Policy Research Working Paper 11131 Rethinking Fiscal Policies Tackling Inequality and Poverty in the Middle East and Noth Africa Region Alan Fuchs Tarlovsky Beenish Amjad Mario Julian Loayza Grisi Poverty and Equity Global Department May 2025 Policy Research Working Paper 11131 Abstract This paper examines the redistributive impact of fiscal regressive, offering limited equity gains. Indirect taxes, policy—specifically taxes and transfers—on poverty and although important for revenue generation, often exacer- inequality in eight countries in the Middle East and North bate income disparities. The study underscores the need Africa: the Arab Republic of Egypt, Djibouti, the Islamic for comprehensive fiscal reforms, including the expansion Republic of Iran, Iraq, Jordan, Morocco, Tunisia, and the of well-targeted transfers, adoption of progressive taxation, West Bank and Gaza. Utilizing the Commitment to Equity and reallocation of inefficient subsidies toward investments framework, the analysis evaluates how fiscal interventions in human capital. Successful initiatives, such as Egypt’s alter income distribution across these diverse national Takaful and Karama and Jordan’s Takaful and bread sub- contexts. The results indicate that direct cash transfers sidy compensation programs, illustrate scalable models of and social assistance programs are generally effective in effective redistribution. Moreover, the Islamic Republic of reducing poverty and shielding vulnerable populations, Iran’s progressive tax policies highlight viable pathways to while in-kind benefits—particularly in education and equitable revenue mobilization. Strengthening investment healthcare—significantly contribute to mitigating income in education and health is essential for promoting long- inequality. In contrast, generalized subsidies, especially term equity, enhancing upward mobility, and supporting in the energy sector, are fiscally burdensome and largely inclusive and sustainable development across the region. This paper is a product of the Poverty and Equity Global Department. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/prwp. The authors may be contacted at afuchs@worldbank.org and bamjad@worldbank.org. The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. Produced by the Research Support Team Rethinking Fiscal Policies: Tackling Inequality and Poverty in the Middle East and North Africa Region*1 Keywords: Fiscal incidence; distributional impact; poverty; inequality; fiscal policy JEL classification: H22, D31, I32, E62, D63 1 The authors gratefully acknowledge the valuable insights and guidance provided by Arden Finn (Lead Country Economist EMNDR), Marco Ranzani, Aziz Atamanov, and Erwin W. Knippenberg (Senior Economists, EMNPV), and Federica Alfani (Economist, EMNPV). This study was conducted under the strategic direction of Nadir Mohammed (Regional Director, EMNDR) and Salman Zaidi (Practice Manager, EMNPV). The analysis benefited from close collaboration with government counterparts in the Arab Republic of Egypt, Djibouti, Iraq, Jordan, Morocco, Tunisia, and the West Bank and Gaza. For the case of the Islamic Republic of Iran, the authors acknowledge the constructive feedback and support provided by the World Bank country team. The findings presented in this paper were discussed in a series of workshops and technical engagements aimed at fostering dialogue on poverty and welfare issues in the eight countries examined. The authors also extend their appreciation to the Ministries of Finance and National Statistics Offices of the respective countries for their cooperation and for providing the data used in the analysis. The views, interpretations, and conclusions expressed in this paper are those of the authors and do not necessarily reflect those of the World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not warrant the accuracy of the data included herein. Any remaining errors or omissions are solely the responsibility of the authors. This paper and the underlying analysis have benefitted from support of the Climate Support Facility Whole of-Economy trust fund for the Middle East and North Africa region of the World Bank. 1. Introduction Income and wealth inequality play a crucial role in shaping economic growth, influencing poverty reduction, and enhancing social stability. Persistent income inequality can limit potential economic growth and hinder poverty reduction efforts (Ferreira et al., 2012). It may also restrict access to basic services such as health and education, fostering unequal opportunities and inefficient resource allocation (Ferreira et al., 2012). The concentration of power and wealth can lead to unfair social contracts (Lustig, 2022). Societies have two main ways to address this: first, by expanding poor people’s access to assets, particularly human capital, and bargaining power to level the playing field; second, by redistributing income through taxes and transfers. In both instances, the power of the state to redistribute assets, income, and wealth through fiscal policy plays a key role (Lustig, 2022). Fiscal policy plays a crucial role in reducing inequality by influencing the distribution of income and wealth through taxation, public spending, and social protection programs. Despite experiencing economic improvements over the past two decades, the MENA region continues to grapple with significant socioeconomic challenges. As of 2023, an estimated 68.3 percent of the population lived below the upper-middle-income international poverty line (US$6.85 per day in 2017 PPP terms), while 29.5 percent fell below the lower-middle-income (LMIC) threshold (US$3.65 per day). Reductions in income inequality have been uneven, and MENA records the highest incidence of moderate inequality among all world regions. Rural populations face disproportionately high levels of poverty and inequality, reflecting limited access to essential public services, including healthcare, education, water, and electricity. Gender disparities are also stark; women’s participation in the formal labor market remains markedly lower than that of men, constrained by cultural, social, and economic factors. Figure 1 Share of Inequality by region (2022) Share of countries 100% 80% 60% 40% 20% 0% EAP ECA LAC MNA SAR SSA ROW WLD Low inequality Moderate inequality High inequality Source: Poverty, Prosperity and Planet report (2024), World Bank. Note: 1. EAP = East Asia and Pacific; ECA = Europe and Central Asia; LAC = Latin America and the Caribbean; MNA = Middle East and North Africa; SAR = South Asia; SSA = Sub-Saharan Africa; ROW = rest of the world; WLD = world. 2.Share of economies in 2022 with Gini less than 30 (low), between 30 and 40 (moderate), and greater than 40 (high). Regional classifications follow the Poverty and Inequality Platform: https://datanalytics.worldbank.org/PIP-Methodology/- lineupestimates.html#regionsandcountries. 2 To effectively address ongoing and emerging socioeconomic challenges, countries in the Middle East and North Africa (MENA) region must also confront pressing demographic dynamics. Key among these is the persistently high rate of youth unemployment. The MENA region records the highest overall unemployment rate globally, with youth unemployment rates at least twice as high as the general unemployment rate. As of 2023, youth unemployment in the region stood at approximately 25 percent, reaching over 30 percent in Tunisia, according to the International Labour Organization (ILO). Additionally, nearly one-third (31.5 percent) of young people were classified as not in employment, education, or training (NEET)- a rate that had yet to return to its pre-pandemic level. Several structural factors underpin the persistence of youth unemployment in the region, including rapid labor force growth, widespread skill mismatches, rigidities in labor and product markets, the predominance of large public sectors, and elevated reservation wages. These factors collectively constrain the expansion of the tax base and fiscal space, while simultaneously increasing dependency ratios. Most critically, they represent a significant missed opportunity for realizing long-term productivity gains, fostering economic resilience, and enhancing social cohesion across generations. At the opposite end of the demographic spectrum, population aging presents a parallel challenge. Rising old-age dependency ratios are poised to place considerable strain on social protection systems across the region. As of recent estimates, the old-age dependency ratio ranged from 20.6 percent in the United Arab Emirates to as high as 72.3 percent in West Bank and Gaza. These ratios are expected to increase further as the proportion of elderly individuals rises and the working-age population contracts. This demographic transition threatens the sustainability of pension systems, which are essential instruments for reducing inequality and safeguarding vulnerable households from poverty. Moreover, aging populations will exert additional pressure on public expenditures, particularly in the health sector, due to the growing prevalence of noncommunicable chronic diseases commonly associated with aging. Figure 2 Age dependency ratio (percent of working age population) Source: World Bank staff estimates based on age distributions of United Nations Population Division's World Population Prospects: 2022 Revision. Data Retrieved from World Bank Gender Data Portal. Sustaining improvements in living standards across the MENA region will require a significant expansion of fiscal space, underpinned by broader and more robust domestic resource mobilization. This entails both widening the tax base and enhancing the efficiency of public expenditures. Key to this 3 objective is reducing the region’s heavy reliance on fossil fuel revenues—which remain highly susceptible to global price volatility—and diversifying fiscal resources through increased and more equitable taxation. A central component of this strategy involves the development of progressive tax systems. There is considerable scope for expanding direct taxation, particularly through the introduction or strengthening of personal income taxes. Simultaneously, rationalizing indirect taxes, such as streamlining Value Added Tax (VAT) exemptions, could enhance revenue efficiency and transparency, aligning with international best practices. These reforms would not only stabilize fiscal revenues but also contribute to a fairer distribution of the tax burden. On the expenditure side, improving the efficiency of public spending is essential. A transition from generalized fossil fuel subsidies to more targeted social assistance programs could improve the equity and sustainability of fiscal policy. Such reforms would support the dual goals of increasing fiscal space and addressing social disparities. Furthermore, reallocating expenditures toward public health and education—particularly to improve access and quality—holds significant potential for long-term poverty reduction and inequality mitigation. Investments in human capital, through enhanced social services, are critical to fostering inclusive growth and addressing intergenerational inequities across income groups and geographic regions. The Fiscal Incidence Analysis (FIA) is designed to serve as a baseline for evaluating current fiscal policy and potential policy reforms aimed at achieving fiscal equity and sustainability. The Commitment to Equity (CEQ) methodology 2 helps in understanding which population subgroups benefit the most from public expenditures and which subgroups are paying most of the taxes that finance those expenditures. It traces changes in the distribution of household incomes step by step from market income (before taxes and transfers) to final income (after taxes, transfers and social spending), identifying changes in income inequality and poverty attributable to different fiscal policy interventions such as taxes, transfers and social expenditure. The equity aspect of fiscal policy is critical to informing Sustainable Development Goals Indicator 10.4.2, which measures the redistributive impact of fiscal policy. The FIA helps identify spending priorities based on their contributions to reducing poverty and inequality and examines how fiscal space can be created without increasing the burden on poor and vulnerable households. Achieving the Sustainable Development Goals (SDGs) demands careful consideration of resource allocation and trade-offs. With the commitment to the SDGs in 2015, countries set out to eradicate poverty and hunger, reduce inequality, and achieve healthy lives, quality education, gender equality, and sustainable development. Achieving these goals requires substantial fiscal resources, primarily from domestic systems, supplemented by international aid (Lustig, 2022). However, the pursuit of these goals involves trade-offs, such as prioritizing hunger eradication over infrastructure investment or raising domestic revenues at the expense of the poor or economic growth (Lustig, 2022). The CEQ Assessments help quantify these trade-offs and offer a preliminary understanding of the potential impacts. 2 The CEQ methodology aims to address four key questions: How much income redistribution and poverty reduction is being accomplished through fiscal policy? How equalizing and pro-poor are specific taxes and government spending? How effective are taxes and government spending in reducing inequality and poverty? What is the impact of fiscal reforms that change the size and/or progressivity of a particular tax or benefit? The methodology has been extended to and adapted for over 85 low- and middle-income countries over the past decade. For methodological details, see Lustig (2022). 4 In the Middle East and North Africa (MENA) region, wealth is highly concentrated, with a significant disparity between the rich and poor. While some countries in the region possess substantial natural resources, such as oil and gas reserves, these resources have not always translated into broad-based economic growth or equitable wealth distribution. In several MENA countries, the top percentile of income and wealth holders experience significant prosperity, while a large portion of the population remains mired in poverty or at risk of falling into it. In 2023, the top 10 percent of the population in the MENA region controlled approximately 57 percent of the total income, 3 an increase from 56 percent in 2010, highlighting the growing income inequality. 4 Despite fiscal gains, poverty reduction has not been achieved in the MENA region. In 2023, 198 million people—around 40 percent of the total population of 500 million—lived on less than $6.85 a day (PPP). 5 This marks an increase from 31 percent in 2010, when 117 million out of 385 million lived in poverty. This wealth concentration, compounded by weak social safety nets and limited access to quality education and healthcare for lower-income groups, has contributed to rising inequality and poverty. The economic structures in many MENA countries also tend to be characterized by a lack of diversification, which exacerbates inequality and leaves large segments of the population excluded from the benefits of growth. The prevalent poverty, along with deep-rooted inequality, underscores the need for a thorough analysis of the redistributive effects of fiscal policy and highlights the necessity for fiscal reforms in the region. Evaluating the effectiveness of existing tax policies, social transfers, and public spending is essential to understanding their role in wealth distribution. Without a clear assessment of the status quo, the gap between the wealthy elite and the impoverished majority is likely to continue expanding, undermining social cohesion and economic stability. This analysis provides critical insights into how fiscal policies currently address, or fail to address, inequality and poverty, offering a foundation for future interventions aimed at fostering more inclusive economic growth and improving living conditions for the disadvantaged populations in the MENA region. To accomplish this, this paper examines the impact of fiscal policy on poverty and inequality in the MENA region. It employs the Commitment to Equity (CEQ) methodology 6 to conduct a cross-country assessment of the redistributive impact of fiscal systems—both in aggregate and by individual fiscal instruments—across countries in the Middle East and North Africa (MENA) region. This methodology offers a comprehensive and rigorous framework to understand the impact of fiscal policy instruments, such as taxes and transfers, to compare income levels before and after their application (Lustig, 2022). By analyzing these changes, the CEQ framework helps identify the redistributive impact of fiscal policies and their effectiveness in reducing poverty and inequality. The analysis evaluates the combined effects of taxes and transfers on poverty and inequality and identifies priority areas for fiscal reform. The primary data sources include nationally representative household income and expenditure surveys, complemented by fiscal and macroeconomic data pertaining to country-specific tax and transfer systems. The specific studies include 7 those for Djibouti, the Arab Republic of Egypt, Morocco, the Islamic Republic of Iran, the West Bank and Gaza, Iraq, Tunisia, and Jordan, allowing for comprehensive examinations of fiscal policies across these countries. 3 The indicator, top 10 percent share in income inequality, measures pre-tax national income share held by the p90p100 group. It is calculated as Pre-tax national income = Pre-tax labor income [total pre-tax income ranking] + Pre-tax capital income [total pre-tax income ranking]. 4 Source: World Inequality Database, accessed in February 2025. 5 Source: Poverty and inequality platform, World Bank, accessed in February 2025. 6 The CEQ approach was developed by the Commitment to Equity Institute (CEQ Institute) at Tulane University. For information on the methodology, implementation guidelines, applications, and software of the CEQ approach, see Lustig (2022). 7 CEQ studies use different survey and administrative (Macro and fiscal) years for their analysis. Survey years: Djibouti, 2017; Egypt, 2018; the Islamic Republic of Iran 2021; Iraq, 2018; and Jordan, 2018; Morocco, 2019; Tunisia, 2021; West Bank and Gaza, 2016. Administrative data years: Djibouti, 2017; Egypt, 2021; the Islamic Republic of Iran 2021; Iraq, 2021; and Jordan, 2018; Morocco, 2017; Tunisia, 2022; West Bank and Gaza, 2017. 5 This paper constitutes the first comparative analysis of the role of fiscal policy in addressing inequality and poverty across the Middle East and North Africa (MENA) region. It evaluates the redistributive effects of taxation and government transfers in eight MENA countries—Egypt, Djibouti, the Islamic Republic of Iran, Iraq, Jordan, Morocco, Tunisia, and West Bank and Gaza—drawing on nationally representative household survey microdata. The analysis identifies the distributional impact of fiscal policy by estimating who ultimately bears the tax burden and who benefits from public spending. In doing so, the paper highlights net contributors and beneficiaries within each country’s fiscal system and derives policy recommendations aimed at enhancing the equity and effectiveness of redistribution mechanisms. By identifying the net beneficiaries and payers of the fiscal system, it draws policy recommendations for effective redistribution in the region. The paper makes four principal contributions to existing literature. First, it addresses a significant empirical gap by providing a comparative analysis of the distributional impact of fiscal policy in MENA countries. Second, it offers updated poverty and inequality estimates, examining the extent to which these outcomes are shaped by fiscal and social policy interventions. Third, it quantifies both the cumulative and sequential distributional effects of the full tax-transfer system, including direct taxes, indirect taxes, cash transfers, and in-kind transfers—thereby enabling a granular understanding of fiscal incidence. Finally, the paper identifies critical areas for fiscal policy reform aimed at enhancing redistribution, reducing poverty, fostering human capital development, and promoting inclusive economic growth across the region. The principal contribution of this study to the existing literature lies in its integration of fiscal incidence analysis within a comparative cross-country framework encompassing the entire Middle East and North Africa (MENA) region. By leveraging country-specific fiscal incidence findings, the study elucidates the diversity of fiscal systems across the region and evaluates the effectiveness of various fiscal instruments in addressing poverty and inequality. This approach enables the identification of context- specific and region-wide policy reform opportunities aimed at strengthening redistribution. The comparative framework not only enhances our understanding of the fiscal policy landscape in MENA but also provides a foundation for evidence-based policy recommendations. The paper offers a comprehensive examination of recent economic trends and assesses the redistributive impact of fiscal policy across selected MENA countries. It is structured as follows: Section 1 presents an overview of macroeconomic performance, poverty, and inequality trends across the region. Section 2 outlines the Commitment to Equity (CEQ) methodology and presents the fiscal incidence results, highlighting both shared characteristics and country-specific variations in the design and effectiveness of tax and expenditure policies. The final section synthesizes key findings and discusses policy options to improve the equity and efficiency of fiscal systems in support of inclusive growth and sustainable development. 2. Regional Macro-Economic Snapshot The MENA region is characterized by a diverse mix of political and economic traits, with significant differences in economic performance, income levels, and development challenges across its countries. The region includes oil-rich economies in the Gulf, conflict-stricken countries, and lower-income nations grappling with structural issues. Over the 20th century and beyond, the region has undergone 6 significant demographic, institutional, and economic transformations, key aspects of which are outlined below. 2.1 Economic and Political Landscape The discovery of oil and gas in the 1930s fundamentally transformed the economic structure of the Middle East and North Africa (MENA) region, giving rise to some of the world’s most prominent oil- exporting nations, including Saudi Arabia, Iraq, the United Arab Emirates, Qatar, Oman, Algeria, and the Islamic Republic of Iran. The subsequent nationalization of hydrocarbon resources and the adoption of inward-oriented development strategies—characterized by protectionist trade policies and state-led industrialization—resulted in highly centralized political institutions and a heavy dependence on oil and gas revenues to finance public expenditures (Bahhout & Cammack, 2018). While this model initially contributed to political stability and rapid economic growth, it also entrenched structural vulnerabilities, including overreliance on volatile commodity prices, limited economic diversification, weak integration into global markets, and persistent macroeconomic imbalances (Amjad, Cabera, & Phadera, 2023; Aubery et al., 2023; McKee et al., 2017). The economic landscape of the MENA region is marked by significant heterogeneity, driven by diverse economic contexts and political circumstances. While there are some commonalities in economic structures, the region’s performance in recent years has been mixed, particularly in the aftermath of the global slowdown induced by the COVID-19 pandemic. Recovery has been uneven across the 21 countries in the region, with six classified as high-income countries 8 (HIC) and the remainder as low- and middle-income countries (LMIC and MIC). Oil-exporting Gulf Cooperation Council (GCC) countries, such as Saudi Arabia, UAE, Qatar, and Kuwait, have demonstrated robust growth. This growth is largely attributed to high oil prices and successful economic diversification efforts, with non-oil sectors like tourism, real estate, and finance also contributing significantly. Consequently, these countries enjoy higher GDP per capita and are ranked 9 as high-income countries. In stark contrast, countries like the Republic of Yemen and the Syrian Arab Republic have faced economic contraction or very slow recovery due to ongoing political instability, conflict, and humanitarian crises, resulting in their classification as low-income countries (LIC). Iraq, despite being the region’s second-largest oil producer, has a GDP per capita below the MENA average, highlighting the impact of its political and economic challenges. The disparities within the MENA region can be traced back to country-specific political developments and socio-economic policies, each influenced by unique historical and contemporary circumstances. Stable political environments, smaller population sizes, and abundant resources have enabled GCC states to accumulate wealth and invest in economic diversification. Conversely, decades of conflict and political instability in countries like Iraq, Lebanon, Syria, and Yemen have led to significant economic challenges, including high unemployment and difficulties in reducing oil dependency. Overall, the heterogeneity in the MENA region's economic systems underscores the diverse political, social, and economic landscapes that shape each country’s development trajectory. This diversity highlights the 8 High-income countries have a Gross National Income (GNI) per capita of $13,046 or more. Six HICs in the MENA region are Qatar, the United Arab Emirates (UAE), Kuwait, Saudi Arabia, Oman, and Bahrain. 9 World Bank Country and Lending Groups ranking: Low-income (LIC) economies are defined as those with a GNI per capita, calculated using the World Bank Atlas method, of $1,145 or less in 2023; lower middle-income (LMIC) economies are those with a GNI per capita between $1,146 and $4,515; upper middle-income (UMIC) economies are those with a GNI per capita between $4,516 and $14,005; high- income economies (HIC) are those with more than a GNI per capita of $14,005. 7 importance of tailored policy approaches to address the unique challenges and opportunities within each country. Individuals and communities within the MENA region are highly susceptible to social, and environmental risks. High unemployment rates, particularly among youth, women, and marginalized groups, are prevalent in many MENA countries. This lack of economic opportunities increases poverty levels and contributes to social vulnerability, particularly in fragile states with limited social safety nets. There is significant regional disparity, with rural residents experiencing higher rates of poverty, limited access to education and healthcare, and insufficient infrastructure compared to urban centers. This geographical divide further exacerbates social vulnerabilities in rural populations. Women in the region face significant social vulnerabilities due to gender-based discrimination in the labor market, education, and political participation. Countries such as Syria and Yemen lead global lists of populations suffering from food insecurity and malnutrition (Middle East Council on Global Affairs, 2023). The prevalence of informal employment in the MENA region reflects deep-rooted structural challenges to formal job creation. With approximately 68 percent of the workforce engaged in informal employment, the region exhibits one of the highest informality rates globally, while the public sector continues to serve as the primary source of formal employment (World Bank, 2023a). Empirical evidence from countries such as Egypt, Morocco, and Tunisia reveals that current labor market and social protection frameworks—characterized by limited redistributive capacity, inadequate risk coverage, rigid minimum wage policies, complex dismissal procedures, and weak enforcement of labor regulations—create disincentives for formal employment and inadvertently promote informality (World Bank, 2023a). Additionally, formal job creation is further constrained by preferential tax regimes, widespread tax evasion, exemptions, and a lack of regulatory incentives for firms to formalize operations. In these countries, informal employment is predominantly composed of own-account workers and contributing family workers, with Egypt also displaying high rates of informality in the private sector. Importantly, informality is not solely a consequence of labor market exclusion; it also reflects voluntary participation. In Morocco, for example, nearly half of informally employed workers belong to households in the top income deciles (World Bank, 2023a). In conflict-affected states, the erosion of public sector employment opportunities and the scarcity of formal labor market alternatives have driven a large share of the labor force into informal employment. By contrast, in Gulf Cooperation Council (GCC) countries, informality remains comparatively low due to the prevalence of expatriate labor and the substantial role of public sector employment among nationals (World Bank, 2019). The persistence of informality presents significant obstacles to both economic diversification and the effectiveness of social protection systems in the MENA region. Although informality may offer short- term adaptive advantages in environments characterized by weak governance and a distorted formal sector, its long-term implications are detrimental to structural transformation. Institutional, policy, and structural constraints perpetuate informality, impeding efforts to shift away from commodity dependence and reduce the dominance of the public sector (World Bank, 2019). Informal economic activity tends to concentrate within small-scale, low-productivity enterprises, thereby constraining overall productivity and limiting prospects for sustained economic growth. Moreover, high levels of informality undermine the coverage, equity, and redistributive capacity of social protection systems by restricting participation, reducing risk pooling, and weakening mechanisms for income redistribution (World Bank, 2023a). Climate-related vulnerabilities further compound the socio-economic and developmental challenges facing the MENA region. The region is acutely susceptible to the adverse impacts of climate change 8 due to its inherent environmental constraints, including chronic water scarcity, a high dependence on climate-sensitive agricultural systems, and significant population concentrations in low-lying, flood- prone coastal urban areas (Cervigni et al., 2009). Water scarcity, already a critical issue across much of the region, poses a substantial risk to agricultural sustainability, with potential ramifications for food security and forced migration. Climate projections indicate a trajectory of rising temperatures, escalating water stress, and an increased frequency and intensity of extreme weather events, all of which are likely to further undermine regional food and water security (Sieghart et al., 2018). 2.2 Growth and Economic Trends Economic growth patterns in the MENA region have been marked by considerable heterogeneity, with the majority of countries exhibiting relatively modest growth performance over the past decade. Between 2010 and 2023, the region's average annual GDP growth rate was approximately 2.5 percent, reflecting persistent structural and macroeconomic constraints. This study focuses on a subset of eight countries within the region. Among these, Djibouti recorded the highest GDP growth rate in 2023, followed by Tunisia. In contrast, Yemen experienced the most pronounced economic contraction, with a negative GDP growth rate of –3 percent, followed by Lebanon, underscoring the adverse effects of ongoing conflict and economic instability in these contexts. Figure 3 Average GDP growth between 2010 - 2023 8% 6% Average GDP Growth rate 4% 2% 0% -2% -4% Source: International Monetary Fund, World Economic Outlook, 2024. Note: Results for Algeria, Bahrain, Djibouti, Iraq, Jordan, Kuwait, Lebanon, Libya, Morocco, Oman, Qatar, Syria, Tunisia, United Arab Emirates, West Bank and Gaza, Yemen are IMF estimates based on the latest data available. A combination of internal and external factors contributed to the subdued economic performance—and in some cases, contraction—of selected MENA economies in 2023. In oil-dependent countries, economic contraction was primarily driven by production cuts under the OPEC+ agreement and a decline in global oil prices, although some experienced partial offsets from a rebound in non-oil sectors (World Bank, 2023b). Macroeconomic pressures, particularly high inflation and persistent unemployment, further dampened growth prospects in countries such as Egypt. Meanwhile, ongoing political instability and armed conflict contributed to economic stagnation in Yemen, Syria, and the West Bank and Gaza. Conversely, countries like Morocco experienced a more favorable economic 9 trajectory, with recovery in the agricultural sector and strong performance in manufacturing and services underpinning positive growth outcomes (World Bank, 2023e). Figure 4 GDP per capita growth in current prices (current USD) in selected MENA countries. 20% 15.0% 15% 8.9% 9.9% 10% 6.5% GDP per capita growth 6.0% 3.7% 4.7% 3.9% 4.2% 5% 1.6% 1.7% 0.8% 0% -0.1% -5% -5.1% -5.1% -10% -15% -20% -18.7% -25% Egypt Iraq (p) West Bank Jordan (p) Djibouti (p) Morocco (p) Tunisia (p) Islamic and Gaza Republic of (p) Iran (p) 2023 2010-2023 average Source: International Monetary Fund, World Economic Outlook, 2024. Note: (p) Results for Djibouti, Islamic republic of Iran, Iraq, Jordan, Morocco, Tunisia and West bank and Gaza are IMF estimates based on the latest data available. 2.3 Regional Fiscal Policy Context MENA countries face several fiscal challenges, including dependency on oil revenues, high public debt, budget deficits inefficient tax system, large public sector and high share of subsidies that hinder sustainable economic growth, social development, and long-term stability. These challenges are driven by a combination of external and internal factors, including reliance on oil revenues, conflict and instability, structural weaknesses in the economy, and global economic pressures. MENA economies struggle with heavy public sector dependence, high unemployment, and weak private sector growth. The public sector remains the major formal employer in Iraq, Tunisia, West Bank and Gaza, and Egypt, which crowds out the private sector (World Bank, 2023f and World Bank, 2023g and World Bank, 2023i). High inflation has added to the fiscal pressure, making it challenging for curb the rising deficits. Furthermore, external shocks and regional conflict are undermining fiscal sustainability in the medium term. In some countries, such as Morocco, public debt remains a concern (World Bank, 2023e). High fiscal deficits and unemployment rates in countries like Jordan and Morocco require comprehensive reforms to stabilize the economy (World Bank, 2023g, World Bank, 2023d and World Bank, 2023e). 10 Figure 5 Government revenue, expenditure and net lending/borrowing as percentage of GDP MENA countries (2023) 100% 80% 60% 40% 20% 0% -20% -40% -60% -80% General government revenue General government total expenditure Net lending/borrowing Figure 6 Government revenue, expenditure and net lending/borrowing as percentage of GDP for selected MENA countries (2023) 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% Djibouti Egypt Islamic Republic Iraq Jordan Morocco Tunisia West Bank and of Iran Gaza General government revenue General government total expenditure Net lending/borrowing Source: International Monetary Fund, World Economic Outlook, 2024. 2.4 Government Revenue Government revenue patterns differ significantly across income levels, with high-income countries relying more on progressive direct taxes and lower-income countries, due to informality, depending more on regressive indirect taxes. High income countries benefit from a broader tax base that allows for higher revenue collection through direct taxes such as personal and income taxes. In contrast, lower- income countries are more dependent on indirect taxes like VAT, consumption and excise taxes, which in most cases are regressive and disproportionately affect lower-income households (World Bank, 2022a). Additionally, the prevalence of informal markets in these countries exacerbates fiscal challenges, and hampers both direct and indirect tax collection capabilities. This limits the ability of governments to generate sufficient revenue for public investment and essential poverty-reduction 11 programs, contributing to a fiscal structure that reinforces inequality (World Bank, 2022a). The reliance on indirect taxes in lower income countries has severe implications for poorer households, as they bear a disproportionately higher tax burden relative to their income (World Bank, 2022a). Figure 7 Government revenue tax source as percentage of GDP 40 35 Grants 30 Non-tax rev. 25 Trade Share of GDP (%) VAT 20 Excises Property 15 Payroll + SSC 10 CIT PIT 5 0 OECD Non-OECD HIC UMIC LMIC LIC Source: World Bank. (2022). Poverty and shared prosperity 2022: Correcting course. Data from: International Centre for Tax and Development. Note: The figure shows the composition of government revenue as a percentage of GDP, aggregated by income group. OECD countries form a separate group. Data by revenue type are from 2020 when available or the most recent available year back to 2015. The sample includes 155 economies. CIT = corporate income tax; GDP = gross domestic product; HICs = high-income countries; LICs = low-income countries; LMICs = lower-middle-income countries; OECD = Organization for Economic Co-operation and Development; PIT = personal income tax; SSC = social security contribution; UMICs = upper- middle-income countries; VAT = value added tax. For revenue collection, MENA countries generally rely more on indirect than direct taxes. Government revenue as a share of GDP and its composition differ across MENA countries, reflecting diverse economic structures and tax systems. For instance, Algeria has the highest share of tax revenues at 36 percent of GDP, while Iraq has the lowest at about 1.4 percent. Within the direct taxes, Algeria has the highest share of personal income tax, whereas Bahrain has lowest. Conversely, Iraq collects the most revenue from indirect taxes, indicating potential for reforms. Overall, Jordan collects the highest revenue as a percentage of GDP. The total tax-to-GDP ratio in the eight economies analyzed is notably low at about 25 percent, compared to 40 percent in advanced economies (Bourguignon, 2018). 10 This low ratio can be attributed to factors such as the large informal sector, the size of the public sector, socio-political characteristics, cultural norms, and weak enforcement and compliance(World Bank, 2022a). Indirect taxes dominate over direct taxes in most MENA countries, with Jordan, Djibouti, and West Bank and Gaza relying predominantly on indirect taxes. In contrast, the share of direct taxes to GDP remains low across these countries. 10 Notably, oil producing GCC countries demonstrated a decrease in total government revenue from 35 to 30 percent between 2000 and 2020, where the share of already low tax revenues decreased from 4.1 to 3.8 percent (IMF, 2023b). 12 Figure 8 Size of the revenue as a share of GDP 60 49.9 50 39.2 40.4 Revenue as share of GDP 38.4 40 34.2 30.5 30 25.9 26.5 22.6 24.1 19.0 20 16.3 13.0 7.8 10 2.9 0 United West Lebanon Bahrain, Egypt, Iran, Tunisia Morocco Jordan Saudi Qatar Kuwait Iraq Algeria Oman Arab Bank and Kingdom Arab Islamic Arabia Emirates Gaza of Rep. of Rep. of Taxes on income, profits, and capital gains Taxes on payroll and workforce Taxes on property Taxes on goods and services Taxes on international trade and transactions Other taxes Social contributions Grants Other revenue Total Source: IMF Government Finance Statistics (GFS) Note: Arranged in ascending order of total indirect taxes (only the categories mentioned). The specific year for each country’s data is as follows: Kuwait (2015), Iraq (2019), Iran (2009), Bahrain (2020), United Arab Emirates (2022), Lebanon (2020), West Bank and Gaza (2021), Egypt (2015), Morocco (2022), Tunisia (2012), Jordan (2022), Algeria (2011), and Saudi Arabia (2022). The composition of indirect tax revenue varies significantly across MENA countries, reflecting varying degrees of reliance. In Egypt, Morocco, Djibouti, Tunisia, and the West Bank and Gaza, VAT constitutes a substantial portion of indirect tax revenue, while in Jordan, this revenue is predominantly composed of sales tax, making up 11 percent. A significant part of the West Bank and Gaza’s revenue is derived from taxes on international trade and transactions. In contrast, Iraq’s share of indirect taxes is below 1 percent, composed solely of consumption tax. Figure 9 Composition of direct taxes in MENA countries as percentage of GDP 30 25 20 15 10 5 0 United Kuwait Bahrain, West Saudi Iraq Oman Jordan Egypt, Iran, Lebanon Morocco Tunisia Qatar Algeria Arab Kingdom Bank and Arabia Arab Islamic Emirates of Gaza Rep. of Rep. of Taxes on income, profits, and capital gains Taxes on payroll and workforce Taxes on property Total Source: IMF Government Finance Statistics (GFS) Note: Arranged in ascending order of total indirect taxes (only the categories mentioned). The specific year for each country’s data is as follows: Kuwait (2015), Iraq (2019), Iran (2009), Bahrain (2020), United Arab Emirates (2022), Lebanon (2020), 13 West Bank and Gaza (2021), Israel (2022), Egypt (2015), Morocco (2022), Tunisia (2012), Jordan (2022), Algeria (2011), and Saudi Arabia (2022). Figure 10 Composition of indirect taxes in MENA countries as percentage of GDP. 12.00 11 10.00 9 8.00 6.00 4 4.00 3 3 2 2.00 1 0.5 1 1 0.0 0.0 0.0 0.00 Kuwait United Iraq Saudi Iran, Jordan Morocco Bahrain, Lebanon West Egypt, Tunisia Algeria Arab Arabia Islamic Kingdom Bank and Arab Emirates Rep. of of Gaza Rep. of Taxes on international trade and transactions Value-added taxes Sales taxes Excises Profits of fiscal monopolies Taxes on specific services TOTAL Source: IMF Government Finance Statistics (GFS) Note: Arranged in ascending order of total indirect taxes (only the categories mentioned). The specific year for each country’s data is as follows: Kuwait (2015), Iraq (2019), Iran (2009), Bahrain (2020), United Arab Emirates (2022), Lebanon (2020), West Bank and Gaza (2021), Israel (2022), Egypt (2015), Morocco (2022), Tunisia (2012), Jordan (2022), Algeria (2011), and Saudi Arabia (2022). 2.5 Government Expenditure Social spending priorities vary widely across the region, reflecting differences in fiscal capacities and policy approaches to welfare. Iraq leads with the highest spending at 12.4 percent of GDP, while Egypt has the lowest at 5.5 percent. Contributory pensions dominate in most countries, especially Tunisia and the Islamic Republic of Iran, while Jordan and West Bank and Gaza allocate more to healthcare and education. Indirect subsidies play a significant role in Jordan and Iraq highlighting their heavy reliance on these mechanisms. Balanced spending on social expenditure is seen in Tunisia and Morocco, whereas Iraq heavily emphasizes pensions and subsidies, showcasing the diversity in spending priorities across the region. (Details regarding the Iraqi pension system are provided in Annex A.) On average, the countries analyzed allocate 2.6 percent of GDP to healthcare, 4.5 percent to education, and 1.8 percent to pensions. (Details regarding the education system are provided in Annex B.) However, this stands in stark contrast to high-income countries (HICs), which allocate significantly more to health (15 percent) and social protection, including pensions (17 percent) (World Bank, 2022a). The continued focus on subsidies in MENA countries aligns with trends in lower-income economies, where subsidy spending often crowds out more targeted social programs (World Bank, 2022a). These variations underscore the region’s diverse policy priorities and reliance on subsidies as a key mechanism for welfare delivery, even as targeted investments in health and social protection remain comparatively low. 14 Figure 11 Share of government spending as percentage of GDP 35 33 31 30 28 27 25 22 20 20 16 15 13 10 5 0 United Arab Malta Iran, Islamic Saudi Arabia Morocco Egypt, Arab Jordan Tunisia Emirates Republic of Republic of Compensation of employees Interest expense Subsidies expense Grants expense Social security benefits expense Social assistance benefits expense Employment-related social benefits expense Other expense Total Source: IMF Government Finance Statistics (GFS) Note: Arranged in ascending order of total indirect taxes (only the categories mentioned) The specific year for each country’s data is as follows: Kuwait (2015), Iraq (2019), Iran (2009), Bahrain (2020), United Arab Emirates (2022), Lebanon (2020), West Bank and Gaza (2021), Israel (2022), Egypt (2015), Morocco (2022), Tunisia (2012), Jordan (2022), Algeria (2011), and Saudi Arabia (2022). 2.6 Poverty and Inequality Overview in the Region The MENA region exhibits significant disparities in poverty rates and income inequality, reflecting diverse economic and social contexts. As of 2024, the regional poverty rate stands at 44.9 percent using the high-income poverty line (PPP 2017 $6.85/day) and 16.4 percent under the middle-income threshold (PPP 2017 $3.65/day) (see Figure 12). Using high-income poverty line of PPP 2017 $6.85/day, out of MENA's total population of 500 million, approximately 198 million people live in poverty, accounting for around 40 percent of the region's population., poverty is most severe in Syria (96.0 percent) and Yemen (85.4 percent), driven by conflict and economic instability, while Lebanon, Jordan, and Tunisia report minimal poverty levels. The regional average remains moderate due to better economic conditions in several countries. Inequality, measured by the Gini index, ranges from 0.27 in Algeria (lowest) to 0.42 in Djibouti (highest). Notably, countries with high poverty rates, such as Syria, tend to have lower inequality, reflecting widespread economic hardship, whereas those with lower poverty rates, like Morocco and Tunisia, exhibit higher inequality, indicating broader income disparities. However, data limitations hinder direct year-to-year comparisons across countries. 15 Figure 12 Gini index and poverty rate in MENA countries. Poverty rate (US$ 3.65, 2017 PPP) Gini 0.45 0.40 Lebanon 0.0% 0.40 0.35 Jordan 0.4% 0.42 0.34 0.35 0.32 Tunisia 1.8% 0.30 0.37 0.27 0.30 0.34 0.34 Iraq 2.1% 0.32 0.25 West Bank and Gaza 2.8% 0.28 0.20 Iran, Islamic Rep. 3.5% Algeria 0.15 3.5% Morocco 0.10 9.0% Egypt, Arab Rep. 16.2% 0.05 Djibouti 41.9% 0.00 Yemen, Rep. 52.4% Syrian Arab Republic 65.1% Middle East & North Africa 16% 0% 20% 40% 60% 80% Poverty rate (US$ 6.85$, 2017 PPP) Lebanon 1.7% Jordan 8.2% Tunisia 16.2% Poverty headcount (6.85$) West Bank and Gaza 20.5% Iran, Islamic Rep. 21.9% Iraq 24.7% Algeria 36.3% Morocco 42.1% Egypt, Arab Rep. 68.8% Djibouti 78.5% Yemen 85.4% Syrian Arab Republic 96.0% Middle East and North Africa 44.9% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0% Source: World Bank. (2024). Poverty and Inequality Platform Note: Poverty rate at Lower Middle Income Class Poverty Line (US$3.65 (2017 PPP) per day per capita). Survey years for each country are as follows: Syrian Arab Republic (2022), Yemen (2014), Djibouti (2017), Egypt (2019), Morocco (2013), Algeria (2011), Iran (2022), West Bank and Gaza (2016), Iraq (2012), Tunisia (2021), Jordan (2010), Lebanon (2011). Regional poverty measured for 2023. 3. Distributional Impact of Fiscal Policy Understanding the distributional impact of fiscal policy is essential to evaluate its effectiveness in reducing poverty and inequality. This section presents a comprehensive comparative analysis of the fiscal systems across the eight MENA countries under study. It explores the structure, size, and composition of tax revenues and government expenditures, providing a detailed assessment of the progressivity and redistributive effects of taxes and transfers. By examining these key dimensions, the analysis highlights how fiscal policies shape income distribution and identifies the extent to which they contribute to poverty alleviation and the reduction of inequality. 16 3.1 CEQ Methodology Redistributing resources plays a crucial role in addressing poverty, promoting social justice and cohesion, enhancing human capital development, and enabling economic mobility. Taxes and transfers are the government’s main instrument to achieving more equal societies, especially in contexts where the benefits of growth fail to reach the poor (Bourguignon, 2018). This methodology allocates taxes and transfers to individuals and households and analyze the impact on poverty and inequality at all levels of income concepts (see Figure 13). This method allows the measurement of the distributional impact of the fiscal policy at the whole as well as at each fiscal intervention level helping policy makers to understand which of the taxes and transfers are pro-poor and progressive. It also helps us analyze who are net payers and receivers of the fiscal system. To analyze the distributional impact of fiscal policy, the CEQ methodology utilizes several income concepts. Pre-fiscal income, defined as market income is a starting point, i.e. household income before any tax-benefit interventions have taken place. It includes income from all forms of employment, capital income (rent and dividends) and private transfers. By subtracting direct taxes and social insurance contributions and adding direct transfers, the analysis arrives at disposable income. Additionally, we compute two more income concepts. By subtracting indirect taxes (value added tax or VAT and excises) and adding subsidies we arrive consumable income which reflects the actual amount of market goods and services consumed by households. The final income includes the cash equivalent of the cost of in- kind transfers such as public health and education services consumed by households (Figure 13). Notably, pensions can be treated either as government transfer, or a deferred income, depending on the country’s prevalent system of pensions. Figure 13 Fiscal incidence and CEQ framework. Source: World Bank 2022a. Adapted from Nora Lustig and Sean Higgins. 2013. Commitment to Equity Assessment (CEQ): Estimating the Incidence of Social Spending, Subsidies and Taxes Handbook. 17 The analysis uses households’ and individuals’ characteristics to identify transfer recipients and taxpayers. Household fiscal instrument allocation is primarily based on household survey, with adjustments to align with administrative and national accounts. There are several allocation methods in the methodology that are used to allocate the burden of taxes and benefits to households and individuals including direct identification, simulation, imputation, inference, and prediction (Lustig, 2022). Depending on the availability of the microdata and macro-administrative data, the analyses were conducted by applying the highlighted methods of allocation. The CEQ Assessment framework for FIA has certain key advantages and some limitations. CEQ is a static and retrospective accounting exercise without behavioral, lifecycle, or general equilibrium effects. Major challenges include the failure to capture top-income households 11 and the exclusion of some interventions from the model—such as the corporate income tax (CIT), 12 public expenditure on infrastructure, 13 defense, or debt interest payments—due to methodological limitations. This means the incidence results represent an accounting-based first approximation of a true counterfactual. 14 In practice, there are no standard errors calculated that would allow a statistical assessment of the allocations made to individuals and households. 15 Nevertheless, the CEQ Assessment framework for FIA provides a standard methodology (which also enables international comparisons) for estimates of the impact of fiscal policy on poverty, inequality, and social welfare more generally. 3.3 Impact of Fiscal Policy on Poverty and Inequality Using CEQ A comparative application of the Commitment to Equity (CEQ) framework across eight MENA countries offers an in-depth analysis of the effects of fiscal policy on poverty and inequality. This evaluation explores shifts across various income concepts, emphasizing the influence of fiscal interventions—both revenue and expenditure—on income distribution. The study encompasses the Islamic Republic of Iran (2021), Jordan (2018), Djibouti (2017), Morocco (2019), Egypt (2018), Tunisia (2021), Iraq (2017), and the West Bank and Gaza (2016), assessing the efficacy of taxation and transfer mechanisms in alleviating poverty and inequality. It further examines marginal contributions, progressivity, and overall redistributive effects, while identifying regional patterns and shared dynamics. The findings offer valuable insights into the role of fiscal policy in promoting equity and enhancing social welfare, with key conclusions presented in the subsequent sections 3.3.1 Impact on inequality Fiscal policy significantly reduces inequality in the MENA region, as evidenced by the decline in the Gini coefficient from market income to final income across all countries analyzed. The initial inequality (market income) is highest in Djibouti (0.44) and Morocco (0.40), while it is lower in countries like Iraq (0.33) and Jordan (0.35). Through taxes, transfers, and subsidies, fiscal interventions substantially 11 Household surveys also do not capture some low-income households very well, such as institutional populations (prisons, old-age care facilities, youth care facilities) and households without a domicile address (informal housing). 12 CIT is better modeled with tax administrative data. Furthermore, data on CIT cannot help in the allocation of CIT burdens to households in the standard CEQ FIA framework. 13 Examples of the relevant infrastructure investments that are missing and that could affect households differently in the income distribution could be connectivity infrastructure, water infrastructure (publicly provided water), and local roads. The methodology for including infrastructure expenditure in fiscal incidence models is currently under development by the CEQ Institute. 14 Meaning distributional (static) impacts, not causal impacts. 15 There are, however, CEQ Assessment procedures for assessing the statistical significance of the estimated impact of a fiscal policy (or set of fiscal policies) on poverty, inequality, and other indicators. 18 narrow inequality, with final income Gini coefficients showing the largest reductions in Egypt (from 0.38 to 0.31) and Tunisia (from 0.36 to 0.27). However, the magnitude of the impact varies, suggesting differences in the effectiveness and scale of fiscal policies among countries. These results underscore the critical role of redistributive policies in mitigating income inequality in the region. Figure 14 Impact of fiscal policy on inequality (Gini index) 0.50 0.44 0.45 0.40 0.40 0.40 0.38 0.38 0.36 0.35 0.35 0.33 0.34 0.35 0.31 0.30 0.29 0.29 0.285 0.30 0.27 Gini 0.25 0.20 0.15 0.10 0.05 0.00 Djibouti Egypt Iran Iraq Jordan Tunisia West Bank and Morocco Gaza Market income Net Market income Disposable income Consumable income Final income Source: World Bank’s estimates based on CEQ reports. In-kind benefits and targeted transfers reduced income inequality in MENA countries, though the magnitude varies. The pre-fiscal income compared to the final income is highest in Djibouti (0.44) and lowest in Iraq (0.33), though Tunisia achieved highest inequality reduction (9.0 Gini points) followed by Djibouti and the Islamic Republic of Iran (8.0 Gini points each) measured from pre-fiscal income to the final income level (see Figure 15). Direct transfers in the form cash (particularly PNAF and AMEN in Tunisia, National Family Solidarity Program (PNSF) in Djibouti) has played most significant role in the reduction of inequality. Education and health also played a crucial role in the inequality reduction in the analyzed countries. In terms of increase in inequality, indirect taxes contributed more as compared with the direct taxes, particularly in Egypt and Jordan. In all countries analyzed, the direct taxes are reducing inequality with Egypt and Morocco having the most redistributive impact. 19 Figure 8 Inequality by different country income groups 0.50 0.40 GINI index 0.30 0.20 0.10 0.00 OECD High income non OECD Lower-middle income Low-Income Upper-middle-income Studied MENA countries Market income Disposable income Consumable income Final income Source: CEQ Data Center on Fiscal Redistribution, https://commitmentoequity.org. Own estimates based on CEQ reports for the MENA region. Note: OECD countries include only those available in the CEQ data center. The relatively low market income inequality in MENA countries contrasts with their fiscal redistribution, as taxes and transfers are less effective in reducing inequality compared to OECD and upper-middle-income countries. Compared to other income groups, MENA countries start with relatively low market income inequality (Gini: 0.38), close to that of low-income countries (0.39), but much lower than OECD and upper-middle-income countries. This suggests that the region’s labor market or income distribution before taxes and transfers is relatively equitable. However, despite this favorable starting point, the ability of fiscal policy in MENA countries to reduce inequality is relatively modest. While disposable income inequality decreases to 0.35, the reduction is less pronounced than in OECD countries (from 0.51 to 0.39) or upper-middle-income countries (from 0.49 to 0.46). This indicates that MENA's fiscal system, including taxes and transfers, is less effective at redistributing income. In contrast, OECD countries achieve more substantial reductions in both disposable and final income inequality through more progressive taxation, better-targeted transfers, and more effective public services. In-kind services and transfers in MENA have a weaker impact on inequality reduction than in OECD countries, indicating potential for improvement in the effectiveness and targeting of social services to enhance equity. While these services and transfers contribute to reducing inequality in MENA, their impact on inequality reduction is not as significant as in OECD countries and even other parts of the world. For example, in South Africa, public spending on health and education results in a 17.5 Gini point reduction, demonstrating the power of in-kind benefits in reducing inequality (Inchauste et al., 2017). Similarly, Poland's fiscal policy, which includes direct taxes and extensive social transfers, achieves a reduction of up to 24 Gini points when pensions are considered as transfers (Goraus-Tanska & Inchauste, 2016). Countries like the Islamic Republic of Iran and Tunisia have made progress with targeted transfers, but increasing the scope of in-kind services, which only contributes to inequality reduction in 4 and 3.6 Gini points, respectively, could further strengthen the region’s fiscal policies against inequality. Additionally, addressing regressive elements, particularly in indirect taxation would ensure that fiscal policies do not disproportionately affect lower-income households. 20 Direct transfers and taxes are important contributors to inequality reduction across MENA countries. When analyzing the impact of fiscal policies, the marginal contribution 16 of specific taxes and transfers is a key measure in determining whether they are equalizing or un-equalizing. The CEQ analysis in MENA highlights the critical role of direct transfers in reducing poverty and inequality, while the effects of indirect taxes and subsidies point to the need for more equitable fiscal policies in the region. In Egypt, direct transfers contribute 2.7 Gini points to inequality reduction, while direct taxes contribute an additional 1.4 points. In Morocco, direct taxes also play an important role with a marginal contribution of 1.19 points, supported by direct transfers with a marginal contribution of 0.59 points. In Jordan, direct transfers contribute 1.2 points to inequality reduction, while indirect subsidies add 0.7 points. In the West Bank and Gaza, direct transfers contribute 1.2 points, and indirect subsidies add 0.14 points, though indirect taxes have a regressive impact with a marginal contribution of 0.89 points. Other countries show smaller but relevant contributions of fiscal policies to inequality reduction. In Tunisia, the marginal contribution of direct transfers is 0.01 points, with no notable contributions from taxes or subsidies. In Djibouti, direct taxes contribute 0.02 points, while other fiscal tools have negligible effects. Iraq shows limited contributions, with a marginal contribution of 0.02 points from direct transfers and no significant impact from indirect taxes or subsidies. Across these countries, the marginal contributions of various fiscal tools highlight the differing capacities and roles of fiscal policies in addressing inequality. Figure 9 Marginal Contribution to the reduction of inequality 3.00 2.70 2.44 2.50 2.00 1.40 1.50 1.20 1.20 1.19 0.89 0.85 1.00 0.72 0.70 0.70 0.59 0.63 0.50 0.33 0.30 0.00 0.14 0.20 0.20 0.10 0.02 0.02 0.00 0.00 0.00 0.18 -0.01 0.02 0.00 -0.17 -0.50 -0.50 -1.00 -0.72 Egypt Jordan West Bank and Iran Marocco Iraq Tunisia Djibouti Gaza Direct Transfers Direct taxes and contributions Indirect subsidies Indirect Taxes Source: Estimates from CEQ Studies, World Bank Poverty and Equity Team, MENA 3.3.2 Impact on poverty The fiscal system in MENA countries has significant implications for poverty levels, highlighting both the effectiveness and limitations of fiscal and social policy interventions across countries. The CEQ 16 The marginal contribution of a tax (or transfer) is calculated by taking the difference between the inequality (or poverty) indicator without the tax (or transfer) and with it (Lustig, 2022). The marginal contribution is used to measure whether taxes and transfers (at the aggregate category level or for specific interventions) are equalizing or unequalizing (and, poverty reducing or poverty increasing). For example, the marginal contribution of a VAT is calculated as the difference between the Gini coefficient without the VAT (but all the rest of taxes and transfers in place) and the Gini coefficient that includes the VAT. If this difference is positive (negative), the VAT exercises an equalizing (unequalizing) effect (Lusting, 2022). 21 analysis reveals that while fiscal policies effectively reduced poverty in some MENA countries, such as Iraq and the Islamic Republic of Iran, other countries, including Tunisia and West Bank and Gaza, experienced poverty increases, highlighting significant limitations in the effectiveness of fiscal interventions across the region. Overall, there is significant heterogeneity on the extent in which fiscal and social policies affect poverty in MENA. In some countries, direct transfers and social assistance programs effectively reduce poverty, with reductions ranging from 0.9 percentage points to 6.27 percentage points. However, indirect taxes and inefficient subsidies can offset these gains, leading to poverty increases. Fiscal policies in the Islamic Republic of Iran, Jordan, Morocco, and Iraq, particularly direct transfers and pension schemes, are successful in reducing poverty, though the impact vary across countries. In the Islamic Republic of Iran (2021), the poverty headcount decreases marginally by 0.9 percentage points from market income to consumable income, primarily driven by pension schemes. Using a $6.85 PPP 2017 poverty line, the overall poverty reduction is 7.1 percentage points from market income to consumable income. Jordan (2018) sees a more significant reduction of 2.28 percentage points in poverty due to direct taxes and transfers. However, considering indirect taxes and subsidies, the poverty rate slightly increases to 15.97 percent at consumable income, indicating the adverse effects of these fiscal measures on the poorest households. Morocco (2019) experiences a slight reduction in poverty of about 1 percentage point at a $5.5 PPP 2019 poverty line. Iraq (2023) exhibits a significant reduction in poverty by 6.27 percentage points at the national poverty line, driven mainly by direct transfers, pensions, and the universal Public Distribution System (PDS). The breakdown reveals that while indirect taxes increase poverty, highly subsidized electricity and fuel have a minimal positive impact. In contrast, Djibouti, Egypt, Tunisia, and West Bank and Gaza observe increases in poverty, mainly due to adverse effects of indirect taxes and limited effectiveness of social programs. In Djibouti (2017), the National Family Solidarity Program (PNSF) is the primary driver of poverty reduction, yet the overall impact of the country’s fiscal policy is negative, with poverty increasing by 4.20 percentage points from market to consumable income. Egypt (2017) demonstrates a substantial reduction in poverty by 9.98 percentage points, largely due to the effectiveness of social assistance programs, in particular the Takaful and Karama program. Tunisia (2022) shows an increase in poverty of 3.70 percentage points when moving from market to consumable income, highlighting potential inefficiencies in its fiscal policies. Conversely, West Bank and Gaza (2023) report a notable increase in poverty of 8.40 percentage points from market to consumable income, primarily due to indirect taxes. 22 Figure 17 Poverty headcount at different income concepts. 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 Djibouti Egypt Iran Iraq Jordan Tunisia West Bank and Morocco Gaza Market income Net Market income Disposable income Consumable income Source: Authors based on CEQ reports. Note: Poverty lines differ between studies. The marginal contribution of direct transfers is an important factor in poverty reduction across MENA. In Egypt, direct transfers, such as Takaful and Karama, reduce poverty by 8 percentage points, making them a significant contributor to poverty alleviation. Similarly, in Iraq, direct transfers contribute 7.8 points to poverty reduction, while indirect subsidies add 0.8 points. However, indirect taxes have a negative impact on poverty, with a marginal contribution of -5.6 points in Egypt, with similar effects in Iraq. Other countries show varied contributions of fiscal policies to poverty reduction. In the West Bank and Gaza, direct transfers and indirect subsidies combined reduce poverty by 2.92 points, with direct transfers contributing 2.22 points and indirect subsidies adding 0.7 points. In the Islamic Republic of Iran, direct transfers contribute 1.9 points to poverty reduction, while indirect subsidies add 1.8 points, despite indirect taxes reducing the gains with a marginal contribution of -1.5 points. Tunisia and Djibouti show limited poverty reduction from fiscal policies, with Tunisia’s direct transfers reducing poverty by only 0.02 points and Djibouti showing no measurable impact. In Morocco, the marginal contribution to poverty reduction of direct transfers reached 0.61 points, with an additional 0.48 points from indirect subsidies, while indirect taxes slightly reduce poverty by -0.85 points. 23 Figure 18 Marginal Contribution to the reduction of Poverty 10.00 8.00 7.80 8.00 6.00 4.00 2.69 2.22 1.90 1.80 1.80 2.00 1.23 0.80 0.70 0.61 0.48 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -0.26 -0.36 -0.02 -0.03 -0.80 -0.85 -1.27 -2.00 -1.30 -1.50 -2.51 -4.00 -4.00 -6.00 -5.60 -8.00 Egypt Iraq West Bank and Gaza Iran Morocco Tunisia Djibouti Jordan Direct Transfers Direct taxes and contributions Indirect subsidies Indirect Taxes Source: Estimates from CEQ Studies, World Bank Poverty and Equity Team, MENA Note: Marginal contributions to poverty reduction is measured at the national poverty lines The net cash position analysis highlights the impact of taxes and transfers on household income, revealing who contributes to and benefits from the fiscal system at the national level. Taxes are shown as cash outflows below the zero axis, while transfers appear above as cash inflows. The red dotted line indicates the net cash benefit, reflecting the change in household income after taxes and transfers, and the grey line shows the total net benefit, which also includes in-kind benefits from public health and education services. At the national level, the poorest three / four income deciles are net beneficiaries of fiscal policy, receiving more from direct transfers than they pay in taxes. In contrast, higher-income households contribute more than they receive. This redistribution mechanism helps reduce inequality. When considering the value of public health and education services, the first seven or eight deciles emerge as net beneficiaries, with all households—except the wealthiest—benefiting from the fiscal system. This includes even some higher-income households when in-kind benefits are factored in. It’s important to note that transfers represent a larger share of income for poorer households, as they have a smaller market income. Since poor have less share of income, they transfer appears to be relatively larger share of their income. 24 Figure 19: Net cash position Islamic Republic of Iran: Net payers/beneficiaries by quintile 113 120 (as a percentage of Market income plus pensions ) 100 % of market income plus pensions 80 54 60 36 40 24 17 20 30 12 7 3 0 0 -7 7 3 -1 -3 -5 -6 -7 -20 -9 -12 1 2 3 4 5 6 7 8 9 10 Deciles of per capita market income plus pensions Direct Transfers Direct Taxes Contributions Subsidies Indirect Taxes Health Education Net Cash Fiscal Position Source: World Bank’s estimates based on 2021 household survey and fiscal administrative data Iraq: Net payers/beneficiaries by quintile (as a percentage of Market Income ) 120 100 80 60 40 20 Quintiles of per capita market income 0 1 2 3 4 5 Direct Transfers Direct Taxes Contributions Indirect Subsidies Indirect Taxes -20 Health Education Net Cash Fiscal Position Source: World Bank’s estimates based on 2017 household survey and fiscal administrative data 25 60% Egypt:Net payers/beneficiaries by quintile (as a percentage of Market income plus pensions ) 50% 40% 30% 20% 10% 0% -10% -20% 1 2 3 4 5 6 7 8 9 10 SSC Direct Taxes Pensions T&K Other Direct Transfers Indirect Taxes Indirect Subsidies In-kind Health In-kind Tertiary Education In-kind Other Education Net fiscal Net cash Source: World Bank’s estimates based on 2018 household survey (nowcasted to 2021) and 2021 fiscal administrative data 100% Tunisia:Net payers/beneficiaries by quintile (as a percentage of Market income) 80% 60% 40% 20% 0% -20% -40% -60% 1 2 3 4 5 6 7 8 9 10 Social contributions Direct taxes Transferts direct Indirect taxes Indirect subsidies Éducation Health Net cash Net fiscal Source: World Bank’s estimates based on 2021 household survey and fiscal administrative data 3.3.3 Progressivity Direct taxes contribute to progressivity but have limited distributional effects due to a narrow tax base in most MENA countries. Informality in labor markets restricts the scope of direct taxes, reducing their overall impact on income redistribution. In Morocco, for instance, while direct taxes exhibit strong progressivity, their limited tax base curtails broader equity gains. Similarly, in Iraq and the Islamic Republic of Iran, direct taxes are progressive but provide modest contributions to reducing inequality due to the small proportion of the population that pays taxes (see Figure 20). Addressing labor market informality is key to enhancing the redistributive potential of direct taxes across the region. 26 Indirect taxes and transfers reveal mixed effects on fiscal progressivity in the region. Progressive direct transfers in countries like Jordan and the West Bank and Gaza are significant drivers of equity. However, regressive indirect taxes in Jordan and Djibouti diminish some of these gains. While Egypt and Tunisia’s systems are generally progressive, indirect taxes, which tend to disproportionately burden lower-income households, remain a challenge to achieving greater fiscal equity (see Figure 20). Figure 20 Progressivity of Direct and Indirect Taxes 17 0.7 0.6 0.6 0.534 0.5 0.4 0.3 0.25 0.2 0.113 0.137 0.1025 0.093 0.1 0 -0.1 -0.005 -0.099 -0.070 -0.2 -0.3 -0.2 -0.26 -0.4 Iraq (2023) Iran (2011) West Bank and Djibouti (2017) Morocco (2019) Jordan (2018) Gaza (2023) Kakwani Direct Kakwani Indirect 3.3.4 Concentration Benefits from public education, and direct transfers predominantly benefit lower-income groups across the studied MENA countries. Similarly, in absolute terms, most of the revenue that comes from both direct and indirect taxes is paid for by the top quintiles in MENA. Concentration indicates how taxes or benefits are distributed in absolute terms across individuals or different income or wealth groups. In the Islamic Republic of Iran and Tunisia, education and health benefits are concentrated in the lower income deciles, providing significant support to poorer households. Similarly, in Jordan and Morocco, benefits from direct transfers and subsidies, especially those linked to education, are directed mainly toward the lower-income groups. Egypt’s education and health benefits, while evenly distributed, still provide proportionately more support to lower-income groups. Djibouti’s direct transfers are focused within the bottom quintiles, while in Iraq and the West Bank and Gaza, public spending on education and health primarily benefits lower-income households, reinforcing the progressive distribution of these services across the region. The concentration of fiscal interventions reveals varying degrees of progressivity across the countries analyzed. Targeted programs like Djibouti's PNSF, which directs 94 percent of transfers to the bottom quintile, and the Cash Transfer Program (CTP) in West Bank and Gaza, where 56.3 percent of benefits reach the poorest decile, demonstrate high progressivity and effective targeting. Similarly, the Islamic Republic of Iran's top-up cash transfers allocate approximately one-third to households in the first quintile. Conversely, subsidies such as Djibouti's kerosene subsidies and Jordan's bread subsidies are disproportionately concentrated among higher-income households, indicating regressivity. Given that higher-income households spend more on consumption, concentration of indirect taxes uniformly relies more on the top quintiles. However, as described above, relative to income levels these taxes may affect 17 The Kakwani index of progressivity is commonly used to establish whether the effect of a specific tax or transfer is equalizing. 27 lower income quintiles more as a proportion of their budgets. Thus, excise taxes in Iraq seem to disproportionately burden lower quintiles, and in Tunisia, indirect taxes adversely affect the poorest segments. These patterns underscore the need to assess the concentration of fiscal policies to ensure they promote equity. Figure 21 Concentration of Fiscal and Social Policies in MENA Concentration of Direct Taxes Concentration of Direct Transfers 100% 100% As share of total direct taxes As share of total direct transfers 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% Djibouti Egypt Iran Iraq Jordan Tunisia West Djibouti Egypt Iran Iraq Jordan Tunisia West Bank and Bank and Gaza Gaza Poorest Q2 Q3 Q4 Richest Poorest Q2 Q3 Q4 Richest Concentration of Indirect Taxes Concentration of Health 70% As share of total healthspending 50% 60% As share of total indirect taxes 40% 50% 30% 40% 20% 30% 10% 20% 0% Djibouti Egypt Iran Iraq Jordan Tunisia West 10% Bank and Gaza 0% Djibouti Egypt Iran Iraq Jordan Tunisia West Bank and Poorest Q2 Q3 Q4 Richest Poorest Q2 Q3 Q4 Richest Gaza Concentration of key SP Programs 100% As share of total in that respectiveSP Program 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% PNFS PASS Karama (Dignity) Takaful AMEN program Djibouti Egypt Tunisia Poorest Q2 Q3 Q4 Richest 3.3.5 Incidence The incidence of fiscal policies in MENA shows that the poorest households generally benefit more from direct transfers and in-kind services like education and health, whereas wealthier households often gain disproportionately from indirect subsidies, and the burden of indirect taxes falls more heavily on the poor. The incidence of fiscal policies reveals who ultimately bears the burden of a tax or receives the benefit of government spending, which may differ from who is statutorily responsible for paying the tax. In the Islamic Republic of Iran, the poorest three deciles benefit the most from health and 28 education services, while in Egypt, education and health benefits are evenly distributed across the population but provide greater proportional support to the poor. In Jordan, the poorest deciles receive higher benefits from fiscal policies compared to the richer deciles, whereas in Morocco, wealthier households gain more from indirect subsidies. In Djibouti, poorer households benefit more from education and health services, while fuel subsidies favor richer households. In Tunisia, direct transfers and subsidies significantly support the bottom deciles, but indirect taxes negatively impact them. In Iraq, the poorest households benefit more from pensions and direct transfers, while indirect subsidies favor wealthier households. In the West Bank and Gaza, poor households benefit more from direct transfers, while indirect taxes and subsidies are more burdensome for them. In MENA, social transfers play a crucial role in complementing market income of poor families, yet their impact is often diminished by the regressive nature of indirect taxes. In Egypt, the bottom decile receives transfers from programs like Tamween and Takaful and Karama, contributing to 31 percent of their market income, while in Djibouti, the PNSF program adds up to 39 percent for the bottom quintile. However, indirect taxes impose a disproportionate burden on the poor. In Egypt, the bottom decile pays 11.4 percent of their pre-fiscal income in indirect taxes compared to 5.7 percent for the top decile, and in Tunisia, indirect taxes significantly affect the market income of the poorest 40 percent of the population. These findings indicate that while social transfers effectively support the poor, the regressive nature of indirect taxes can offset these benefits, exacerbating income inequality. 3.3.6 Effectiveness Fiscal instruments in the MENA region demonstrate varied effectiveness in reducing poverty and inequality, with direct transfers, education, and direct taxes as key tools in inequality reduction. Cost- effectiveness indicators, which measure poverty and inequality reduction per GDP unit spent, provide a useful metric to assess the efficiency of these fiscal policies. In Egypt, the Takaful and Karama programs reduce inequality by 0.038 and 0.029 Gini points per billion EGP, respectively, highlighting their effectiveness in addressing inequality. Similarly, Jordan’s Takaful and bread compensation programs are also notable, reducing inequality by 0.7 and 0.42 Gini points per million JOD. Similarly, in Tunisia, the universal child benefit and primary education expenditure, reduce inequality by 1.37 and 0.71 Gini points per million dinars spent respectively, underscoring the effectiveness of transfers and in-kind programs in the region. Targeted programs like Morocco's TAYSSIR and the Islamic Republic of Iran's direct transfers demonstrate high cost-effectiveness in reducing inequality, while untargeted subsidies and formal employment-linked initiatives in Morocco and Iraq often fall short or worsen disparities, highlighting the need for more progressive social policies. In Morocco, the TAYSSIR program achieves a cost- effectiveness 18 rate of 61 percent, demonstrating its impact on inequality reduction. Similarly, the Islamic Republic of Iran’s fiscal strategy shows that direct transfers and education spending are highly efficient, with effectiveness rates of 56 percent and 40 percent, respectively. Iraq’s educational spending, especially on non-tertiary education, is the most impactful, with a 33 percent effectiveness index, followed by health investments and direct transfers, achieving 25 percent and 22 percent 18 Impact effectiveness indicators assess the extent to which a specific fiscal intervention—or combination of interventions—reduces inequality or poverty compared to an "optimal" redistribution approach aimed at maximum inequality reduction. Spending effectiveness indicators, on the other hand, evaluate the actual expenditure or revenue collection used to achieve the observed reduction in inequality or poverty against the minimum resources necessary to reach that same reduction level (Lustig, 2022). The closer the value to 100 percent, the more effective the intervention. 29 effectiveness, respectively. However, programs tied to indirect subsidies or formal employment in Morocco and Iraq have limited success in reducing inequality and can even exacerbate it, underscoring the need for targeted social support and progressive tax measures. In Djibouti and Jordan, education spending and direct transfers like the PNSF and Takaful programs effectively reduce inequality, while indirect taxes exacerbate. In Djibouti, the National Family Solidarity Program (PNSF) significantly reduces poverty and inequality, while education spending on kindergarten and basic education plays a crucial role in social equity. Jordan’s fiscal system shows a similar pattern: while indirect taxes tend to increase inequality, direct transfers and subsidies, such as the Takaful and bread compensation programs, demonstrate high effectiveness in inequality reduction. Among these, education benefits are most equalizing, though health spending has a smaller impact, underscoring the need to prioritize educational investments and direct transfers in social policy. Despite notable successes, regressive policies in the region can reduce the overall effectiveness of fiscal interventions. Egypt’s Takaful and Karama programs or the child benefit in Tunisia are efficient in reducing inequality, but direct transfers alone have limited impact on poverty, suggesting the need for additional poverty-targeted measures. In the Islamic Republic of Iran, income tax and social assistance reduce inequality effectively, but direct transfers alone may not sufficiently address poverty. Similarly, Iraq’s universal public distribution system and targeted cash transfers are highly cost-effective but face challenges due to indirect taxes and tertiary education spending, which increase inequality. This calls for a balanced approach in fiscal policy to enhance the impact of direct assistance while reducing reliance on regressive policies. 4. Lessons and Policy Recommendations 4.1 Regional Lessons on Revenue Broadening the tax base in the MENA region is crucial for fostering sustainable economic growth, reducing fiscal deficits, and enhancing government revenues without overburdening a narrow segment of taxpayers. Many countries in the region rely heavily on oil revenues or a small pool of taxpayers, making their economies vulnerable to external shocks and revenue volatility. Expanding the tax base through comprehensive reforms, including digitization, improved compliance mechanisms, and reducing informality, can create a more equitable and efficient taxation system. A broader tax base enables governments to invest in critical infrastructure, healthcare, and education, ultimately driving long-term economic stability and social development. High reliance on indirect taxes across MENA countries for revenue generation poses a challenge to achieving equitable fiscal outcomes, often offsetting gains from direct cash transfers and social programs, leading to higher poverty in some cases. This is particularly evident in Jordan, Djibouti, Morocco, Tunisia, Iraq, and the West Bank and Gaza, where the poverty rate after taxes and transfers often exceeds that at net market income. Although indirect taxes are an essential source for financing social programs, they often disproportionately affect lower-income households, undermining the overall progressivity of fiscal systems in the region. Compounding this issue is the low coverage of direct taxes, primarily due to the widespread informal labor markets in the region. While direct taxes are inherently progressive, their limited reach, especially in economies with large informal sectors, restricts their revenue generation potential and that of reducing income inequality. Notably, poverty at the consumable 30 income stage is lower in the Islamic Republic of Iran and Egypt when compared to market income, though the effect in the Islamic Republic of Iran is modest. Harmonizing complex taxation systems, such as property tax, in the MENA region is essential for improving efficiency, transparency, and compliance while fostering a stable investment climate. The current tax structures in many countries are often fragmented, with varying regulations, valuation methods, and enforcement mechanisms, leading to inefficiencies and revenue losses. A unified and standardized approach to property taxation can enhance predictability for investors, reduce administrative burdens, and ensure fairer tax collection. Moreover, streamlined property tax policies can support urban development, encourage formalization of real estate markets, and provide governments with a sustainable revenue stream for essential public services. By implementing clear, consistent, and technology-driven tax frameworks, MENA countries can enhance economic stability and attract long-term investment. The MENA region exhibits a complex interplay between direct and indirect taxes, with varying impacts on inequality and poverty across countries and income levels. In Egypt, direct taxes significantly reduce income inequality, as evidenced by a 1.4-point reduction in the Gini coefficient, despite the slight increase in poverty due to indirect taxes. Similarly, the Islamic Republic of Iran’s fiscal system is overall progressive, driven by strong progressivity of direct taxes, which offsets regressivity of indirect taxes. In contrast, Morocco and Djibouti face challenges in expanding direct taxation due to limited tax bases. Tunisia and the West Bank and Gaza also struggle with the predominance reliance on indirect taxes, which, while critical for financing social programs, diminish the overall equity of their fiscal systems. However, Jordan presents a case where targeted fiscal reforms—such as reducing electricity subsidies, implementing a flat GST tax rate, and expanding social assistance—show potential for reducing both poverty and inequality, despite the reliance on indirect taxes. These examples highlight the need for a holistic approach to fiscal policy that prioritizes effective tax revenue mobilization while minimizing impacts on poverty and inequality. 4.2 Regional Takeaways on Transfers Government expenditures reflect a balancing act between essential services and social support within limited fiscal space. Education is a priority, with Tunisia investing around 6.2 percent of GDP, mainly in primary and secondary education, followed by Djibouti and the West Bank and Gaza at around 5 percent, and Iraq at 4.5 percent. Spending in social assistance programs also vary widely: Tunisia’s PNAFN/AMEN programs account for 2.7 percent of GDP, while Egypt’s Takaful and Karama receive 0.15 percent, with an additional 1.1 percent allocated to the Tamween subsidy program. MENA countries support lower-income households through subsidies, though spending levels differ—Jordan allocates 1.5 percent of GDP to electricity subsidies, while Djibouti’s kerosene subsidy is minimal at 0.1 percent. Iraq’s Public Distribution System (PDS) and Social Safety Net (SSN) programs balance direct support within fiscal limits at 1.5 percent of GDP. These spending patterns underscore the need to strengthen tax revenue mobilization to sustain and expand essential programs. Direct cash transfers across the region are progressive and effective in reducing poverty and inequality, with heterogeneous effects by country. In Egypt, programs like Takaful and Karama stand out as a significant contributor to poverty reduction, underscoring the power of well-targeted cash transfers. Similarly, in the West Bank and Gaza, direct cash transfers have a substantial positive impact on the poorest deciles, making one of the highest marginal contributions to reducing inequality and poverty. 31 Iraq also shows the effectiveness of cash transfer programs, which outperform indirect subsidies in targeting the poor and achieving higher reductions in poverty and inequality. However, in Morocco, while direct transfers are progressive, their relatively small scale limits their overall impact on reducing poverty and inequality. In Djibouti, direct transfers are identified as the most effective instrument for poverty reduction, with potential further gains if resources are reallocated from regressive fuel subsidies to cash transfers. Tunisia also showcases the power of direct transfers, which are highly concentrated in the bottom deciles and have the most significant impact on poverty and inequality reduction within the country. These examples highlight the critical role that well-designed and adequately funded direct cash transfer programs can play in improving equity across the region. 4.3 Regional Takeaways on In-Kind Transfers (Education and Health) In-kind transfers, particularly in education and health, play a pivotal role in mitigating inequality across MENA, complementing the effects of cash transfers and direct taxes. Results consistently show that while cash transfers and direct taxes contribute to narrowing income disparities, the most substantial reductions in inequality are achieved when non-cash services, such as education and healthcare, are factored in. This pattern emphasizes the importance of comprehensive fiscal policies that integrate both cash and in-kind benefits to promote greater equity by investing in human capital on an equitable manner. However, the incidence of fiscal policies reveals a disparity in the distribution of benefits, where the poorest households generally gain more from direct transfers and essential in-kind services, while wealthier households often benefit disproportionately from indirect subsidies. At the same time, the burden of indirect taxes tends to fall more heavily on the poor, highlighting the need for a balanced approach that ensures equitable access to both cash and in-kind benefits while minimizing regressive impacts. 4.4 Regional Takeaways on Subsidies Subsidies across the MENA region, particularly energy subsidies, tend to be less effective and often regressive, with benefits disproportionately favoring wealthier households while offering limited relief to the poor. In the West Bank and Gaza, indirect subsidies are less effective than the well-targeted cash transfer program, underscoring the inefficiency of these subsidies in reducing poverty. Iraq’s experience further highlights this issue, as benefits from general subsidies are heavily concentrated in the top income deciles, providing minimal support to the poor. Similarly, in Morocco, while indirect subsidies on essential goods like LPG, wheat flour, and sugar are somewhat more equitably distributed than income in general, they remain largely concentrated among the wealthier segments of the population, though they still have a poverty-reducing effect due to their importance for the poor. Egypt’s broad subsidy programs, such as the Tamween food subsidy, suffer from poor targeting, covering most of the population with little focus on those most in need. In the Islamic Republic of Iran, indirect subsidies, such as those for diesel, are explicitly regressive, further exacerbating inequality. Jordan’s proposed fiscal reforms, which include reducing electricity subsidies for higher-consuming households and redirecting resources towards social assistance, illustrate the potential for creating fiscal space while simultaneously reducing poverty and inequality. Overall, the incidence of fiscal policies in the MENA region shows that while the poorest households generally benefit more from direct transfers and in-kind services, wealthier households disproportionately gain from indirect subsidies, leaving the poor to bear the greater burden of indirect taxes. This imbalance often results in the poor bearing a heavier burden of indirect taxes. This 32 underscores the necessity of gradually phasing out fuel subsidies. Indonesia, for instance, has made substantial progress in reducing fuel subsidies, which were a significant fiscal burden. A similar approach could be adopted in MENA countries, where governments should shift from blanket subsidies to targeted assistance for low-income households. Such a transition would enable more efficient resource allocation, and the savings from subsidy reductions could be redirected towards investments in infrastructure and social spending. MENA has the world’s highest fossil fuel subsidies as a share of GDP standing at 14.5 percent in 2023. The magnitude of global fossil fuel subsidies has increased from US $4.4 trillion in 2015 to $6.5 trillion in 2023. In terms of share of global GDP, this is an increase from 5.3 percent in 2015 to 6.5 percent in 2023. Of all the regions, total fossil fuel subsidies in MENA amount to US $623 billion in 2023 (or 14.5 percent of regional GDP see Figure 22). Of all these subsidies, explicit 19 fossil fuel subsidies remained 4.6 percent of GDP whereas remaining are implicit 20 (see IMF, Parry, Black and Vernon (2023)). Spending on energy subsidies surpasses 10 percent of GDP in more than ten countries of the region with Algeria, Bahrain, the Islamic Republic of Iran, Egypt and Saudi Arabia have highest share (more than 20 percent of the countries’ GDP) (see Figure 23). Fig 22: Global fossil fuel subsidies (as % of GDP) 2023 Fig 23: Total energy subsidies (as % of GDP), MENA 16.0 14.5 25 23 21 21 21 14.0 20 20 18 12.0 9.5 16 As share of GDP 9.2 15 10.0 14 As share of GDP 15 14 8.0 13 6.4 5.3 11 11 6.0 4.4 3.2 10 4.0 2.0 5 5 4 2 3 0.0 North Europe & Latin Sub-Saharan South Asia East Asia & Middle East America Central Asia America & Africa Pacific & North 0 Caribbean Africa Total subsidies Explicit subsidies Implicit subsidies Of all the types of the energy subsidies, oil subsidy remained highest with total amount of US$ 409 billion in 2023 in MENA (see Figure 24). Subsidies to natural gas and electricity comes second and third largest with total spending of US$159 billion and US$ 47 billion each in 2023. MENA total oil subsidies are 9.5 percent of regional GDP or $409 billion. MENA explicit subsidies to oil are $89.6 billion which is 2.1 percent of regional GDP (see Figure 25). Fig 24: Total subsidy by fuel (USD billions 2023) Fig 25: Total subsidy, by fuel (% of GDP) 2023 20 200 180 160 15 140 As % of GDP USD billions 120 100 10 80 60 5 40 20 0 0 Oil Coal Natural Gas Electricity Djibouti Malta Yemen Jordan Qatar Bahrain Oman Lebanon Oil Coal Natural Gas Electricity Morocco Tunisia Kuwait Iran 19 Explicit fossil fuel subsidies = [supply cost ─ fuel user price] × [fuel consumption]. 20 Implicit subsidies account for efficient fuel price by incorporating the environmental objectives, fiscal costs and environmental costs (including CO2, local air pollution and broader road externalities). 33 Source: World Bank staff calculations based on IMF Energy subsidy report, 2023. Distributional analysis shows the disparities and inefficiencies in the allocation of the energy subsidies. Using the fiscal incidence analysis (based on Commitment to Equity methodology), 21 the redistributive impact of the energy subsidies was assessed for selected eight countries including Djibouti, Egypt, the Islamic Republic of Iran, Iraq, Jordan, Tunisia and West Bank and Gaza. Results indicated that the energy subsidies benefits are highly concentrated (as share of total budget allocation) in the top deciles of the population. In Iraq, the wealthiest 20 percent of the population receive over 50 percent of the total subsidies, while only 5 percent of the subsidies reach the poorest 20 percent (see Figure 4.5). The results indicate that these subsidies are mostly untargeted with richest deciles obtaining most benefits. Fig 4.5: Concentration of the subsidies 60% 50% 50% As a share of total expenditures 40% 36% 32% 34% 30% 27% 23% 20% 17% 13% 14% 9% 10% 6% 5% 0% Djibouti Egypt Iran Iraq Jordan Tunisia Poorest Q2 Q3 Q4 Richest Source: World Bank staff calculations based on CEQ reports. The marginal contributions to inequality and poverty reduction of the energy subsidies have been very low. Measured by the Gini index, the results indicated that marginal contribution to inequality reduction remains negative in case of West Bank and Gaza and remained very low in case of other countries (with maximum contribution of 1.4 Gini points in Jordan to 0.0001 Gini points in Djibouti) (see Figure 4.6). Relative to the allocation and spending of the government, the marginal contribution of all other interventions, including health, education and social protection remained higher. In terms of poverty reduction, four out of eight countries analyzed, the impact on poverty reduction remained close to 0.0 percentage points (measured at national poverty line) (see Figure 4.7). 21 The Commitment to Equity (CEQ) methodology helps assessing the impact of fiscal policy on poverty and inequality. It aims to address four key questions: How much income redistribution and poverty reduction is being accomplished through fiscal policy? How equalizing and pro-poor are specific taxes and government spending? How effective are taxes and government spending in reducing inequality and poverty? What is the impact of fiscal reforms that change the size and/or progressivity of a particular tax or benefit? The methodology has been extended to and adapted for over 85 low- and middle-income countries over the past decade. For methodological details, see Lustig (2022). 34 Fig 4.6: Marginal contribution to inequality reduction (at final Fig 4.7: Marginal contribution to poverty reduction (at income) Subsidies consumable income) Subsidies Jordan Iran Tunisia Tunisia Iraq Jordan Egypt Iran Iraq Djibouti Egypt West Bank and Gaza West Bank and Gaza -0.2 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 0 0.5 1 1.5 2 2.5 3 3.5 Gini index Poverty line (National) Source: World Bank staff calculations based on CEQ reports. Given the significant budget allocations and the limited redistributive impact, energy subsidies in the MENA region require urgent reform. Indirect subsidies, particularly for liquid fuels, electricity, and natural gas, are not effectively reaching the poor. Instead, these subsidies disproportionately benefit wealthier households, as they tend to consume more of the subsidized goods, largely due to higher ownership of appliances. To enhance both equity and effectiveness, subsidies should be redirected to better target low-income groups, ensuring that fiscal resources are more effectively used to reduce poverty and inequality. One potential reform is to reallocate the subsidy budget towards more targeted forms of government transfers, such as social protection programs. 4.5 Regional Takeaways on Female Labor Force Participation The employment ratio in the MENA region has been a topic of concern, with many countries struggling with high unemployment rates, especially among the youth and women. As of 2023, the youth unemployment rate in MENA stood at 24.4 percent, more than double the global average of 13.0 percent, making it the highest among all regions. Several factors contribute to this issue. Rapid population growth has led to a surge in the number of young individuals entering the labor market, outpacing the creation of new jobs. Additionally, the prominence of public sector employment in many MENA countries has limited the expansion of the private sector, which is crucial for job creation. Obstacles to private enterprise development, such as bureaucratic hurdles and limited access to financing, further hinder employment opportunities. To improve the employment ratio, governments in the region should focus on diversifying their economies, investing in education and vocational training to meet market demands, and promoting policies that support entrepreneurship. Additionally, creating more inclusive policies to empower women and youth in the workforce, as well as encouraging private sector growth and innovation, can significantly help address the unemployment challenge in MENA (see Annex-C for Gender equity in fiscal policy: MENA perspective). 4.6 Policy Recommendations Enhance Targeting and Expand Direct Transfers: Across the MENA region, direct transfers, such as social assistance programs, have proven effective in reducing poverty and inequality. However, the efficiency of these programs can be undermined by poor targeting or limited coverage. Expanding coverage, particularly in countries where large segments of the population remain underserved (e.g., Jordan and Tunisia), and improving the accuracy of targeting mechanisms will ensure that transfers 35 reach the most vulnerable populations. For instance, programs like Egypt’s Takaful and Karama and Jordan’s Takaful and bread compensation have demonstrated high effectiveness but scaling them up to reach a broader segment of the population could yield further reductions in poverty and inequality. Reduce Regressive Indirect Taxes and Reform Subsidies: Indirect taxes, including VAT, often disproportionately burden lower-income households, counteracting the benefits of direct transfers. In several MENA countries, such as Iraq, Tunisia, and the West Bank and Gaza, the regressive impact of indirect taxes reduces the overall progressivity of fiscal systems. Policy reforms should focus on reducing the reliance on indirect taxes by increasing the progressivity of direct taxation. Moreover, energy and fuel subsidies, which tend to disproportionately benefit wealthier households, should be reformed or gradually phased out. For instance, Morocco’s TAYSSIR program and the Islamic Republic of Iran’s direct transfers are effective models that could be expanded by redirecting funds to protect the most vulnerable and those most likely affected from funds currently allocated to indirect and inefficient subsidies. Invest in Education and Health to Improve Long-term Equity: In-kind transfers, particularly in education and health, play a crucial role in reducing inequality over the long term. Countries like Tunisia, the Islamic Republic of Iran, and Egypt show that education spending, particularly at lower levels, contributes significantly to reducing inequality. Increasing investments in education and health services and ensuring equitable access to these services for all income groups, will help create a more equal distribution of opportunities and outcomes. Additionally, improving the targeting of health services, particularly in countries like Morocco where health benefits have low coverage, could enhance the redistributive impact of public services. Strengthen Progressive Taxation: The fiscal systems in many MENA countries rely heavily on indirect taxes, which exacerbate inequality. Increasing the share of revenue generated through progressive direct taxes—such as income and wealth taxes—would contribute to a more equitable fiscal system. For example, the Islamic Republic of Iran’s fiscal system benefits from a strong progressivity in direct taxes, which offsets the regressive impact of indirect taxes. Other countries in the region should explore similar reforms to increase the progressivity of their tax systems, ensuring that wealthier households contribute proportionally more to government revenues. 36 4.7 Roadmap for Fiscal Reforms Governance and structural measures - Private sector led growth Expenditure efficiency - Incentivize entrepreneurship - Phasing out inefficient and - Increase female labor force untargetted energy subsidies participation Revenue diversification - Horizontal and vertical expansion of targetted cash - Enhancing non-oil revenue transfer programs - Broadening the tax base by - Enhanced spending in health adding un-taxed or under-taxed and education sectors - Pension reforms by - Explore progressive taxation transitioning towards more measures sustainable pension system - Reduce informality - Restructure inefficient SOEs to - More pigouvian taxes (tobacco, reduce fiscal burden sugar) - Performance based budgeting - Harmonization and standardization of complex tax system - Implementation of digital tax platforms to enahnce efficiency Annex A: Overview of Iraq’s Pension System Iraq’s pension system comprises multiple schemes that reflect disparities in coverage, fiscal pressures, and inequities across sectors. The public sector contributory scheme, managed as a pay-as-you-go system, supports civil servants, military personnel, and employees of state-owned enterprises. By 2021, this system covered 405,000 primary beneficiaries and 199,000 dependents (International Monetary Fund, 2023). In contrast, the private sector contributory scheme extends to only about 6 percent of the workforce, underscoring a significant gap in coverage (Pension Policy International, 2022). In addition to these contributory systems, Iraq relies heavily on budget-financed pensions. Legacy pensions, covering individuals who retired before 2006, supported approximately 1.96 million beneficiaries as of 2021. Other Treasury- financed schemes include payments to victims of terrorism and military actions, which benefit over 575,000 individuals (International Monetary Fund, 2023). However, a large portion of Iraq’s elderly population lacks individual pensions, relying instead on the Social Safety Net (SSN), a household-based program providing cash transfers to around 225,000 older Iraqis (Humanitarian Web, 2022). Informal workers and women are disproportionately excluded from coverage, amplifying the inequities within the system (International Monetary Fund, 2023). The fiscal burden of Iraq’s pension system is considerable. In 2021, spending on legacy pensions and other budget- financed programs amounted to over 13 trillion Iraqi dinars, equivalent to 4.4 percent of GDP. Meanwhile, the State Pension Fund (SPF), which initially built reserves from a growing public payroll, has faced rising deficits since reforms in 2020 lowered the retirement age and increased benefits. By 2021, the SPF deficit had reached 1.6 trillion dinars (0.5 percent of GDP), with projections indicating that reserves will be exhausted by the end of 2024, necessitating additional budgetary support (International Monetary Fund, 2023). 37 Fragmentation between the public and private sector schemes exacerbates inequities and labor market distortions. Public sector pensions are significantly more generous, while private sector and informal workers, as well as women, face severe exclusions. For instance, fewer than 3 percent of private sector employees are covered under the private contributory scheme, managed by the Pensions and Social Security Department (PSSD) (World Bank, 2021). Additionally, public pensions are highly generous, with benefits far exceeding contributions. In 2019, the average pensionable income was 360,000 IQD, while the average pension benefit exceeded 900,000 IQD, reflecting a benefit ratio of 253 percent (World Bank, 2021). The 2019 amendments to Iraq’s pension law further strained the system by reducing the retirement age from 63 to 60 years and extending survivorship benefits beyond immediate family members. Treasury-financed pensions also cover a wide range of non-contributory beneficiaries, including victims of terrorism and martyrs, contributing to the system’s fiscal strain (World Bank, 2021). Addressing the fragmentation, expanding coverage to marginalized groups such as informal workers and women, and aligning benefits with contributions will be critical for creating a more inclusive and fiscally stable system. Annex B: Overview of the Education Systems in Djibouti and the Arab Republic of Egypt Djibouti and Egypt have implemented significant reforms to their education systems and social protection programs, aiming to enhance access, quality, and equity. These efforts, supported by international organizations such as the World Bank, have implications for poverty reduction and inequality in the region. Djibouti's Education System In Djibouti, education is a central pillar of national development strategy. A 2000 reform established a nine-year compulsory education cycle, comprising five years of primary and four years of middle education, followed by secondary and vocational training options. Gross enrollment rates remain low, at 55.5 percent for primary education and 37.0 percent for middle education, with gender disparities favoring boys. Recent efforts, such as the "Expanding Opportunities for Learning Project," aim to enroll 35,000 out-of-school children, prioritizing vulnerable groups, including girls, refugees, and children with special needs (World Bank, 2021). Fiscal constraints remain a challenge, as public education expenditure accounted for 8.6 percent of GDP and 22.8 percent of government spending in 2007. International partnerships, such as those with the Global Partnership for Education, play a critical role in supplementing domestic resources to improve educational outcomes (World Bank, 2007). Egypt's Education System and Takaful and Karama Program Egypt's education system has undergone extensive reforms aimed at increasing access and improving quality, particularly for marginalized groups. The government has focused on modernizing curricula, enhancing teacher training, and integrating technology into classrooms. These efforts are evident in programs such as "Education 2.0," which seeks to transform pre-university education by promoting critical thinking and problem-solving skills over rote memorization. Enrollment rates in primary education are nearly universal, with improvements in secondary and tertiary education participation, though challenges in quality and regional disparities persist. Investments in vocational training and technical education are also being scaled up to align graduates' skills with labor market demands (World Bank, 2019). In addition, the government has linked social safety nets with education improvements through initiatives like the Takaful and Karama program. Launched in 2015, Takaful provides conditional cash transfers to families with children, contingent on school attendance and regular health check-ups, while Karama offers unconditional transfers to the elderly and individuals with disabilities (World Bank, 2020). The program, which covered approximately 3.69 million households as of June 2022, has been effective in targeting the poor, with 93.6 percent of beneficiaries below the poverty line. Women represent 74 percent of direct recipients, and two-thirds of funds are directed to underserved regions such as Upper Egypt (World Bank, 2022). Fiscal commitments have been substantial, with $500 million in additional funding approved in 2022 to expand coverage and strengthen implementation (World Bank, 2022). Egypt’s and Djibouti’s education systems’ impact on inequality 38 In Djibouti, public spending on education services reflects a mixed impact on inequality and poverty, with its progressivity decreasing at higher education levels. Public primary education expenditures are relatively equitable across income quintiles, driven by a gross enrollment rate of around 80 percent and the high prevalence (94 percent) of students in public schools. However, lower secondary education spending exhibits an inverted U-shaped distribution, with 70 percent concentrated in the middle-income quintiles. This pattern reflects both dropout rates among lower- income students and a shift to private schooling among higher-income households. Public expenditures for primary education are pro-poor, but those for lower secondary education are neutral, and spending on upper secondary and tertiary education is less progressive. The gross enrollment rates of 80, 60, and 44 percent for primary, lower secondary, and upper secondary/vocational education, respectively, highlight disparities in access, particularly for low-income households. In Egypt, education spending has a significant absolute effect on reducing inequality, lowering the Gini coefficient by 3.1 points. However, its cost-effectiveness diminishes as the level of education increases. Spending on kindergarten and basic education yields the highest marginal contributions to inequality reduction (0.030 and 0.027 Gini points per billion spent, respectively), with basic education having the greatest overall impact due to its larger share of the budget. In contrast, tertiary education spending is the least effective in reducing inequality, reflecting its observed regressivity. Concentration of Education 30% As share of total health spendng 25% 20% 15% 10% 5% 0% Djibouti Egypt Iran Iraq Jordan Tunisia West Bank and Gaza Poorest Q2 Q3 Q4 Richest 39 Annex C: Gender Equity in Fiscal Policy: MENA Perspective One of the reasons behind high unemployment is low female labor force participation (FLFP) in the Middle East and North Africa (MENA) region. FLFP remains among the lowest globally. In five of the seven regions, more than half of all women (ages 15-64) participate in the labor market. However, in South Asia, the Middle East and North Africa only a quarter or less do. The gender gap in participation remains particularly striking in the Middle East and North Africa where the rates of participation among men are more than three times higher. As of 2022, the FLFP rate was approximately 21 percent, significantly below the global average of 47 percent (see Figures C.1 and C.2). Despite notable advancements in women's education, with many MENA countries achieving gender parity in educational attainment, these gains have not translated into proportional increases in women's participation in the labor market. For instance, in Egypt, the FLFP rate for women aged 15 to 64 declined from 23.6 percent in 2013 to 17.8 percent in 2023. Figures C1 and C2 Gender equity in fiscal policy is critical for inclusive and sustainable growth, poverty reduction, and welfare. The fiscal system affects women and men differently at the micro level through different channels, behaviors, and interactions. 22 The fiscal system may in turn be affected by gender relations and existing structural gender inequalities in the economy and society. Gender gaps can arise in the outcomes and opportunities enjoyed by men and women across several dimensions, including education, earnings, access to productive assets, political representation, and bargaining power within the household. Gender gaps affect individual well-being at the micro level, as well as economic institutions, inclusive growth, and poverty reduction at the aggregate level. 23 Promoting gender equality can therefore play an important role in boosting economic productivity and growth, enhancing economic resilience, and reducing overall income inequality. Standard FIA treats the household as a unitary entity where all its members have equal (per capita) access to income and consumption, or they are weighted by an externally given parameter and income and consumption are expressed in adult equivalent units. The CEQ methodology 24 estimates the combined impact of the taxes and transfers on the household’s income and welfare at different stages at an aggregate level. CEQ assessments typically do not assess gender impacts because the burdens and benefits created by fiscal policies accrue to activities rather than to individuals or their characteristics. Household budget surveys do not reveal individual preferences, economic, financial, and social needs. In reality, fiscal policies have heterogeneous impacts on individuals’ welfare and decisions. Policies such as incentives for labor force participation that influence time allocation for child and elderly care and policies such as legal restrictions or non-legal barriers to women’s access 22 Gender is a normative social construct defining and differentiating the roles, rights, entitlements, responsibilities, and social obligations of women and men; it also provides positive and negative incentives for broad-based compliance with those roles, responsibilities, and obligations. 23 World Bank (2012). 24 The CEQ methodology aims to address four key questions: How much income redistribution and poverty reduction is being accomplished through fiscal policy? How equalizing and pro-poor are specific taxes and government spending? How effective are taxes and government spending in reducing inequality and poverty? What is the impact of fiscal reforms that change the size and/or progressivity of a particular tax or benefit? The methodology has been extended to and adapted for over 85 low- and middle-income countries over the past decade. For methodological details, see Lustig (2018). 40 to education, healthcare, financial services, and labor force participation affect each member of the family differently. It is important to highlight the gender gaps and disparities existing within the households. An Engendered CEQ (E-CEQ) methodology explores the effects of the fiscal system in promoting gender equality while reducing poverty, vulnerability, and exposure to livelihood risks. The analysis reviews the interaction of the fiscal system with gender and intra-household resource dynamics. The E-CEQ leverages from the CEQ analysis to estimate fiscal policy impacts at different income levels on households according to their gender composition, age, and employment-based characteristics. It analyzes various gender inequalities such as those in employment, entrepreneurship, and other opportunities created by the fiscal policy. The E-CEQ methodology recommends classifying households into different typologies to highlight gender dimensions and potential gender disparities. It aims to explore different access points by identifying and quantifying the fiscal benefits and burdens experienced by women and men. To understand the differential impact of fiscal policy by gender and on household typologies, it would be valuable to conduct E-CEQs for all countries, as CEQ has already been conducted in MENA. 41 References Fardoust, S. (2023). Challenges new and old: The myriad economic issues affecting MENA through the lens of public opinion. Middle East Institute. Retrieved from https://www.mei.edu/publications/challenges- new-and-old-myriad-economic-issues-affecting-mena-through-lens-public Coady, D., Parry, I., & S. T. (2017). 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