MENA: 4 policies countries can take to fight inflation – World Bank Group | Vette Leader

As we hear the term “inflation” in the news every day, it’s worth reflecting on what it really means for MENA countries. Inflation is the general and sustained increase in the price level of an economy, and a commonly used measure of inflation is the consumer price index, which measures the prices of a representative basket of goods and services purchased by a typical household. Countries urgently need good policy choices to enable sustained economic growth and curb inflation, which hits the poor harder than the rich. Here are four strategies to tackle high inflation and low growth while supporting the less affluent:

1. Improving the “quality” of public spending.

Many MENA countries, especially oil importers, have high public debt and little fiscal space, but they still have spending needs, such as expanding modern social protection systems and investments in climate adaptation. They need to improve and refocus the quality of current public spending.

Currently, public sector wages, untargeted subsidies and debt servicing dominate public spending, all contributing to budgetary rigidity. Even if there is little choice in the short term, countries need to improve their spending quality by:

  1. make public spending more performance-oriented
  2. Elimination of untargeted energy subsidies
  3. Infrastructure reform State-Owned Enterprises (SOEs)
  4. and more effective debt management to reduce debt servicing costs (e.g., by reducing reliance on high-cost, short-term financing).

The World Bank supports countries in these efforts through its Public Expenditure Reviews (PERs), Fiscal Incidence Analysis (CEQs) and infrastructure and debt management advice, which is currently being carried out in Egypt, Morocco, Lebanon and other countries.

2. Improve debt transparency and avoid “hidden debt”.

For countries active in public finance markets, which is most of the MENA region, it is important not to surprise international market players. Especially in the existing context of high debt and (emerging market) risk aversion, countries need to ensure confidence in their debt data. Global experience shows that “hidden debt” often comes to light at the worst possible time – when a crisis is already at hand.

While data transparency is a common challenge in MENA, the region has pretty good debt statistics; Hidden debts, as they have become known in countries like Mozambique, did not appear in MENA. But countries need to be mindful of contingencies, whether they arise from government guarantees for state-owned enterprises or public sector projects; implied guarantees, such as when a state-owned company borrows on the basis of perceived government support; or other liabilities. Power Purchase Agreements (PPAs) are an important cross-sectional example: often under-disclosed, they are adopted in the context of poor cost recovery, with the potential to become government liabilities.

3. Avoid “fiscal dominance” and over-reliance on central banks.

Fiscal dominance refers to a situation where public deficits and debt are expected to be “monetized”—that is, funded by “printing money.” Under normal circumstances, a combination of economic growth and taxation keeps public debt manageable and under control. But shocks and bad policies can drive debt to unsustainable levels and lead to expectations or hopes that the Treasury will draw on the central bank. This is not a good situation. Lebanon is the best example of fiscal dominance in the MENA region.

Central banks are limited in what they can do with their foreign exchange reserves and the management of the monetary and banking system; they cannot maintain price stability (control inflation) when they become government fallback lenders. Once stability is eroded, foreign exchange reserves quickly disappear. And to avert that, central banks will have to resort to highly distortive forex rationing that only postpones the inevitable, such as when Sri Lanka defaulted on its external debt for the first time in its history last month.

Some central bank governors in MENA are calling for urgent action on structural reforms. That is understandable. If fiscal conditions deteriorate and structural reforms fail, the central bank’s toolbox will become ineffective.

4. Protect the poor and vulnerable

Rising inflation is already impoverishing households across MENA, as food spending accounts for a large portion of household budgets. Food accounts for more than 30% of household budgets in Djibouti, Algeria, Morocco and Egypt.

While several MENA countries are considering what steps they can take to redistribute spending, others have already implemented subsidy reform programs in favor of targeted compensation mechanisms to protect the poor from rising food and energy prices. Egypt, for example, announced in March 2022 additional spending of EGP 130 billion (1.6% of FY2023 GDP) to increase public sector wages and pensions and expand the reach of its “Takaful and Karama” money transfer programs . Adding 450,000 families to the programs. Such programs need to be analyzed to ensure that the intended populations are being reached and receiving the right level of support.

Despite all the crises MENA is facing that may affect the development achievements of the last decade, good policy decisions can help to improve the situation . Limiting universal subsidy programs and deploying cash transfer-based social protection schemes are critical. Data transparency on the quality of the spend is also crucial. The World Bank remains ready to provide analysis, funding and policy support to governments facing these challenging choices.

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