How Can Policymakers Boost Private Investment in the Middle East, North Africa, Afghanistan, and Pakistan?

With millions of young people entering the workforce each year, fiscal resources severely constrained, and economic risks on the rise, countries in the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) region are at a defining moment. Bolstering the private sector is critical to meeting this challenge, but the key to doing so—increasing private investment in the region—has long been elusive.

Facing increasing global headwinds, MENAP countries need to urgently unlock private investment. That will take more and higher-quality investment in education and infrastructure, and policy reforms to increase access to finance and improve the effectiveness and governance of the public sector. -Jihad Azour, Director of the IMF's Middle East and Central Asia Department

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Indeed, private sector investment has been historically low in the MENAP region relative to most other emerging markets and developing economies. That trend has worsened in recent years. For half the countries in the region, the ratio of private investment-to-GDP has been lower since the 2011 Arab Uprising, compared to the period that preceded the 2008-09 global financial crisis. This decline has had a profound effect on the economic health of the region, translating into an annual loss of 1.5 percentage points of growth on average for oil exporters and close to 1 percentage point on average for oil importers.

Amid increasing risks clouding the global economic outlook, and with continued technological innovation promising to change the very nature of work, countries in the region urgently need bold reforms if they are to achieve inclusive growth today and for future generations. The IMF’s latest Regional Economic Outlook: Middle East and Central Asia explores this critical policy challenge and finds that by focusing on several priorities, MENAP countries can attract investment to the region and lay the foundation for a more prosperous tomorrow.

What is holding back private investment in the region?

Some factors that boost private investment—such as growth in export markets and the evolution of oil prices—are outside the influence of the region’s policymakers. However, other factors that the report shows have a meaningful impact on private investment, including education, infrastructure, governance, and access to finance—all areas where MENAP countries could improve—can be directly impacted by policy choices.

For instance, the school enrollment rate for oil-importing countries in the region stands at just above 50 percent for secondary schools, well below the emerging markets and developing economies average of over 75 percent. If MENAP’s oil importers raise school enrollment rates to that level, it could boost private investment by over 1 percentage point of GDP. Investing in human capital by expanding educational opportunities will also help ensure countries can meet the challenges of the future, especially as rapidly developing technology becomes even more intertwined with the jobs of tomorrow.

Infrastructure improvements are another vital need. For example, ensuring universal access to electricity has the potential to raise investment by another ¾ of a percentage point. How to create the space for the public spending necessary to support these critical investments is also discussed in the report.

Oil-importing countries also trail their peers on various governance measures, ranging from corruption to the rule of law. Improving the rule of law to the emerging markets and developing economies average could raise private investment by 2/3 of a percentage point of GDP. In parallel, bringing the level of financial development in MENAP oil importers to that of emerging Europe could boost private investment by ½ of a percentage point of GDP.

This is not just a challenge for the region’s oil-importing countries. The richer oil exporting countries are behind their advanced economy peers on various governance and financial development measures. In particular, further financial development to the level of the average advanced economy could yield almost 2 percentage points of GDP in additional private investment.

An urgent need for action

The need for policy action to boost private investment is more critical than ever for the MENAP region. Policymakers need to focus on reforms that help their countries catch up with their peers on education, infrastructure, financial development, and governance. These reforms would help offset the headwinds from global factors outside policymakers’ control. This is the course that needs to be navigated to shore up economic resilience and map out the voyage to higher and more inclusive growth for the future.