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A Tale of Two Middle Easts

Higher oil prices, by softening budget constraints for energy producers in the Middle East and North Africa, may reduce the incentive for major economic reforms. But the region’s oil importers, facing renewed risks to social and political stability from rising costs, must contend with much greater challenges.

LONDON – The soaring commodity prices affecting developing countries have produced both winners and losers in the Middle East and North Africa (MENA). The region’s resource-rich states, which are among the world’s biggest oil and gas exporters, are experiencing revenue windfalls. But for oil importers such as Egypt, Jordan, Lebanon, Morocco, and Tunisia, higher energy prices have stretched national budgets to the limit and increased current-account deficits.

MENA is of course no stranger to the vicissitudes of global oil markets. But the region has been exposed to a succession of shocks in the past few years, including the mass protests in Algeria, Iraq, and Lebanon in 2019, Saudi-Qatari geopolitical tensions, the COVID-19 pandemic, and now the further surge in oil and food prices triggered by Russia’s invasion of Ukraine.

In the Middle East, oil and wheat shape both the economic and political fortunes of states. Governments provide citizens with generous welfare entitlements, including public-sector jobs and subsidized fuel and food. These distributional commitments ultimately form part of an authoritarian bargain whereby rulers deliver social welfare in exchange for citizens’ quiescence, if not support. Fuel and food subsidies are at the heart of this social contract, which is funded through externally generated incomes such as oil revenues, aid, and remittances.

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