Highlights:

Growth in the Middle East and Central Asia (ME&CA) is slowing, with growth for the region projected at 2.0 percent in 2023 (down from 5.6 percent last year) before increasing to 3.4 percent in 2024.

The Middle East and North Africa (MENA) region is mainly driving this year’s slowdown, reflecting oil production cuts, tight macroeconomic policies, and country-specific factors. Inflation is declining, but it remains high in some countries. The need to address recurrent shocks has reduced policy space to support economic activity in many economies, and slow progress in comprehensive reform implementation is holding back investment, job creation, and inclusion while undermining resilience to shocks. Rising climate challenges are adding to the urgency of action.

In the MENA region, economic growth is projected to slow markedly this year (to 2.0 percent from 5.6 percent last year) amid lower oil production in oil exporters, tight policy settings in emerging market and middle-income economies (EM&MIs), and country-specific headwinds. Moreover, the conflict in Sudan is affecting lives and livelihoods, causing displacement of people and severe economic disruption. Economic conditions are set to improve in 2024, with growth reaching 3.4 percent, as the contraction in Sudan subsides and other growth-dampening factors, including temporary oil production cuts, dissipate. However, public sector debt remains elevated in several countries, and medium-term growth is forecast to remain subdued. Although inflation is broadly easing, it remains elevated in some economies, with high food prices exacerbating food insecurity.

Growth in the Caucasus and Central Asia (CCA) is projected to remain robust this year (4.6 percent) and next (4.2 percent), despite some moderation as migration, trade, and financial flows from Russia gradually normalize.

In the ME&CA region, an escalation of Russia’s war in Ukraine could reignite inflationary pressures and worsen food insecurity. Climate-related shocks could result in worsening drought conditions and floods, affecting infrastructure, agricultural output, and food prices. Other downside risks could also materialize, such as debt distress related to tighter-for-longer global financial conditions.

Amid these challenges, policymakers have a pressing yet complex task of maintaining tight policies to safeguard macroeconomic stability and debt sustainability, while bolstering growth prospects. This can be accomplished through wide-ranging structural reforms to support job creation for the more than 100 million people who are set to enter working age over the next decade. As discussed in Chapter 2, structural reforms could help spur near-term economic activity—thus easing current policy trade-offs—while also lifting longer-term potential growth.