Fiscal Sustainability in the MENA Region in Light of COVID-19 Crisis

Since late 2010, the economies of the Middle East and North Africa (MENA) region have been experiencing mounting socioeconomic grievances resulting in popular uprisings in parts of the region and the eruption of extended conflicts in other parts. Many of the resource-poor MENA countries continue to accumulate public debt relying on fiscal spending to reignite growth and root out popular dissent. Despite decent growth outcomes in some of the more diversified MENA economies, unemployment remains high, and poverty and inequality continue to rise. Meanwhile, the resource-rich MENA economies saw their public finances come under stress due to a secular decline in oil prices since 2014, prompting a serious re-thinking of their future fiscal sustainability. Most recently, the COVID-19 pandemic, coupled with further lows in oil prices, dealt a fierce blow to the already-weakened economies of the region.

In this context, questions of fiscal sustainability come to the forefront. And while the rise in debt is a global phenomenon, it deserves particular attention in the MENA region for three main reasons. First, fiscal discipline is weak and often coupled with problematic governance of debt management. In particular, the low incidence of fiscal transparency in the region does not currently allow an objective assessment of the extent of the problem . For several MENA economies, there is little information on the public and private debt stocks, their maturity structure, terms of borrowing and currency denomination. Moreover, in many cases, the accumulation of debt is often not solely driven by the increase in fiscal deficits, suggesting that below-the-line operations (including off-budget transactions) contribute to debt increases. In addition, MENA governments may have significant contingent liabilities which are not transparently documented.

Second, debt sustainability in these economies is particularly vulnerable to external shocks over which they have little control. The oil price is one key variable, however, many of these economies also rely on volatile sources such as grants, tourism revenues and remittances as primary sources of foreign exchange.

Third, as many MENA economies peg their currency to other major currencies, primarily the US dollar, the stance of increasingly unconventional monetary policy in advanced economies increases the chances of monetary instability, and may place pressure on these exchange rate parities over the medium term, especially in the absence of strong fiscal consolidation. In either case, it is likely that fiscal policy will be forced to do the heavy lifting, thereby increasing pressure on already strained public finances and further limiting these economies’ fiscal space.

Given the above, there is a growing need for in-depth systematic studies about fiscal sustainability and the existing fiscal space in the MENA region to deal with the emerging challenges.

ERF acknowledges the generous financial contribution of the Arab Fund for Economic and Social Development (AFESD).