Fiscal Reform in MENA: Reducing Poverty and Inequality through Smarter Policies

The World Bank’s Poverty and Equity Global Practice, in collaboration with the Commitment to Equity (CEQ) Institute at Tulane University, has produced a landmark Policy Research Working Paper authored by Alan Fuchs Tarlovsky, Beenish Amjad, and Mario Julian Loayza Grisi, this comprehensive study evaluates how taxation, government spending, and social assistance affect income distribution in eight MENA countries: Egypt, Djibouti, Iran, Iraq, Jordan, Morocco, Tunisia, and the West Bank and Gaza. Applying the CEQ methodology, the research traces how incomes are reshaped through fiscal tools and assesses the extent to which these policies reduce poverty and inequality.

Despite notable reforms over the years, the MENA region continues to struggle with deeply entrenched inequality and widespread poverty. Over two-thirds of the population lived below the upper-middle-income poverty line in 2023. The demographic crisis is equally urgent; youth unemployment stands at 25%, and in places like Tunisia, it surpasses 30%. The region also faces a growing old-age population that strains pension systems and public services. Meanwhile, women remain largely excluded from the formal labor market, with female labor force participation hovering around 21%, far below global averages.

The Fiscal Puzzle: Narrow Tax Bases and Burdensome Subsidies

The study highlights that structural weaknesses hinder the MENA region’s fiscal systems. Many countries rely heavily on indirect taxes like value-added tax (VAT), which are regressive and disproportionately affect the poor. At the same time, generalized energy subsidies, long used as a tool to protect consumers, are highly inefficient and mainly benefit wealthier households. In contrast, direct taxes and targeted transfers are more equitable but are often underutilized or poorly scaled.

Government revenues in the region average just 25% of GDP, much lower than the 40% typical in high-income countries. This limited revenue base undermines governments’ ability to finance inclusive programs. In many countries, the informal labor market shrinks the pool of income tax contributors, making it difficult to implement progressive taxation effectively. This imbalance results in fiscal systems that are not only inefficient but also insufficiently redistributive.

Success Stories and Stark Contrasts

The report’s application of the CEQ framework reveals a patchwork of outcomes. Tunisia achieved the most dramatic drop in income inequality, reducing the Gini coefficient by 9 points, followed by Egypt and Djibouti. Egypt’s Takaful and Karama cash transfer programs, and Jordan’s Takaful and bread subsidy compensation schemes, stood out as particularly effective in reducing poverty and inequality. In Iraq, the Public Distribution System (PDS) proved vital in lowering poverty levels.

However, the picture is not uniformly positive. In countries such as Tunisia and the West Bank and Gaza, the combined effect of indirect taxes and underperforming transfers actually led to increased poverty post-intervention. In Djibouti, despite the presence of the National Family Solidarity Program, indirect taxes outweighed the benefits, causing a net increase in poverty. These cases illustrate that even well-intentioned policies can falter without proper targeting, scale, and balance.

Energy Subsidies: High Costs, Low Returns

Nowhere is the inefficiency of fiscal policy more glaring than in the realm of fossil fuel subsidies. MENA countries have the highest energy subsidy burden in the world, spending a staggering 14.5% of regional GDP on subsidizing fuels like oil, electricity, and natural gas. These subsidies are largely untargeted. In Iraq, for instance, the wealthiest 20% of the population receives over 50% of all energy subsidy benefits, while the poorest 20% receive just 5%. The marginal contribution of these subsidies to inequality or poverty reduction is either negligible or negative.

The report calls for a gradual phasing out of blanket subsidies in favor of targeted cash transfers, echoing successful reforms in countries like Indonesia. Redirecting these fiscal resources toward social protection and human capital investments would have far more meaningful and lasting impacts.

Toward More Inclusive and Gender-Sensitive Policies

The authors also address the critical issue of gender inequality, noting that fiscal policy in MENA is rarely designed to account for differential impacts on men and women. While educational gains for women have been substantial, these have not translated into improved employment outcomes. The report suggests adopting an Engendered CEQ (E-CEQ) methodology to analyze how fiscal tools, such as taxes, transfers, and in-kind benefits, affect men and women differently within households.

Moving forward, the study recommends several priorities: expanding progressive taxation, scaling up effective transfer programs, investing in basic education and health services, and reforming regressive subsidies. Strengthening these pillars could make fiscal systems not only more efficient but also more just. The paper emphasizes the need to increase spending effectiveness, ensuring that every dollar spent yields measurable social returns.

In sum, the report provides a detailed blueprint for transforming fiscal policy into a more powerful engine of equity in the MENA region. By identifying what works and what doesn’t, it offers both granular insights and high-level policy pathways. If implemented, its recommendations have the potential to reshape the social contract across a region long marred by inequality, exclusion, and fiscal inefficiencies.