Embarking on a Path of Renewal MENA Commission on Stabilization and Growth

In the chaotic global post-COVID-19 economy, with the ongoing war in Ukraine, the challenge of adjusting to the global stagflation that is engulfing the world is particularly hard for the oil importing countries of the Middle East and North Africa (MENA) region. A regional commission of experts, working under the auspices of the Economic Research Forum (ERF), and the Finance for Development Lab (FDL), was asked to evaluate the macro-economic risks ahead, and to make recommendations on the best course correction to avoid them. After an elaborate process of analysis, consultation, and deliberation, the Commission came up with four sets of recommendations, which are developed in this report: First, the recent macroeconomic shock waves are making an already weak economic situation catastrophic. Public debts are rising fast towards unsustainable levels. The challenge ahead is stark: inaction would lead to a financial crisis; but austerity alone could stabilize debt only in the very short term and at the cost of high social tensions. Economic growth is already falling, poverty rising, and the middle-class further weakened, all threatening a rise of social unrest. Failing to develop a convincing response raises the threat of a vicious cycle of economic, social, and political declines, including a retreat into populism, and destructive social polarization. Second, the immediate debt challenge forces countries to adopt painful decisions. While some reduction in government expenditure is unavoidable, much of the political capital invested in adjusting to high indebtedness should go towards improving growth prospects. Public expenditure should be reoriented to safety nets and pro-growth spending. Debt restructuring can only go so far, and countries should not expect too much from it. IMF support will be necessary. It needs to be more generous, but it also need to be made conditional on launching credible national revival strategies, as opposed to the austerity-only based approaches of the past. Third, a pro-growth macroeconomic framework is necessary to ignite growth. But it is not sufficient. In order to achieve a shift in expectation, structural reforms are needed. The reform agenda not only includes the “old” challenges of improving growth prospects and modernizing the state, it should also address the new challenges of relocalization and climate change. On all these fronts, the medium-term reform agenda needs to be initiated in credible ways to create a major expectation shock that can affect the short term - to encourage the private sector into initiate a supply response, and to encourage citizens to start buildin social trust. The fourth recommendation is to recognize that economic reforms are eminently political exercises that need to mobilize the political elites to work. The latter need to believe that the risks ahead are catastrophic, but that a better future is possible, and to convey these messages to the citizens with brutal honesty. Politically, they need to organize an open dialogue with the private sector and civil society to find new mutually beneficial arrangements - political, social, and economic - that can unlock the countries’ true potential. A gradual process if it starts in earnest is possible - improved trust in institutions and confidence about the future will support collective action and generate a virtuous process of progress on all fronts. In addition, there are enormous new opportunities to expand regional and global cooperation that can and should be mobilized in support of reformist national programs.