Is Escaping the Fiscal Pro-Cyclicality Trap Possible? Evidence from the Middle East and North Africa

This paper analyzes fiscal policy cyclicality, with a specific focus on the Middle East and North Africa region, which is known for its significant output volatility. The paper provides new and more granular evidence on the direction, intensity, and specific fiscal sources of cyclicality. Based on annual data covering 184 countries from 2000 to 2022, the findings suggest that there are important differences in the assessment of countercyclical fiscal policy achievements among different fiscal policy variables, across world regions, and also within the Middle East and North Africa region. While the global associations between fiscal cyclicality and income levels have remained relatively stable, countries in the Middle East and North Africa have exhibited diverse performances, some transitioning toward countercyclicality and others moving away from it. The paper also identifies several countries in the Middle East and North Africa that have successfully shifted from procyclical to countercyclical fiscal policy, breaking free from the "fiscal pro-cyclicality trap." To understand more specific fiscal sources of cyclicality, the paper examines subcomponents of revenues and expenditure. It shows that nontax revenues exhibit a greater degree of procyclicality than tax revenues, and subsidy expenditures tend to be less countercyclical than other fiscal expenditures. This has policy implications and adds a dimension of assessment to subsidies that is not addressed in the literature: subsidies, being less countercyclical than other expenditures in the Middle East and North Africa, do not contribute to macroeconomic stability and long-term growth through this channel, independent of their adverse efficiency, distributional, and fiscal space effects. The paper concludes with a discussion of the implications of these findings, aimed at improving countercyclicality in fiscal policy