stabilize fiscal spending and lower inflation, and remove significant price distortions. Implicit subsidies, mainly in the energy sector, have recently accounted for more than 45 percent of GDP (World Bank 2021i).

The projections of potential growth in MNA are highly uncertain. There are some upside risks to the baseline projections. The region’s relatively low female labor force participation and exceptionally high share of youth in the population (people younger than 25 years account for one-third of the population) indicate a large pool of potential new entrants to the labor market and consumer base. This, in turn, could substantially increase returns to investment and innovation, but it will hinge on whether the private sector is sufficiently vibrant and able to draw on a well-educated work force in flexible labor markets.

Risks to the baseline projections of potential growth, however, remain predominantly to the downside. While the war in Ukraine has provided a massive windfall to oil exporters, the longer-term benefits of this windfall depend on whether it is funneled into financing reforms and diversifying economies. For oil-importing economies in the region, the war in Ukraine may undermine longer-term growth prospects by raising the risk of social unrest and conflict, counteracting human capital gains through malnourishment and increased poverty, and increasing the likelihood of financial and balance of payments crises (Dieppe 2021; Hadzi-Vaskov, Pienknagura, and Ricci 2021; Kilic Celik, Kose, and Ohnsorge 2020; World Bank 2021e). More broadly, the pandemic could fragment global trade and investment networks, increase global uncertainty, and persistently increase borrowing costs, thereby limiting investment prospects. The pandemic remains an ongoing risk and could further destroy human capital and undermine investment if new variants appear that significantly disrupt activity and raise uncertainty.

# 8.4. Policy options to lift potential growth in MNA

The region faces multiple impediments to faster potential growth, including high dependence on the production and export of commodities; widespread poor governance and ongoing political instability; wide gender gaps in the labor market; large and less productive public sectors; fragility and conflict; prolonged crises in some economies and high debt and rising crisis risks in others; the repercussions of the COVID-19 pandemic, and climate change. A major challenge for the region is the deep-seated structural impediments to private sector-led growth. These need to be tackled to enable job creation and substantial improvements in living standards.

The gains from reforms could be significant. Cross-country experience indicates that reforms of education and health systems and labor markets can raise potential growth. A scenario analysis applied to the MNA region suggests that labor market policies to raise the female labor force participation rate in each country by the largest 10-year improvement in MNA during 2000-21 could lift average potential growth by 0.1 percentage point a year during the remainder of this decade. Similar steps to address gaps in investment could yield a further boost of 0.3 percentage point a year (figure 17). If