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Cover Regional Economic Outlook: Middle East and Central Asia, May 2023
1. Regional Developments and Economic Outlook: Safeguarding Macroeconomic Stability amid Continued Uncertainty1
International Monetary Fund. Middle East and Central Asia Dept.

Abstract

The economies of the Middle East and Central Asia (ME&CA) proved resilient in 2022, despite a series of global shocks. However, this year—and potentially next—growth is expected to slow in the Middle East and North Africa (MENA) as tight policies to fight inflation, reduce vulnerabilities, and rebuild buffers start to dent economic activity in many countries, and agreed oil production cuts curb growth in oil exporters. Inflation is projected to remain persistent.2 The outlook for Caucasus and Central Asia (CCA) countries depends heavily on external factors, namely the impact of monetary tightening, growth in their main trading partners, the pace of private transfers, and inflows of migrants from Russia. Uncertainty is high, and risks to the baseline are tilted to the downside amid financial stability concerns—particularly in advanced economies amid contagion fears. Policy trade-offs are even more complex, and policymakers will need to calibrate the policy mix carefully to reduce core inflation without triggering financial stress and excessive tightening and continue to provide targeted fiscal support to vulnerable groups while preserving debt sustainability and financial stability. Tight monetary and fiscal policies across the region amid tight global financial conditions call for accelerating structural reforms to bolster potential growth and enhance resilience.

Keywords:
Growth outlook; monetary tightening; inflation; downside risks; financial stability concerns; policy priorities; debt sustainability; structural reforms
Cover Regional Economic Outlook: Middle East and Central Asia, May 2023
2. Monetary Policy: Where Does the Middle East and Central Asia Stand?1
International Monetary Fund. Middle East and Central Asia Dept.

Abstract

The monetary policy response of Middle East and Central Asian (ME&CA) countries to the 2021–22 surge in inflation has varied widely. The current stance is appropriately tight or neutral for many countries using a policy rate, but it needs further tightening in others. The response to the latest inflation shock has been in line with or, in some cases, even more forceful than during previous inflation episodes. Nevertheless, in several countries monetary policy implementation continues to be undermined by a lack of coordination with fiscal policy or fiscal dominance. Monetary policy transmission in countries with floating or managed exchange rate regimes is stronger than in those with a peg, it operates mainly through the exchange rate channel, and the credit channel is relatively weak. Even countries that have responded appropriately would benefit from strengthening monetary policy frameworks and fostering financial development. Activating additional transmission channels would enhance central bankers’ ability to fight inflation while reducing their economic costs. In addition, greater exchange rate flexibility and the use of macroprudential policies could help strengthen monetary policy effectiveness. In countries where state-owned banks play an important role in financial intermediation, policymakers should also reduce their quasi-monetary and quasi-fiscal activities to improve transmission.

Keywords:
growth outlook; monetary tightening; inflation; downside risks; financial stability concerns; policy priorities; debt sustainability; structural reforms
Cover IMF Working Papers
Financial Deepening, Property Rights and Poverty: Evidence From Sub-Saharan Africa
Mr. Yifei Huang and Mr. Raju J Singh
Recent studies on the relationship between financial development and poverty have been inconclusive. Some claim that, by allowing more entrepreneurs to obtain financing, financial development improves the allocation of capital, which has a particularly large impact on the poor. Others argue that it is primarily the rich and politically connected who benefit from improvements in the financial system. This paper looks at a sample of 37 countries in sub-Saharan Africa from 1992 through 2006. Its results suggest that financial deepening could narrow income inequality and reduce poverty, and that stronger property rights reinforce these effects. Interest rate and lending liberalization alone could, however, be detrimental to the poor if not accompanied by institutional reforms, in particular stronger property rights and wider access to creditor information.
Keywords:
WP; Gini coefficient; GDP; financial development; poverty alleviation; income distribution; Africa; poverty gap; poverty indicator; dependent variable; allocation mechanism; decrease poverty; absolute value; positive correlation; Financial sector development; Credit; Income inequality; Sub-Saharan Africa
Cover IMF Working Papers
Financial Integration and Rebalancing in Asia
Mr. Olaf Unteroberdoerster and Ms. Runchana Pongsaparn
The paper shows that Asia's degree of financial integration, both with the world and within the region remains low by various measures. The paper also provides empirical evidence that greater financial integration can support economic rebalancing in statistically meaningful ways. The implication is that in the debate on managing capital inflows the longer-term benefits of financial openness for broader-based growth should not be forgotten.
Keywords:
WP; GDP; Asia; Financial Integration; Financial Development; Rebalancing; Portfolio investment; savings-investment norm; FDI inflow; FDI flow; FDI outflow; Foreign direct investment; Financial sector development; Exchange rates; Asia and Pacific; Global; Eastern Europe
Cover IMF Working Papers
Asset Price Bubbles: A Selective Survey
Ms. Anna Scherbina
Why do asset price bubbles continue to appear in various markets? This paper provides an overview of recent literature on bubbles, with significant attention given to behavioral models and rational models with frictions. Unlike the standard rational models, the new literature is able to model the common characteristics of historical bubble episodes and offer insights for how bubbles are initiated and sustained, the reasons they burst, and why arbitrage forces do not routinely step in to squash them. The latest U.S. real estate bubble is described in the context of this literature.
Keywords:
WP; discount rate; rate of return; subprime mortgage; fair value; share price; Bubbles; Limits to Arbitrage; Financial Crisis; overvalued asset; long position; price limit; market price; equilibrium price; paper money; growth decrease; internet bubble; bubble asset; Asset bubbles; Asset prices; Housing prices; Real estate prices; Stocks; Europe
Cover IMF Working Papers
Assessing Countries’ Financial Inclusion Standing - A New Composite Index
Mr. Alexander Massara and André Mialou
This paper leverages the IMF’s Financial Access Survey (FAS) database to construct a new composite index of financial inclusion. The topic of financial inclusion has gathered significant attention in recent years. Various initiatives have been undertaken by central banks both in advanced and developing countries to promote financial inclusion. The issue has also attracted increasing interest from the international community with the G-20, IMF, and World Bank Group assuming an active role in developing and collecting financial inclusion data and promoting best practices to improve financial inclusion. There is general recognition among policy makers that financial inclusion plays a significant role in sustaining employment, economic growth, and financial stability. Nonetheless, the issue of its robust measurement is still outstanding. The new composite index uses factor analysis to derive a weighting methodology whose absence has been the most persistent of the criticisms of previous indices. Countries are then ranked based on the new composite index, providing an additional analytical tool which could be used for surveillance and policy purposes on a regular basis.
Keywords:
WP; income group; factor analysis; Financial inclusion; access and usage of financial services; index; borrowers variable; a number of variable; outreach variable; cross-dimension composite index; scale invariance; household depositor; composite index value; usage variable; normalized variable; geometric mean; Public expenditure review; Personal income; Commercial banks; Global
Cover IMF Working Papers
The Statistical Measurement of Financial Derivatives
Mr. Robert M Heath
The System of National Accounts 1993 (1993 SNA) provided new standards for the statistical treatment of financial derivatives. Subsequently, financial derivative markets have evolved, and there have been requests from national statisticians for clarification and amplification of the recommendations in the 1993 SNA and the fifth edition of the IMF’s Balance of Payments Manual (BPM5). Meeting this need is the main purpose of this working paper. Its recommendations have been widely discussed in international meetings and have been approved by bodies that effect changes in the 1993 SNA and BPM5.
Keywords:
WP; financial derivative; derivative contract; market price; options contract; cash settlement; economic value; unit of account; Financial derivatives; Options; Currencies
Cover IMF Working Papers
Defining Financial Stability
Mr. Garry J. Schinasi
The main objective of this paper is to propose a definition of financial stability that has some practical and operational relevance. Financial stability is defined in terms of its ability to facilitate and enhance economic processes, manage risks, and absorb shocks. Moreover, financial stability is considered a continuum: changeable over time and consistent with multiple combinations of the constituent elements of finance. The paper also discusses several practical implications of the definition that should be considered when using it for policy analysis or developing an analytical framework.
Keywords:
WP; financial system; market; finance; economy; economic process
Cover IMF Working Papers
Toward a Framework for Safeguarding Financial Stability
International Monetary Fund
This paper examines the emergence of financial stability as a key policy objective. It discusses the underlying trends in the financial system, as well as the role of finance in relation to money, the real economy, and public policy. Financial stability is defined in terms of its ability to help the economic system allocate resources, manage risks, and absorb shocks. Moreover, financial stability is considered a continuum, changeable over time and consistent with multiple combinations of its constituent elements. On the basis of these concepts, a framework is presented that comprises an encompassing analysis and assessment of financial stability, and maps out broad policy implications.
Keywords:
WP; payments system; economic system; market imperfection; unit of account; financial-system policy; Financial stability; Policy framework; foregone exchange opportunity; financial system performance; market uncertainty; market failure; public goods; market discipline; market confidence; Financial sector stability; Financial stability assessment; Systemic risk; Asset prices