Volatile growth, high universal subsidies, and loss-making state-owned enterprises expose many low- and middle-income economies in the Middle East, North Africa, and Pakistan to such fiscal risks.
These factors combine with adverse external developments such as recent interest-rate rises and food and fuel price surges to put public finances under pressure in many countries.
In a new report titled the “MENAPEG”, the Fund averred that it often leads to a situation where budget revenue and spending often end up far away from government plans.
Despite the frequency of these events, policymakers are often caught off guard. Such shocks force them to make ad hoc cuts to development and other priority spending. This also limits many countries’ ability to use fiscal policy to smooth economic slowdowns, precisely when it is needed most.
The report noted that economic growth is more volatile than in other parts of the world just as high reliance on resource revenue and pervasive universal energy and food subsidies across the region have also exposed budgets to fluctuations in commodity prices.
“Second, state ownership of non-financial corporations and banks in these countries can generate sizable government obligations that can come due when negative events occur, known as contingent liabilities. For example, a public electric or water utility company that faces large operational losses might require government financial assistance to continue providing services.
“Many state-owned enterprises (SOE) in the region are financially weak and require regular government cash injections. This often reflects their role in fulfilling quasi-fiscal activities such as selling goods and services at below market rates or creating jobs, rather than being run on a commercially sound basis. Contingent liabilities may also be arise from public-private partnerships (PPPs). For example, certain PPP contracts might require government to compensate a private partner if collections, as in toll road projects, fall short of projections,” the Fund noted.
As a way of addressing this, the Fund urged policy makers in the region to strengthen their capacity to analyze and manage fiscal risks.
However, the report said, the region’s governments still need to take steps to enhance fiscal risk data collection, identification, analysis, and management capacity.
Economic reforms can help address fiscal risks at the source. For instance, stronger macroeconomic frameworks can lessen growth volatility. Governance reforms and asset divestment can moderate contingent liabilities or lower the odds of their materialization. And improved budget processes reduce the likelihood of surprises.
Given various uncertainties, fiscal risks in the Middle Eastern and North African countries cannot be fully avoided. However, better risk awareness and stronger fiscal risk management will reduce budgetary surprises and provide firm ground for long-term development policies.
