Middle East and North Africa Investment Policy Perspectives

Maximizing the potential of investment to drive sustainable development in the Middle East and North Africa (MENA) is more critical now than ever. The COVID-19 pandemic exacerbated the region's existing socio-economic challenges, with both health and economic crises compounding difficulties. Global foreign direct investment (FDI) plummeted by 50% in the first half of 2020, and the OECD projects a 4.2% contraction in global economic output for the year. The MENA region is expected to face even more severe impacts, with FDI inflows dropping sharply and forecasts indicating substantial economic contraction. Rising unemployment, poverty, and the risk of macro-economic and political instability add to these concerns.

Although MENA governments have initiated bold reforms to enhance the investment climate and respond to the pandemic, further action is required to align investment with sustainable development. The region's economies—ranging from Algeria and Egypt to Jordan, Lebanon, Libya, Morocco, the Palestinian Authority, and Tunisia—each face unique challenges and opportunities. However, they also share many common obstacles. This report highlights reform recommendations across various policy areas that shape the investment environment, emphasizing how targeted investment can improve the well-being of citizens.

A Shared Challenge: Ensuring Investment Drives Sustainable Development

MENA governments recognize the role of investment in supporting development objectives, such as economic diversification and job creation. Over the past decade, they have implemented significant reforms to attract and facilitate FDI, revising investment laws, easing market access, streamlining regulations, strengthening investment promotion agencies (IPAs), and directing investment toward underdeveloped regions. However, despite these efforts, MENA economies have been less successful than their emerging market peers in leveraging investment for sustainable development. Political instability, conflict, and economic shocks have negatively impacted the investment climate, and structural issues like competition barriers, skill shortages, weak infrastructure, governance problems, and insufficient regional integration have further hindered FDI benefits.

FDI in the MENA region has largely been concentrated in capital-intensive sectors like extractive industries, real estate, construction, and light manufacturing. These sectors have not effectively promoted job creation, economic diversification, or support for small and medium enterprises (SMEs). Public sentiment in many MENA economies suggests that investment has not adequately benefited the general population. Despite reform efforts, several challenges remain in the investment climate, limiting the overall impact of FDI on private sector growth and sustainable development.

Four Priorities to Enhance the Investment Climate and Leverage FDI

1. Enhance clarity, consistency, and transparency of investment rules: While MENA economies have made strides in improving investment legislation, rapid reform efforts have sometimes created legal overlaps and ambiguities. Ensuring coherence across investment laws is critical for creating a stable and attractive investment environment. Reducing the scope for interpretation in laws and regulations will help limit corruption, reduce unfair competition, and prevent investor-state disputes.

2. Advance reforms to promote competition and private sector growth: MENA economies tend to impose more restrictions on foreign investors, particularly in service sectors, compared to other emerging markets. These restrictions hinder competition and productivity, limiting participation in global value chains (GVCs) and reducing the potential for knowledge transfers and innovation. Addressing institutional barriers like excessive bureaucracy, corruption, and state ownership of key sectors is crucial for promoting competition and economic growth.

3. Target investment policies toward sustainable development: Governments in the region must rethink their investment promotion strategies to address new challenges and capitalize on emerging opportunities. Expanding the digitalization of procedures, focusing on aftercare, and developing clear, targeted policies will help attract investment with high development impacts. This includes fostering skills development, innovation, and SME linkages. In fragile or post-conflict contexts, governments should prioritize investment in sectors that contribute to rebuilding efforts while promoting responsible business conduct in areas like human rights, gender equality, and environmental protection.

4. Strengthen governance and policy coordination: MENA governments have made significant progress in reforming their institutional frameworks for investment, but further improvements are needed to enhance coordination and policy coherence. Clarifying the roles of IPAs and improving collaboration across investment policy, promotion, and facilitation will reduce confusion and boost credibility. Aligning investment policies with other areas such as trade, competition, and anti-corruption measures will help create a more favorable investment climate. Engaging stakeholders, including investors, in policy development is key to fostering trust and accountability between governments and the business community, especially in uncertain times.