Why renewable energy in MENA depends more on economic stability than resources

Rising inflation and economic instability are the critical obstacles to renewable energy growth across the Middle East and North Africa (MENA), according to new academic research. While the region has invested heavily in solar and wind capacity, long-term deployment remains vulnerable to shifting macroeconomic conditions. The study finds that economic fundamentals now play a decisive role in determining whether renewable energy projects advance or stall.

Published in Economies, the study Macroeconomic Determinants of Renewable Energy Deployment: The Role of Inflation, Fiscal Policy, and Economic Volatility in MENA Countries (2000–2023), the research examines data from 16 MENA economies and shows that inflation and volatility consistently undermine renewable energy security, while targeted fiscal policy supports sustained deployment

Inflation and volatility undermine long-term energy investment

Inflation acts as a persistent brake on renewable energy deployment across the MENA region. Renewable energy projects are capital-intensive by nature, with long payback periods and returns that depend heavily on stable financial conditions. When inflation rises, the real value of future revenues falls, financing costs increase, and investor confidence weakens. The study finds that higher inflation rates are associated with a statistically significant decline in the share of renewable electricity in total power generation, both in the short term and over the long run.

This link matters deeply for MENA economies, where inflationary episodes have often coincided with global commodity price shocks, currency pressures, and domestic fiscal stress. In such environments, renewable energy investments become less attractive relative to short-term spending priorities or conventional energy projects backed by existing infrastructure. The research shows that inflation does not merely slow renewable growth temporarily, but systematically erodes the conditions needed for sustained deployment.

Economic volatility aggravates this problem. The study demonstrates that higher levels of macroeconomic instability significantly reduce renewable energy security across the region. Volatility increases uncertainty around future demand, regulatory frameworks, exchange rates, and financing conditions, all of which are critical for projects that require long planning horizons. In volatile economies, investors tend to delay or cancel irreversible investments, and renewable energy projects are often among the first to be postponed.

This finding is particularly relevant in the MENA context, where economic cycles are closely tied to fluctuations in oil and gas revenues. When hydrocarbon prices fall, fiscal balances weaken and uncertainty rises, even as diversification into renewable energy becomes more urgent. The study shows that this contradiction creates a structural challenge: the same economic instability that makes renewable energy diversification necessary also undermines the conditions required to carry it out.

Importantly, the negative effects of inflation and volatility are not limited to long-term trends. The research finds that short-term shocks in both variables have immediate adverse impacts on renewable energy deployment. While these effects are smaller in magnitude than long-run impacts, they demonstrate how sensitive renewable energy investment decisions are to changing macroeconomic signals.

Fiscal policy plays a decisive enabling role

The study finds that government spending directed toward energy infrastructure, renewable subsidies, and capital investment has a statistically significant and durable positive effect on renewable energy security. Unlike inflation and volatility, which discourage private investment, targeted fiscal action can reduce risk, lower costs, and crowd in private capital.

The research notes that not all public spending is equally effective. What matters is fiscal policy that directly supports renewable energy development, such as investment in grid infrastructure, financial incentives for renewable projects, and public participation in early-stage market development. These measures help overcome market failures that often prevent private investors from entering renewable sectors in emerging or transitional economies.

The positive impact of fiscal policy holds in both the short run and the long run. In the short term, increased government spending can stimulate immediate activity by improving project bankability and signaling policy commitment. Over time, sustained fiscal support helps build institutional capacity, reduce financing costs, and accelerate learning effects that make renewable energy more competitive.

The study also highlights important regional differences. While fiscal policy has a positive effect across the MENA region as a whole, its effectiveness varies between hydrocarbon-exporting and hydrocarbon-importing countries. In non-oil economies, fiscal support tends to have a stronger marginal impact on renewable deployment, reflecting greater reliance on public intervention to attract private investment. In oil-rich countries, fiscal policy remains important but must compete with entrenched fossil fuel interests and revenue structures.

According to the research, fiscal policy cannot operate in isolation. Expansionary spending loses much of its effectiveness in environments marked by high inflation or persistent economic volatility. Without macroeconomic stability, even well-designed fiscal incentives struggle to deliver lasting results. This finding reinforces the study’s central message that renewable energy policy and macroeconomic policy are deeply interconnected.

Energy transition depends on economic stability, not resources alone

Renewable energy security is measured not by installed capacity or policy targets, but by the actual share of renewable electricity integrated into national power systems. This focus captures whether renewable energy has moved beyond pilot projects and announcements into reliable, system-level deployment.

The research finds strong evidence of a stable long-run relationship between renewable energy security and macroeconomic conditions across MENA countries. Deviations from this equilibrium do occur during economic shocks, but the system shows a meaningful capacity to adjust. Approximately 42 percent of any short-term deviation from the long-run path is corrected within a year, indicating a moderate but significant adjustment speed. This suggests that while macroeconomic shocks disrupt renewable deployment, the underlying relationship between stability and energy transition remains intact.

The study’s findings challenge the assumption that renewable energy deployment in MENA is primarily constrained by institutional inertia or political resistance. Instead, they point to economic fundamentals as a critical bottleneck. Countries with abundant renewable resources but unstable macroeconomic environments struggle to convert potential into actual energy security. Conversely, those that maintain price stability and predictable fiscal frameworks are better positioned to sustain renewable growth, even amid global uncertainty.

The research links energy transition to key economic policy objectives. Monetary policy aimed at price stability becomes not just a macroeconomic goal but an energy security tool. Fiscal discipline and counter-cyclical spending emerge as mechanisms to protect long-term energy investments from short-term economic shocks.

The study also highlights the risks of stop-and-go policy approaches. Inconsistent fiscal commitment, particularly during downturns, can derail renewable momentum and increase long-term costs. The findings suggest that insulating renewable energy investment from political and economic cycles may be essential for achieving durable energy transitions in the region.