Arab Countries.. The Delay in Urgent Reforms
Imposes a Burden on Prospects and Resources?!
According to the International Monetary Fund, public debt in many economies in the Middle East and North Africa is a concern, despite the Arab world making tremendous progress over the past years and playing a real leadership role globally.
However, despite the successes, Arab countries, like many regions around the world, are witnessing enormous challenges, as after rising 3.4 percent last year, global growth will decline to 2.9 percent in 2023, recording a slight improvement in 2024, reaching 3.1 percent.
On the positive side, inflation is expected to slow from 8.8 percent in 2022 to 6.6 percent this year and 4.3 percent in 2024, although it will still exceed pre-pandemic levels in most countries. But while the picture looks promising, negative developments are still the preponderance of the balance of risk. China's recovery could be disrupted. Inflation may remain above expectations, requiring further monetary tightening, which could lead to sudden repricing in financial markets.
As the global economy slows, growth in the Middle East and North Africa (MENA) region is also expected to slow from 5.4 percent in 2022 to 3.2 percent this year, before rising to 3.5 percent in 2024.
Challenges will continue in oil-importing countries. Public debt is a major concern, with several economies in the region facing high debt-to-GDP ratios, which are close to 90 percent in some economies.
There are several risks to worry about in the region as well, according to the International Monetary Fund. Russia's continued war in Ukraine, Russia's withdrawal from the grain export agreement and climate catastrophes could exacerbate food deficits in the most vulnerable countries. Added to this is the chronic rise in unemployment, especially among young people, which puts us at enormous risk to social stability.
Further tightening global or domestic financial conditions can also lead to higher borrowing costs and, in some cases, lack of financing. Delaying urgent domestic reforms would put a strain on regional prospects and government resources.
Fluctuations in energy and food prices in the region require governments to intervene to protect vulnerable groups while pursuing development plans and investments. This requires careful planning and resources. This is what Morocco is doing by phasing out costly subsidies that are not directed in favor of providing targeted social support. Mauritania has also laid a fiscal foundation to counter fluctuations in mineral export revenues and has raised fuel prices by 30 percent by cutting subsidies. Some energy-importing countries build up reserves when prices rise in preparation for oil price fluctuations.
Governments must also manage many of the risks to their public finances, including from public guarantees and losses of state-owned enterprises, which could lead to debt destabilization and sharp cuts in necessary expenditures. Arab countries should plan and invest for the long term to meet climate challenges. From North Africa to Central Asia, warming levels in the region are twice as high as the rest of the world.
Enhanced tax revenues are also required, as investment in a more resilient future depends on further strengthening tax policies and administration. Many countries in the region have made significant progress in strengthening their tax capacities. However, the average tax-to-GDP ratio, excluding hydrocarbon-related revenues, remains at about 11%, less than half the possible revenue. This ratio could be increased through better tax policy design and the phasing out of inefficient tax exemptions. For example, Algeria is currently working to broaden the tax base and distribute the tax burden more fairly. Bahrain and Saudi Arabia have succeeded in raising huge revenues through the introduction of VAT. In the UAE, the introduction of corporate income tax is expected to be gradual.
Another key factor to increase revenue is the modernization of tax administration, and the use of digital tools can help. Jordan has already done this, and the Palestinian Ministry of Finance has taken similar action. Somalia is also engaged in policy and administration reform to rebuild tax capacity. Such measures are expected to contribute to increasing revenues by improving tax compliance.
