Macroeconomic and monetary policy responses in selected highly indebted MENA countries post Covid 19: A structural VAR approach

With limited fiscal space, MENA governments with flexible exchange rates have been relying extensively on accommodative monetary policy to circumvent external shocks such as Covid 19 and other domestic macroeconomic imbalances. Other MENA countries with high debt levels and fixed exchange rates are not able to use conventional monetary policy effectively. We use a battery of econometric models to identify domestic and external nominal shocks affecting the MENA region and their dynamic transmission mechanisms through impulse response functions and granger causality tests derived from a structural VAR. Once the nature of those shocks is identified, we formulate appropriate macroeconomic policy responses to mitigate their effects. We show that shocks to Saudi Arabia’s macroeconomic fundamentals and oil prices have a significant impact on MENA countries’ GDP, inflation, and interest rates. In the absence of an effective conventional monetary policy, MENA central banks will have to rely more on non-conventional monetary policy tools.