3. MENA’s unexpectedly low inflation

Changes in real, that is inflation-adjusted, GDP per capita are arguably a more accurate measure of changes in living standards. Following a modest recovery of 2.0 percent in 2021, growth in real GDP per capita for MENA is expected to accelerate to 3.9 percent in 2022 before slowing to 2.0 percent in 2023. This growth, however, is uneven among the country groups. GDP per capita growth for GCC countries is expected to accelerate to 5.5 percent in 2022 before slowing to 2.4 percent in 2023. The corresponding rates are 2.5 percent and 1.1 percent for developing oil exporters. By contrast, for developing oil importers, GDP per capita growth is expected to remain at around 2.9 percent for 2022 and 2.7 for 2023. Excluding Egypt and Lebanon, GDP per capita in developing oil importers are forecast to grow by just 0.7 in 2022 and 2.5 in 2023. Of the 18 countries in Table 2.3, six will have returned to their pre-pandemic level of real GDP per capita by the end of 2022, and only nine will have reached their pre-pandemic real GDP per capita levels by the end of 2023.

The current account and fiscal balances for MENA are projected to improve substantially in 2022 to 10.5 and 1.9 percent, respectively—driven by higher hydrocarbon prices. For the GCC, the current account balance is expected to increase to 17.2 percent in 2022 and 14.6 percent in 2023, from 7.9 percent in 2021. Fiscal balances are also forecast to improve markedly, with Saudi Arabia and Oman expected to post fiscal surpluses of 6.8 and 5.7 percent, respectively, in 2022, their first in almost a decade. Developing oil exporters are also forecast to have substantial improvements in their current account (7.6 percent) and fiscal balances (0.8 percent) in 2022. By contrast, among developing oil importers, the higher bill for food and energy imports is expected to worsen their current account deficit to -4.9 percent in 2022 from -4.6 percent in 2021, while their fiscal deficits are forecast to improve slightly to -6.3 percent in 2022 versus -7.0 percent in 2021.

3. MENA’s unexpectedly low inflation

The macroeconomic performance of developing countries and emerging markets has been shaped by the global economy’s transition to a higher inflation and higher interest rate environment. This section focuses on the challenge of inflation, first presenting novel evidence concerning the imperfect pass-through of global inflation to domestic inflation rates across MENA. It discusses the various types of policy responses observed across the region and concludes with an empirical assessment of the relative fiscal costs of two broad types of consumption support programs aimed at reducing the negative consequences of food-price inflation.

3.a. Imperfect pass-through of global inflation

Broadly speaking, domestic inflation is driven partly by global inflation and partly by domestic factors. The component of domestic consumer-price inflation driven by global inflation is called “tradable” inflation by economists, because it refers to the price behavior of goods that are traded in international markets and usually denominated in U.S. dollars. Another component of domestic inflation is driven by largely domestic factors that affect the price of “non-traded” goods and services.

To the extent that the MENA countries covered in this report are “small open economies,” their inflation rate of tradable goods is driven by two key variables—global inflation denominated in U.S. dollars and the country’s exchange rate relative to the U.S. dollar—that is, how much a good costs in dollars and how much it costs to acquire those dollars. This

description refers to the demand side of global markets, not the supply side. A country may be able to partly influence global prices—and thus global inflation—by being, say, a large producer of a particular commodity such as oil. But a country is unlikely to affect global prices through its consumption of globally traded goods. As small open economies, MENA countries covered here are price takers as consumers of tradable goods.

Even though they cannot affect the global price of a tradable good, national policymakers can affect its domestic price through product-market interventions—such as price controls or consumption subsidies. In fact, recent IMF (2022) research indicates that MENA countries have the lowest pass-through rate from global oil prices to domestic gasoline prices, which suggests that governments intervene in the domestic gasoline market by providing, say, some sort of gasoline consumption subsidies.

Moreover, the pass-through of global inflation to domestic inflation is imperfect because consumers across countries do not consume only tradable goods, they also consume non-traded goods and services such as doctor visits, schooling, housing, or construction. Consequently, domestic inflation need not equal global inflation.

The pass-through from global inflation to domestic inflation, then, is not one-for-one because: • tradable goods account for far less than 100 percent of domestic consumption. • exchange rates can fluctuate, thus augmenting or reducing the impact of changes in global prices denominated in U.S. dollars. • governments can respond to inflation through product-market interventions that affect the domestic prices of tradable goods.

What follows is a discussion of the roles of both the share of tradable goods in domestic consumption and fluctuations in exchange rates as drivers of reported inflation rates across MENA.

Ì 3.a.i. Exchange rate adjusted inflation rates since February 2022

The tradable consumption share and the variation in a country’s exchange rate (defined as local currency units per U.S. dollar) are key to understanding the extent to which exchange rate fluctuations since the start of the war in Ukraine affect domestic inflation rates.1 The formal derivation of the relationship between the domestic Consumer Price Index (CPI), or headline inflation, and global inflation under the small open economy assumption appears in Appendix A1.

Getting accurate estimates of the share of tradable goods in total consumption requires detailed data on the components of the CPI for each country. Such data are available for 12 MENA countries—Algeria, Bahrain, Djibouti, Egypt, Iraq, Iran, Jordan, Lebanon, Oman, Qatar, Saudi Arabia and Tunisia—but others have data only for broad product or services categories. Thus, as documented in Appendix A2, we rely on informed statistical guesses to impute the tradable consumption share for MENA countries that do not have the necessary data.

Figure 3.1 shows the tradable consumption shares for 16 MENA countries with available CPI data.2 The 12 countries, represented by red bars, publish enough detailed data to compute tradable consumption shares with relative precision, while consumption shares had to be imputed for the four countries represented by orange bars. These countries—Kuwait,

1 We use the exchange rate of the local currency relative to US dollars. The choice is justified because most global transactions are denominated in U.S. dollars (Gopinath et al. 2010;

Bertaut et al. 2021). 2 Three MENA countries have no publicly available CPI data: Libya, Syria, Yemen.