Middle East and Central Asia's economies need more social spending to boost inclusive growth, IMF says

The Covid-19 pandemic has magnified socioeconomic challenges for the region, lender says

Frontline workers in the fight against Covid-19. Economies in the Middle East and Central Asia need to increase social spending for to boost inclusive growth. Reuters

Economies in the Middle East and Central Asia region lag global peers in health, education and social protection spending, which needs to be substantially increased to improve inclusive growth, according to the International Monetary Fund.

The Covid-19 pandemic has magnified socioeconomic challenges for these economies, bringing into sharp focus the "urgent need for higher spending" to protect the most vulnerable, the IMF said in its Social Spending for Inclusive Growth in the Middle East and Central Asia report on Tuesday.

A 10 per cent increase in social spending per capita could close 20 to 65 per cent of the Human Development Index gap between countries in the region and their global peers, the IMF said. HDI is an index that combines four factors: life expectancy, expected years of schooling of children, mean years of schooling for adults and gross national income per capita.

Socioeconomic outcomes in the Middle East and Central Asia have improved substantially over the past two decades. However, the pandemic has had a substantially adverse impact across the world, and the region was no exception.

"Generating inclusive growth has been a key challenge for the Middle East and Central Asian countries for a long time," Antoinette Sayeh, deputy managing director of the IMF, said at a panel discussion on Tuesday evening.

"Even before the pandemic, the region has faced very high and rising inequality – both gender and income inequality –  high youth unemployment … conflicts in some countries and large movements of refugees. All of that is making it more challenging [for regional governments]."

The region, she said, has "made considerable progress in recent decades improving social indicators", but that pace of progress has slowed in recent years.

"The pandemic has just magnified the challenges, exacerbating what was already there", making social spending "a key lever" for supporting and promoting inclusive growth in these difficult times, Ms Sayeh added.

These headwinds, the IMF said, have underscored the importance of "policy efforts to boost opportunities for all and meet the UN Sustainable Development Goals [SDGs]”.

The Covid-19 crisis has plunged the global economy into the deepest recession since the 1930s. It has disrupted health and education systems around the world as governments look to balance protecting people from the virus and reviving their economies. The pandemic risks wiping out gains made in education and health globally over the past decade, particularly in poorer nations, the World Bank said in a report earlier this month.

The IMF said while there is significant cross-country diversity in the Middle East, North Africa, Afghanistan and Pakistan (Menap) and the Caucasus and Central Asia (CCA) regions, social spending overall is lower than in other parts of the world. Governments in the region devote 10.4 per cent of their gross domestic product on average to social spending, compared to an emerging markets average of 14.2 per cent.

The level of social spending by low-income nations within the Menap region is particularly low, averaging only 8 per cent, compared to the global low-income countries’ (LIC) average of 14 per cent of GDP. Social spending within the GCC countries is also lower than in some advanced economies around the world, the IMF said.

There is also a difference in terms of purchasing power parity (PPP) per capita spending, where emerging markets in the Menap region spend an average of $1,220 on social outlays, compared to $1,978 in emerging markets globally.

"The additional spending needed to reach the SDGs underscores the scale of the challenges faced by the region," the IMF said

The median country in the Middle East and Central Asia needs to spend an additional 5.3 per cent of GDP per year by 2030 to achieve five “critical” SDGs including human, social, and physical capital improvements. However, some economies in the region need significantly higher rates of spending.

“The additional spending needed to reach the SDGs underscores the scale of the challenges faced by the region,” the IMF said.

Nearly all countries in the broader Middle East and Central Asian region should aim to increase the efficiency of social spending – particularly those with limited capacity to expand their fiscal space.

"We not only need to look into the efficiency of the social spending, but also the effectiveness", which is equally important for improving socioeconomic outcome, Rola Dashti, executive secretary of the UN's Economic and Social Commission for Western Asia, told the panel.

Social solidarity funds created and managed by wealthy individuals aimed at supporting the poor, without being a part of the government’s fiscal system, could be another way of improving social spending where needed.

"It can bridge the gap between the haves and the have-nots," she added.

In terms of spending on healthcare, the IMF said countries in the region spend 6 per cent of their GDPs on average, which is divided equally between public and private sector expenditure.

However, in lower-income countries in the Menap and CCA regions 71 per cent of overall health spending is on private sector facilities, "perhaps reflecting the unavailability of extensive public medical services”, the IMF said. “This composition of expenditure, tilted toward private sources, raises concerns about the access of poorer individuals to health services.”

Spending on public education in the region is also lower than global peers. On average, governments in the region spend 3.5 per cent of GDP, whereas global emerging markets spend 4.2 per cent, according to the IMF report.

The Washington-based lender said similar patterns could be observed in the amounts dedicated to social protection measures. Countries in the region, on average, spend 4.9 per cent of GDP on social protection, compared to 6.6 percent in EMs.