Fiscal Limits in the MENA Region: A Structural Analysis of Debt Sustainability

The MENA region has faced significant socio-economic and political shocks over the past decade, which impacted the fiscal stability of its economies. This paper explores how the fiscal fundamentals of these economies and the economic shocks they face influence their fiscal space, defined as the maximum level of sustainable debt net of actual debt as a share of GDP. Using a non-linear DSGE model with a state dependent fiscal limit that is calibrated using data from six non-oil-exporting and six oil-exporting MENA countries, I estimate the fiscal limit distributions for these economies. I also examine how shocks to productivity, public spending and government revenues affect the fiscal space, as well as how fiscal policy tools such as transfers and taxation shape debt sustainability. Key findings reveal that non-oil exporting MENA countries operate with more constrained fiscal positions, that government transfers and tax capacity play a major role in shaping fiscal limits, and that the fiscal resilience of oil-exporting MENA economies is primarily attributed to the oil revenues they generate.