The MENA region's economy is expected to grow 5.5 percent this year, its fastest pace since 2016, before slowing to 3.5 percent in 2023. However, the growth has been uneven across the region, with countries still struggling to overcome the lasting effects of the coronavirus pandemic and facing major new shocks such as higher oil and food prices from the war in Ukraine, rising global interest rates and economic slowdowns in the US, China and the eurozone.

The World Bank's latest economic bulletin, New Thinking for the Middle East and North Africa: Improving Transparency and Accountability, notes that while oil exporters in the region benefit from high oil and gas prices, the picture is very different for oil importers. Oil-importing countries face the pressure and risk of higher import bills, especially for food and energy, and tighter fiscal room as they spend heavily on price subsidies to ease the burden of higher prices on their populations.

"Countries in MENA will have to adjust to sharply higher prices for food and other imports, especially if they lead to higher government debt or weaker currencies," said Fred Belhaj, World Bank vice President for the Middle East and North Africa region. What countries need now is smart governance to weather the storm and start rebuilding from the pandemic's multiple shocks."

The bulletin, published twice a year, says responsive governance now will help countries tackle these challenges more effectively and strengthen the foundations for long-term growth. Each newsletter selects a particular area of focus, and this issue examines how reforms that drive greater transparency and accountability in public institutions can contribute to a sustainable economic recovery. There is an urgent need for institutions to enable government bodies to measure results, rationalise responsibility, experiment and learn from those results.

Roberta Gatti, the Bank's chief economist for the Middle East and North Africa region, said: "Advancing data transparency and accountability is a game changer for the region; Countries can be helped to identify what is working and what needs to be improved, and to act accordingly. This will help countries manage risks and move towards shaping a more sustainable and inclusive future. Not only are the potential gains huge, but the reforms needed to set institutions on the learning path can be achieved."

The report predicts that growth in the region will diverge. The Gulf Cooperation Council (GCC) countries are expected to grow 6.9% in 2022, driven by high oil and gas revenues, slowing to 3.7% in 2023 as oil and gas prices ease. Developing oil exporters are expected to follow a similar trend to the GCC countries, but at a lower level, with growth expected to rise to 4.1% in 2022, led by Iraq, before falling back to 2.7% in 2023. Developing oil importers are expected to grow by 4.5 percent in 2022 and 4.3 percent in 2023. However, slower growth in Europe poses specific risks because these countries are more dependent on trade with the eurozone, especially the North African oil importers closest to Europe: Tunisia, Morocco and Egypt.

Policymakers in the region have taken some steps, notably to rein in prices and subsidies that have kept domestic prices of some goods, such as food and energy, below global prices. This has kept inflation rates lower in the Middle East and North Africa region than elsewhere, the report found. Egypt, for example, averaged 14.3 per cent year-on-year inflation between March and July 2022, but would have been 4.1 percentage points higher at 18.4 per cent had the authorities not intervened.

Some countries have given cash handouts to poor households rather than the usual market subsidies that lower prices for everyone, including the rich, because cash handouts are a more effective way to help the poor cope with rising prices. For Egypt, using general-benefit subsidies on food and energy prices to reduce average inflation by the equivalent of 4.1 percentage points is 13.2 times more expensive than allowing prices to rise and supporting the poorest 10% of households through cash transfers.

Increased subsidies and cash transfers by governments to mitigate the impact of higher food and energy prices on national living standards will generate additional spending. For the GCC countries and developing oil exporters, this is not a big concern at the moment. The additional growth in national revenues from higher oil and gas prices has significantly expanded their fiscal space and will leave most oil exporters in fiscal surplus in 2022, even after deducting additional spending from inflation mitigation programmes.

Developing oil importers, however, without such a windfall, will have to cut other spending, find new revenue, or increase deficits and debt to finance inflation mitigation programs and any other additional spending. In addition, as the global interest rates rise, oil importer's debt burden will increase, because these countries must for any new debt and refinancing existing debt to pay higher interest rates, over a period of time will cause pressure to the country's debt sustainability, especially in countries already high debt levels, such as Jordan, Tunisia and Egypt.