middle east and north africa macro poverty outlook...

MPOMacro Poverty Outlook

Country-by-country Analysis and Projections for the Developing World

Annual Meetings

2019

Middle East and North Africa

MPO Oct 19 145

Middle East and North Africa

Jordan Kuwait Lebanon Libya Morocco Oman

Palestinian Territories Qatar Saudi Arabia Tunisia United Arab Emirates Yemen, Republic

Algeria Bahrain Djibouti Egypt, Arab Republic Iran, Islamic Republic Iraq, Republic

146 MPO Oct 19

Recent developments GDP growth reached 1.5 percent in 2018, compared to 1.4 percent in the previous year, and was sustained at 1.5 percent in Q1-2019. Growth in the hydrocarbon sec-tor was sluggish, with economic activity contracting by 6.5 percent and 7.7 percent in 2018 and Q1-2019, respectively, partial-ly offsetting the slight increase in non-hydrocarbon growth of 3.4 percent and 3.9 percent in 2018 and Q1-2019. On the sec-toral side, commercial services, industrial, construction and public works, and agri-culture sectors continue to drive non-hydrocarbon growth, reaching 5.6 percent, 4.6 percent, 3 percent and 2.7 percent in Q1-2019, respectively. On the demand side, real private con-sumption growth reached 2.5 percent in Q1-2019, compared to 3 percent in the same period of the previous year. This deceleration is explained by lower growth in food consumption, possibly affected by the economic disruption. Investment grew however by 4.9 percent in Q1-2019 - a re-markable increase compared to the 0.2 percent of Q1-2018 - driven by public in-vestment in the construction, public works and hydraulics sector with the expansion of social housing programs. On the external front, exports of goods and services have contracted in real terms by 6.4 percent in Q1-2019, driven by a sizable decline in hydrocarbon exports (-8.1 percent) due to rising domestic de-mand and stagnant production. At the same time, imports of goods and services

have increased by 4.1 percent despite the sluggish economy, marking a sharp in-crease compared to a 10.6 percent retrac-tion in the previous quarter. This has re-sulted in a wider trade and current ac-count deficit of 6.5 percent and 12.8 per-cent of GDP, compared to 5.1 percent and 10.4 percent in Q1-2018, respectively. For-eign exchange reserves contracted to US$68 billion in end-July, down from US$79.9 billion in end-December 2018. The fast depletion of official reserves has pushed the government to take additional steps to tighten imports through new operational mechanisms to regulate wheat and milk imports and better con-trols on subsidies. The budget and primary deficits have improved in 2018, reaching 7.6 percent and 4.9 percent of GDP, respectively, down from 8.8 and 6.9 percent of GDP a year earlier. This improvement occurred on the back of a slight increase in reve-nues, coupled with lower spending on goods, services and wages, as well as on capital spending. Inflation remained sta-ble at 4.3 percent in 2018, and has declined to 4.1 percent in end-March 2019, despite the expansionary monetary policy under the “unconventional financing” by the central bank, amounting to 32 percent of GDP of which half has been already inject-ed in the economy. On the socioeconomic front, the unem-ployment rate reached 11.7 percent as of October 2018 and is higher among the youth (29 percent in April 2018), women (19.4 percent), and university graduates (18.5 percent), a result of the skills mis-match in the labor market. There are no

Table 1 2018

Population, million 42.0

GDP, current US$ billion 1 64.9

GDP per capita, current US$ 3926

National poverty ratea 5.5

International poverty rate ($1.9)a 0.5

Lower middle-income poverty rate ($3.2)a 3.9

Gini indexb 27.6

School enro llment, primary (% gross)c 1 1 1 .7

Life expectancy at birth, yearsc 76.3

(a) M ost recent value (2011).

(c) M ost recent WDI value (2017).

Source: WDI, M acro Poverty Outlook, and off icial data.

Notes:

(b) M ost recent WDI value (2017).

ALGERIA

FIGURE 1 Algeria / Real GDP growth FIGURE 2 Algeria / Twin deficits

Sources: IMF and World Bank Staff estimates and projections. Source: World Bank Staff estimates and projections.

Major protests erupted in February 2019

to oppose President Abdelaziz Boute-

flika's candidacy for a fifth term and de-

manding his resignation, which took place

in April. An acting president was inau-

gurated to carry the transition and organ-

ize the presidential election. The uncer-

tain path to elections and corruption in-

vestigations have reduced predictability

in the business environment. The hydro-

carbon sector continues to contract in the

face of oil price volatility, partially off-

setting the slight increase in non-

hydrocarbon growth.

-8

-6

-4

-2

0

2

4

6

8

2016 2017 2018e 2019f 2020f 2021f

Hydrocarbon GDP Non-hydrocarbon GDP Real GDP

Percent change

-20

-15

-10

-5

00

10

20

30

40

50

2016 2017 2018e 2019f 2020f 2021f

Total expendituresTotal RevenuesGeneral Government balance (rhs)Current account balance (rhs)

Percent of GDP Percent of GDP

147 MPO Oct 19

recent poverty estimates for the country, but official numbers from 2010/11 show that 5.5 percent of the population was considered poor, with large regional vari-ations and higher concentration in the Sahara and the Steppe regions. Moreover, these estimates are based on poverty lines of less than 3.6 USD/day in 2011 PPP, which is far below the 5.5 USD/day pov-erty line associated with upper middle-income countries.

Outlook Political uncertainty is likely to cause a slowdown in the non-hydrocarbon sector in 2019. Top business executives in vari-ous sectors have been detained on investi-gations of corruption, leading to economic disruptions due to abrupt changes in man-agement and supervision, as well as in-vestment uncertainty. In the hydrocarbon sector, political uncertainty will dampen the hope of increasing production as the revision of the hydrocarbon fiscal law is delayed. As a result, GDP growth is ex-pected to decelerate to 1.3 percent in 2019. The pre-election season is also likely to

further delay the fiscal consolidation that had been programmed for 2019, exacer-bating the fiscal deficit to an expected 12.1 percent of GDP and increasing the risk of a sharper adjustment down the road. On the external front, the current account deficit is expected to widen to 8.1 percent of GDP, mainly on the back of a substan-tially larger trade deficit. The recent dis-covery of a new gas field provides hope for a rebound in gas production and ex-ports, but only in the medium term and only if the hydrocarbon investment frame-work is conducive. Due to the unavailability of recent data, projections for poverty trends are not possible. However, the economy’s ability to reduce poverty (or vulnerability) may be limited given low rates of economic growth, persistently high unemployment and policy uncertainty. Despite the efforts to diversify the economy, increase the private sector contribution and attract foreign investors, few improve-ments are likely in the short run and job creation is likely to be limited. Consum-ers’ real incomes and purchasing power are likely to be protected given that in-flation is expected to remain contained in 2019.

Risks and challenges Algeria’s economy remains highly de-pendent on hydrocarbons, and on global oil and gas prices. As economic activity is expected to be impacted by the political course, it is also expected that more re-sources will be directed to social measures, at the expense of public invest-ment spending. Private sector activity and investment will also be impacted by the political disruption and the unfavorable business climate, as well as disruptions caused by delays in paying workers in several industrial activities. The combination of high fiscal break-even oil prices (estimated at over $100) and de-layed fiscal consolidation leaves the coun-try vulnerable to renewed oil price volatili-ty and a weaker global economy. In this context, fiscal policy needs to be operation-ally anchored in a medium-term frame-work to insulate the economy from oil price volatility. Delays in ending the politi-cal deadlock and policy uncertainty could further harm the country’s economy, lead-ing to an increase in imports and further depletion of foreign currency reserves.

TABLE 2 Algeria / Macro poverty outlook indicators (annual percent change unless indicated otherwise)

2016 2017 2018 2019 e 2020 f 2021 f

Real GDP growth, at constant market prices 3.2 1.4 1.5 1.3 1.9 2.2

Private Consumption 3.3 1.9 2.9 2.5 1.9 2.2

Government Consumption 24.0 -5.9 -4.2 -10.5 8.2 7.3

Gross Fixed Capital Investment 19.7 -4.1 -7.0 -4.7 1.6 2.0

Exports, Goods and Services 7.3 -5.3 -6.1 -5.5 0.4 0.8

Imports, Goods and Services -2.6 3.2 1.4 1.5 1.5 1.5

Real GDP growth, at constant factor prices 3.2 1.4 1.5 1.3 1.9 2.2

Agriculture 1.8 1.0 5.5 2.8 1.8 1.8

Industry 5.0 1.9 -2.4 1.4 2.1 2.1

Services 2.4 1.2 3.2 0.8 1.8 2.4

Inflation (Consumer Price Index) 6.4 5.6 4.3 4.3 5.1 5.9

Current Account Balance (% of GDP) -16.6 -12.6 -6.7 -8.3 -10.7 -12.5

Fiscal Balance (% of GDP) -14.6 -8.8 -7.6 -12.2 -7.2 -7.1

Debt (% of GDP) 32.2 33.9 41.7 52.1 62.2 66.1

Primary Balance (% of GDP) -13.8 -6.9 -4.9 -5.3 -3.4 -3.3

Source: World Bank, Poverty & Equity and M acroeconomics, Trade & Investment Global Practices.Notes: e = estimate, f = forecast.

148 MPO Oct 19

Recent developments Overall growth is estimated to remain at 1.8 percent in 2019, and non-oil growth to slow to 2.2 percent, from 2.5 percent in 2018, driven by the planned fiscal consoli-dation measures under the Fiscal Balance Program (FBP), including the VAT. The oil sector is estimated to grow by just 0.2 percent following a 1.2 percent contrac-tion in 2018 capped by OPEC+ output cut agreement and weaker crude production. However, according to figures released by Bahrain’s Ministry of Finance and Na-tional Economy (MOFNE), Bahrain’s economy grew by 2.7 percent in Q1-2019 boosted by expansion in the non-oil sec-tor and higher spending on infrastructure thanks to the Gulf financial support pack-age. Inflation is estimated to pick up in 2019 to 3.3 percent given the introduction of VAT in January 2019. While narrowing, fiscal and external posi-tions remained inimical to sustainability. Bahrain adopted a Fiscal Balance Program (FBP) which aims to achieve a balanced budget by 2022. This plan is supported by US$10 billion in financing from other GCC countries. The program is being monitored by the Arab Monetary Fund. Bahrain out-lined a path for deficit reduction under the FBP, with the deficit falling from 12 per-cent of GDP in 2018, to 8 percent in 2019 and further to 2.1 and 1 percent in 2020 and 2021, respectively. Bahrain introduced the VAT in 2019. This is estimated to boost non-oil revenue by 2 percentage points of non-oil GDP this year compared to 2018.

While balances have improved, preliminary spending estimates do not provide confi-dence that the planned deficit reduction will be on track, due to higher expenditure. On August 6th, the MOFNE announced that the budget deficit during H1/2019 declined by 37.8 percent (y-o-y) driven by increase in revenue and marginal reduction in spend-ing (2.5 percent y-o-y). Meanwhile, updated data released by MOFNE late May 2019, show that total public spending was 24 per-cent and 23 percent of GDP in 2019 and 2020, respectively, above FBP targets of 22.6 percent and 21.6 percent. The current ac-count deficit is estimated to narrow to 3.6 percent of GDP in 2019 compared to 5.8 percent of GDP in 2018, driven by growth in services exports. Reserves are estimated to stay low at US$2 billion in 2019 (or one month of non-oil imports). Persistent large fiscal and current account deficits have led to a rapid rise in the pub-lic debt-to-GDP ratio, estimated to in-crease to 100 percent in 2019, from 93 per-cent in 2018. However, the FBP, accompa-nied by US$10 billion in regional support, has reduced market stress and led to a significant decline in bond spreads. Like other GCC members, Bahrain has high share of working-age population. The country has sought to encourage the re-cruitment of its citizens in the private sector by subsidizing salaries and providing fi-nancial support for businesses. However, latest data available from the Labor Market Regulatory Authority (LMRA) for the Q2 2018 show that expatriates still accounted for 79 percent of the country's total work-force, despite a 4.6 percent contraction in the foreign workforce since its previous

BAHRAIN

FIGURE 1 Bahrain / Real annual GDP growth FIGURE 2 Bahrain / General government operations

Sources: Bahrain authorities, World Bank; and IMF staff projections. Sources: Bahrain authorities, World Bank; and IMF staff projections.

The non-oil economy is expected to

grow 2.2 on average percent over 2019-

2021, with GCC investment supporting

elevated infrastructure spending. This

will offset continued oil sector weakness

and keep headline growth around 2 per-

cent. Inflation is expected to pick up

this year to 3.3 percent as a result of the

introduction of the VAT. The budget

deficit is projected to gradually narrow

in line with reforms outlined in the Fis-

cal Balance Program. Adhering to this

program will improve the external cur-

rent account position and lessen the

pressure on Bahrain’s foreign reserves.

Table 1 2018

Population, million 1 .6

GDP, current US$ billion 38.3


School enro llment, primary (% gross)a 1 01 .0

Life expectancy at birth, yearsa 77.0


Notes:

(a) M ost recent WDI value (2017).

0

5

10

15

20

25

30

35

40

-20

-18

-16

-14

-12

-10

-8

-6

-4

-2

0

2016 2017 2018 2019 2020 2021

Overall fiscal balance

Total revenus (RHS)

Total expenditure (RHS)


-2

-1

0

1

2

3

4

5

6

2016 2017 2018 2019 2020 2021

Hydrocarbon GDP

Non-hydrocarbon GDP

Real GDP

Percentage change

149 MPO Oct 19

peak in Q4 2016. Bahraini employment only increased by 1 percent in Q2 2018 compared to same quarter 2017. According to ILO (2019), labor force participation among female youth (% of female labor force ages 15-24) remains low at 29 percent compared to 57 percent among male youth. Similarly, although overall unemployment rates are low at around 1 percent, female unemployment rate is 12.8 percent among women aged 15-24 years old. In late 2018, the government announced a series of re-forms under the FBP to induce greater par-ticipation by nationals in the private sector, including the Voluntary Retirement Scheme (VRS). Furthermore, Bahrain’s La-bor Fund (Tamkeen) is providing retrain-ing initiatives to enable skill upgrading, increase female labor participation. The recently announced National Employment Program in Feb. 2019, is designed to make citizens the first choice of employment in the private and public sectors, and increase the fees on expatriate labor.

Outlook Bahrain’s economy is projected to post a moderate level of growth at an average of

2.2 percent over 2020-2021 as the econo-my continues to rely on its limited oil revenues to underpin the safety net for citizens while furthering diversification. The non-oil economy is expected to grow at 3 percent over the same period thanks to high levels of infrastructure spending and an increase in manufactur-ing output. Continuing fiscal reforms and emphasiz-ing better-targeted subsidies under the FBP will help to narrow the fiscal deficit to 7.7 percent of GDP in 2020, assuming the costs of the VRS is financed off budget. Public debt is expected to remain high over 103 percent of GDP in the forecast period, with sizable gross financing needs. The non-oil primary balance is expected to keep improving on the back of higher non-oil revenues projected at 6.7 percent of non-oil GDP in 2020. The current account deficit is likely to persist, albeit at moder-ate levels. Reserves are expected to stay low at one month of prospective non-oil imports. The government’s VRS, which now covers around 8,000 people, could also reduce the wage bill by BD122 million by end-2019, assuming no new hiring takes place. While implementing the FBP, the coun-try faces tough public policy choices

deriving from the cuts in social spend-ing that may have a negative impact on the delivery of public services and safe-ty net programs. Designing a reform program that protects the most vulnera-ble is, thus, critical to ensuring sus-tained progress and to enhance the wel-fare of the population.

Risks and challenges While regional financial support has re-duced near-term pressures, delays in fiscal adjustment and tightening of global fi-nancing conditions continue to pose downside risks to the outlook. Any devia-tion from the balanced budget target, a delay in implementing fiscal consolidation or a decline in global oil prices could lead to higher financing needs, intensify pres-sures on reserves, and reduce investor confidence. Achieving a balanced fiscal position by 2022 will require stronger fis-cal measures than those currently planned. Continuing fiscal reforms, in-cluding further subsidy cuts and saving associated with the VRS, rising oil prices and improving spending efficiency will help to narrow these risks.

TABLE 2 Bahrain / Macro poverty outlook indicators (annual percent change unless indicated otherwise)

2016 2017 2018 2019 e 2020 f 2021 f


Private Consumption 0.5 -1.4 2.6 2.4 1.6 2.3

Government Consumption -0.6 3.1 -0.4 -0.5 -0.1 0.8

Gross Fixed Capital Investment 10.8 11.0 6.0 5.0 3.4 4.1

Exports, Goods and Services -1.8 2.8 3.4 4.5 4.2 4.6



Agriculture 6.9 -0.9 -0.9 -0.9 -0.9 -0.9

Industry 2.8 0.6 0.6 0.6 0.6 0.6

Services 4.0 6.3 2.7 2.7 3.2 3.5



Net Foreign Direct Investment (% of GDP) 3.5 0.8 1.9 1.9 1.9 1.9



150 MPO Oct 19

Recent developments Economic growth is projected to reach 7.2 percent in 2019 as international trade nor-malizes in Ethiopia following the continu-ing political transition and the 2017 devalu-ation by 15 percent of the Ethiopian birr. Growth will be driven by export of trans-portation and logistics services supported by the newly commissioned trade infra-structure. Container terminal volume in-creased by 8.3 percent in the first seven months of 2019 to reach 520,000 TEU, while bulk cargo volume increased by 17.7 per-cent, to 3.5 million tons in the same period. Growth in the small secondary sector will also remain strong, supported by the nas-cent food processing and construction ma-terials industries – signs that domestic val-ue chains related to trade are emerging. Logistics services exports and reexport activities by free zone companies have replaced public investment as main driver of growth, thus generating significant macroeconomic spillover effects to the economy. As a result, the current account balance which turned positive in 2018 as imports related to the large public projects tapered, is expected to reach a surplus of 16 percent of GDP in 2019. Excluding the free zones, the current account is expected to show a small deficit of 3 percent of GDP, which is financed by FDI inflows, mainly to the tourism (hotels) and hous-ing sectors. International reserves hold-ings by the Central Bank are expected to stabilize at 3.3 months of imports, enough for currency board requirements, while

net foreign assets holding by the commer-cial banks will average 45 percent of GDP. Inflation has been below 1 percent in the last two years, but in the first seven months of 2019, the CPI increased by 3.0 percent on a year on year basis. On the fiscal side, the budget deficit, al-ready down from 20 percent of GDP in 2015 to 2.8 percent of GDP in 2018, is ex-pected to decline further to 0.7 percent of GDP in 2019. Despite lower mobilization of nontax revenue, the fiscal stance is ex-pected to improve further in 2019 as total expenditure continues to decline. Capital expenditure is normalizing toward its share in 2013 and current expenditures are also expected to decline in 2019, with tight-ening of spending in goods and services and transfers. As a result, external public and publicly guaranteed debt (PPG) reached its peak in 2018 and is expected to decline to 71 percent of GDP in 2019. Ex-ternal PPG debt rose from 34 percent of GDP in 2013 to an estimated 72.2 percent of GDP in 2018, mainly resulting from three non-concessional loans that the gov-ernment contracted or guaranteed to build a water pipeline, a multipurpose port and a new railway link to Ethiopia. The loan related to the railway was recently restruc-tured with an extension of the maturity date, an augmentation of the grace period and a diminution of the interest rate to match the debt service repayment sched-ule with the maturation of the project. Despite faster economic growth, poverty remains high. According to the last household survey conducted in 2017, 17.1 percent of the population lived with less US$1.90 PPP per day. The regions

Table 1 2018

Population, million 1 .0



International poverty rate ($1.9)a 1 7.1


National poverty ratea 21 .1

Gini indexa 41 .6

School enro llment, primary (% gross)b 93.0


(a) M ost recent value (2017), 2011 PPPs.



Notes:

(b) M inistry of Education.

DJIBOUTI

FIGURE 1 Djibouti / Real GDP growth, fiscal, and current account balances

FIGURE 2 Djibouti / Actual and projected poverty rates and real GDP per capita

Sources: Government of Djibouti and World Bank staff projections. Source: World Bank. Notes: see Table 2.

After a successful implementation of

large infrastructure projects to support

the country’s vision of becoming the

logistic, financial and digital hub of the

Horn of Africa, Djibouti’s economy has

entered a stabilization phase. The coun-

try has started harvesting the fruits of

its investment in terms of growth and

exports while cautiously managing

financial risks including those related

to rapid external debt accumulation.

Poverty rate (%) Real GDP per capita (LCU constant)

0

100000

200000

300000

400000

500000

600000

700000

0

10

20

30

40

50

60

70

80

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

International poverty rate Lower middle-income pov. rateUpper middle-income pov. rate Real GDP pc

0

1

2

3

4

5

6

7

8

9

-25

-15

-5

5

15

25

2016 2017 2018e 2019f 2020f 2021f

Real GDP growth (rhs) Current Account deficit (lhs)Government fiscal deficit (lhs)

Percent change Percent of GDP

151 MPO Oct 19

registered an extreme poverty rate that was more than twice as high as the na-tional rate (41.2 percent) and Djibouti city a lower rate (9.5 percent). The poverty rate in the rural areas is very high at 57.8 percent. The reported unemployment rate is high, with significant gender differences. Younger individuals also face higher unemployment rates.

Outlook The medium-term economic outlook re-mains positive, as the Government’s strat-egy of positioning the country as a region-al trade, logistics, and digital hub gains traction. GDP growth is expected to reach 7.5 percent in 2020 before accelerating to 8.0 percent in 2021-2023. Growth will re-main supported by reexports by free zone companies and exports of transportation, logistics, and telecommunication services. A gradual emergence of non-traditional exports, mainly light manufacturing from the export-processing zones will increase value-added. As trade and investment flows to Ethiopia continue to develop, the need for deeper connectivity will drive

capital inflows over the medium term and help increase the utilization of existing logistics facilities. With the starting of pro-duction of natural gas in Ethiopia, an ex-port terminal in Djibouti will generate further boosts in activity. On the policy side, the Government will continue to implement its Vision 2035, pivoting to modernize its administration, including strengthening SOEs’ manage-ment and monitoring, develop its human capital and its private sector, and open some of its protected industries to compe-tition. The recent performance in the Do-ing Business and LPI ranking has in-creased the appetite for reform. The extreme poverty rate at US$1.90 per day is expected to decline to 15.5 percent in 2019, with reductions in the medium term if economic growth is mirrored by increased dynamism in the private sector. The country’s monitoring of welfare has taken a significant step forward in 2019. A new National Strategy for Development of Statistics was prepared and released this year. In addition, microdata and metadata from household consumption surveys of 2017, 2012 and 2002 was made available in public domain on the World Bank’s Mi-crodata Catalog.

Risks and challenges Downside uncertainties are related to: (i) high dependence on Ethiopia which is going through a transition period; (ii) high uncertainties in global trade and emer-gence of competitor ports which could weaken transit and transshipment pro-spects; (iii) high vulnerability to exoge-nous shocks, such as price hikes on its food and fuel imports, and cyclones and floods; (iv) non-prudent debt leveraging borrowing by SOEs; and (v) failure to im-plement reforms. Without significant im-plementation of policy re-forms, Djibouti may become a modern port enclave in a country otherwise equipped with lagging energy, ICT and education system, with high poverty at the periphery. Reaching the poor is the main policy challenge to make growth inclusive. Unlike countries endowed with widely distributed and broadly accessible natural assets, the na-ture of the Djibouti’s natural asset, its geo-graphical position, is such that resources and capacity are to be pooled and invest-ed to make it productive and distribute gains for collective benefit.

TABLE 2 Djibouti / Macro poverty outlook indicators (annual percent change unless indicated otherwise)

2016 2017 2018 2019 e 2020 f 2021 f



Government Consumption 25.0 3.4 3.0 3.2 3.6 3.6



Imports, Goods and Services 6.6 55.8 5.0 6.5 7.0 7.5


Agriculture 4.4 2.8 3.5 3.5 3.5 3.5

Industry 6.3 10.8 10.8 9.5 10.2 10.2

Services 7.6 4.1 4.7 7.0 7.2 7.8

Inflation (Consumer Price Index) 2.5 0.6 -0.1 2.0 2.5 3.0

Current Account Balance (% of GDP) -20.9 -3.6 14.9 16.0 18.8 22.4


Fiscal Balance (% of GDP) -8.2 -4.6 -2.8 -0.7 -0.5 0.8

Total PPG Debt (% of GDP) 63.9 71.2 72.2 70.9 68.6 66.9

Primary Balance (% of GDP) -7.3 -3.5 -1.6 0.6 0.8 2.1

International poverty rate ($1.9 in 2011 PPP)a,b .. 17.1 16.5 15.5 14.3 13.5

Lower middle-income poverty rate ($3.2 in 2011 PPP)a,b .. 40.2 38.6 36.7 34.6 32.0

Upper middle-income poverty rate ($5.5 in 2011 PPP)a,b .. 70.6 69.3 67.1 65.1 62.6

Source: World Bank, Poverty & Equity and M acroeconomics, Trade & Investment Global Practices.Notes: e = estimate, f = forecast.(a) Calculations based on 2017-EDAM . Actual data: 2017. Nowcast: 2018. Forecast are from 2019 to 2021.(b) Projection using neutral distribution (2017) with pass-through = 0.7 based on GDP per capita in constant LCU.

152 MPO Oct 19

Recent developments Real GDP growth reached 5.6 percent in FY19, up from 5.3 percent in FY18. Data for the first nine months of FY19 show that this pickup is driven by net exports, as goods and services exports inched up in tandem with a contraction of oil im-ports (supported by the increase in natural gas production). Private investment is also picking up. On the sectoral side, gas ex-tractives, tourism, wholesale and retail trade, real estate and construction have been the main drivers of growth. Unemployment decreased to 7.5 percent in Q4-FY19 (from 9.9 percent a year earli-er), although accompanied by shrinking labor force participation. The share of em-ployed individuals remained modest, at 39 percent of the working age population, indicating relatively weak private sector job-creation. Indeed, the credit extended to private businesses averaged only 22 percent of total domestic credit during FY19 (slightly lower than the previous year). Similarly, the Purchasing Managers’ Index (PMI), an indicator for non-oil pri-vate sector activity, has been relatively feeble, averaging 49.3 throughout FY19. The Central Bank of Egypt cut policy rates by 150 basis-points in August 2019, a move that should improve private sector cash flow via its impact on lending rates. Policy rates have decreased to 14.25 percent and 15.25 percent for the overnight deposit and lending transac-tions, respectively, albeit still 250 basis-points higher than their levels prior to the

2016 depreciation. The monetary easing was triggered by the remarkable decline in headline inflation in July 2019 to 8.7 percent, due to favorable base effects, as well as moderating food inflation; alto-gether diluting the inflationary impact of the July energy price hikes. The budget and primary balances have improved to an estimated -8.3 percent and 1.9 percent of GDP, respectively in FY19, from -9.7 percent and 0.1 percent of GDP a year earlier. This comes on the back of the containment of energy subsidies and civil servants’ wages, in addition to increased revenues collection (notably from the VAT and income tax). In tandem, government debt is estimated to have decreased to 90.5 percent of GDP in end-June 2019, from 97.3 percent of GDP in end-June 2018, with the decline mostly stem-ming from the domestic portion. Egypt’s external position has stabilized at broadly favorable levels, as foreign re-serves reached US$44.97 billion in end-August 2019 (covering around eight months of merchandise imports). Howev-er, non-oil exports remain sluggish. FDI also remained modest and predominantly directed to hydrocarbons. Portfolio in-flows were supported by the sovereign Eurobond issuances worth US$4 billion and EUR2 billion during H2-FY19, as well as continued foreigners’ purchases of government securities. The Egyptian pound strengthened against the US$, reaching EGP/US$16.4 by mid-September 2019; cumulatively appreciating by around 16 percent since the Pound’s weakest point around mid-December 2016. Another component of

Table 1 2018


GDP, current US$ billion 251 .0


Lower middle-income poverty rate ($3.2)a 1 6.1


Gini indexa 30.0

School enro llment, primary (% gross)b 1 05.0

Life expectancy at birth, yearsb 71 .7



Notes:


ARAB REPUBLIC OF EGYPT

FIGURE 1 Arab Republic of Egypt / GDP growth and employment rate, FY2015Q3-FY2019Q3

FIGURE 2 Arab Republic of Egypt / Headline and core CPI inflation, Jul 2014 – Aug 2019

Sources: Ministry of Planning and CAPMAS. Source: Central Bank of Egypt.

Egypt is sustaining its robust growth, fiscal

outturns are improving, and external ac-

counts are stabilizing at broadly favorable

levels. Inflation receded significantly, pav-

ing the way for monetary easing. Social

conditions remain difficult, as the economy

recovers from the preceding period of high

inflation. Resolving long-standing challeng-

es will be key to achieve structural transfor-

mation towards a vibrant economy where

the business environment is conducive for

competition, and the private sector is capa-

ble of generating more and better jobs.

0

10

20

30

40

Jul'14 Jul'15 Jul'16 Jul'17 Jul'18 Jul'19

Core

Headline Urban

Percent

25

30

35

40

45

1

2

3

4

5

6

FY2015Q3 FY2016Q3 FY2017Q3 FY2018Q3 FY2019Q3

Employment rate (rhs)

GDP growth (lhs)

Percent Percent

153 MPO Oct 19

exchange rate liberalization was achieved in September 2019 with the abolition of the “customs dollar” – a fixed exchange rate applicable to trade transactions. While the macroeconomic environment has improved, social conditions remain difficult. Between 2016 and 2018, nomi-nal wage growth fell below inflation. Official reports indicate that 32.5 percent of the population lived below the nation-al poverty line in FY18, with the highest poverty rates in rural Upper Egypt. If the World Bank’s internationally compa-rable poverty line of US$3.20 per person per day (2011 PPP) for lower middle-income countries is used as the thresh-old, then simulations using per capita private consumption growth rates sug-gest that 15.8 percent of the population was poor in 2019.

Outlook Assuming a continuation of macroeco-nomic reforms and a gradual improve-ment in the business environment, eco-nomic growth is expected to reach 6 per-cent by FY21, supported by a recovery in private consumption, investments and exports (notably in tourism and gas). If overall growth is reflected in a per capita

private consumption growth (of at least 0.7 percent) that is distributed across all the income groups, then poverty rates – at the international poverty line of US$3.20 – could be reduced from 15.80 percent to 15.67 percent, during the forecast horizon. The overall fiscal deficit is also expected to continue declining gradually over the medium term. The newly adopted fuel indexation mechanism should (partially) shield the budget from exchange rate movements or shocks in global oil prices. The external accounts are expected to re-main stable over the forecast trajectory. The current account deficit is expected to hover around 2.6 percent of GDP (compared to 2.4 percent in FY18), due to the balancing effects of an expected im-provement in the services trade surplus, against a decline in private transfers (if remittances – especially from the Gulf – continue to inch downwards).

Risks and challenges Following the final review of the IMF pro-gram in July 2019, Egypt needs to sustain its macroeconomic stabilization path. The softening global growth and trade outlook may negatively impact Egypt’s prospects. This further emphasizes the urgency for a

new wave of structural reforms that can translate into higher productivity and job-creation. These should focus on core insti-tutional constraints to effective policy im-plementation, lifting non-tariff barriers, and creating space for the private sector to expand in more sophisticated products and exports. While fiscal outturns improved, the budg-et structure remains challenging, dominat-ed by large interest payments (surpassing 10 percent of GDP in FY19), while tax rev-enues remain low at below 14.5 percent and insufficient to finance Egypt’s devel-opmental needs, especially in the health and education sectors. Despite the declin-ing debt-to-GDP ratio, the external debt service-to-exports ratio increased to 28 percent in end-FY2018, from an average 15.7 percent in the previous three years, indicating that the external debt has grown faster than the economy’s basic source of foreign income. Further, contin-gent liabilities (20.4 percent of GDP in end-December 2018) represent another source of fiscal risk. On the inclusion front, challenges emanate from eroded real incomes, high youth unemployment, informal- and under-employment. These are exacerbated by high population growth, sluggish job-creation and low participation in the labor force, especially among females.

TABLE 2 Arab Republic of Egypt / Macro poverty outlook indicators (annual percent change unless indicated otherwise)

2016 2017 2018 2019 e 2020 f 2021 f






Imports, Goods and Services -2.2 52.5 11.3 -7.5 0.5 3.5


Agriculture 3.1 3.2 3.1 3.0 3.0 3.0

Industry 0.8 2.1 6.4 7.5 6.4 6.8

Services 3.2 4.6 5.0 5.0 6.0 6.0





International poverty rate ($1.9 in 2011 PPP)a,b 1.4 1.4 1.4 1.4 1.4 1.4

Lower middle-income poverty rate ($3.2 in 2011 PPP)a,b 15.9 15.7 15.8 15.8 15.7 15.7

Upper middle-income poverty rate ($5.5 in 2011 PPP)a,b 61.0 60.2 60.4 60.5 60.2 60.0

Source: World Bank, Poverty & Equity and M acroeconomics, Trade & Investment Global Practices.Notes: e = estimate, f = forecast.(a) Calculations based on 2012-HIECS and 2015-HIECS. Actual data: 2015. Nowcast: 2016-2018. Forecast are from 2019 to 2021.(b) Projection using point-to-point elasticity (2012-2015) with pass-through = 0.5 based on private consumption per capita in constant LCU.

154 MPO Oct 19

Recent developments Iran’s economy is expected to contract further by 8.7 percent in 2019/20 due to external shocks to oil and gas sector out-put. The plummeting exports comes after the expiration of US waivers to major im-porters of Iranian oil and tightening of banking sector restrictions in addition to new sanctions being imposed on the coun-try’s petrochemicals, metals, mining, and maritime sectors. The expected deteriora-tion in economic growth would mean that by the end of 2019/20 the economy would be 90 percent of its previous size com-pared to just two years earlier. The oil sector decline coupled with inter-national trade and capital flow restrictions have negatively influenced economic activ-ity in key non-oil sectors, including auto, machinery and construction sectors which have faced supply chain challenges and higher operational costs. In August 2019, the housing sector registered the lowest volume of sales in six years while prices rose by around 78 percent year over year (yoy). On the supply side, these develop-ments among other shocks such as recent floods and earthquakes, are likely to result to further stagnation in the services sector, the largest production component of GDP (56 percent share in 2017/18). Similarly, the GDP expenditure components are to be strongly influenced by the shock to ex-ports. However, the simultaneous reduc-tion in imports is expected to moderate part of the downward pressure on the trade balance and the current account. Real

government consumption is also expected to contract at a faster rate of 5.4 percent compared to the previous round of oil export embargos placed on Iran in 2012-13. The fiscal deficit is estimated to further widen to around 5.6 percent of GDP in 2019/20 as more than 30 percent (and as high as 63 percent in 2002/03) of the gov-ernment budget is sourced directly from the sales of oil and gas. The reduction in the tax base due to lower economic activi-ty would also have a negative effect on current revenues and is likely to come at the expense of lower capital expenditures which have been under-realized relative to the budget approved levels in the re-cent years. Consumer price inflation peaked at 52 percent, yoy, in May 2019 due to height-ened economic uncertainty, inflationary expectations and strong depreciation of the rial in the preceding 12 months. Infla-tion has been especially high for food items (e.g., 116 percent, yoy, for meat products in April) and disproportionately affected the rural population (e.g., in Au-gust 2019, 46 percent, yoy, in rural areas vs. 41 percent, yoy, in urban areas). By August 2019, the rial recovered around 40 percent of its open market value against the dollar compared to its historical low in September 2018. The relative stabilization of the rial in tandem with the passing of the shock effects from a year earlier has contributed to a slight easing of the infla-tion rate (42 percent, yoy, in August 2019). Unemployment remains high at almost 11 percent while labor force participation rate slightly declined (yoy) to 40.6 percent in June quarter 2019 reflecting the labor

Table 1 2018




Upper middle-income poverty rate ($5.5)a 1 1 .6

Gini indexa 40.0

School enro llment, primary (% gross)b 1 08.0

Life expectancy at birth, yearsb 76.2



Notes:


IRAN, ISLAMIC REPUBLIC

FIGURE 1 Islamic Republic of Iran / Exchange rate and inflation

FIGURE 2 Islamic Republic of Iran / GDP growth and supply side components

Sources: SCI and local media. Sources: CBI, SCI and World Bank staff estimations.

Iran’s economy is expected to undergo

a second consecutive year of recession,

contracting by 8.7 percent in 2019/20.

Inflation is estimated to reach 38 per-

cent annually while fiscal pressures

have mounted further. Economic activ-

ity is expected to remain subdued in

the medium term.

0

10

20

30

40

50

60

70

80

90

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19

Exchange rate (lhs)

Total inflation (rhs)

Food inflation (rhs)

Rials per 1 USD Percent (yoy)

-10

-5

0

5

10

15

2011/12 2013/14 2015/16 2017/18 2019/20 2021/2022

Agriculture Industry (inc. oil)Services GDP growth at factor cost

Percent, percentage points

155 MPO Oct 19

market implication of the stagnant econo-my. The gender gap in the labor market, especially in participation rate and em-ployment figures, remains high. Poverty in Iran, measured at the World Bank’s upper middle-income threshold of US$5.5 per day (2011 PPP), started to rise moderately between 2013 and 2016 from 8.1 to 11.6 percent. This negative trend in wellbeing was associated with the erosion of cash transfers in real terms. Universal cash transfers were the main driver of poverty reduction during 2009-2012, but due to inflation, the real value of benefits has diminished since.

Outlook The medium-term economic outlook re-mains challenging. The baseline assump-tion for the medium-term rests on contin-ued oil exports of around 500 thousand barrels per day on average in 2019/20 and the following years. In the course of the next two years (2020/21 to 2021/22) the economy is expected to grow at 0.5 per-cent annually, from a considerably smaller base. Inflationary pressures are expected to moderate but annual inflation is ex-pected to remain above 20 percent which is considerably higher than the country’s

single digit inflation during 2016-17 and relative to other countries in the region. In the coming years, the effect of the re-cent large exchange rate depreciation could allow the country’s goods and ser-vices to become more competitive region-ally and help close the expected current account deficit gradually. The fiscal deficit is projected to further widen in the next two years due to the legacy of the 2018-19 oil shock pushing government expenditures such as social protection measures upwards at the same time as receiving lower oil income and tax revenues. Political and economic uncertainty makes it difficult to project future poverty trends. However, a sharp decline in real GDP per capita and double-digit infla-tion are expected to have a strong nega-tive impact on poverty rates through different channels, including the labor market, increasing costs of living and a further erosion of the real value of cash transfers. Future poverty rates will also depend on the government’s public poli-cy response. Any increases in the value of cash transfers, possibly along with introducing targeting mechanisms, could help the poor and vulnerable population cope with the social-economic shocks, but fiscal constraints may limit the scope for significant response.

Risks and challenges The nature of uncertainties facing the economy means that downward risks to the projected growth path remain in place. If oil exports were to be curtailed further, the economy could enter into a deeper recession and experience higher inflation rates. The challenge of protecting the vul-nerable households would put additional pressure on the government finances and potentially the value of rial. Further re-strictions on existing trade volumes and financial transaction arrangements with Iran’s neighbors could also pose as a ma-jor risk to the current projections. If re-mained unaddressed, the ongoing liquidi-ty and recapitalization challenges of the banking sector could further undermine banks’ ability to continue facilitating eco-nomic activity. These important challenges highlight the crucial role of further economic diversifi-cation by focusing on non-oil sources of growth and government revenues. Build-ing on the existing economic base in the non-oil traded sector would improve resil-ience to external shocks and achieve a long-envisioned development plan goal that has been elusive to Iran and other countries in the region.

TABLE 2 Islamic Republic of Iran / Macro poverty outlook indicators (annual percent change unless indicated otherwise)

2016/17 2017/18 2018/19 e 2019/20 e 2020/21 f 2021/22 f

Real GDP growth, at constant market prices 13.4 3.8 -4.9 -8.7 0.1 1.0

Private Consumption 3.8 2.5 -2.2 -2.0 -0.3 0.5

Government Consumption 3.7 3.9 -1.3 -5.4 -2.1 1.7

Gross Fixed Capital Investment -3.7 1.4 -5.9 -0.1 1.0 1.3

Exports, Goods and Services 41.3 1.8 -13.5 -28.7 1.6 2.0

Imports, Goods and Services 6.1 13.4 -38.3 -21.1 1.3 4.3

Real GDP growth, at constant factor prices 12.5 3.7 -4.9 -8.7 0.1 1.0

Agriculture 4.2 3.2 -1.5 1.0 1.0 1.5

Industry 24.7 3.0 -9.6 -19.8 -0.7 0.4

Services 3.7 4.5 -0.8 -0.2 0.5 1.2


Current Account Balance (% of GDP) 3.9 3.5 0.1 -0.6 -0.5 -0.3


Gross Public Debt (% of GDP) 49.0 38.2 40.2 49.3 50.4 51.3



156 MPO Oct 19

Recent developments Iraq’s economy is gradually rebounding, after the contraction in the last two years. GDP grew at 4.8 percent year on year (y/y) in the first half of 2019, reversing the con-traction of 2017-18. Growth can be mainly attributed to a rise in crude oil production (up 6.3 percent) and a rebound in non-oil economic activity (up 5.6 percent in H1-19, y/y). Crude oil production is a significant success story for Iraq; prior to 2014, there had been doubts as to whether production could be sustained above 3 million barrels per day (mbpd), whereas it currently is within striking distance of 5 mbpd. The non-oil sector improvement is under-pinned by better rainfall, an improvement in electricity production, and an expan-sionary fiscal policy linked to higher oil prices in 2018 which persisted into the early part of this year. Repeating past patterns of “windfall” spending, higher oil revenues have resulted in a rising wage bill and public consumption. Overall real GDP growth is estimated to be 4.8 percent at end-2019, with the non-oil economy likely to accelerate over 5 percent. Inflationary pressures remain muted. This is largely due to cheaper imported consumption goods following the depre-ciation of both Turkish and Iranian cur-rencies, the two main trading partners for Iraq. The fiscal policy stance is expansionary based on a higher wage bill and subsidies to lessen social pressures amidst weak private sector job creation. This is evident

from the latest decision to absorb militias into the security forces and employ large numbers of graduates into ministries and SOEs. As a result, recurrent spending has increased by 28.8 percent in H1-19 (y/y), only partially offset by a 1.1 percent de-cline in capital spending over the same period. Such a decline reflects serious public investment management con-straints. Despite large allocations made for public investments (12.5 percent of GDP in the 2019 budget law), the execution rate remains below 5 percent in H1-2019. This puts a drag on growth and increases social tensions as reconstruction, notably in Mo-sul, is further delayed. Furthermore, do-mestic revenue mobilization remains weak with non-oil revenues representing only 8 percent of total government re-ceipts. Customs exemptions and weak growth in 2018 have led to a 33.5 percent decline in tax receipts, partially offsetting the 6.3 percent rise in oil budgetary reve-nues. As a result, the fiscal surplus in 2018 (7.9 percent of GDP) is expected to turn into 4.6 percent deficit by end-2019 push-ing debt-to-GDP to 49.7 percent (up from 49.3 percent a year ago). The external position has weakened. The 2018 current account surplus (6.9 percent of GDP) is expected to turn into a deficit of 4.6 percent of GDP in 2019. This is due to less favorable terms of trade as Iraq’s oil export price average fell from US$66/barrel in 2018 to US$62/barrel in the first 8 months of 2019, and to an expansionary fiscal policy, which has resulted so far in a 12 percent rise in imports. The central bank’s reserves are at US$68 billion at end-August 2019, a 5.3 percent increase compared to 2018 (y/y)

Table 1 2018




Lower middle-income poverty rate ($3.2)a 1 7.9

Upper middle-income poverty rate ($5.5)a 57.3

National poverty rateb 22.5

Gini indexa 29.5





Notes:


REPUBLIC OF IRAQ

FIGURE 1 Republic of Iraq / Fiscal accounts FIGURE 2 Republic of Iraq / Selected labor market indicators

Sources: Ministry of Finance; and World Bank staff projections. Sources: World Bank staff calculations using IHSES 2012, CHS 2014, SWIFT 2017-18.

Higher oil prices entering 2019, improved

security conditions, better rainfall and

fiscal loosening have contributed to a no-

ticeable pick-up in economic activity.

However, in the absence of structural

reforms and accelerated reconstruction,

growth recovery in Iraq may be short-

lived especially with an unfavorable out-

look for oil prices given global trade ten-

sions. The poverty rate was 22.5 percent

in 2014 and is likely to have declined

since then. Almost 5 percent of Iraqis

remain displaced.

0

10

20

30

40

50

60

Unemployment Underemployment NEET youth

2012 2014 (pre-crisis) 2017 2017 IDPs

Percent of population

-25

-20

-15

-10

-5

0

5

10

25

30

35

40

45

50

55

60

65

2014 2015 2016 2017 2018 2019e 2020f 2021f

Overall Fiscal Balance, excl grants (rhs)Revenues (lhs)Expenditures (lhs)


157 MPO Oct 19

supported by oil export volumes. Howev-er, the situation is expected to reverse due to a projected dip in international oil price coupled with a more stringent implementa-tion of the OPEC+ quota for Iraq. Reserves are projected to decline to an estimated US$60 billion at end-2019 (or 6.7 months of imports), from over US$64 billion in 2018 (8 months of imports), increasing the vulnera-bility of the country to external shocks. While updated official poverty data is not yet available, the monetary poverty rate is expected to have declined from 2014 (22.5 percent) due to the recent economic growth and improved security situation. Several non-income dimensions of welfare have improved, including increases in school enrollment, and expansion of drinking water provision. At the same time, employment conditions have wors-ened since 2012. The unemployment rate, which was falling before the ISIS crisis, has increased beyond the 2012 level to 9.9 percent in 2017/18. Underemployment is particularly high among internally dis-placed persons (IDPs), with almost 24 percent of IDPs unemployed or underem-ployed (compared to 17 percent for the national average). Also, more than a fifth of the economically active youth do not have a job, and more than a fifth is neither

in employment nor in education or train-ing (NEET). In conflict afflicted areas, the standard of living is likely below the 2014 level because of disruptions in the labor market and general economic activity.

Outlook In the absence of structural reforms and accelerated reconstruction, growth recov-ery may be short-lived (Table 2). Growth is projected at 5.1 percent in 2020 and down to 2.7 percent in 2021. This is most-ly due to the oil markets outlook where both prices and exports are expected to weaken given lower global demand and the uncertainty of the OPEC+ agreement renewal. Non-oil growth is expected to remain positive on the back of improved security conditions and higher invest-ment to rebuild the country's damaged infrastructure – which is nonetheless likely to remain far short of needs. High-er spending together with lower oil pric-es will result in a fiscal deficit projected at 3.3 percent of GDP in 2020 and remain in a similar range in 2021. Lower oil pric-es and increased imports will cause the current account balance to remain into

deficit, and international reserves to de-cline during the forecast period.

Risks and challenges Volatility in oil prices remains the main risk exposure, reflecting the lack of diver-sification and budget rigidities linked with irreversible spending measures on the wage bill. These factors reduce Iraq’s fi-nancial buffers and increase its vulnerabil-ity to external shocks. They also threaten to further delay reconstruction and the addressing of legacy development deficits. Volatility could also swamp the recent positive government reforms efforts espe-cially in the electricity and agriculture sectors. Labor market outcomes continue to be a concern, especially for women and youth. Creating the adequate fiscal space for growth-enhancing programs in human and physical capital will be key for diver-sification and job creation, without which the impressive increases in oil production will mean little for most Iraqis. With IDPs returning to their homes, there will be an increasing need to open economic oppor-tunities and maintain flexible social assis-tance in these parts of the country.

TABLE 2 Republic of Iraq / Macro poverty outlook indicators (annual percent change unless indicated otherwise)

2016 2017 2018 2019 e 2020 f 2021 f

Real GDP growth, at constant market prices 15.2 -2.5 -0.6 4.8 5.1 2.7

Private Consumption 14.6 -1.2 0.3 1.6 5.2 3.6


Gross Fixed Capital Investment -13.2 -13.0 -9.1 23.6 -7.7 -3.0

Exports, Goods and Services 13.2 -0.1 1.4 4.7 5.9 1.7

Imports, Goods and Services -5.7 -1.7 13.1 18.3 1.4 0.5

Real GDP growth, at constant factor prices 15.3 -2.5 -0.6 4.8 5.1 2.7

Agriculture -30.9 -16.0 -26.1 5.0 6.6 5.6

Industry 23.5 -3.5 -2.3 4.5 5.6 2.0

Services 1.7 0.9 4.7 5.5 3.9 4.2


Current Account Balance (% of GDP) -8.3 1.8 6.9 -4.6 -4.0 -4.0

Fiscal Balance (% of GDP) -13.9 -1.6 7.9 -4.6 -3.3 -3.1

Debt (% of GDP) 64.2 58.9 49.3 49.7 48.6 48.6

Primary Balance (% of GDP) -13.2 -0.4 9.4 -3.3 -2.2 -2.1


158 MPO Oct 19

Recent developments Real GDP grew at 2.0 percent in Q1-2019, only slightly higher than 1.8 percent in Q4-2019. Key supply side drivers were the services sector, contributing 1.4 percent to GDP growth, while industry contributed 0.3 percent and agriculture 0.2 percent. Real sector indicators for the first six months showed a mixed performance. Industrial sector contracted by 0.6 percent, driven by a 1.3 percent decline in the man-ufacturing index, while ‘Mining and quar-rying’ and ‘Electricity and gas’ showed some sign of recovery. Driven by benign food and transportation prices, headline inflation during the first seven months of 2019 stood at 0.5 percent compared to 4.5 percent in the same period last year. This appears to be driven largely by decline in oil prices (average 8.8 percent decline Jan-Jul 2019 period). Given benign outlook for inflation and cut in US Federal Reserve policy rates, CBJ also decreased its policy interest rate by 25 basis points on August 1 and September 18, 2019. The current account deficit during the first quarter of 2019 declined by 46.0 percent on a year-on-year basis to US$ 483 million. In Q2-2019, trade data indicates 7.0 percent reduction in trade deficit on y-o-y basis. This reduction, however, is mostly driven by 4.2 percent contraction in imports as growth of exports during Q2-2019 re-mained flat; reflecting the impact of slack in global trade. On cumulative basis, total exports indicated 4.5 percent growth in H1-2019 (driven by clothing and chemicals)

compared to 2.9 percent growth in the same period last year. Imports contracted by 3.8 percent in H1-2019 compared with 2.4 percent decline in the same period last year. More than half of this contraction is explained by non-energy imports. The latest statistics for travel receipts and workers’ remittances also indicated favora-ble trends during H1-2019. The budget deficit (excl. grants) during H1-2019 stood at 2.1 percent of GDP com-pared to 2.5 percent in the same period last year. Domestic revenue collection during H1-2019 grew by 4.5 percent year-on-year, significantly below the budgeted target of 15.3 percent growth. Non-tax revenues exceeded the budget target growth. There has been a significant short-fall in indirect tax collection, which on year-on-year basis contracted by almost 8.1 percent. Adjustment on the spending side curtailed total spending growth at 2 percent but largely due to cut in transfers and stagnant capital spending. Poverty and jobs remain important issues. At the launch of the Social Protection and Poverty Alleviation Strategy 2019-25 in May, the Department of Statistics an-nounced that the national poverty rate among Jordanians was 15.7 percent. un-employment rate reached 19 percent in Q1-2019, 0.7 percentage points higher than the 2018 average. The increase was due to a sharp rise in the female unemployment rate, while male unemployment slightly improved. The Jordanian youth (15-24 years of age) remains the age group with the highest rate of unemployment, stand-ing at 40.1 percent in Q1-2019. Meanwhile, consistent with the prevalence of early

JORDAN

FIGURE 1 Jordan / Supply side contribution to real GDP growth (year-on-year)

FIGURE 2 Jordan / Labor market dynamics

Sources: Central Bank of Jordan and World Bank staff calculations. Sources: Department of Statistics and World Bank staff calculations.

Recent signs of export-pick up and con-

tinued strong international support pre-

sent renewed momentum for economic

recovery, while time remains to address

still-sluggish fiscal revenues. Implemen-

tation of broader key reforms particularly

related to procurement, PPP, and the

power sector is anticipated to provide the

necessary impetus to growth. However,

recent escalation of global trade tensions

and anticipated global slowdown present

a serious downside risk to immediate re-

covery prospects, outweighing the gain

from lower oil prices.

Table 1 2018

Population, million 1 0.0





Notes:


15

16

17

18

19

20

32

34

36

38

40

42

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2017 2018 2019

Labor force participation rate Unemployment Rate (rhs)

Percent (%) Percent (%)

0.0

0.5

1.0

1.5

2.0

2.5

Q1 Q2 Q3 Q4 Q1

2018 2019

Net Taxes On Product ServicesIndustry AgricultureReal GDP

Percent (%)

159 MPO Oct 19

retirement, the labor force participation dropped to 35.1 percent in Q1-2019, de-clining for both, males and females.

Outlook GDP growth is projected to recover grad-ually, supported by net exports on the demand side, and robust performance of the services sector, especially tourism, from the supply side. Projected increased inflows of foreign private investment are welcome but well below levels of the mid-2000s boom. Immediate downside risks feature low public consumption and in-vestment, which are restrained by ongo-ing fiscal consolidation, while private con-sumption growth is expected to remain weak because of stagnant job creation and tax policy measures. Inflation is projected to remain subdued in 2019 and through the medium-term. To-gether with lagged impact of earlier tight monetary stance, ongoing slack in domes-tic demand and receding one-off impact of last year’s taxation measures are moderat-ing forces. The current account deficit is projected to slightly improve in 2019 to 6.4 percent of GDP compared to 6.7 percent in 2018. Albeit the favorable terms of trade effect, compared to last year, export growth is projected to moderate due to slack in global trade activity while imports are projected to marginally recover. Over

the medium-term, the current account deficit, as percent of GDP, is expected to remain moderate. However, given sizable financing requirements over medium-term along with a maturing Eurobond in 2020, the sustainability of the external position remains contingent upon the timely realization of committed multilat-eral and bilateral flows. The fiscal balance (incl. grants) is expected to improve to -2.5 percent of GDP in 2019, compared to -3.3 percent in 2018. Domestic revenues are expected to improve by 0.4 percent of GDP in 2019 as 2nd half measures to tackle areas of underperformance take hold while total expenditure is anticipated to decrease. Lower inflows of foreign grants will keep total revenues and grants nearly unchanged at 26 percent of GDP. Over me-dium term, the fiscal balance is anticipated to narrow to 2.0 percent of GDP, supported by higher revenues from the new income tax law, tax enforcement and the govern-ment’s continued commitment to keep its consolidation trajectory on course. The pri-mary balance (incl. grants) is projected to decline by 2 percent of GDP and improve debt dynamics. While low expected infla-tion will be helpful for living conditions, persistent labor market challenges raise concerns. A forthcoming World Bank Jobs Diagnostic discusses some of the key issues for employment. Only one in three working age Jordanians has a job and employment is re-allocating from high to low productivity sectors with high levels of informality. An

increasing number of workers are not cov-ered by social insurance nor have a legal contract. Very high population growth amongst Jordanians along with the refugee influx mean that the job creation needed to raise the employment rate to ‘normal’ levels is dramatic.

Risks and challenges Global growth slowdown, escalation of trade tensions between USA and China and continued regional uncertainty pose an immediate downward risk to economic recovery. Sustainable debt reduction re-quires continued fiscal adjustment, includ-ing additional mobilization of revenues and containment of public spending. Moreover, in the light of Eurobond repay-ment next year, the coverage of large gross external financing requirements, particu-larly in 2020, is dependent on the govern-ment’s continued ability to mobilize inter-national financial assistance. The recent disruption in Saudi Arabia oil production – if manifested in higher oil prices over the medium-term – adds further vulnerability. The manner in which any fiscal adjustment is achieved – how new revenues are raised and what spending is reduced – would have implications for poverty and equity. Moreover, long-term sustained reductions in poverty and vulnerability will require significant increases in employment.

TABLE 2 Jordan / Macro poverty outlook indicators (annual percent change unless indicated otherwise)

2016 2017 2018 2019 e 2020 f 2021 f


Private Consumption 0.2 4.0 -2.6 0.9 1.2 2.2

Government Consumption -3.0 3.2 0.7 0.7 0.9 0.9

Gross Fixed Capital Investment -8.0 7.5 -3.0 2.5 2.8 3.1


Imports, Goods and Services -7.9 7.9 -6.1 -0.5 0.3 3.4


Agriculture 3.8 4.8 3.2 3.0 2.5 2.0

Industry 1.3 1.8 1.3 1.5 2.0 2.0

Services 2.4 2.2 2.3 3.5 2.5 3.0

Inflation (Consumer Price Index) -0.8 3.3 4.5 2.0 2.5 2.5



Fiscal Balance (% of GDP)a -3.0 -2.2 -3.3 -2.5 -2.4 -2.0

Debt (% of GDP)b 93.8 94.3 94.4 94.7 94.6 93.2

Primary Balance (% of GDP)a 0.0 0.7 0.0 0.9 1.3 2.0

Source: World Bank, Poverty & Equity and M acroeconomics, Trade & Investment Global Practices.Notes: e = estimate, f = forecast.(a) Includes grants and fiscal gap of 0.7% of GDP in 2020 and 1.7% of GDP in 2021.(b) Government and guaranteed gross debt. Includes WAJ estimated borrowing for 2019-2021.

160 MPO Oct 19

Recent developments Despite the drag from OPEC-led oil out-put cuts, growth recovered in 2018, rising to 1.2 percent following a 3.5 percent con-traction in 2017. The improvement contin-ued in the first quarter 2019, with the economy expanding by 2.6 percent year-on-year (y/y) amid strong non-oil growth (of 4.1 percent y/y). High frequency indi-cators suggest that consumer spending improved in the first half of 2019, helped by strong public sector hiring, in turn sup-porting service sector activity. Notwith-standing broadly flat oil output, oil sector GDP rose 1.3 percent y/y in Q1, likely re-flecting growth in refining output. Kuwait is the fifth largest OPEC oil producer, and oil production averaged 2.69mbd in the first half of 2019 versus an OPEC+ man-dated target of 2.72mbd: in July, OPEC+ supply cuts were extended for another nine months until end-March 2020. Credit growth is recovering, reflected in rising lending to the consumer, business and real estate sectors. The banking sector remains the main intermediary of oil reve-nues to the domestic economy, and at 18.4 percent, bank capital adequacy ratios are above the central bank’s required 13 per-cent. Capital market reforms have led to the upgrade of Kuwait to emerging mar-ket status by FTSE, S&P Dow Jones and, in 2020, by MSCI, boosting investor confi-dence and triggering capital inflows. As of mid-August, the Kuwaiti stock market was up nearly 20 percent on year-to-date basis, significantly outperforming GCC

peers. Inflation has been subdued at around 1 percent due to declining housing costs and weak food price growth. The central bank has tightened monetary poli-cy more slowly than the US Fed, raising rates only four of the nine times that the Fed hiked rates since 2015. Most recently in July, it kept rates unchanged following a 25bp cut by the Fed. Higher oil prices during 2018 contributed to a narrowing of the fiscal deficit (excluding investment income and before oil revenue transfers to the Future Genera-tions Fund) to 3 percent of GDP in FY18/19. The FY19/20 budget projects a 3 percent increase in government spending (over last year’s outturns), and a deficit target of about KD6.7 billion. However, as in past years, actual outturns should be considera-bly better given conservative oil price as-sumptions and a tendency to underspend on capital projects. Fiscal reforms have been slow; the implementation of the VAT has been postponed until 2021. Assets esti-mated at close to US$600 billion in Ku-wait’s SWF exemplify the reliance on finan-cial assets to save oil rents. In the past, defi-cits have been financed by a mix of draw-downs from the General Reserve Fund and debt issuance. However, following the issu-ance of a maiden US$8 billion bond in 2017, further debt issuance in international mar-kets has been constrained by delays in Par-liament’s approval of new legislation to raise the government’s borrowing limit. Higher oil prices have boosted export re-ceipts and the current account (CA) surplus to 19.5 percent of GDP in Q1 (versus 15 percent in 2018), led by a rising income bal-ance (reflecting higher investment income

KUWAIT

FIGURE 1 Kuwait / Compliance with OPEC production cuts FIGURE 2 Kuwait / Current account surplus and oil exports

Source: OPEC. Sources: Haver, World Bank.

Notwithstanding OPEC+ oil output

cuts, the economy has continued to re-

cover, helped by strong public sector

hiring and service sector growth. A loose

fiscal stance and rising public infrastruc-

ture spending will buttress growth in the

medium term. Continued volatility in oil

prices underscores the need for an opera-

tional medium-term anchor for fiscal

policy. The slow pace of structural re-

forms needed to diversify away from hy-

drocarbons and support private sector

activity is the key challenge.

Table 1 2018


GDP, current US$ billion 1 41 .7


School enro llment, primary (% gross)a 97.3



Notes:


0

2

4

6

8

10

12

-200

0

200

400

600

800

1000

Iraq Kuwait Nigeria Saudi Arabia UAE

Pledged cut

Cut achieved

Oil Production (rhs)

Thousand bpd Millions bpd, July 2019

-60

-40

-20

0

20

40

60

80

2013 2014 2015 2016 2017 2018 2019

Current Account Balance (% of GDP)

Oil Exports (% change, y/y)

Percent

161 MPO Oct 19

and declining remittance outflows) along-side a significant trade surplus. Kuwait is an oil-rich country, where abso-lute poverty and involuntary unemploy-ment are virtually nonexistent. Eighty percent of employed Kuwaiti nationals work in the public sector. In contrast, mi-grants, who make up two-thirds of the population, constitute the bulk of lower-income residents. Additional concerns for migrant workers include unpaid or de-layed wages, difficult working conditions and fear of a crackdown. About 18 percent of the total population lives on less than half the median income level—this num-ber is 1.5 percent for Kuwaiti nationals and 34 percent for others.

Outlook GDP growth is projected at about 2 per-cent in 2019, supported by rising consum-er and government spending, increasing to around 3 percent in the medium term as OPEC+ oil output cuts expire in March 2020 and government infrastructure pro-jects are completed. Plans to invest US$115 billion in the oil sector over the next five years should further boost oil production, if they can be implemented – a long standing challenge. Resumption of

production in the shared fields (Khafji and Wafra) with Saudi Arabia offers a more immediate prospect of an oil sector boost. The partial pull back in oil prices and oil production constraints in the near term, coupled with delays in VAT reforms and higher government spending are expected to widen the fiscal deficit to around 6 per-cent. The current account surplus should moderate to 9 percent of GDP, as the trade surplus narrows and as infrastructure-related import spending increases.

Risks and challenges Key external risks include spillovers from geo-political tensions and conflict, global financial volatility, and volatility in oil prices. The slowdown in global growth could weigh on energy prices, widening fiscal imbalances. Lower oil prices in re-cent years have resulted in a depletion of liquidity buffers; further drawdowns from the GRF could erode these further. To mitigate these risks, and to secure fiscal sustainability, the government will need to persevere with fiscal consolidation, expenditure rationalization and revenue mobilization reforms over the medium term. Parliamentary opposition to critical fiscal reforms remains a key challenge.

Longer term challenges relate to the economy’s heavy dependence on oil. Notwithstanding Kuwait’s large oil re-serves, the global shift to cleaner energy threatens economic and fiscal sustainabil-ity over the long term. Instead of being used to build “above ground wealth” through investments in human and phys-ical capital, oil rents (which are derived from a depleting resource) have been channeled into an expanding public-sector workforce, and generous wage, subsidy and transfer benefits. This in turn tilts infrastructure investment to-wards meeting continually growing de-mand driven by subsidies and labor mar-ket distortions, depressing the long-term productivity potential of the economy. Private sector development and job crea-tion has been modest. Kuwait ranks 97 out of 190 economies in the 2019 World Bank Doing Business Report – the lowest among its GCC peers – reflecting on the bureaucratic procedures and suboptimal business environment. The country also ranks 77th in the World Bank Human Capital Index, a reflection of poor learn-ing outcomes and high incidence of non-communicable diseases. Comprehensive reforms are needed that are focused on innovation, private sector entrepreneur-ship and job creation, and improving the quality of its labor force.

TABLE 2 Kuwait / Macro poverty outlook indicators (annual percent change unless indicated otherwise)

2016 2017 2018 2019 e 2020 f 2021 f

Real GDP growth, at constant market prices 2.9 -3.5 1.2 1.5 2.5 2.8



Gross Fixed Capital Investment 2.0 5.2 -2.3 4.4 5.4 6.4

Exports, Goods and Services 2.5 -3.3 1.0 -0.4 1.7 1.3


Real GDP growth, at constant factor prices 2.8 -2.8 1.5 1.6 2.5 2.8

Agriculture 0.5 3.4 3.3 3.3 3.0 3.0

Industry 3.5 -6.2 1.9 -0.2 1.8 1.7

Services 1.8 2.4 1.0 4.2 3.3 4.3


Current Account Balance (% of GDP) 0.6 6.5 15.0 9.0 8.6 8.9

Net Foreign Direct Investment (% of GDP) -3.8 -6.5 -5.5 -5.4 -4.0 -3.9


Debt (% of GDP) 10.0 20.7 20.7 21.0 24.0 26.3



162 MPO Oct 19

Recent developments The economy has stagnated in 2018-19, with a bias in the latter towards a minor recession. While slow growth has been in effect since 2011, the past couple of years have specifically reflected decelerated growth that is linked to a policy of liquidi-ty tightening meant to counter rising mac-ro-financial risks. This includes a halt in subsidized lending by the central bank (BdL) that was being channeled via com-mercial banks to (mostly) the real estate sector, providing a rare source of growth impetus since 2012. Indeed, high frequency indicators over the first part of 2019 (6 months: 6M-2019; 7: months 7M-2019) point to a broad-based slowdown, with tourism an exception—tourist arrivals rose by 8.1 percent, year-on-year (yoy), in 7M-2019. The real estate sector is a main drag on the economy as illustrated by a 32.4 percent yoy decline in cement deliveries in 6M-2019. Further, the BLOM-PMI Index, which captures private sector activity, averaged 46.7 in 7M-2019, indicating a contraction (< 50 represents contraction). Net exports is also a negative contributor to GDP, as the rise in exports is projected to be more than offset by import growth, with the latter driven by fuel im-ports; in fact, even as total imports rose by 5.8 percent over 6M-2019, non-fuel imports decreased by 14.7 percent, in strong reflec-tion of the sluggish economy. On the de-mand side, private consumption, driven by tourism, regains its traditional role of leading real GDP growth (Figure 1).

Following a sharp deterioration in the Government’s fiscal position in 2018 (by 4 percentage points, pp, of GDP), a belated-ly ratified Budget 2019 (in July) aimed for a reduction in the overall deficit via a number of revenue and expenditure measures. 6M-2019 fiscal data show that despite a 10 percent decrease in VAT reve-nues, reflecting the slow economy, the overall deficit fell by 21 percent, driven by a 11 percent decline in expenditures. The latter is likely partially due to accumulat-ed arears since Budget 2019 measures were not yet in effect. Similarly, the pri-mary balance improved by 300 percent over the same period to register a surplus. Nonetheless, the debt-to-GDP ratio is ex-pected to persist in an unsustainable path, at 151 percent by end-2019. Monetary conditions have tightened signifi-cantly since the November 2017 Hariri res-ignation crisis, with BdL using direct, indi-rect, conventional and non-conventional tools; average interest rates on deposits in dollars and LL rose by 324 and 212 basis point (bps), respectively, over the October 2017-Jun2 2019 period. A principal objective for the policy-induced monetary tightening has been to boost BdL’s foreign exchange reserves and limit the LL resources in the market that can be used against the ex-change rate. This is in a context of surging risk premia (Figure 2). As a result, the stock of banks’ credit to the private sector has been on an uninterrupted retraction since its peak in December 2017, declining by 7.3 by June 2019. The 12-month headline inflation rate averaged 3 percent in 6M-2019, com-pared to 6.2 percent over 6M-2018, as com-modity prices soften.

LEBANON

FIGURE 1 Lebanon / Volatile economic activity reflects frequent shocks

FIGURE 2 Lebanon / Already elevated risk premium on the rise due to global monetary conditions

Sources: Lebanese authorities and WB staff calculations. Source: World Bank staff calculations.

Upon formation (January 2019), Govern-

ment efforts converged on the electricity

sector, Budget 2019 and Budget 2020.

First, Cabinet formally endorsed an up-

date of the 2010 electricity plan, which

was drafted with the support of the World

Bank. This was followed by an austere

2019 budget, and discussions over Budget

2020, with an aim to make it the first

budget in a decade to be ratified within

the constitutional period. This is occur-

ring within a context of heightened macro

-financial risk, illustrated by a sovereign

downgrade by Fitch.

Table 1 2018





Gini indexa 31 .8





Notes:


0

200

400

600

800

1000

1200

1400

1600

1800

1-Feb-17 1-Aug-17 1-Feb-18 1-Aug-18 1-Feb-19 1-Aug-19

1 Yr 2 Yr

3 Yr 5 Yr

CDS spread (percent)

-8

-6

-4

-2

0

2

4

6

8

10

2015 2016 2017 2018 e 2019 f 2020 f 2021 f

Statistical discepancy Net exportsGross fixed capital formation Government consumptionPrivate consumption GDP

Percent

163 MPO Oct 19

The latest official poverty rate is based on data from 2011/12 and cannot be used for poverty projections due to the substantial structural changes that the country has been undergoing in part due to the large refugee influx. A Labor Force and House-hold Living Conditions Survey conducted in 2018/2019 is expected to provide a more up-to-date picture of the non-monetary living conditions in the country.

Outlook The Government continues to express its commitment to a structural reform pro-gram with an objective to effect the CEDRE opportunity. While this consti-tutes a positive signal, our baseline sce-nario precludes this outlook over the medium term. Instead, lack of obvious sources for an economic boost suggests medium-term economic prospects re-main sluggish at best. We assume a mar-ginal increase in public investment re-flecting minimum progress on infra-structural projects. On the fiscal side, the full-year impact of Budget 2019 measures is accounted for in our projec-tions, while new (yet unidentified) measures in Budget 2020 is not. Overall,

a higher debt service and increased capi-tal expenditures leaving the fiscal deficit at close to 10% of GDP.

Risks and challenges Despite BdL’s persistent financial opera-tions over the past few years in support of the Net Foreign Asset (NFA) position, the economy has been steadily draining US dollars since 2011. More recently, this hemorrhaging has intensified. Private sector deposits at commercial banks have been in decline in 2019, suggesting out-right outflows. Moreover, the deposit dollarization rate reached 73 percent by June 2019, compared to 69.8 in June 2018. In consequence, the economy’s NFA posi-tion declined by US$ 5.4 billion over only the first 6 months of 2019, amounting to approximately 9 percent of GDP. This compares to NFA losses of US$ 4.8 billion for all of 2018 and US$ 156 million in 2017. Critically, this has reflected on BdL’s gross foreign exchange reserves, which underwent a year-on-year (yoy) decline of US$ 7.8 billion to reach US$ 36.4 billion by end-June 2019, of which foreign currencies amounted to $ 29.7 billion. In response, BdL initiated in July

2019 a new financial operation to encour-age the inflow of hard currency. Nonethe-less, Fitch downgraded sovereign risk by two notches to CCC (from B-). A slight reprieve is the expected slowing in global monetary tightening conditions. Lebanon remains significantly vulnerable to confidence shocks, especially those em-anating from political quarters. Should this materialize, the stabilizing tools avail-able are limited. The dollar peg is a central pillar for its macro-financial structure and cannot be abandoned without a significant risk of systemic financial failures. Moreo-ver, due to the narrow export base, it lacks the routes to an export-led adjustment. Even netting out such a shock scenario, the monetary tightening along with slow-er growth is likely to further degrade loan performance, leading to balance sheet vulnerabilities for banks. One of the key challenges to improving empirically informed policy is to strengthen the data and analytical base of the government, especially the Central Administration of Statistics for poverty measurement and monitoring. In the ab-sence of such data, distributional analysis of the impact of shocks and reform sce-narios is severely constrained, including for extremely urgent reforms as in the electricity sector.

TABLE 2 Lebanon / Macro poverty outlook indicators (annual percent change unless indicated otherwise)

2016 2017 2018 2019 e 2020 f 2021 f

Real GDP growth, at constant market prices 1.6 0.6 0.2 -0.2 0.3 0.4


Government Consumption 1.3 6.3 0.4 -3.8 5.0 -1.5

Gross Fixed Capital Investment 7.2 -0.3 -6.6 0.4 5.2 8.6

Exports, Goods and Services -3.5 -3.2 8.4 2.6 2.0 2.8

Imports, Goods and Services 10.9 6.4 -4.6 9.4 4.4 3.7

Real GDP growth, at constant factor prices 0.9 0.4 2.1 1.0 -0.1 0.5

Agriculture 6.1 11.7 0.0 -4.6 2.5 0.0

Industry 0.6 -3.9 3.9 -0.7 0.3 2.5

Services 0.7 0.6 1.9 1.6 -0.3 0.2





Debt (% of GDP) 146.3 149.0 150.3 150.8 155.6 159.7

Primary Balance (% of GDP) 0.0 2.7 -1.1 0.3 0.0 0.4


164 MPO Oct 19

Recent developments The war around Tripoli that erupted in April 2019 between the two main politi-cal rivals reversed the momentum of the relative economic recovery over 2017-18. Indeed, Libya managed to more than double its oil production over the two-year recovery period, to reach 1.17 mil-lion barrel per day (bpd) in April 2019. Oil production declined by 0.1 million bpd at end July 2019. As the violence does not seem likely to recede, it is ex-pected that this production trend will continue over the rest of the year. Within this dynamic, GDP growth is expected to slow down to around 5.5 percent in 2019 (down from an average 17.3 percent over 2017-2018), mainly driven by higher av-erage oil production (1.05 million bpd vs. 0.96 million bpd in 2018) and steady do-mestic demand. After four years of high inflation, the consumer price index (CPI) is expected to decline in 2019, mainly driven by falling parallel market premia. The concomitant actions by the government and the CBL establishing a fee on hard currency trans-actions while easing access to foreign exchange –including for essential im-ports and for family allowance– allowed the convergence of parallel market and official exchange rates. In this context, prices of the main commodities started to fall. In fact, the CPI fell by 7.3 percent over the first half of 2019, driven by dropping prices of food (minus 6.3 per-cent), housing equipment (minus 19.3),

and school supplies (minus 46.6 percent). Disinflation is expected to persist for the rest of 2019 to an average 7 percent. Prices easing is a welcome event for households who lost almost half of their purchasing power over the last four years. Despite higher oil revenues and forex fees, public finances remained under stress in 2019, constrained by higher and rigid ex-penditures. Revenues from the hydrocar-bon sector represented 91 percent of cur-rent revenues. They are estimated to reached LYD 31 billion (45 percent of GDP) in 2019. Non-oil revenues (LYD 3.2 billion) remain low reflecting decrepit tax administration. As a result, current reve-nues are just enough to cover the high wage bill and subsidies. The forex tax (183 percent) instituted last year generated a windfall to fund part of the other expendi-tures and reduce the financing gap. The forex fees are expected to reach LYD 20.8 billion (29 percent of GDP), of which around 7 billion are expected to be used to reduce public debt. The wage bill contin-ued to increase (LYD 29.2 billion, or 42.3 percent of GDP) reflecting a bloated pub-lic sector, and rising salaries. Subsidies remained high (LYD 7.4 billion), with the largest part supporting consumer prices of petroleum products, encouraging inherent overconsumption and international smug-gling. As a result, the budget is expected to run a deficit for the sixth year in a row, amounting to 6.9 percent of GDP. The deficit is expected to be financed through cash advances from the CBL and issuing government bonds in the East. Libya’s domestic public debt remains high at 150 percent of GDP.

LIBYA

FIGURE 1 Libya / Public finances FIGURE 2 Libya / Balance of payments

Sources: Government of Libya and World Bank staff estimates. Sources: Government of Libya and World Bank staff estimates.

The relapse into war constrains economic

activity and exacerbates the hardship of

the population. The political uncertainties

make reaching stabilization unlikely, let

alone recovery. Growth remains subdued

in a context of disinflation. Expenditure

rigidity is keeping the budget deficits

high, while repressed imports contribute

to current account surpluses, which eases

pressure on foreign reserves. A political

resolution is needed to implement the

required reforms for a private sector driv-

en growth and jobs generation, the only

path for sustainable shared prosperity.

-90

-70

-50

-30

-10

10

30

50

70

90

2010 2012 2014 2016 2018 2020 2022

Budget Balance Total RevenueWages and salaries Subsidies and transfers

Percent of GDP

-60

-40

-20

0

20

40

60

80

2010 2012 2014 2016 2018 2020 2022

Current account balance Exports Imports

Percent of GDP

Table 1 2018


GDP, US$ billion 48.5

GDP per capita, US$ 7552

Life expectancya 75.2

School enro llment, primaryb 1 1 4.4



Notes:


165 MPO Oct 19

The balance of payments is expected to run a surplus in 2019. This is due to the persistence of the rationing policy con-ducted by the CBL since 2016 to limit supply of hard currency to essential im-ports only, while the forex fee curtailed the distortion caused by preferential ac-cess to the official rate, thus curbing im-port demand. The higher hydrocarbon revenues (US$ 29.3 billion) are also con-tributing to the surplus in 2019. However, the surplus will be lower than that rec-orded in 2018 (13.6 percent of GDP vs. 23 percent of GDP). The surplus will allow the CBL to strengthen further foreign reserves by US$ 4 billion, reaching US$ 87.7 billion end 2019. They still represent less than 71 percent of those recorded in 2012 (US$ 124 billion).

Outlook The lengthy political vacuum transformed early 2019 into an open war for power and wealth capture, disrupting the lengthy, yet fragile no-war no-peace status quo that prevailed for many years. This com-plicates further the political situation, de-laying reaching an agreement, which makes sustained stabilization unlikely over the foreseen horizon. In this context,

Libya can only manage to produce a daily average of 1 million barrel by the end of this year and keep production around this level over the next few years, which will represent 2/3rd of potential. GDP growth will be negative in 2020 (minus 0.6 per-cent) and stabilize around 1.4 percent over 2021-22, resulting in a GDP per capita at 61 percent of its 2010 level. Disinflation is expected to persist over the forecast peri-od (minus 2.8 percent in average) as paral-lel market rates converge further towards the official one. Budget deficits will re-main high, averaging 10 percent of GDP. The CBL is expected to continue rationing imports, but current account surpluses will steadily decline from 7.3 percent of GDP in 2020 to 1.4 percent in 2022. Con-sequently, reserves will stabilize around US$ 91 billion over 2020-22.

Risks and challenges The on-going violence for the seizure of Tripoli and its associated uncertainties on economic and social outcomes impose severe hardship on citizens and migrants. An alternative scenario that can surmount the current adversity and uncertainty would entail a revitalized political will to unite the country and its institutions. This

would be the foundation for the needed critical reforms to stabilize the macroeco-nomic and fiscal frameworks. The alterna-tive scenario needs a political resolution enabling a cohesive state that could imple-ment the critical policies and reforms to strengthen institutions, stabilize the mac-roeconomic framework, and diversify the economy to generate enough private jobs. The main policies include renewing state governance, rebuilding infrastructure and restoring public services, while improving economic institutions through reforming the subsidy system, rightsizing the public sector, reforming the tax system, and con-solidating the financial sector. Although there is no systematic study on poverty and very little evidence on the current well-being of Libyan households, conditions are inimical to poverty reduc-tion. The sharp decline in oil exports start-ing in 2011 has severely impacted public services. Worsening conditions also con-tribute to the erratic power supply and the recurrent food shortages. While the paral-lel currency premium has eased, inequali-ty is still driven by the overall collapse in governance which has created vast rents for those with ability to use force and ap-propriate assets. This forms an increasing-ly unrestrained incentive for conflict, while the associated economic distortions spill over to neighboring countries.

TABLE 2 Libya / Macro poverty outlook indicators (annual percent change unless indicated otherwise)

2017 e 2018 e 2019 e 2020 f 2021 f 2022f

Real GDP growth, at constant market prices 26.7 7.9 5.5 -0.6 1.4 1.4

Private Consumption -3.8 -3.7 4.4 3.5 4.3 3.2



Exports, Goods and Services 125.3 22.6 6.5 -4.1 0.3 0.3


Real GDP growth, at constant factor prices

Hydrocarbon 116.8 17.5 10.1 -3.9 0.5 0.5

Non-hydrocarbon 0.0 1.8 2.0 2.0 2.0 2.0

Inflation (Consumer Price Index) 28.4 9.3 -7.0 -5.0 -3.0 -2.0




166 MPO Oct 19

Recent developments Morocco’s economy continues to operate below potential, with the rainfed agricul-tural sector contributing to volatility and a timid recovery of the other sectors. Real GDP is expected to slow further to 2.7 per-cent in 2019, due to a decline in agricultur-al output (minus 2.1 percent). Non-agricultural growth will improve (3.4 per-cent in 2019 compared to 3 percent in 2018), driven by better performance of phosphates, chemicals, and textiles output. On the demand side, private consumption will contribute the most to growth, boost-ed by higher salaries and low inflation. The contribution of net exports will remain negative, reflecting low competitiveness of exports and dependence on energy im-ports. Thanks to sound monetary policy and ample supply of fresh food, inflation has remained low, under 0.6 percent. The unemployment rate will slightly decline to 9.3 percent in H1-2019, underlined by a protracted fall in the labor force participa-tion, which dropped to 46.1 percent. Public finance will remain under stress with high and rigid current expenditures. The fiscal deficit will not decline as ex-pected and will stall at 3.6 percent of GDP in 2019 (vs. 3.7 percent of GDP in 2018), impacted by higher wage bill and subsi-dies. The wage bill increased due to the rolling out of the social dialogue agreement adopted in April 2019, while rising subsi-dies reflect higher consumption of LPG. On the revenue side, fighting tax evasion efforts will compensate the negative impact

on tax revenue of weaker economic activi-ty. A new national Tax Conference was organized in May 2019 to generate consen-sus around an overhaul of the tax system to enhance its efficiency, equity, and contribu-tion to growth. The next step on tax reform is the approval of the multiannual pro-gramming framework law that will bring together all relevant recommendations of the Tax Conference and will serve as a ref-erence for the next Budget laws. The external position, while sustainable, has some vulnerabilities stemming from the structural trade deficits driven by weak competitiveness of exports and en-ergy import dependence. The current ac-count balance is expected to drop to around 4.3 percent of GDP in 2019 com-pared to 5.5 percent of GDP in 2018, helped by declining import prices, espe-cially of energy, and intermediate and consumer goods.

Outlook Growth is expected to pick up gradually and average 3.3 percent over 2020–2021, mainly driven by more dynamic second-ary and tertiary activities, bolstered by high foreign investments. In particular, significant FDIs continue to flow into au-tomotive industries, especially in the new Peugeot plant –that will eventually dou-ble the sector’s production capacity– as well as into logistics and trade services following the expansion of the Tangiers port. Inflation is projected to average around 1 percent over the medium term.

MOROCCO

FIGURE 1 Morocco / Morocco’s fiscal deficit / Central government debt

FIGURE 2 Morocco / Actual and projected poverty rates and real GDP per capita

Source: Ministry of Economy and Finance. Source: World Bank. Notes: see Table 2.

Morocco’s growth momentum slowed in

2019, largely driven by a volatile rainfed

agricultural sector. The unemployment rate

fell, but remains high, especially for the

youth and women. The fiscal deficit edged

down, but remains above medium-term

target of 3 percent of GDP, reflecting high

and rigid current expenditures. Looking

forward, a higher contribution of produc-

tivity gains to economic growth is needed

to ensure the sustainability of Morocco’s

development path, improve job creation,

expand economic inclusion and thereby

reduce social and political tensions.

Table 1 2018


GDP, current US$ billion 1 1 7.1




Gini indexa 39.5

School enro llment, primary (% gross)b 1 1 2.3




Notes:


0

5000

10000

15000

20000

25000

30000

35000

0

10

20

30

40

50

60

2006 2008 2010 2012 2014 2016 2018 2020


Poverty rate (%) Real GDP per capita (constant LCU)

0

20

40

60

80-8

-6

-4

-2

0

2012 2013 2014 2015 2016 2017 2018

Central Government debt (rhs) Fiscal deficit (lhs)


167 MPO Oct 19

The medium-term outlook assumes sus-tained reforms including those to main-tain fiscal restraint, strengthen tax reve-nues, improve governance and oversight of SOE’s, enhance exchange rate flexibil-ity, and reform the business environment and labor markets. The 2020 Budget Law under preparation is expected to reflect the Government’s commitment to increase social spending financed by expanded efforts to mobilize revenue and controlling some recurrent expenditures. Subsidy policy will contin-ue, especially for LPG (Liquefied petrole-um gas) consumption. A hedging system will be put in place to protect the Budget against any surge in LPG prices. In the context of the Social Dialogue agreement, the wage bill increase will cost the Budget a total of MAD 14.2 billion over 2019-21 (or 1.2 percent of GDP). In order to control the wage bill, the government intends to rationalize the creation of new public po-sitions, inter alia by opting for human resources redeployments at sectoral and territorial levels. Consequently, fiscal defi-cit is forecast to slightly improve, averag-ing 3.5 percent of GDP over 2020–2021. The current account balance is expected to gradually improve over the forecast period due to the growth of manufactur-ing exports – especially automobiles,

agribusiness, electronics, and chemicals – and rising tourism receipts, supported by a price easing of the main imported com-modities and goods. Foreign direct in-vestment will remain at 2 percent of GDP over the forecast period. Net internation-al reserves should remain above 5 months of imports in 2019-20. With contained inflation, and no immi-nent subsidy cuts, real incomes will be protected. However, poverty reduction is expected to be modest given the growth outlook. In the first part of 2010s Morocco experienced significant poverty reduction. Predictions based on GDP per capita indi-cate that poverty will decline but at a much slower pace. In 2020, extreme pov-erty, measured using the international poverty line of US$1.9 PPP, will be below 1 percent and poverty measured with the US$3.2 PPP line will be just above 5 per-cent. The planned increase of social spending accompanied by a better target-ing can speed up the pace of poverty re-duction beyond the current predictions.

Risks and challenges Risks remain tilted to the downside, miti-gated by a sound macroeconomic policy

framework and a precautionary IMF ar-rangement. External risks include low and decelerating global trade, volatile prices of main commodities, both exacerbated by uncertainties of geopolitical environment. There are also domestic risks, including the impact of climate change on the agri-culture sectors and social demands for jobs (especially for the young), better pub-lic services and social protection pro-grams. Energy imports could worsen the trade deficit if oil prices continue to rise, and delays in implementing key structural and financial sector reforms could ad-versely affect growth potential and in turn heighten social tensions. Economic volatility can impact house-holds’ wellbeing, especially those whose consumption expenditure is just above the poverty line; a small negative shock can push this group back into poverty. The percentage of the population “vulnerable” to falling into poverty varies depending on the household expenditure adopted as a threshold. Using an ex-penditure threshold of US$5.5 PPP, the numbers of poor and those not poor but vulnerable to falling into poverty are strikingly high: more than 24 percent of the population, or nearly 9 million Mo-roccans can be considered poor or at risk of poverty.

TABLE 2 Morocco / Macro poverty outlook indicators (annual percent change unless indicated otherwise)

2016 2017 2018 2019 e 2020 f 2021 f




Gross Fixed Capital Investment 8.8 -0.2 1.2 2.2 1.9 2.5

Exports, Goods and Services 6.0 11.1 5.8 7.2 7.5 8.1



Agriculture -12.5 13.1 2.7 -2.1 4.8 3.8

Industry 0.6 3.6 3.0 3.5 3.5 3.6

Servicesa 3.4 2.6 2.7 3.6 3.2 3.5





Debt (% of GDP) 64.9 65.1 65.3 65.4 65.1 64.8


International poverty rate ($1.9 in 2011 PPP)b,c 0.9 0.7 0.7 0.7 0.6 0.6

Lower middle-income poverty rate ($3.2 in 2011 PPP)b,c 6.9 6.2 5.8 5.5 5.1 4.8

Upper middle-income poverty rate ($5.5 in 2011 PPP)b,c 29.1 27.4 26.3 25.2 24.1 22.7

Source: World Bank, Poverty & Equity and M acroeconomics, Trade & Investment Global Practices.Notes: e = estimate, f = forecast.(a) Service is recalculated as the residual of GDP at Factor Cost minus Agriculture and Industry to ensure internal consistency, and therefore might be different from official sources.(b) Calculations based on 2013-ENCDM . Actual data: 2013. Nowcast: 2014-2018. Forecast are from 2019 to 2021.(c) Projection using neutral distribution (2013) with pass-through = 0.7 based on GDP per capita in constant LCU.

168 MPO Oct 19

Recent developments Following a recovery of 2.2 percent in 2018, Oman’s real GDP growth is esti-mated to decelerate to 0.3 percent in 2019 as oil production remains capped by the OPEC+ production cut agree-ment. Lower hydrocarbon production is estimated to weigh on the contribution of the sector to GDP growth this year, contracting it to an estimated 1.1 per-cent, from a growth of 3.1 percent in 2018. The non-oil economy is estimated to grow by 1.5 percent, partly supported by the ongoing diversification through the Tanfeedh program aimed at sup-porting activities in key sectors, namely logistics, tourism, transport, mining, manufacturing, and fisheries. Inflation is estimated to remain subdued at 0.8 per-cent in 2019, reflecting weak domestic demand. Although the authori-ties implemented an excise tax in mid-June, they revised down the rate of tax on alcohol from 100 to 50 percent only a few days later. Fiscal rigidities have made fiscal consoli-dation difficult. While narrowing com-pared to 2018, Oman’s fiscal deficit is ex-pected to remain large at an estimated 7.2 percent of GDP in 2019. So far, fiscal con-solidation has been achieved by a reduc-tion in spending, one-off revenue increas-es, and the recent adoption of the new excise tax decree on selected products. As a result, non-oil revenues are likely to see added momentum in 2019, increasing by 1.5 percentage points of GDP. In July

2019, Oman’s statistics center published monthly data showing that the fiscal defi-cit for the first five months fell by 67 per-cent (y-o-y) and a modest decline in the overall expenditures (mainly capital spending) by 4.3 percent same period. The published data also reveals a 15.3 percent increase in total revenue drive by corporate income tax and undefined other revenue. However, with oil accounting for over 53 percent of the income and given the projected lower oil prices, the fiscal deficit will remain high, indicating the need to undertaking fundamental fiscal reforms. In July 2019, MoF sold US$3 billion of US dollar-denominated bonds to finance the widening deficit, which should be sufficient to meet financ-ing needs for 2019. The current account deficit is estimated to increase to 7.7 percent of GDP in 2019 driven by the drop-in oil prices. The ex-tensive investment program in the public and private sectors is contributing to the current account deficit. Reflecting the current account deficit, foreign reserves are estimated to drop to an estimated US$16 billion (or 5 months of imports), from US$17.4 billion in 2018 (or 5.8 months of imports), despite the recent bond issuance; the standard three-month threshold for emerging markets is some-what alleviated by liquid assets in other funds and SOEs. Persistent large fiscal and external deficits have contributed to sharply rising debt levels. Public debt-to-GDP is estimated to increase to 60 percent in 2019 from 53 percent in 2018. External debt is estimated to remain high at 106 percent of GDP in 2019, a 12.8 percent

OMAN

FIGURE 1 Oman / Real annual GDP growth FIGURE 2 Oman / General government operations

Sources: Oman authorities; World Bank; and IMF staff projections. Sources: Oman authorities; World Bank; and IMF staff projections.

Growth is expected to increase over

2020-21, driven in part by a large in-

crease in gas production from the new

Khazzan gas project, and infrastructure

spending plans in both oil and non-oil

sectors. Elevated spending, however,

will keep the fiscal deficit high, averag-

ing over 8 percent of GDP over the

forecast period, and raise public debt to

66 percent of GDP. High fiscal and

current account deficits and rising pub-

lic debt indicate that Oman’s financing

needs will be high in the coming years.

Plans to boost non-oil revenues and

additional fiscal consolidation measures

are needed to reduce macroeconomic

risks in the medium term.

Table 1 2018



GDP per capita, current US$ 1 6424

School enro llment, primary (% gross)a 1 07.2



Notes:


0

10

20

30

40

50

60

-25

-20

-15

-10

-5

0

2016 2017 2018 2019 2020 2021

Overall Fiscal balance

Total expenditure (rhs)

Total revenue (rhs)


-3

-2

-1

0

1

2

3

4

5

6

7

2016 2017 2018 2019 2020 2021

Hydrocarbon GDP Non-Hydrocarbon GDPReal GDP

Percentage change

http://country.eiu.com.libproxy-wb.imf.org/article.aspx?articleid=1338133517&Country=Oman&topic=Economy&subtopic=Forecast&subsubtopic=Fiscal+policy+outlook




169 MPO Oct 19

increase compared to 2018. These high vulnerabilities have led to a series of sov-ereign credit rating downgrades and an increase in funding costs. A lack of jobs remains a key concern amongst young Omanis. Latest data from Oman’s statistical center reveals that the unemployment rate for Omani youth aged (15-24) stood at 8.5 percent as of June 2019 (versus a 2.3 percent national unemploy-ment rate) but is more than twice higher (19 percent) among females in the same ages group. Oman has long used selective expat visa bans across various private sector indus-tries to reduce the number of unem-ployed locals. The ban has been extended many times with the latest extension came into force in July 2019 to include four more professions in the private sec-tor. According to official figures, the num-ber of legally employed expats fell by over 5 percent between January 2018 and July 2019, and currently stands at 1.75 million, down from 1.85 million in Janu-ary 2018 (100,000 expats less). The gov-ernment’s long-term strategic Vision 2040 and the 2021–25 development plan, which are currently being formulated, give more prominence to spur economic diversifica-tion and job creation.

Outlook Growth is expected to accelerate to 3.7 percent in 2020 driven largely by the rise in natural gas output as production from new fields comes on stream. The potential boost of the government’s diversification efforts would continue to facilitate an in-crease in non-hydrocarbon growth to about 4 percent annually in the medium-term. Inflation is expected to increase to almost 2 percent in 2020, and to further accelerate to nearly 4 percent in 2021, re-flecting the possible introduction of VAT. In the absence of further significant fiscal reform, the budget deficit is projected to remain high at an average of over 8 per-cent of GDP in 2020-2021. The current account deficit is also projected to increase to an average of 8 percent of GDP mainly due to higher imports. Gross reserves are forecast to remain stable at US$16 billion in 2020 and the medium term, reflecting the current account deficit and possible increase in international government bond issuance, but to cover less than 5 months of imports in 2020 and beyond. Although narrowing, the persistently high fiscal deficit is expected to raise the public debt-

to-GDP ratio to an average of 66 percent over 2020-2021. External debt is projected to further increase to 116 percent of GDP by 2021 largely driven by the high level of private external debt.

Risks and challenges Although Oman’s policy efforts have aimed to strengthen the fiscal position, enhance private sector-led growth and employment, and encourage diversifica-tion since the 2014 oil price shock, major concerns remain. Continued worsening of the fiscal and debt positions could result in higher financing costs and further sov-ereign rating downgrades. Difficulties in accessing external financing could lead to greater reliance on domestic bank financ-ing, squeezing private sector credit and affecting growth. Additional consolidation based on a balanced approach combining measures to tackle current spending rigid-ities (wage bill and subsidies) and stream-line capital outlays, would help alleviate some of these concerns. Providing more job opportunities remain an important challenge given higher unemployment rates among youth Omanis.

TABLE 2 Oman / Macro poverty outlook indicators (annual percent change unless indicated otherwise)

2016 2017 2018 2019 e 2020 f 2021 f



Government Consumption -9.7 -0.7 0.3 0.4 0.5 1.3

Gross Fixed Capital Investment 16.5 -3.9 0.6 3.3 3.4 3.8




Agriculture 8.3 9.0 9.1 9.5 9.7 8.6

Industry 4.6 -2.5 -0.9 2.8 3.5 3.1

Servicesa 5.5 1.0 6.4 -3.5 3.2 5.0




Source: World Bank, Poverty & Equity and M acroeconomics, Trade & Investment Global Practices.Notes: e = estimate, f = forecast.(a) Service is recalculated as the residual of GDP at Factor Cost minus Agriculture and Industry, and therefore might be different from official sources.

170 MPO Oct 19

Recent developments The Palestinian economy witnessed mini-mal real growth in 2018 due to a steep deterioration in Gaza while the West Bank economy continued to grow, albeit at a slower pace. The most recent national accounts data for the first quarter of 2019 reveals a bounce back with the Palestinian economy growing by 3.8 percent year-on-year: 4.2 percent in the West Bank and 2 percent in Gaza. This growth is mostly due to a base effect as the first quarter of 2018 was especially weak. Also, the Palestinian Authority’s (PA) fiscal crises started in March 2019, so its impact was not yet reflected in the first quarter’s GDP data. Overall prices increased by 1.4 percent between January and July 2019, year-on-year. The increase was mainly driven by a rise in the West Bank where prices rose by 1.7 percent compared to 0.5 percent in Gaza. The majority of the rise in the West Bank is due to an increase in the prices of food and beverages, which rep-resent a large part of the Palestinian con-sumer basket. Following a law enacted in 2018, the Gov-ernment of Israel (GoI) started in March 2019 making deductions of nearly US$12 million per month from the tax revenues it collects on behalf of the PA (clearance revenues). According to the GoI, the de-ductions are made to offset payments by the PA to Palestinian prisoners in Israeli prisons and families of those deceased as a result of violence. In response, the PA

has refused to accept these transfers alto-gether. Given that clearance revenues con-stitute 65 percent of the PA’s total reve-nues and 15 percent of GDP, their loss has resulted in a severe liquidity squeeze. To make ends meet, the PA had to accrue large arrears to its employees, private sup-pliers, local government units and the public pension fund in the amount of US$686 million in the first half of 2019. The PA also resorted to additional bor-rowing from the domestic banking sector, raising its stock of debt to US$1.6 billion, as of June 2019. The external current account deficit (including official transfers) is estimated to have widened in 2018 to 11.4 percent of GDP due to an increase in imports and a drop in transfers. Exports continue to be constrained by the ongoing trade re-strictions and have remained stagnant at around 19-20 percent of GDP, while im-ports increased by 4 percentage points of GDP in 2018 and reached nearly 60 per-cent. Current transfers as a share of GDP dropped due to a decline in both private and official transfers. The unemployment rate in the Palestinian territories continues to be high. It reached 26 percent in the second quarter of 2019—almost the same (revised) level it was in 2018. In the West Bank, unemployment reached 15 percent in the second quarter of 2019—2 percentage points lower than its 2018 average mostly due to more jobs created in domestic commerce, hotels and restaurants. The decline in the West Bank was offset by an increase in Gaza where extremely high as it reached 64 percent in the second quarter of 2019.

PALESTINIAN TERRITORIES

FIGURE 1 Palestinian territories / Real GDP growth rate FIGURE 2 Palestinian territories / Poverty rate at 5.5 dollars per day (2011 PPPs)

Source: Palestinian Central Bureau of Statistics (PCBS). Sources: PECS, World Bank staff calculations.

Despite signs of a bounce back in early

2019, the Palestinian economy is expected

to fall into negative growth starting 2020

due to an ongoing standoff over the trans-

fer of Palestinian taxes collected by Israel

on top of the long-lasting constraints to

economic competitiveness. Living condi-

tions have worsened with a quarter of the

labor force unemployed and 24 percent of

Palestinians living below the US$5.5

2011 PPP a day. A further decline in aid

and increased possibility of conflict pose

significant downside risks.

Table 1 2018




Upper middle-income poverty rate ($5.5)a 23.6

Gini indexa 33.7





Notes:


-20

-15

-10

-5

0

5

10

15

20

25

1995 1998 2001 2004 2007 2010 2013 2016 2019

Palestine

West Bank

Gaza

Percent

0

10

20

30

40

50

60

2004 2005 2006 2007 2009 2010 2011 2016

West Bank

Gaza

Headcount rate, percent of population

171 MPO Oct 19

Around 24 percent of Palestinians lived below the US$5.5 2011 PPP a day poverty line in 2016/17–2.9 percentage points high-er compared to 2011. The gap between the West Bank and Gaza has increased sub-stantially in 2016/17 with 46 percent of the population below the US$5.5 poverty line in Gaza, compared to 9 percent in the West Bank. Monetary living standards in both regions remained fragile. In the West Bank, poverty status is sensitive to even small shocks in household expenditures, while in Gaza any change in social assis-tance flows can significantly affect the population's wellbeing.

Outlook A one-off clearance revenue transfer of fuel taxes (USD560 million) was made by Israel in August 2019. This is expected to enable the PA to muddle through 2019, with reduced spending. Various economic indicators show that the decline in public spending has not resulted in a significant downward adjustment in consumption and investment patterns so far in 2019, as the crisis has been perceived as a liquidity rather than a solvency problem. As a re-sult, real GDP growth is expected to be 1.3

percent in 2019. But uncertainty about a comprehensive resolution for the clear-ance revenue standoff remains high. Un-der a baseline scenario which assumes a continuation of the Israeli restrictive re-gime, persistence of the internal divide between the West Bank and Gaza and a decline in aid levels, the Palestinian econ-omy is expected to slip into negative growth in 2020 and 2021, even if addition-al one-off transfers from clearance reve-nues are made. This is mainly due to the high level of uncertainty around a resolu-tion, which would eventually exact a toll on private spending behavior. The decline in growth implies a sizable decline in real per capita income and a rise in poverty. The future fiscal outcome likewise hinges on the clearance revenue standoff. If not resolved, the PA would embark on the year 2020 with severe fiscal conditions. If donor support levels remain similar to 2019, the PA could be facing a financing gap after aid, on a commitment basis, ex-ceeding US$2 billion. The PA would have almost fully exhausted its domestic sources of financing including borrowing from domestic banks. The accu-mulation of extremely high arrears to pub-lic employees and the private sector may eventually result in a collapse in economic conditions and create social unrest.

Given the prevailing policy uncertainty, poverty is not forecasted in this MPO round. However, declining aid flows, ex-pected shrinking of GDP per capita and a potential reduction in donor funding are expected to have a negative impact on people’s wellbeing and incomes.

Risks and challenges There are significant downside risks to the outlook. A second general election in Isra-el in the span of six months and a new government on the Palestinian side indi-cate that the political environment is high-ly uncertain. Furthermore, uncertainties emanate from international initiatives for economic integration. Also, recent trends indicate an overall decline in the amount of development assistance to be received by the Palestinian economy in the coming years. With private sector activity con-strained by the externally imposed re-strictions, potential sources of growth will be very limited going forward. Further, if recent clashes between Palestinians and the Israeli forces in the West Bank contin-ue or Gaza suffers a further escalation in violence, there is little room left to absorb such shocks.

TABLE 2 Palestinian territories / Macro poverty outlook indicators (annual percent change unless indicated otherwise)

2016 2017 2018 2019 e 2020 f 2021 f

Real GDP growth, at constant market prices 4.7 3.1 0.9 1.3 -1.1 -0.4

Private Consumption 3.3 -1.8 1.5 0.8 -0.8 -0.8

Government Consumption 1.8 0.9 0.9 -3.6 -0.7 -0.8

Gross Fixed Capital Investment -0.9 2.1 3.5 4.2 -5.8 0.5

Exports, Goods and Services 1.9 12.4 7.9 2.0 -1.0 -2.0

Imports, Goods and Services 0.2 -0.8 7.0 0.6 -1.5 -0.5

Real GDP growth, at constant factor prices 4.2 2.8 1.6 1.3 -1.2 -0.5

Agriculture -8.1 -5.7 7.2 0.3 0.6 0.7

Industry 7.5 3.5 2.4 0.7 -1.6 -0.8

Services 3.9 3.0 1.0 1.5 -1.2 -0.5





Debt (% of GDP) 18.5 17.5 16.1 18.0 20.3 22.5



172 MPO Oct 19

Recent developments Growth slowed to 1.5 percent in 2018, and the weakness persisted in the first quarter of 2019, with GDP expanding by a modest 0.9 percent year-on-year (y/y). Slower growth reflects a gradual winding down of a dec-ade-long boom associated with the imple-mentation of large infrastructure projects in preparation for the FIFA 2022 World Cup. Additionally, hydrocarbon activity has been flat in recent years reflecting a decade-long self-imposed moratorium on the North Field, the world’s biggest natural gas field (now ended). The non-oil sector expanded by just 1.6 percent y/y in Q1 reflecting soft service and manufacturing sector growth and a contraction in the construction sector, which accounts for about a fifth of non-oil activity. While the economy has coped well since the mid-2017 diplomatic rift with some GCC neighbors by accessing new import and export routes, inward foreign direct investment has dropped off sharply. A new draft foreign investment law ap-proved in 2018 seeks to allow foreigners to own 100 percent of the capital of companies across all economic sectors, the first GCC country to do so. This follows permanent residency reforms aimed at attracting high-ly-skilled foreign workers to help Qatar become a knowledge-intensive economy. Public finances have improved, with Qa-tar posting a small fiscal surplus of 2.2 percent in 2018, the first since 2014. Cur-rent and non-FIFA related capital spend-ing have been pared back in recent years. Although the Government has delayed

the implementation of a VAT, it has an-nounced “sin taxes” that include 100 per-cent excise duties on tobacco and energy drinks and a 50 percent levy on sugary drinks. The 2019 budget projects a 3.6 per-cent decrease in capital spending as some FIFA projects are completed; this should help offset an increase in current spend-ing, notably the public sector wage bill in line with the government planning to sub-stantially increase the number of public sector jobs, particularly within health, education, defense and security. Qatar is the largest LNG exporter globally, and goods export earnings rose 25 percent in 2018 on higher global energy prices. Export earnings have remained flat since then, in line with oil prices, contributing to a narrowing of the current account sur-plus from 8.7 percent of GDP in 2018 to 4.3 percent in Q1. The banking system has maintained strong asset quality despite the rift and liquidity has been buttressed in part due to in-creased government deposits into the bank-ing system to replace private outflows. Despite the US$ peg, monetary policy has remained accommodative since 2017, with the central bank keeping policy rates on hold even as the US Federal Reserve raised by 1.5 percentage points over this period. With inflation remaining muted, Qatar’s central bank cut its benchmark rate by 25bp in August following a similar cut by the US Fed. Investor confidence remains under-pinned by sovereign wealth fund financial assets of over US$300 billion. Qatar has repeatedly borrowed in international debt markets at low yields, most recently in March when it issued US$12 billion in

QATAR

FIGURE 1 Qatar / Public finances FIGURE 2 Qatar / External balances

Sources: Haver, World Bank. Sources: Haver, World Bank.

Growth slowed to 1.5 percent in 2018 and

has slid further since, as FIFA-related

infrastructure investments have tapered.

Fiscal and external balances have re-

turned to surpluses but remain vulnera-

ble to volatility in oil prices. Expanding

LNG capacity is expected to lift exports

and growth in the medium-term. Down-

side risks include energy price volatility

and the continued diplomatic rift with

some Gulf neighbors. Diversification

away from hydrocarbons is now seen in

the context of resilience to diplomatic as

well as oil price volatility.

Table 1 2018


GDP, current US$ billion 1 91 .4

GDP per capita, current US$ 71 01 0

School enro llment, primary (% gross)a 1 04.2



Notes:


-10

0

10

20

30

40

50

60

70

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Fiscal BalanceRevenueExpenditure

Percent of GDP (4-quarter rolling sums)

-10

0

10

20

30

40

50

60

2011 2012 2013 2014 2015 2016 2017 2018 2019

Current Account

Trade Balance

Percent of GDP (4-quarter rolling sums)

173 MPO Oct 19

bonds against orders of US$50 billion. Giv-en improved fiscal balances, the bond sale appears designed to strengthen buffers while market conditions are favorable. Public debt has doubled since 2014 to an estimated 53 percent of GDP in 2019. Absolute poverty is not an issue for citi-zens. In the context of the National Devel-opment Strategy 2011-16 the authorities have adopted a national relative poverty line and a welfare measurement method-ology to track living standards of the pop-ulation and identify vulnerable house-holds. This threshold is equal to half of the median household’s income, and about 8 percent of Qataris in 2013 lived on an in-come less than that—a share broadly un-changed from 2007. Lower incomes corre-late with household dependency ratio, job market status, educational attainment, female headship and disability. Spatial differences in welfare exist, both for mon-etary and non-monetary measures, nota-bly between more urbanized and less ur-banized areas.

Outlook Growth is projected at 2.0 percent in 2019 as government spending increases, and to

rise to over 3 percent in the medium term driven by stronger activity in the service sector as the FIFA World Cup draws near-er. Under the Qatar National Vision 2030, nearly QR60 billion (US$16.4 billion) in infrastructure and real estate investments are planned over the next four years to help offset falling FIFA-investment spend-ing. Qatar is also rapidly moving forward with large-scale LNG capacity expansion plans, which should increase gas liquefac-tion capacity by more than a third. The fiscal and current account surplus will narrow in 2019 owing to weaker global energy prices, but should improve over the medium term, as exports and revenues rise once the US$10 billion Barzan natural gas facility comes online in 2020, and the expansion of North Field gas projects is completed by 2024. Public sector balances over the medium term should also remain supported by recent tax reforms and the introduction of a VAT in 2020. Inflation-ary pressures should remain muted, aside from when the VAT is implemented.

Risks and challenges Major external risks include those of the global slowdown which could fuel volatility

in global financial and asset markets. A fall in global energy prices could lead to a renewed deterioration in fiscal and exter-nal balances, particularly if government spending continues to rise over the medi-um term. Qatar’s dominance in LNG ex-port markets is threatened by new and emerging producers, notably Australia, the USA, and over the coming years Egypt and Mozambique. On the domestic front, Qatar’s investment and hydrocarbons-driven growth strategy over the past decade has helped to trans-form standards of living for citizens. However, it has also given rise to con-cerns about excess capacity in the econo-my and rapid demographic change, while resulting in a narrow economic base – although the investment in LNG and ports proved to be an important instru-ment for dealing with forced trade rerout-ing. With the adoption of its Second Na-tional Development Strategy, Qatar is moving to further open and diversify the economy. However, going forward, a lack of resolution of the diplomatic rift pro-longs the lost opportunity of further re-gional integration, and thereby limits the impact of reforms to strengthen the busi-ness environment.

TABLE 2 Qatar / Macro poverty outlook indicators (annual percent change unless indicated otherwise)

2016 2017 2018 2019 e 2020 f 2021 f



Government Consumption -10.9 -6.1 0.4 3.9 2.9 2.9

Gross Fixed Capital Investment 7.4 -3.5 4.0 -0.7 2.5 4.6


Imports, Goods and Services 4.9 -2.8 3.0 0.5 1.2 1.2


Agriculture 9.0 8.2 8.3 8.0 8.0 8.0

Industry 2.5 2.0 1.4 1.4 2.6 2.6

Services 1.3 0.6 2.0 3.3 3.8 4.4


Current Account Balance (% of GDP) -5.5 3.8 8.7 4.3 5.3 4.8


Fiscal Balance (% of GDP) -9.2 -5.8 2.2 1.2 2.0 2.7


174 MPO Oct 19

Recent developments The Kingdom of Saudi Arabia implement-ed significant cuts in oil production in 2019, as part of an OPEC+ agreement. These have contributed to softening GDP growth to 1.7 percent year-on-year (y/y) in Q1 2019 from 2.4 percent in 2018. With US shale production continuing to increase in the first half of 2019, Saudi Arabia’s oil production cuts were deeper than pledged, with output in July standing at 9.65mbd versus the voluntary limit under the OPEC+ accord of 10.3mbd. Non-oil sector growth increased as the fiscal stance turned more supportive and the government settled US$43 billion in arrears to private firms. Business confi-dence surveys signal continued expan-sion in Q2. Nevertheless, deflationary pressures persist, reflecting negative growth in rental prices, in part due to the exit of some 1.8 million foreign workers since 2017. Public sector finances posted a surplus of US$7.4 billion in Q1, despite rising gov-ernment spending and lower oil produc-tion. The improvement reflected in-creased VAT collection and expansion of excise taxes and larger transfers (including a special dividend) from Saudi Aramco to the budget. With spending increasing in Q2 and growth in revenues moderating, fiscal balances shifted back into deficit (of US$8.9 billion). Public in-vestment has increased as Vision2030-related infrastructure plans are imple-mented. Recent fiscal deficits have led to

a rapid increase in public debt, from 1.6 percent of GDP in 2014 to nearly 20 per-cent at end-2018, with US$18 billion in sovereign debt raised in H12019 alone. Additionally, a US$12 billion bond issu-ance in April by Aramco was one of the most oversubscribed offerings in history, and at a lower yield than the sovereign. To help develop domestic debt markets, the government has issued longer (30-year) maturity domestic bonds and al-lowed trading of government debt instru-ments on the stock exchange. The current account surplus narrowed slightly in Q1 2019 on lower oil export earnings. The services balance has im-proved amidst lower remittances outflow. Net FDI flows remain significantly below pre-2014 levels at US$1.25 billion in Q1. Portfolio investment inflows significantly increased in preparation of the Saudi Stock Exchange listing in Emerging Mar-kets Stock indices. Foreign exchange re-serves at the central bank (excluding gold) stood at US$512 billion in June, up from US$496 billion at the end of 2018. Given the US dollar peg, the repo rate was re-duced to 2.75 percent following Fed’s re-cent looser monetary policy. Vision 2030 has spurred reforms in several areas, including the development of the financial sector, improving the business climate, strengthening human capital, developing SME’s, and attracting foreign investments. Public financial management reforms include the introduction of medi-um-term fiscal frameworks, improve-ments to budget processes and fiscal transparency and expenditure manage-ment systems. Labor market reforms aim

SAUDI ARABIA

FIGURE 1 Saudi Arabia / Saudi unemployment and participation rates

FIGURE 2 Saudi Arabia / Trade balance, oil exports, and goods imports

Source: GASTAT. Source: SAMA.

Slower growth is anticipated in 2019 due

to lower oil production levels, subdued

prices and a temporary supply disruption

due to the attack on Aramco’s oil facilities.

Growth is expected to rebound in the me-

dium term as production cuts are reversed

and structural reforms yield dividends.

The 2019 budget continues its expansion-

ary path while also deepening initiatives

for non-oil revenue mobilization and me-

dium-term spending restraint. A key

challenge is to ensure that the numerous

spending initiatives and reforms under

Vision 2030 are well coordinated.

Table 1 2018






Notes:


0

20

40

60

80

100

120

140

160

180

200

0

50

100

150

200

250Trade Balance (rhs)

Oil Exports (lhs)

Goods Imports (lhs)

SAR billion SAR billion

39

40

41

42

43

10

11

12

13

Saudi unemploment rate Saudi participation rate (rhs)

Percent Percent

175 MPO Oct 19

to increase the share of nationals, in the private sector workforce. While employ-ment of nationals, including women, has increased, impacts on private sector growth and productivity are less clear. Levies on expatriate labor have raised business costs and weakened domestic demand as foreign workers have exited. While no official information is available on poverty, identifying and supporting low income households is challenging. As in other GCC countries, the bulk of low-income residents are migrant work-ers, but as the citizen population crosses the 20 million-mark, there will inevitably be issues of ensuring secure livelihoods and well-being for nationals. Vision 2030 set ambitious goals to protect citizens, including modernizing the social welfare system, redirecting price subsidies to-ward those in need, preparing and train-ing those unable to find employment, and providing tailored care and support to the most vulnerable citizens. Accord-ingly, the Citizens Account was intro-duced to compensate Saudi households for the cost of higher energy prices, intro-duction of VAT, and expatriate levy. However, close coordination with other cash transfer programs is warranted to assure overall effectiveness and efficiency of social assistance programs and use of public resources.

Outlook GDP growth is anticipated to slow in 2019 to 0.8 percent, as the drag from oil produc-tion cuts is compounded by the worsening global outlook since the early summer. The attacks on Saudi oil facilities in September led to a significant supply disruption which is also expected to impact 2019 growth. These adverse outcomes would be partially offset by the boost to non-oil private sector activity from rising government spending. Growth is expected to rise to 2.2 percent in 2021 as oil production cuts are reversed and ongoing diversification reforms yield dividends. Inflation should remain sub-dued as growth remains below potential. Public finances will remain in deficit, albeit narrowing, given the outlook for low ener-gy prices over the next two years. Realizing the balanced-budget target by 2023 (as in the Fiscal Balance Program) is contingent on sustained fiscal consolidation and high-er oil prices. The current account surplus is projected to widen with a shrinking trade surplus from lower oil exports receipts and higher private demand and Vision 2030-related infrastructure imports. Saudi Ara-bia will chair the G-20 in 2020; this in-creased global profile is likely to stimulate progress on structural reforms.

Risks and challenges Downside risks include disappointing global growth that weighs on energy de-mand and prices, and volatility in global financial markets that could increase funding costs. With government spending remaining a key driver of non-oil activity, a key challenge for fiscal policy is to bal-ance macroeconomic stability and growth, on one hand, and fiscal sustainability, on the other. Despite significant progress on Vision2030 reforms, diversification re-mains a challenge, requiring stronger poli-cy consistency, predictability, and agency coordination. Building political and social support and sound prioritization of re-forms will be essential to realizing Vision 2030 objectives. Saudi Arabian nationals are disincentivized to fill the gap left by the expatriate exodus and a key challenge will be to reduce the reservation wage for nationals as well as better manage foreign labor admission and mobility across sec-tors. Finally, large capital investments and mega projects are envisaged under Vision 2030 but may generate significant financ-ing needs and fiscal risks. Longer term impacts hinge on whether these projects genuinely ease bottlenecks for private sector led growth.

TABLE 2 Saudi Arabia / Macro poverty outlook indicators (annual percent change unless indicated otherwise)

2016 2017 2018 2019 e 2020 f 2021 f



Government Consumption -17.5 3.3 6.0 2.9 1.2 1.2

Gross Fixed Capital Investment -14.0 0.7 -2.9 4.2 5.6 6.2

Exports, Goods and Services 8.0 -3.1 6.8 -2.5 0.8 1.8



Agriculture 0.6 31.0 -4.5 2.3 2.3 2.3

Industry 2.3 -2.4 2.7 -0.2 1.5 1.5

Services 0.8 -0.2 2.6 1.4 1.7 3.2

Inflation (Consumer Price Index) 2.0 -0.9 2.5 -1.2 0.8 1.0

Current Account Balance (% of GDP) -3.7 1.5 9.0 5.8 7.1 7.9

Net Foreign Direct Investment (% of GDP) -0.2 0.9 0.7 0.8 1.0 1.0



176 MPO Oct 19

Recent developments After growth picked up to 2.5 percent in 2018 from 2 percent in 2017, Tunisia ex-perienced weak growth of 1.1 percent during the first half of 2019. This was driven by a slowdown in agricultural growth (base effect after 9.5 percent growth in 2018) as well as a contraction in industry (oil and gas, agrobusiness) which was only partially compensated by growth in services. Inflation signifi-cantly accelerated between 2017 and mid-2018 (7.8 percent in July 2018). In re-sponse, the Central Bank increased the policy rate to 7.75 percent, and authori-ties recently moved to enforce tighter loan-to-deposit ratios among banks and reduce liquidity injections through FX swaps. Consequently, inflation has decel-erated since the second half of 2018, and stood at 6.7 percent in August. Interest rates (except for some deposit rates) are now positive in real terms. The fiscal deficit widened to TND 3.3 billion during the first eight months of 2019 (estimated 2.9 percent of GDP) from TND 2.6 billion during the same period of 2018. Revenues increased by 17 percent driven by VAT and income tax revenue growth. Despite a stagnation of capital expenditures year-on-year (y-o-y), other elements of expenditure grew rapidly including wages and salaries (12.8 per-cent), interest payments (13.5 percent), and subsidies and transfers (48.5 percent), thereby resulting in expenditure growth of 24 percent (y-o-y).

The trade deficit reached an estimated 11.3 percent of GDP (TND 12.86 billion) during the first eight months of 2019 compared to an estimated 11.5 percent of GDP (TND 12.16 billion) during the same period last year as exports grew by 12 percent (led by phosphate, energy and electrical products) and imports grew by 10 percent y-o-y. This will help to slightly narrow the current account deficit, also thanks to improved services (tourism) and transfers (remittances). FDI remains muted and financing has mostly been received through conces-sional loans from multilateral and bilat-eral partners. Lower CBT FX interven-tions and improved FX market function-ing (introduction of FX auction in mid-2018) have contributed to protecting foreign reserves which currently cover slightly over three months of imports. The Dinar has appreciated by 8.5 percent against the Euro since the beginning of the year, reversing a multi-year trend of currency depreciation. The unemployment rate has stagnated, recording 15.3 percent during the first half of 2019, compared to 15.4 percent in 2018, whereas unemployment among females (22.6 percent in Q1-2019) and graduates (28.2 percent in Q1-2019) re-mains significantly higher than the na-tional average. Latest available survey data show that the share of those living at the lower middle-income poverty line of US$ 3.2 (2011 PPP US$) fell from 9.09 percent in 2010 to 3.21 percent in 2015. Between 2016 and 2020, however, the pace of poverty reduction is likely to slow down considerably, consistent

TUNISIA

FIGURE 1 Tunisia / Fiscal deficit and debt FIGURE 2 Tunisia / Actual and projected poverty rates and real GDP per capita

Sources: Tunisian Ministry of Finance and World Bank staff estimates. Source: World Bank. Notes: see Table 2.

Tunisia experienced a slowdown in

growth in 2019. The impact of rapidly

growing government revenues on reduc-

ing the fiscal deficit has been limited by

increased spending. Inflation is slowing

in response to tightening monetary poli-

cy and currency appreciation, but the

unemployment rate remains high. The

current account deficit is still elevated

whereas reserves have strengthened

thanks to improved FX market function-

ing and lower Central Bank interven-

tions. Presidential and Parliamentary

elections were held in mid-September

and October this year.

Table 1 2018

Population, million 1 1 .6



National poverty ratea 1 5.2


Gini indexa 30.9




Notes:


0

1000

2000

3000

4000

5000

6000

7000

0

10

20

30

40

50

2005 2007 2009 2011 2013 2015 2017 2019 2021


Poverty rate (%) Real GDP per capita (constant LCU)

0

10

20

30

40

50

60

70

80

90

100

0

1

2

3

4

5

6

7

8

Fiscal deficit Public Debt (rhs)


177 MPO Oct 19

with the GDP per capita trend. Alt-hough this is worrisome, poverty levels measured at these global benchmarks are similar to those prevailing in the region and extreme poverty (those liv-ing on less than US$1.90, 2011 PPP US$) seems on the way to being eradicated. A big divide in poverty rates has accumu-lated over time between the traditional-ly disadvantaged North West and Cen-ter West regions whose poverty rates are almost twice the national averages, and the coastal and more urbanized eastern regions (notably the Tunis area, North East and Center East).

Outlook Growth is projected to drop below 2 per-cent in 2019 before recovering slowly, contingent on completion of pressing reforms to improve investment climate and ensure greater security and social stability. Growth will be supported by expansions in agriculture, manufactur-ing, and tourism, and the coming online of the Nawara gas field. Inflation is ex-pected to continue declining provided monetary policy remains focused on its central goals. Poverty is projected to hov-er below 3 percent using the 3.2 U$ PPP

per day line and below 0.3 percent using the extreme poverty line. Our August projections are updated to incorporate fiscal developments during the first 8-9 months of the year as docu-mented in the Government’s 2019 Com-plementary Budget Law. The 2019 fiscal deficit is projected to reach 4.1 percent of GDP against an initial Budget Law target of 3.9 percent of GDP, due to the significantly lower than forecast GDP growth rate and its dampening effect on government revenue growth, as well as civil sector wage hikes, double-digit growth in interest payments, and poten-tial effects of the electoral period on growth, revenue mobilization and ex-penditure containment. Projections for the 2019 debt-to-GDP ratio have been revised downwards from our spring forecast and stand at 76.6 percent in light of the appreciation of the Dinar over the past 4-5 months (around 54 percent of public debt is external debt denominated in foreign currency). We project that public debt will grow in 2020-21 towards 80 percent of GDP due to Dinar and growth dynamics. The current account deficit will remain in the double digits over the forecast period but will start to improve as of 2021 as growth picks up and energy import costs decline with the increase in gas production.

Risks and challenges The key risks facing Tunisia are domestic and external. Domestically, the main risks are around reform continuity (in light of recent elections), socio-political tensions, and a security deterioration which would adversely impact investment and tourism. Risks of exchange rate depreciation and contingent liabilities would impact debt sustainability. The risk of contingent lia-bilities has come to the forefront following the recent seizure of the Tunisian Foreign Bank in Paris. External risks include high-er oil prices which would affect fiscal and external accounts, and a further growth slowdown in the European Union (Tunisia’s key trading partner) which would affect exports and remittances. Ris-ing trade tensions and spillovers of insta-bility in neighboring countries, could affect economic stability. Should any of these risks materialize, the wellbeing of households would be impact-ed, particularly vulnerable households whose consumption is just above the pov-erty line. Around 17 percent of the popu-lation (i.e. about 2 million Tunisians) is considered vulnerable, if one uses the definition of the 'vulnerable’ as those liv-ing below the US$ 5.5 PPP.

TABLE 2 Tunisia / Macro poverty outlook indicators (annual percent change unless indicated otherwise)

2016 2017 2018 2019 e 2020 f 2021 f








Agriculture -8.5 2.0 9.5 0.5 3.1 2.3

Industry -0.4 -1.3 0.0 0.1 2.1 3.0

Services 3.0 2.8 2.3 2.3 2.1 2.5

Consumer Prices (end-of-period) 4.2 6.3 7.6 6.3 5.8 5.3


Fiscal Balance (% of GDP)a -6.1 -6.2 -4.8 -4.1 -3.2 -2.4

Debt (% of GDP) 62.3 70.4 77.0 76.6 80.2 82.9

Primary Balance (% of GDP) -3.9 -3.9 -2.1 -1.2 -0.2 1.0

International poverty rate ($1.9 in 2011 PPP)b,c 0.3 0.3 0.3 0.2 0.2 0.2

Lower middle-income poverty rate ($3.2 in 2011 PPP)b,c 3.2 3.2 3.1 3.0 3.0 2.9

Upper middle-income poverty rate ($5.5 in 2011 PPP)b,c 18.3 18.1 17.6 17.5 17.1 16.5

Source: World Bank, Poverty & Equity and M acroeconomics, Trade & Investment Global Practices.Notes: e = estimate, f = forecast.(a) Fiscal Balance excludes Grants, Privatization Proceeds, and Confiscated Assets. (b) Projection using neutral distribution (2015) with pass-through = 0.7 based on GDP per capita in constant LCU. (c) Calculations based on 2015-NSHBCSL.

178 MPO Oct 19

Recent developments The economic growth recovery in 2018 was supported by a rise in net exports as the OPEC+ production cuts were eased and as imports decreased. Improvements in economic sentiment indicators such as the Purchasing Managers’ Index (PMI) indicate a positive non-oil growth mo-mentum early in Q1-2019. However, sev-eral indicators point to weakening growth in H1-2019. The hydrocarbon sector weakened due to a 7 percent de-crease in oil production in line with the renewed OPEC+ agreement. The slow-down in the real estate sector continues due to oversupply— Q1-2019 property prices significantly declined in Dubai and Abu Dhabi by 9.1 percent and 7 percent respectively, from last year. Oil prices also declined early this year, which in addition to the continued dampening of the real estate sector form an overhang for the remainder of 2019. Another indi-cator of a weak 2019 is the fall in out-ward personal remittances by 35.1 per-cent in Q1. As such, prospects for further recovery in 2019 are dampened. The overall fiscal deficit is estimated to have turned into a surplus of 1.2 percent of GDP in 2018 as revenues increased from higher oil prices and the newly intro-duced VAT. According to official an-nouncements, VAT revenue amounted to US$7.4bn (1.7 percent of GDP) in 2018, of which 70 percent will to go to the emirates and 30 percent to the federal government. The recent deficits were partly financed

through external debt issuances (US$5 billion in 2016, and US$10 billion in 2017) by some emirates. In 2018 a law allowing the federal government to issue sovereign debt was passed for the first time, ena-bling the northern emirates to benefit from higher sovereign credit rating and lower borrowing costs. The current account re-mains in surplus. Monetary policy tracks the US to main-tain the dollar peg; which led to higher interest rates. The banking sector showed signs of recovery in liquidity. In Q1-2019, deposits declined mildly while deposits of the private sector increased by 2.2 per-cent. Lending to the Government in-creased by 8.8 percent, while lending to the private sector grew by 3.6 percent. Inflation increased slightly due to the VAT to 3.1 percent in 2018 from 2 percent in 2017. But in 2019, deflation is likely reflecting the decline in the tradeable and non-tradable prices and fading effects of VAT implementation. According to the International Labor Or-ganization (ILO), the unemployment rate in UAE is low (2.2 percent in 2018), while 83 percent of the working-age population participated in the labor force in 2018. However, unemployment among the young population (aged 15-24) tends to be higher, at 6.9 percent, and disproportion-ately affects young women (aged 15-24), who face a 12.8 percent unemployment rate, more than twice the male unemploy-ment rate (5.0 percent) for the same age group. Understanding of poverty and inequality in the UAE is limited due to limited access to information from repre-sentative household surveys. Previous

UNITED ARAB EMIRATES

FIGURE 1 United Arab Emirates / Annual GDP growth rate FIGURE 2 United Arab Emirates / General government operations

Sources: UAE authorities and IMF and World Bank staff estimates. Sources: World Bank, Macroeconomics and Fiscal Management Global Practice, IMF WEO April 2019.

Growth recovered to 1.7 percent in 2018

boosted by higher oil production as the

OPEC+ production cuts were eased. Fis-

cal easing is underway to facilitate nonoil

growth recovery, putting pressure on

public finances. Oil prices plunged in

early 2019 which along with renewed

OPEC oil production cuts are expected to

dampen further growth recovery in 2019.

The medium-term outlook will be influ-

enced by the global economic slowdown

and the UAE government’s commitment

to structural reforms that reinvigorate its

diversification model.

Table 1 2018



GDP per capita, current US$ 4341 9



Notes:


0

5

10

15

20

25

30

35

40

-4

-3

-2

-1

0

1

2

3

2014 2015 2016 2017 2018 2019f 2020f 2021f

Overall Fiscal balance

Total expenditure (rhs)

Total revenue (rhs)


-4

-2

0

2

4

6

8

2013 2014 2015 2016 2017 2018 2019f 2020f 2021f

Oil GDP

Non-Oil GDP

Real GDP growth

Percent change

179 MPO Oct 19

surveys show little evidence that poverty for nationals is a concern. However, a recent household survey was launched in 2019 covering both Emirati and non-Emirati populations.

Outlook Growth is expected to recover over the medium term. In 2019 however, the pace of recovery will be muted by OPEC+ oil pro-duction cuts that have been extended until March 2020. Growth is forecast to reach 3 percent by 2021 supported by the govern-ment’s economic stimulus plans and impe-tus from hosting Dubai Expo 2020. Howev-er, trade, transport and tourism dynamics will continue to be influenced by the pro-jected global economic slowdown. The Abu Dhabi and federal budgets are expansionary in 2019, but less so in Dubai as most of the Expo-2020 infrastructure projects are complete. While 2019 revenue growth is expected to be modest with low

oil prices compounded by fee reductions, the loss may be mitigated by VAT reve-nue. Overall, the fiscal balance is expected to return to deficit in 2019 but will gradu-ally improve over the medium term. Abu Dhabi recently sold US$10 billion in bonds to finance the deficit, its first international offering since 2017. Beyond 2019 the current account surplus is projected to average 6 percent sup-ported by higher export volume from Abu Dhabi’s oil capacity improvement, and projected growth in the services account from tourism related to mega-projects, mitigated by rising imports from higher consumption. The UAE continues to implement signifi-cant structural reforms that began in 2014 to maintain its status as a regional eco-nomic hub. In 2019, the UAE opened up 122 economic activities to 100 percent foreign ownership outside free zones, excluding oil, gas and banking. Bank guarantees for labor were replaced with low-cost insurance policy and the new Permanent Residency Scheme aims to

boost investment by allowing longer visas for skilled expats.

Risks and challenges Compared to its GCC neighbors, the UAE economy is relatively diversified but still hinges on regional oil-driven liquidity and intermediation. Volatility in oil prices will dampen growth in the real estate sector which continues to face head-winds. Key fiscal challenges include rais-ing spending efficiency and improving management of fiscal risks. Further eco-nomic diversification will require deepen-ing labor-market and education reforms to enhance productivity. Key risks to the outlook include a contin-ued global slowdown, trade wars and other trade/payment disruptions, financial volatility, and disincentives to immigra-tion with increased tax burden on foreign-ers. Increasing tensions in the region could deter new investments.

TABLE 2 United Arab Emirates / Macro poverty outlook indicators (annual percent change unless indicated otherwise)

2016 2017 2018 2019 e 2020 f 2021 f



Government Consumption -1.1 21.2 -1.6 1.1 2.6 2.8

Gross Fixed Capital Investment 8.8 -8.2 -0.4 0.5 2.8 3.9


Imports, Goods and Services 2.7 3.0 -3.2 2.3 3.4 3.8


Agriculture 3.4 3.3 7.1 3.8 3.9 3.9

Industry 2.3 -1.1 2.0 2.0 2.5 2.7

Services 3.7 2.0 1.4 1.6 2.6 3.3

Inflation (Consumer Price Index) 1.6 2.0 3.1 -1.8 1.3 1.5


Fiscal Balance (% of GDP) -2.0 -1.6 1.2 -1.3 -1.0 -0.6


180 MPO Oct 19

Recent developments Violent conflict in Yemen has severely disrupted economic activity and hydro-carbon exports, along with significant damage to infrastructure and a wide sus-pension of basic public services. The loss of oil receipts has created an acute for-eign exchange shortage, while govern-ment revenue has plummeted. This, cou-pled with the fragmentation of state insti-tutions, including the Central Bank of Yemen (CBY), has interrupted supply of foreign exchange for essential imports and payment of public sector salaries, fueling inflation and exacerbating the humanitarian crisis. In late 2018, however, Yemen’s economy began to show signs of stabilization, sup-ported by balance of payments assistance from the Kingdom of Saudi Arabia and a gradual recovery of oil and gas produc-tion, which came to a near halt when the conflict broke out in March 2015. Availa-ble information suggests that GDP growth turned into positive territory in 2018, ar-resting a cumulative output contraction of over 40 percent during 2014-17. Neverthe-less, oil production, albeit increasing, re-mains significantly below the pre-conflict levels, while protracted hostilities and widespread destruction of infrastructure continue to interrupt economic activity, leaving many Yemenis without a regular source of income. Progress in fiscal management 2019 has also contributed to the improvement of macroeconomic conditions. For the first

time since 2014, the government prepared a budget and made a commitment to re-sume pension and salary payments to all civil servants, including teachers and healthcare workers, throughout the coun-try. This is an important step with poten-tial to restore household purchasing pow-er, prevent further deprivation of service delivery, and, given the size of public sec-tor in the economy, ease liquidity crisis and inflationary pressures. While pay-ments are already being made to all pen-sioners, not all civil servants have received salaries. Payment to about 25 percent of workers have been delayed due to reve-nue shortfalls. With still muted oil reve-nue, the government would likely be con-strained to pursue its ambitious spending plan, while protecting salary payments to all civil servants. Fragmented conflict en-vironment and political instability also pose a major challenge to the execution of capital expenditure. Surging inflation was curtailed as the US$2 billion Saudi Arabian deposit, oil grant, and increasing oil export receipts have allowed the CBY to supply foreign currency to finance essential imports. In-creased foreign reserves have also helped to stabilize the exchange rate. Albeit de-preciating incrementally, the Yemeni rial is trading broadly in line with the inflation path. The CBY’s new measure to offer subsidized exchange rate for essential food imports has also helped to stabilize the exchange rate. Yet the Saudi Arabian deposit, which funded this arrangement, is soon being exhausted. Improving macroeconomic conditions have not yet translated into the mitigation

Table 1 2018



International poverty rate ($1.9)a 1 8.8



Gini indexa 36.7






Notes:


REPUBLIC OF YEMEN

FIGURE 1 Republic of Yemen / Public finances FIGURE 2 Republic of Yemen / Household suffering deprivation (July 2019)

Sources: Yemen authorities, IMF, World Bank. Source: World Food Program.

Violent conflict has crippled Yemen’s

economy and created a humanitarian cri-

sis. While there have been signs of remis-

sion of macroeconomic crisis since late

2018, the humanitarian conditions re-

main dire, with approximately three-

quarters of the entire population in need

of food aid and other forms of assistance,

according to the UN estimates. Yemen’s

socio-economic outlook depends critically

on a cessation of hostilities and a renewed

political vision for the country.

Share experiencing at least 1 deprivation

(80, 100]

(60, 80]

(40, 60]

(20, 40]

(10, 20]

[0, 10]

No data

-15

-10

-5

0

5

10

15

0

10

20

30

40

2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019f

Total domestic revenuesGrantsCurrent expenditureCapital expenditureFiscal deficit excl. grants (rhs)


181 MPO Oct 19

of poverty and human suffering. About 20 million people in Yemen are facing severe and acute food insecurity, and nearly 5 million people are either experiencing fam-ine-like conditions or famine. Recent sur-veys by the World Food Program suggest that the share of households suffering any deprivation in basic services is nearly 90 percent, and for a number of governorates, nearly every single respondent reported to suffering from at least one deprivation. Broken sanitation systems and difficulties in accessing safe drinking water are con-tributing to the spread of cholera in 2019, further complicating the already dire hu-manitarian situation in Yemen.

Outlook Economic prospects in 2019 and beyond are uncertain and depend critically on the

political and security situation. The gen-erally improving macroeconomic condi-tions are under renewed stress because of the surge in violence in the interim capi-tal Aden. If reconciliation efforts in the south succeed, macroeconomic improve-ment can continue in the latter half of 2019, underpinned by the gradual in-crease in hydrocarbon production and continued salary payments to public sec-tor employees. The economy could grow by 2-2.5 percent a year over the next 2 years, far below rates needed for recon-struction or to address human develop-ment challenges. Inflation would contin-ue to moderate, if donor support could help prevent monetization of fiscal defi-cits, and the availability of foreign ex-change and security situations (especially in the largest seaports in Hodaidah) al-low for imports of food and other essen-tial commodities. As the Saudi Arabian deposit is projected to be exhausted by

end-2019, mobilization of additional ex-ternal assistance would be critical to sup-port adequate imports of basic items and maintain macroeconomic stability.

Risks and challenges There are concerns that the recent political and security instability in Aden could affect the functioning of state institutions based in the city, including those tasked for economic management – which are already fragmented by their disconnect from Sana’a. The operating environment for the recognized government and devel-opment partners in the immediate future remains unclear. Further deterioration in the security condition in Aden could dis-rupt policy decisions and implementa-tions, potentially reversing good progress made in recent months.

TABLE 2 Republic of Yemen / Macro poverty outlook indicators (annual percent change unless indicated otherwise)

2016 2017 2018 2019 e

Real GDP growth, at constant market prices -9.4 -5.1 0.8 2.1

Private Consumption 0.1 1.3 -3.2 -1.0

Government Consumption -26.7 -31.7 15.1 9.9

Gross Fixed Capital Investment -24.8 37.6 174.9 44.2

Exports, Goods and Services -67.5 4.4 34.9 25.5

Imports, Goods and Services -5.2 15.3 5.3 4.4

Real GDP growth, at constant factor prices -10.2 -4.9 0.9 2.1

Agriculture -5.6 -5.7 0.7 2.0

Industry -21.2 -2.5 1.3 8.4

Services -5.6 -5.7 0.7 -1.5

Inflation (Consumer Price Index) 21.3 30.4 27.6 14.7

Current Account Balance (% of GDP) -3.2 -0.2 -1.8 -4.2

Fiscal Balance (% of GDP)a -9.3 -5.3 -6.3 -6.8

Source: World Bank, Poverty & Equity and M acroeconomics, Trade & Investment Global Practices.Notes: e = estimate, f = forecast.(a) Fiscal Balance is on cash basis.

Macro Poverty O

utlook10 /

2019

middle east and north africa macro poverty outlook...

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