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Regional Economic Outlook: Middle East and Central Asia, October 2017

By The International Monetary Fund

Economic prospects for the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) and Caucasus and Central Asia (CCA) regions are diverging. Despite the strengthening global recovery, the outlook for MENAP countries remains relatively subdued due to the continued adjustment to low oil prices and regional conflicts. In contrast, the outlook for the CCA region is improving, supported by the more favorable global environment. In both regions, efforts to promote growth-friendly fiscal consolidation, stronger monetary policy frameworks, economic diversification and private sector development should continue. The window of opportunity arising from various integration initiatives and the favorable external environment call for increasing trade openness, while the adoption of financial technologies could increase financial inclusion and facilitate greater access to credit. Together, these actions will help MENAP and CCA countries to secure higher and more inclusive growth.

Chapter 1 - MENAP Oil Exporters: Need to Push Ahead with Fiscal Consolidation and Diversification

Oil exporters in the Middle East and North Africa, Afghanistan, and Pakistan region (MENAP) are continuing to adjust to lower oil prices, which have dampened growth and contributed to large fiscal and external deficits. Oil prices have softened recently, despite the extension of the production cuts led by the Organization of the Petroleum Exporting Countries (OPEC) and the strengthening global recovery. Non-oil growth is generally recovering, but the muted medium-term growth prospects highlight the need for countries to push ahead with diversification and private sector development. Most countries have outlined ambitious diversification strategies and are developing detailed reform plans, but implementation should be accelerated, particularly to exploit the stronger global growth momentum. Oil exporters should continue pursuing deficit-reduction plans to maintain fiscal sustainability and, where relevant, to support exchange rate pegs. Some countries will need to identify additional fiscal consolidation measures, while protecting social and growth-oriented expenditures. Financial stability risks appear low, although pockets of vulnerabilities remain. The outlook for countries in conflict remains highly uncertain, with growth dependent on security conditions.

Chapter 2 - MENAP Oil Importers: Securing Resilience and Inclusive Growth

Growth in oil importers in the Middle East, North Africa, Afghanistan, and Pakistan region (MENAP) is projected to increase to 4.3 percent in 2017, supported by strengthening domestic demand and a cyclical recovery of the global economy. This positive momentum is expected to persist into the medium term, lifting growth further to 4.4 percent in 2018 and 5.3 percent during 2019–22. However, even at this pace, growth will remain below what is needed to effectively tackle the unemployment challenge facing the region. The balance of risks to the regional outlook remains tilted to the downside. To leverage the global upswing and secure resilience, policy priorities continue to include growth-friendly fiscal consolidation and stronger monetary policy frameworks in countries transitioning to more flexible exchange rates. Structural reforms need to accelerate to improve the business environment, create jobs, fully take advantage of the global growth momentum, and boost inclusive growth.

Chapter 3 - Caucasus and Central Asia: No Room for Complacency

Growth in the Caucasus and Central Asia (CCA) started to pick up during the second half of 2016, and is projected to accelerate further in 2017 and beyond. Improved economic conditions in the region’s main trading partners and some firming of commodity prices, combined with continued implementation of structural reforms, are anticipated to support the recovery. However, medium-term growth is forecast to remain below historical norms. Reforms promoting diversification away from remittances and commodities should therefore be accelerated to secure strong, sustainable, and inclusive growth. To capitalize on opportunities for integration into the global economy—including through China’s Belt and Road Initiative—institutional frameworks should be strengthened to facilitate productive investment and foster private sector development. Fiscal consolidation should continue to ensure that buffers are rebuilt, public expenditure channeled efficiently, tax collection improved, and social safety nets protected. Monetary policy frameworks should be strengthened further, including by establishing clear objectives, safeguarding central bank independence, and enhancing communication. Deep-rooted weaknesses in highly dollarized banking sectors— which are not in a position to support growth in some countries—should be addressed promptly.

Chapter 4 - Leveraging Trade to Boost Growth in the MENAP and CCA Regions

For economies in the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) and the Caucasus and Central Asia (CCA) regions, the strengthening global recovery provides an important opportunity to boost exports and growth. Illustrative calculations suggest that achieving greater trade openness, coupled with increased global value chain (GVC) participation, export diversification, or product quality could raise the level of income by some 5–10 percent within the following five to ten years. Oil importers are better placed than other countries in the region to take advantage of the improved outlook for global trade, given their better integration into GVCs and more diversified export bases. However, oil importers could still improve the quality of their exports. In contrast, oil exporters should focus on economic diversification to produce and export a broader range of goods and services. Most countries would benefit from deepening access to export markets through trade agreements and by leveraging new integration opportunities, such as China’s Belt and Road Initiative and the Compact with Africa. Structural reforms to foster investment and job creation, as well as targeted fiscal policies to mitigate adjustment costs, may be needed to relieve any negative consequences of increased openness and to ensure the resulting boost to growth is as inclusive as possible.

Chapter 5 Fintech: Unlocking the Potential for the MENAP and CCA Regions

After a late start, fintech is gaining momentum in some countries of the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) region,2 and there are green shoots in the Caucasus and Central Asia (CCA) region. For both regions, fintech has the ability to address the critical challenges of enhancing financial inclusion, inclusive growth, and economic diversification through innovations that help extend financial services to the large unbanked populations, and facilitate alternative funding sources for small and medium-sized enterprises (SMEs). Fintech could also make an important contribution to financial stability by harnessing technology for regulatory compliance and risk management, and can facilitate trade and remittances by providing efficient and cost-effective mechanisms for cross-border payments, while the use of electronic payments can improve the efficiency of government operations. To unlock this potential, further reforms are needed to close gaps in the regulatory, consumer protection, and cybersecurity frameworks as well as improve the business environment, information communication technology (ICT) infrastructure, and financial literacy.

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