerable economic potential and meet the legitimate aspirations of their growing populations.

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