Can Better Monetary and Fiscal Policies Help MENAP and CCA Economies Survive Global Turmoil?

An IMF study finds that stronger fiscal rules, credible inflation targeting, and more flexible exchange-rate regimes can significantly reduce the economic impact of global shocks across the Middle East, North Africa, Pakistan, and Central Asia. It urges governments to strengthen institutions now to lower borrowing costs, attract investment, and build long-term economic resilience in an increasingly uncertain global economy.

Global economic uncertainty is becoming a permanent feature of the international economy rather than a temporary disruption, forcing countries to rethink how they prepare for future crises. A new International Monetary Fund (IMF) working paper argues that the Middle East, North Africa and Pakistan (MENAP) and the Caucasus and Central Asia (CCA) regions will face increasingly frequent shocks from geopolitical tensions, trade fragmentation, financial market volatility and slower global growth. Instead of relying mainly on emergency policy responses, the report says governments should strengthen their monetary and fiscal policy frameworks to make their economies more resilient, attract investment and support long-term development.

Stronger Institutions Can Reduce the Cost of Future Crises

The IMF study, prepared by economists Hasan Dudu, Troy Matheson, Dirk Muir, Karmen Naidoo, Salem Nechi and Pedro Rodriguez, combines evidence from 57 countries covering 1996–2021 with advanced macroeconomic simulations. Its central message is that institutional strength matters as much as economic size when responding to global shocks.

The report identifies two major weaknesses across the MENAP and CCA regions. First, many countries continue to rely on fixed or tightly managed exchange-rate systems, limiting their ability to respond independently during global downturns. Second, fiscal institutions remain relatively weak, reducing governments' capacity to increase spending when economies slow.

Only about 25% of MENAP and CCA economies have formal fiscal rules, compared with around two-thirds of emerging and developing economies and more than 80% of advanced economies. Nearly half of the countries in the region also continue to operate under fixed or managed exchange-rate arrangements. According to the IMF, these institutional gaps make economies more vulnerable to external shocks, particularly when commodity prices fall or global financial conditions tighten.

Exchange Rate Flexibility and Fiscal Discipline Deliver Better Results

The report finds that countries with flexible exchange-rate systems generally recover faster from major global uncertainty shocks. Economies with floating exchange rates experience average GDP losses of around 2.1%, compared with approximately 2.6% for countries operating under fixed regimes. Flexible exchange rates allow currencies to adjust naturally, improving export competitiveness while enabling central banks to lower interest rates and support domestic demand.

However, the IMF stresses that exchange-rate flexibility works best when supported by diversified exports and deeper financial markets. Economies that depend heavily on a single commodity or have underdeveloped financial systems gain fewer benefits because exchange-rate movements cannot easily stimulate broader economic activity.

Fiscal credibility also plays a critical role. Based on its global analysis, the IMF estimates that countries with strong fiscal rules enjoy sovereign borrowing costs roughly 85 basis points lower than countries with weak or no fiscal rules. Lower financing costs allow governments to invest more in infrastructure, healthcare, education and climate resilience while maintaining debt sustainability. Strong governance, political stability, lower corruption, adequate foreign-exchange reserves and sovereign wealth funds further strengthen investor confidence and reduce borrowing costs.

Global Shock Simulations Highlight the Need for Immediate Reform

The researchers modelled a severe global downturn combining weaker Chinese demand, slower European productivity, escalating trade disputes, tighter financial conditions and rising policy uncertainty.

Under this scenario, global GDP falls by about 1.4% below baseline after two years, global inflation declines by 0.8 percentage points, oil prices fall by more than 12%, while sovereign risk premiums for emerging markets rise by 50 basis points.

Oil-exporting economies across the Middle East suffer the largest losses because falling oil prices reduce government revenues, exports and investment. Oil-importing countries are affected mainly through higher financing costs and weaker external demand, although lower energy prices provide some relief.

The simulations show that countries adopting credible inflation-targeting frameworks together with stronger fiscal rules perform significantly better than those relying on existing policy frameworks. For MENAP non-GCC oil exporters and oil-importing economies, GDP losses fall to roughly one-quarter of the baseline shock. For CCA oil exporters and importers, losses decline to about one-third of baseline projections. Lower borrowing costs, stronger investor confidence, automatic fiscal stabilizers and more effective monetary policy combine to support investment and household consumption.

Why the Findings Matter for Governments, Development Partners and Businesses

The report provides an important policy roadmap for governments seeking sustainable growth in an increasingly uncertain global environment. Strengthening fiscal institutions, improving public financial management, expanding domestic financial markets and gradually adopting more flexible exchange-rate systems can improve economic resilience while reducing long-term borrowing costs.

For international development partners such as the World Bank, Asian Development Bank, African Development Bank and bilateral donors, the findings suggest that institutional reforms should receive the same priority as infrastructure financing. Supporting fiscal governance, central bank capacity, financial market development and macroeconomic policy reforms could improve the effectiveness of future development investments and strengthen economic stability across the region.

Private-sector stakeholders also stand to benefit from these reforms. Countries with stronger fiscal credibility and more predictable monetary policy are likely to attract greater foreign direct investment, reduce financing costs and create a more stable business environment. Infrastructure developers, manufacturers, exporters, financial institutions and long-term investors would benefit from lower sovereign risks and stronger economic fundamentals. At the same time, countries delaying institutional reforms may continue facing higher borrowing costs, greater exchange-rate volatility and weaker investor confidence.

The IMF concludes that resilience cannot be built during a crisis, it must be established beforehand through credible institutions, disciplined fiscal policy and flexible monetary frameworks. As MENAP and CCA economies continue diversifying exports and deepening financial markets, these reforms will become increasingly important for protecting growth, supporting development and improving competitiveness in a rapidly changing global economy.