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Caucasus and Central Asia Middle East Gulf Countries Should Maintain Reform Momentum, Despite Oil Boom Photo credit: HansMusa/Getty Images GDP growth for Gulf Cooperation Council (GCC) countries—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE—is expected to more than double, reaching 6.5 percent in 2022, according to our recent Policy Paper. Surging commodity prices have limited the spillovers from the war in Ukraine and the impact from tighter global financial conditions, and have allowed for a more positive outlook for GCC economies. Throughout its history, the GCC region has experienced distinct periods of rising oil revenues. During those periods, countries deepened their dependency on oil and gas, increased wages and hirings in the public sector, expanded social safety nets, and ramped up capital expenditure. During 2002-08 and 2010-14 for example, the public sector wage bill increased by 51 and 40 percent respectively. Our analysis suggests that GCC countries will save far more resources than during previous episodes because of the fiscal and structural reforms taken in the region. In 2022 alone, the overall fiscal surplus will amount to over $100 billion, as the rise in expenditures—particularly on wages—remains contained so far. While GCC countries have benefited from higher, albeit volatile, oil and gas prices, numerous risks still cloud the outlook—notably a slowdown in the global economy. In this context, the reform momentum established in previous years should be maintained—irrespective of the level of hydrocarbon prices.  How to keep that reform momentum To respond to near-term shocks and firmly address medium-and long-term challenges, we recommend implementing a comprehensive package of policies that includes: Using additional revenues from higher oil prices to rebuild buffers and strengthen policy space. Given the available fiscal space, targeted support for the most vulnerable can be prioritized, leveraging the progress made on digitalization. Keeping medium-term fiscal policy geared towards ensuring fiscal sustainability and increasing savings, through a credible fiscal framework. Over the long term, this is critical to ensure equity between generations and a smooth energy transition out of fossil fuels. This can be supported through non-oil revenue mobilization and energy subsidy phase-out, which will also contribute to climate change mitigation. Other supporting measures include the gradual reduction of public sector wage bills and increasing spending efficiency - for example, through continuing reforms to improve procurement and investment planning. A proper assessment of the fiscal stance will require fully incorporating the sovereign wealth funds’ operations, given their role in diversifying savings from oil revenues and their involvement in national development strategies. Maintaining financial sector stability, which is essential to sustaining strong economic growth. As a result of high oil prices and abundant liquidity, which are facilitating credit expansion, GCC bank balance sheets are currently shielded from tighter global financial conditions. However, bank soundness should continue to be carefully monitored. Accelerating ongoing structural reforms, including by raising female labor force participation, increasing flexibility for expatriate workers, improving education quality, further leveraging technology and digitalization, enhancing regulatory frameworks, strengthening institutions and governance, deepening regional integration, and addressing climate change adaptation and mitigation challenges. Implementing policies for sustained private sector-led economic growth and diversification will be as key as ever. **** Amine Mati is an Assistant Director and Jerome Vacher is a Senior Economist. Both are in the IMF’s Middle East and Central Asia Department. RELATED LINKS Regional Economic Outlook Country Focus: Saudi Arabia Russia's War in Ukraine Could Raise Poverty in Caucasus, Central Asia Photo credit: mbrand85/Getty Images Poverty reduction in the Caucasus and Central Asia is likely to stall due to Russia’s war in Ukraine and the cost-of-living crisis, which comes on top of pandemic-related work disruptions and loss of income that impacted poor people the most. When Russia invaded Ukraine in February, countries in the Caucasus and Central Asia were expected to be among the hardest hit by the war’s fallout due to their proximity and close economic ties to Russia. But surprisingly, economic activity in most of the region’s countries has held up well so far, partly due to unexpected positive spillovers, including a surge in income and financial inflows to the region.   Despite these spillovers, our latest Regional Economic Outlook shows that the war in Ukraine could raise poverty rates by about 1 percentage point across the CCA countries through its impact on inflation and remittances. This implies that nearly an additional one million people could fall into poverty in the coming years. The poorest people in the poorest countries will bear the brunt of the war.  High prices take a toll Even before the war, inflation had been rising in the region. However, the war’s impact on global food and energy prices has exacerbated the inflation outlook. Although food prices are below their pre-war levels now, they are still significantly higher than the 2021 average. High food prices are especially concerning for low-income families who have low savings and spend a higher share of their income on food—as much as 60 to 70 percent in Azerbaijan, the Kyrgyz Republic, and Tajikistan. Lower remittances Remittances account for 10 to 30 percent of the gross domestic product in Armenia, Georgia, the Kyrgyz Republic, Tajikistan, and Uzbekistan. Russia is the most important source of remittances for most of these countries, especially for the Kyrgyz Republic and Tajikistan. Historically, remittances from Russia are strongly correlated with Russia’s GDP—the higher the GDP, the higher the level of remittances. However, sustained sanctions on Russia could damage its productive capacity, leading to persistent changes in migration patterns and a drop in remittances from Russia. The fall could be significant given Russia’s projected GDP losses, deeply affecting many families that rely on them as a source of income support. Rising risks to poverty By 2023, high food price inflation is expected to increase poverty rates by an average of 0.7 percentage points across most countries in the region. In poorer countries, where poverty rates are already elevated, the impact will be significantly higher. The Kyrgyz Republic and Tajikistan are most at risk. A sharp decline in remittances could increase the poverty rate even more—by up to 1.4 percentage points in Tajikistan. Targeted support Policymakers should prioritize mitigating the war’s potential impact on the vulnerable by making substantial investments to improve the coverage, adequacy, targeting, and efficiency of social safety nets. Additional targeted support may be needed if declines in remittances persist. Governments must act now to prevent the war in Ukraine and the broadening sanctions on Russia from increasing poverty levels and reversing their hard-won achievements of the last two decades. **** Bashar Hlayhel is a Research Assistant, Troy Matheson is a Senior Economist, and Sahra Sakha is an Economist. The authors are in the IMF’s Middle East and Central Asia Department.  RELATED LINKS Regional Economic Outlook Country Focus: Kazakhstan

F&D December 2022 Issue: The Scramble for Energy Dear maria, High energy prices and supply disruptions since Russia’s invasion of Ukraine have fueled a rush to ensure dependable energy. But achieving energy security may risk jeopardizing climate goals. The December 2022 edition of F&D Magazine focuses on the scramble for energy, and what geopolitical tensions mean for the clean transition.  “The scramble for quick solutions to secure affordable and reliable energy could imperil climate action,” writes F&D editor-in-chief Gita Bhatt. “How do nations manage the gap between near-term energy needs and long-term green goals?” To investigate this question, we present groundbreaking research and analysis from economists and other leading authorities in the world of energy economics. The issue covers a range of perspectives on topics including energy efficiency, affordability, green technologies, alternatives such as hydrogen and nuclear, and political economy. We examine Poland’s pursuit of energy independence; and we look at the push towards renewables—from Chile’s bet on green hydrogen, to Kenya’s geothermal industry, to Indonesia’s solar future. We hope this issue offers our readers some food for thought. FEATURED ARTICLES: A Call to Clean Energy | Fatih Birol Bumps in the Energy Transition | Daniel Yergin Green Growth Opportunities | Ricardo Hausmann Nuclear Resurgence | Ted Nordhaus and Juzel Lloyd Hydrogen’s Decade | Thijs Van de Graaf From Abundance to Thirst | Andrea Pescatori and Martin Stuermer Beating the European Energy Crisis | Jeromin Zettelmeyer, Simone Tagliapietra, Georg Zachmann, and Conall Heussaff Helping Europe’s Households | Oya Celasun and Dora Iakova America’s Landmark Climate Law | Jason Bordoff Pipeline Diplomacy with Piotr Naimski | Chris Wellisz Energy Transitions | Andrew Stanley The Search for Clean Energy: Chile (John Bartlett), Indonesia (Harry Jacques), and Kenya (Will Brown) Also in this issue, David Cutler and Edward Glaeser look at cities after the pandemic, Amir Sufi talks about the state of household debt, and Ratna Sahay and co-authors call for a bigger role for women in digital finance. Ali Abbas and Alex Pienkowski examine sovereign debt, Analisa Bala highlights a Barbados banknote that pays tribute to the man who united West Indian cricket, and Peter Walker profiles Berkeley’s Emi Nakamura. Lisa Kolovich reviews Ann Mari May’s new book, Gender and the Dismal Science: Women in the Early Years of the Economics Profession, and Joseph McCartin reviews Sanford M. Jacoby’s Labor in the Age of Finance. Sincerely, F&D Team   Stay Engaged Please don’t hesitate to contact me directly. I'd love to hear what you think of our content or what you would like to see more coverage of. Please do flag any interesting or significant research we should consider showcasing. We will be publishing more online articles in the coming weeks and months on a range of subjects. Nick Owen Senior Editor F&D Magazine nowen@IMF.org   P.S.  As always, this issue of F&D will soon be available in español, français, عربي, русский, 中文 and 日本語. You can also get a print copy delivered to your home or office.

Dear maria, We just published a new blog—please find the full text below.  Climate Security and Energy Security Must Go Hand-in-Hand (Photo: Grispb/AdobeStock) By Gita Bhatt A few years ago, in an era of abundant energy supplies, the world’s focus was on curbing fossil-fuel use to achieve net-zero carbon emissions. Today, priorities have shifted amid supply threats and price increases since Russia’s invasion of Ukraine. The scramble to secure affordable and reliable energy could imperil climate action. How do nations and their leaders manage the gap between urgent energy needs and longer-term green goals? In this issue of Finance & Development, energy policy leaders look at where the transition to greener energy sources stands amid geopolitical tensions. It’s a fallacy that the world must choose between energy security and climate action, writes International Energy Agency chief Fatih Birol. He warns against using the current crisis as an excuse to deepen dependence on fossil fuels. In fact, he says, the situation strengthens the case for more investment in clean energy—including energy efficiency, renewables, electrification, and a range of clean fuels—to reduce dependence on imported oil and gas. Energy authority and author Daniel Yergin warns that the energy transition needs careful planning and will lose public support if it comes at the price of economic disruption, especially in developing countries grappling with other competing priorities like health, poverty, and economic growth. “Advocacy has too often taken precedence over analysis,” he writes. But Europe’s supply challenge is now. The IMF’s Andrea Pescatori and Martin Stuermer explain the structural differences between oil and gas markets, while putting the energy crisis into a broader perspective. European think tank Bruegel’s Jeromin Zettelmeyer and coauthors urge European Union countries to strike a “grand bargain” to reduce energy demand and boost supply while keeping internal energy markets open and compensating vulnerable consumers. For emerging and developing economies, the clean energy transition offers an opportunity to supercharge growth, says Harvard’s Ricardo Hausmann. Investing in green technologies creates value and jobs, enabling these nations to do more to decarbonize, he argues. Long-term security still depends on a mix of clean technologies, from solar and wind power to nuclear, green hydrogen electric vehicles, and carbon capture. As Birol argues, massive investment in clean energy is the best guarantee of energy security. Indeed, climate security and energy security must go hand-in-hand. Elsewhere in the issue, Columbia University’s Jason Bordoff suggests that America’s new climate law presents an opportunity for the US to engage with partners to create special trading rules that support clean energy. We interview Poland’s former energy minister Piotr Naimski on the country’s pursuit of energy independence, and we look at the push towards renewables—from Chile’s hydrogen bet to Kenya’s geothermal industry and Indonesia’s solar future. There is, of course, much more to explore in this issue. I hope you also find that it reveals something new to you and provides food for thought. Thank you as ever, for reading us. Jeff Kearns Managing Editor IMF Blog jkearns@IMF.org   Thank you again for your interest in IMF Blog. Read more of our latest content here. Take good care!

Dear maria, In today’s edition, we spotlight the importance of the policy mix in responding to persistently high inflation, the poverty threat to a million people in the Caucasus and Central Asia, the scramble for energy, sub-Saharan Africa’s crypto clampdown, sovereign finance and transparency, Aruba's tourism arrivals, and much more.

Global Policy Fiscal Restraint Can Help Fight Inflation Why Countries Must Cooperate on Carbon Prices (IMF PHOTO/LENA MUCHA) In early 1980s, the United States pursued an expansionary fiscal policy despite persistently high inflation. The Federal Reserve under then-chairman Paul Volcker raised interest rates sharply to rein in inflation, causing investment to collapse and the dollar to appreciate. Manufacturers clamored for trade protection. That episode is relevant for many countries facing similar challenges today, the IMF’s Tobias Adrian and Vitor Gaspar write in a blog. With many people still struggling amid economic pressures, the authors say that governments should prioritize helping the most vulnerable to cope with soaring food and energy bills—but should also avoid adding to aggregate demand that risks driving up inflation. A smaller fiscal deficit cools aggregate demand and inflation, so the central bank doesn’t need to raise rates as much. Reducing deficits also addresses debt vulnerabilities at a time of tight global financial conditions. “While many central banks are tightening policy in response to the large and persistent rise in global inflation, the policy mix matters. Fiscal restraint will reduce the cost of bringing inflation back to target…compared with the alternative of leaving monetary policy alone to act.” Read more about the policy trade-offs governments face in responding to the spikes in food and energy prices in our latest Fiscal Monitor.   Central Asia Russia's War in Ukraine Could Raise Poverty (IMF PHOTO/YAM G-JUN) Poverty reduction in the Caucasus and Central Asia is likely to stall due to Russia’s war in Ukraine as a decline in remittances and rising cost of living could push one million more people into poverty, according to a new IMF Country Focus article. Although food prices are now below pre-war levels, they are still significantly higher than the 2021 average. High food prices are especially concerning for low-income families who have low savings and spend a higher share of their income on food—as much as 60 to 70 percent in Azerbaijan, the Kyrgyz Republic, and Tajikistan. By 2023, high food price inflation is expected to increase poverty rates by an average of 0.7 percentage points across most countries in the region. In poorer countries, the impact will be significantly higher. A sharp decline in remittances could increase the poverty rate even more—by up to 1.4 percentage points in Tajikistan. “Governments must act now to prevent the war in Ukraine and the broadening sanctions on Russia from increasing poverty levels and reversing their hard-won achievements of the last two decades,” the authors say. The IMF’s latest regional outlook describes the risks to the Caucasus and Central Asia from close economic ties to sanctions-hit Russia.   F&D The Scramble for Energy (BJÖRN ÖBERG) The December 2022 edition of F&D Magazine focuses on the scramble for energy, and what geopolitical tensions mean for the clean transition.  “The scramble for quick solutions to secure affordable and reliable energy could imperil climate action,” writes F&D editor-in-chief Gita Bhatt. “How do nations manage the gap between near-term energy needs and long-term green goals?” To investigate this question, we present groundbreaking research and analysis from economists and other leading authorities in the world of energy economics. FEATURED ARTICLES: A Call to Clean Energy | Fatih Birol Bumps in the Energy Transition | Daniel Yergin Green Growth Opportunities | Ricardo Hausmann Nuclear Resurgence | Ted Nordhaus and Juzel Lloyd Hydrogen’s Decade | Thijs Van de Graaf From Abundance to Thirst | Andrea Pescatori and Martin Stuermer Beating the European Energy Crisis | Jeromin Zettelmeyer, Simone Tagliapietra, Georg Zachmann, and Conall Heussaff Helping Europe’s Households | Oya Celasun and Dora Iakova America’s Landmark Climate Law | Jason Bordoff Pipeline Diplomacy with Piotr Naimski | Chris Wellisz Energy Transitions | Andrew Stanley The Search for Clean Energy: Chile (John Bartlett), Indonesia (Harry Jacques), and Kenya (Will Brown) Other articles in this issue include David Cutler and Edward Glaeser on cities after the pandemic, Amir Sufi on the state of household debt, and Ratna Sahay and co-authors on women in digital finance. Ali Abbas and Alex Pienkowski examine sovereign debt, Analisa Bala highlights a cricket-related Barbados banknote, and Peter Walker profiles Berkeley’s Emi Nakamura. Want to get a print copy delivered to your home or office? Click here to subscribe.

Reinventing the Social Contract Events of the past three years have made life difficult for millions of people around the world, and the recent rise in prices has left people angry and questioning the efficacy of the social contract between the government and its citizenry. In a podcast, University of Michigan economics professor Justin Wolfers says there has never been a better time to reinvent the institutions that foster social cohesion.

Innovation and Institutions Reforming institutions so that innovation is concentrated in areas of public concern could help to address populist skepticism, University of Chicago economic professor Michael Kremer said at the IMF's annual Richard Goode Lecture. The lecture examined the design of institutions to accelerate innovation and shape it to meet human needs as well as the use of field experiments as an effective tool to test and develop new policies and products.

Gulf's Oil Boom Economic growth in the countries of the Gulf Cooperation Council—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE—is expected to more than double to 6.5 percent this year. Fiscal surpluses for the region as a whole are set to reach more than $100 billion. But in a Country Focus article, IMF economists say that governments must maintain the reform momentum established in previous years despite the oil boom.

Climate Data Deficit To accelerate cuts to carbon emissions, policymakers need detailed statistics to monitor the energy transition and devise mitigation measures that can deliver the fastest and least disruptive pathway toward net zero. In a blog, IMF Deputy Director Bo Li says this underscores the importance of the support of G20 leaders for a new Data Gaps Initiative to make official statistics more detailed.

The collapse of the world’s third-largest crypto exchange FTX, and subsequent plunge in the prices of Bitcoin, Ethereum, and other major crypto assets, is prompting renewed calls for greater regulation of the crypto industry. Only one-quarter of countries in sub-Saharan Africa formally regulate crypto. But as our Chart of the Week shows, two-thirds have implemented some restrictions. Six countries—Cameroon, Ethiopia, Lesotho, Sierra Leone, Tanzania, and the Republic of Congo—have banned crypto altogether.

WEEKLY ROUND-UP 01. Transparency and Sovereign Financing Does it pay to be transparent and, if so, can the benefits of transparency be measured? An IMF staff paper explores changes in sovereign financing conditions when countries join the IMF Data Standards Initiatives—a multilateral framework that promotes data transparency as a global public good. The results show a significant decrease in spreads following the adoption of the standards. Countries with relatively weaker governance benefit the most from signaling their effort toward strengthening transparency. 02. Stock Market Incentives for Decarbonization Financial markets can support the transition to a low-carbon economy by redirecting funds from highly emissive to clean investments. An IMF staff study looks at whether European stock markets incorporate carbon prices in company valuations and to what degree they discriminate between firms with different carbon intensities. The paper finds a strongly statistically significant relationship between weekly carbon price changes and stock returns. Crucially, this relationship depends on firms’ carbon intensity: the higher the carbon costs a firm faces, the poorer its stock performance during the periods of carbon price increases. 03. Aruba's Tourist Arrivals An IMF staff paper improves short-term forecasting models of monthly tourism arrivals using the case of Aruba, a small open tourism-dependent economy in the Caribbean. It investigates informational value of Google Searches originating in the United States, Aruba's largest tourism market, flight capacity on US airlines, and per capita demand of US consumers. It yields several insights, including related to COVID-19 restrictions. MARK YOUR CALENDAR 01. Middle East and North Africa Webinar High global food and energy prices are exacerbating fiscal pressures in the Middle East and North Africa at a time when countries face extraordinary uncertainty. An IMF webinar on Dec. 7 at 9:00 am EST will take a close look at how countries have responded to volatile commodity prices in the past and what they can do next. Register here.

Nick Owen Editor IMF Weekend Read nowen@IMF.org   Thank you again very much for your interest in the Weekend Read! Be sure to let us know what issues and trends we should have on our radar.