Introduction

The de-escalation of tensions in the Middle East and North Africa (MENA) has brought a welcome pause in hostilities among regional countries. It has opened a window of opportunity for states to begin working together to address pressing, shared issues. The region faces many challenges, such as impinging climate change, rising unemployment, growing indebtedness, and increasing food insecurity and water scarcity. Moreover, there is a deep socio-economic divide between the countries of the region, which may come to pose a threat to regional stability.

This report argues that rapprochement between Saudi Arabia and Iran has created a time-limited opening for regional states to cooperate with each other in three key areas: geopolitics and security, economics, and energy. As such, it is an opportunity to close the gaps between countries of the region and, in doing so, not only strengthen MENA’s overall resilience to external shocks, but also shore up its long-term stability.

The report is divided into three sections: geopolitics and security, economics, and energy. Each section considers the contours of, and prospects for, regional co-operation in its area, and although the analysis and conclusion in each case differ, there is a common thread, which argues that the moment for advancing beyond de-escalation, strengthening economic resilience, and building new collaborative energy systems is now.

Part 1 argues that shifts in the global configuration of power have created an opportunity for the region to exercise more agency, to assume greater responsibility for its stability and security, and to play a larger role in global affairs. However, it also argues that unless deeper foundations of cooperation are laid, there is a risk that the progress made to date will be fragile, and may not endure.

Part 2 focuses on the regional economy and highlights the growing gulf between economies of the region. It asserts that the Gulf Cooperation Council (GCC) countries – buoyed by high oil prices and a pressing need to diversify their economies – are well positioned to provide financial support to, and increase the economic resilience of, middle- and lower-income countries; however, it argues that they are only likely to do so if they can be certain of high investment returns or that recipient countries will implement IMF reforms. It also highlights how these economies face significant challenges in accessing capital markets, and therefore have become more dependent upon GCC investment. In return, they are obliged to meet conditions set by GCC lenders.

Part 3 of the report makes a strong case that, if regional states are to safeguard their energy security and meet renewable energy targets and climate change commitments, then they must collaborate on energy systems. Part 3 argues that complex new energy systems, which draw upon the region’s abundant natural resources – including solar and wind – will only be effective if they are developed, deployed and operated via region-wide interconnections. In other words, cooperation is essential if the MENA region is to transition successfully from a hydrocarbon to a renewable energy system. And rapprochement between Saudi Arabia and Iran is a good place to start.

Part 1: Geopolitics

The shift towards multipolarity in the global order has made space for middle powers to rise in importance and influence. MENA countries are responding to global power shifts by pursuing de-escalation and greater cooperation intra-regionally, and by seeking a greater role in international affairs. Driven by national priority and perception of risk rather than regional good, de-escalatory measures are fragile and may not last.

The global configuration of power is undergoing significant change. New dynamics have created space for middle powers to “rise” in importance and influence, while also pushing states to redesign their existing international partnerships and consider new ones. Middle East and North Africa (MENA) countries have begun to play a larger role in global geopolitical affairs, deepen and broaden relationships with a range of international partners, and pursue de-escalation among themselves. The shift is motivated by several significant factors: rising great power competition between the United States (US) and China, the reprioritisation of US interests towards the Indo-Pacific, the growing Iranian threat to regional economic prosperity, the increasing likelihood of unilateral Israeli action against Iran, and the need to diversify partnerships as part of plans to achieve economic sustainability. However, underpinning all of these is the prioritisation of national interest. This is the new driving force behind policy making and action and will determine the depth and longevity of the region’s current push towards de-escalation.

At the epicentre of the new balance of power

Where ideology was once the binding force in bilateral and multilateral alliances on the world stage, there is a new emphasis on pragmatic, national-interest-focused policies that prioritise the development, stability, and prosperity of individual countries. The post-Cold War unipolar structure of the global order is moving towards multipolarity – where numerous powers vie for and exert influence on international affairs. The widening gap between the Global North and the Global South – on issues such as the impact of climate change, emissions reduction targets and effort, energy security and economic growth – is encouraging countries to pursue relationships with like-minded states despite the consequences for their relationships with “great” western powers. This approach not only allows for, but encourages, diversified partnerships to achieve this.

“National interest is the driving force behind policy making and will determine the depth and longevity of de-escalation.”

MENA sits squarely at the centre of this new balance of power, both geographically and politically. It was cast into the spotlight following Russia’s invasion of Ukraine, with global energy markets looking to the region’s major oil producing countries to boost production to replace sanctioned Russian barrels and stabilise international prices. But what was viewed by the West and the US as a reasonable and morally justified request was seen differently by the oil producers. For them, the economic importance of oil revenues and a growing sentiment across the world’s middle powers that sanctions are an extraterritorial measure overly deployed by the US, in violation of international law, were key considerations. The region continued oil market coordination with Russia within OPEC+ (which pumps approximately 40% of the world’s crude1), consistently responding to market signals by cutting output to put a floor under prices.

The episode demonstrates how the focus on national priorities is testing and reshaping historical partnerships, with middle powers becoming more assertive, and therefore more important, players in global politics. It is a trend that can also be seen in the “non-aligned” approach of MENA states to Russia’s invasion of Ukraine; most supported the UN resolution condemning Moscow’s actions but have refrained from implementing Western sanctions. Russia and the US play distinct and discrete roles in the region, and individual MENA states have sought to maintain working relations with both, using their ability to do so to elevate their country’s role in global diplomacy. For example, Saudi Arabia and the United Arab Emirates (UAE) brokered several prisoner swaps and releases in 2022 linked to the conflict.2 In early August 2023, the Kingdom hosted talks between international parties to discuss Kyiv’s 10-point peace plan to resolve the Russo–Ukrainian war. While no firm outcomes were reached, China’s continued participation in the discussions – Beijing had refused to participate similar talks in Copenhagen just weeks before3 – was hailed as a diplomatic success for the Kingdom. It also reveals how the region is acting as a bridge in an increasingly fragmented global political order.

“The focus on national priorities is testing and reshaping historical partnerships, with middle powers becoming more assertive players in global politics.”

Warming ties between MENA states and China comes as Beijing grows its presence and involvement in regional affairs, leading some to fear that it is seeking to usurp the US in its traditional role as strategic partner of choice. Indeed, as part of an eastern pivot that began during the presidency of Barack Obama, the US has advocated for regional countries to take on greater responsibility for their own security, enabling Washington to focus its attentions on the Indo-Pacific, and more recently, Eastern Europe. The US response to Iranian-sponsored attacks against Saudi energy facilities in 2019 and the UAE in 2022 – deemed inadequate by both the Kingdom and the Emirates – coupled with the superpower’s withdrawal from Afghanistan, were warning signals to Middle Eastern capitals that Washington was more focused on other matters. This raised concerns across the region about US’ reliability. This sense was compounded by the Biden administration’s continued refusal to include the issue of Iranian support for destabilising proxy groups across the region in its efforts to renew or redraft the Joint Comprehensive Plan of Action (JCPOA), known as the Iran nuclear deal.

Re-evaluating relationships with middle powers and each other

As the US has steadily redrawn the parameters of its relationship with the Middle East, MENA states have responded by stepping out from underneath Washington’s umbrella and charting their own course, pursuing transactional relationships with players such as China, India, and Russia to build insurance policies and create leverage for use in future scenarios. For example, in August 2023 Saudi Arabia, the UAE, and Egypt were invited to join the BRICS (Brazil, Russia, India, China) bloc, further strengthening economic, developmental, and political ties with non-Western partners.4 These growing relationships are also driven by objectives set out in the region’s respective development plans; for example, the UAE has long aimed to become a strategic logistics hub, and in pursuing this ambition it has also become a key node in China’s Belt and Road Initiative. Chinese investment in Emirati ports, airports, and transport networks has served the objectives of both countries: approximately 60% of China’s trade with the region now transits the UAE.

New members of BRICS. Flags of the six new members joining BRICS.

Foreign ministers of Saudi Arabia, China, and Iran in Beijing on 6th April 2023 after talks to resume diplomatic, security, and trade relations : Ding Lin/Xinhua via AP Photo

In the perceived absence of a strong and reliable security guarantor, MENA states have also adjusted their approaches towards each other on issues such as regional security, investment and financial aid, and trade relations. The region has turned inward, seeking to mend rifts and stabilise relations, beginning with the Al Ula summit in January 2021, at which Saudi Arabia led the way in ending the GCC boycott against Qatar. Separately, both Abu Dhabi and Riyadh have responded positively to outreach from Ankara, strengthening ties pre- and post the re-election of President Recep Tayyip Erdoğan, especially economically.5

But perhaps the most recognised and lauded development in regional affairs was the March 10, 2023, announcement that Riyadh and Tehran intended to resume diplomatic ties.6 Brokered by China but enabled by long-running talks between the two capitals mediated by Oman and Iraq, the agreement has set expectations in some quarters about the potential for broader regional de-escalation and relative peace.

The Saudi–Iran détente is the latest in a string of similar measures: the UAE began its own independent outreach to Tehran in 2019 following attacks against tankers off the coast of Fujairah in a bid to reduce tensions. It also led a campaign – supported by Jordan – to normalise the region’s relations with Damascus after the international community’s failure to make progress on a political agreement in Syria increasingly threatened regional stability; MENA states continue to bear the brunt of the Syrian refugee crisis and are also target markets for the country’s booming Captagon drug trade.

These diplomatic recalibrations indicate a desire to minimise the risk of instability and its potential knock-on effects across the region, particularly as GCC states pursue major economic transformation and expansion plans. MENA states are also increasingly adopting new forms of cooperation with partners outside their geographic sphere. This includes through “minilaterals” – voluntary arrangements usually between three to four countries that are unique in that participants are not bound by geography or ideology but a shared desire to achieve results on a particular issue or issues. Minilaterals are an attractive proposition for countries seeking to make rapid progress, especially on matters where there may be differences of opinion on collective actions and solutions.

However, moves by MENA states towards de-escalation have been taken in response to international developments, not to get ahead of them. In other words, MENA governments have not proactively sought cooperation as an independent choice; rather, their hands have been forced by the decisions and actions of other world powers. The dialling down of tensions stems from recognition that the region is fractured and unstable, and that without the guarantees or oversight of a global superpower the risk of insecurity is high. In this context, states are motivated by national interest – as each seeks to ensure its stability and prosperity in what is becoming an increasingly uncertain era of geopolitical tension and change.

For this reason, the recent series of de-escalatory measures is not indicative of a wider trend towards regional collaboration. Where interests between MENA countries align, there is, and will continue to be, clear desire and intent to cooperate. However, cooperation among states within the region will continue to ebb and flow depending on the national interests of its many members and the risks posed to each, sometimes by each other.

Indeed, some moves to dial down tensions have already hit obstacles and are stalling or slowing. For example, normalisation between Damascus and regional states has decelerated after Bashar Al Assad’s failure to meet his obligations agreed at the pre-May Arab League meeting, during which Syria’s membership suspension was lifted.7 Similarly, while Saudi–Iran “rapprochement” is moving forward, it has not eradicated all sources of tension; instead, the US is considering increasing its military presence in the waters around the Gulf to deter Iranian attacks on commercial shipping.8 In parallel, the Kingdom’s request for security guarantees from Washington calls into question whether Iran will follow through on its commitments, and if Beijing can, or is willing to, hold Tehran to its end of the bargain.

“The recent series of de-escalatory measures should be recognised as reactionary, and therefore fragile and potentially short-lived.”

Cooperation based on mutual benefit

As MENA states navigate the increasingly multipolar geopolitical order, they have been pushed into recalibrating their relationships intra-regionally and externally. It is evident that the primary objective of each is to secure its own interests first, prioritising domestic stability, development, and prosperity. Cooperation between regional states – be it multilateral, minilateral, or bilateral – is being driven by mutually convenient benefit. In this light, the recent series of de-escalatory measures should be recognised as reactionary, and therefore fragile and potentially short-lived. The foundations beneath have been laid – but have not yet had time to set.

Part 2: Economy

As regional growth slows amid global uncertainty and tightening financial conditions, MENA’s economic performance is one of stark contrast – a tale of two regions. While low- and middle-income countries struggle with macroeconomic vulnerabilities, large financing needs, and challenges in accessing markets, the GCC countries continue to enjoy robust growth, large surpluses, and advancements of economic diversification policies.

The GCC’s financial footprint in the region is growing under a new investment strategy that gives non-GCC countries an opportunity to overcome their fiscal and economic challenges and address their development needs. To take advantage of it, they must level the playing field by accelerating structural reforms.

A tale of economically diverging regions

Despite global shocks, the Middle East and North Africa (MENA) region saw a higher-than-expected 5.3% real GDP growth rate in 2022, up from 4.3% in the previous year. This was supported by strong domestic demand and a return of tourism and trade as part of the post-pandemic economic recovery, and the spike in oil and gas prices following Russia’s invasion of Ukraine. High prices for crude and liquefied natural gas (LNG) in 2022 – Brent averaged US$100 per barrel9 and LNG prices reached a peak of US$70.50 per one million British Thermal Units (MBtu)10 – benefitted producers, which derive as much as 56.4% of their GDP from hydrocarbons.11

However, closer examination of the region’s performance reveals a divergence – a tale of two regions. On one track are the high-income oil exporters, mostly Gulf Cooperation Council (GCC) countries. Reaping the benefits of 2022’s oil windfall, GCC economies enjoy robust fiscal and external positions and are advancing economic diversification policies under their respective national transformation programmes. On another track are middle to low-income MENA economies, whose post-pandemic recovery has been disrupted by the war in Ukraine. The spike in commodity prices and tightening of financial conditions have led to the loss of foreign capital, currency depreciations, rising borrowing costs, and food insecurity; these challenges have been aggravated by slow or stalling economic reforms.

Growing debt levels, fiscal challenges

MENA states have a history of responding to socio-economic shocks by running fiscal deficits, rather than implementing austerity and reforms. The expansionary fiscal policies introduced in response to the Arab uprisings in 2011, then the Covid-19 crisis in 2020, were enabled by unsustainable levels of borrowing at a time of easy access to credit and when GCC states were more willing to offer bailouts.12

But times have changed. The global economic outlook is darkening, regional growth is slowing, and the economic and investment policies of MENA’s more advanced economies are less forgiving. This leaves non-GCC countries in a difficult position. Public debt levels are particularly high – for example, in Egypt the debt-to-GDP ratio has crossed 92.9%;13 in Tunisia, 80%14 – and interest rates are rising, making the cost of servicing debt greater. There is a growing risk that countries will default – as Lebanon did in 2020 – and this is discouraging investment in the region, hindering economic growth.

Adding to these immediate difficulties, MENA oil importers also face uphill struggles in maintaining fiscal discipline given their dependence on hydrocarbon imports. Volatility in oil and gas prices expose exporting and importing economies to fiscal risks: exporters are over-reliant on oil revenues to fund state budgets – hydrocarbon revenues accounted for 95% of the Libyan government’s budget in 202215 and 85% in Iraq.16 Moreover, government moves to finance public and private sectors – via guarantees, cash injections into loss-making State-Owned Enterprises (SOEs), and compensation given to private partners for underperforming projects17 – accounted for nearly 8% of the region’s GDP in 2018.18 Oversized public sectors place further pressure on state budgets and crowd out the private sector – yet public service delivery is often poor.

Cited in the IMF report: Regional Economic Outlook – Middle East & Central Asia, October 2022

These domestic challenges heighten the vulnerability of non-GCC MENA economies to external shocks, such as those which occurred with Russia’s invasion of Ukraine. In the wake of those events, MENA governments were forced to increase subsidies in response to soaring domestic retail prices, driven by the increase in commodities prices.19 The International Monetary Fund (IMF) estimates that additional food and energy subsidies have cost as much as 1% of GDP and between 1.7% and 3% of GDP respectively, in Iraq and Tunisia.20 While subsidy hikes increase fiscal deficits, they are integral to the social contract, and any reform measures would likely face resistance. At the same time, countries also experienced a fall in foreign direct investment (FDI) as increasingly risk-averse investors pulled out capital from the region amid unprecedented rate hikes and tighter borrowing conditions in the United States (US) and Europe. Egypt experienced foreign capital outflows of US$20 billion during the first half of 2022 as investors withdrew from portfolio investments due to concerns over the impact of Russia’s invasion of Ukraine on Egypt’s already fragile economy.21 This has put pressure on exchange rates, leading to higher costs of borrowing and lower sovereign Eurobond issuances,22 completely depriving Egypt – and Tunisia – of access to global capital markets.23

Cited in the IMF report: Regional Economic Outlook – Middle East & Central Asia, October 2022

Until the global economic outlook improves, and without meaningful advancements on economic reforms, MENA economies will find it very difficult to address their debt challenges, shore up their fiscal positions, and rebalance their economies. As such, their ability to address pressing socio-economic challenges such as youth unemployment – which stands at around 30% across the region24– is completely hamstrung. Historically, GCC countries have stepped in to assist countries falling behind, providing bank deposits, loans, and grants, in addition to FDI. For example, between 2003 and 2015 a total of 76% of Lebanon’s FDI came from the GCC.25 Jordan has been similarly reliant on GCC funding; in 2011 Arab Gulf states joined efforts to provide US$5 billion in aid, and again in 2018 with another US$2.5 billion aid package.26 In 2022 Arab Gulf states deposited around US$13 billion in Egypt’s central bank to support foreign currency reserves and maintain solvency.27 However, as states increasingly prioritise their own interests (see Part 1) this approach has been replaced by one focused on returns – to maintain the GCC’s strong economic performance to date and diversify investment ties with the region.

Strong economic performance and evolving investment strategies

In stark contrast to the rest of the region, GCC countries continue to enjoy robust economic growth. They have dominated global growth tables since the end of the global pandemic in 2021, with Kuwait (8.2%), Saudi Arabia (8.7%) and United Arab Emirates (UAE) (7.4%) overshadowing Jordan (2.7%) and Morocco (1.1%) in IMF data for 2022.28 Although IMF forecasts indicate that GCC economies are poised to achieve lower growth rates in 2023 (2.9%), they will continue to surpass other advanced economies, such as the US (1.8%)29 and United Kingdom (0.4%).30 The GCC region has also experienced moderate inflation rates compared to other regions in the world due to subsidies and price caps on specific products, a robust US dollar that alleviates import costs, and restrained rent prices due to increased supply. For example, inflation in the GCC rose from 0.7% in July 2021 to 3.6% in July 2023; in the European Union (EU) it increased from 2.5% in July 2021 to 9.8% in July 202231 and 6.1% in July 2023.32

The economic success of the Gulf Arab region has been driven by high oil prices – the price per barrel has averaged US$100 over the past year33 – which have enabled significant investments and growth in their non-oil economies. Oil revenues for GCC countries amounted to more than US$570 billion in 2022 (Saudi: US$311 billion, the UAE: US$119 billion, Kuwait: US$98 billion,34 and Oman: US$42.9 billion).35 Revenues from the oil industry have provided substantial income for government budgets, and GCC governments have invested heavily in infrastructure development, including airports, seaports, roads, and urban facilities, and made progress on advancing economic diversification programmes, developing sectors such as finance, tourism, real estate, and technology, and enacting labour market, banking sector, and taxation reforms to enhance the business environment. This in turn has helped attract foreign investment and promote economic growth. FDI inflows to the Gulf grew by two thirds in 2021 from low pandemic levels to US$44 billion.36

In parallel, GCC states’ sovereign wealth funds (SWFs) have begun playing a pivotal role in managing and investing substantial state wealth, diversifying income sources, and ensuring long-term returns. Abu Dhabi Investment Authority (ADIA) assets are estimated at US$853 billion; Saudi Arabia’s Public Investment Fund (PIF) is thought to manage assets of around US$775 billion; and the Qatar Investment Authority (QIA) oversees an estimated US$475 billion.37

“GCC investment strategies have evolved significantly. Each now prioritises a more calculated approach, setting prerequisites and meticulously vetting projects to ensure they deliver better returns.”

Crucially, the SWFs reduce the dependency of GCC economies on oil and gas revenues by diversifying their investments across geographies and sectors. In the Middle East, the SWFs contribute towards economic development, enhance trade relationships, and promote regional stability; they often invest in strategic sectors such as real estate, banking, telecommunications, transportation, infrastructure, agriculture, and technology. But the investment strategies of GCC states have evolved significantly from past practices of providing unconditional financial aid to emerging economies based on diplomatic or strategic ties. Each now prioritises a more calculated approach, setting prerequisites and meticulously vetting projects to ensure they deliver a return on investments.

Source: Sovereign Wealth Fund Institute
Cited in: “The New Wave of Dealmaking by Gulf Sovereign Wealth Funds.” Middle East Institute, July 2023.

Support conditional on reforms, focused on returns

The GCC’s change in approach from delivering unconditional financial aid to MENA countries to focusing on strategic investments that deliver financial returns reflects their aim to secure and grow their wealth – in full recognition of the eventual shift away from hydrocarbons – while still influencing regional development and underpinning stability.

While GCC countries are well positioned to offer MENA countries financial assistance, this will no longer be condition-free. GCC countries now offer support in at least three ways. First, they deposit funds into a country’s central bank, retaining the ability to withdraw their deposit at their discretion; this gives them greater financial control as well as more political leverage. Second, investment funds now employ more robust due diligence methodologies, basing investment decisions on the rate of return rather than political or social objectives; consequently, GCC investments are more directed towards strategic sectors and national champions – given their greater value – rather than traditional industries such as tourism and real estate. Third, GCC countries pledge financial support complementary to IMF loan packages, on the condition that recipient countries implement agreed upon IMF reform programmes.

The GCC states are in a strong financial position and have a unique opportunity to address structural deficiencies across MENA. The way in which they invest their substantial financial reserves – and the conditions they attach in doing so – can encourage the region’s middle- and low-income countries to implement reforms with long-term benefits for their economies and, by extension, the region.

GCC states now expect recipient governments to institute meaningful reform programmes, benchmarked against IMF requirements, to secure financial support and investments. In other words, they use their leverage to encourage countries to “do their part” and accelerate structural reforms to gain access to much-needed capital. Concomitantly, middle- and low-income MENA countries need to attract GCC financial support and investments to shore up their economies and advance their development, and so must demonstrate a willingness to implement IMF reforms, no matter how painful.

Jordan has experienced notable success in this regard, making progress on implementing its economic reform programme supported by the IMF’s Extended Fund Facility.38 In response, there has been an uptick in interest from GCC states looking to make strategic investments that both underpin Jordan’s economy and deliver high returns – a move away from the bailout model of the past.

Investments from GCC member states in the Hashemite Kingdom are estimated to be worth US$40 billion,39 covering services and industrial sectors.40 The PIF’s takeover of Jordanian banks’ shares in the Saudi–Jordan Investment Fund (established in 2017) demonstrates the SWF’s growing interest in the Jordanian market and its new focus on developing strategic economic partnerships that offer substantial financial reward.41 The fund is, as of the first quarter of 2023,42 looking to invest in infrastructure, healthcare, and tourism in Jordan.

The Hashemite Kingdom still faces economic challenges, such as addressing systemic inefficiencies including an over bloated bureaucracy, constrained capacity and complex decision-making processes. Yet, it is in a strong position to capitalise on the GCC’s new approach to regional investments, having made good progress on implementing reforms.

However, the governments of other middle- and low-income countries will need to exercise considerable political will if they are to attract the GCC investment they need. Domestic factors will continue to present hurdles and frustrate their efforts to implement key reforms, including, among others, changing subsidy programmes; increasing competitiveness to encourage private sector participation; reforming labour laws to create greater employment opportunities, including for women, and reducing the role of the military in the economy.

The IMF requires Egypt to reduce the influence of the military in its economy – by selling stakes in military-owned companies – to allow private sector growth and therefore increase competitiveness. Since 2013, the military has become the dominant actor across both strategic and non-strategic industries, ranging from construction and manufacturing to real estate, tourism, and consumer goods production – benefitting from little to no government oversight or regulatory control and therefore crowding out private companies. However, President Abdul Fatah Al Sisi depends on the military to ensure stability and secure his presidency and, therefore, cannot afford to marginalise its interests.

As a result, President Sisi has been reluctant to introduce reforms that would satisfy the IMF and, indeed, the GCC. Seeking higher investment returns, GCC countries have been disappointed at the number and commercial appeal of the SOE shares on offer, as the Egyptian government is unwilling to cede control of its strategic, and most profitable, SOEs.43 In February 2023, Saudi Arabia suspended talks with Egyptian authorities over PIF’s acquisition of the government-owned United Bank of Egypt after the two sides disagreed about the valuation of the asset. The Kingdom’s firm stance on the valuation is an example of the prioritisation it is giving to carefully evaluating investment opportunities.44

A unique opportunity

The GCC’s new approach to supporting its neighbours is an opportunity for MENA’s middle- and low-income countries to introduce structural reforms, expand the role of the private sector, and build more inclusive and resilient growth models. GCC states will use their leverage to push regional neighbours to improve economic conditions to ensure their investments are low risk and high reward. In turn, middle- and low-income MENA countries will have to demonstrate progress on implementing reforms to attract much-needed capital. Failure to take advantage of this window of opportunity will result in its closure – and it will be some time before it opens again.

“The GCC’s new approach to supporting its neighbours is an opportunity for MENA’s middle- and low-income countries to introduce structural reforms, expand the role of the private sector, and build more inclusive and resilient growth models.”

Part 3: Energy

Increasingly complex energy systems are creating a pressing need for regional collaboration in MENA. As climate change and economic concerns drive the energy transition forward; overhaul energy infrastructure; and disrupt energy models; financial, technological, and resource sharing becomes both necessary and inevitable to adapt to the changes. However, if collaboration is not inclusive, advancements will be incremental and benefits uneven.

Energy systems in flux

In the Middle East and North Africa (MENA) region, energy systems are becoming increasingly complex. The region’s extreme vulnerability to the impacts of climate change has prompted governments to commit to decarbonising energy systems and rolling out climate mitigation and adaptation measures to ensure the region’s future is sustainable. At the same time, countries around the region are diversifying energy mixes for domestic power generation either to free up hydrocarbons for export or reduce the fossil fuel imports bill. Both trends are playing a major role in moving the energy transition forward. Within the power sector – where the bulk of the energy transition is taking place – they have created a set of important and interlinked challenges for conventional, centralised energy models based on balancing load demand and supply from conventional sources.

The first set of challenges relates to the ability of existing infrastructure to meet rising energy demand caused in part by climate change. High temperatures – which can exceed 50 degrees Celsius in some cities – and drought are increasing both water and energy demand for cooling and are negatively impacting the performance of both conventional and renewable power plants. This, and the region’s reliance on energy-intensive desalination for water production, is increasing the frequency of black outs, even in countries with significant power generation reserve margins such as Egypt and Kuwait.

The second set of challenges stems from the transition from fossil fuels to renewable energy sources, which is creating complications for energy infrastructure, especially in terms of balancing supply and demand. Investments in renewable energy deployment are occurring at a faster pace than in electricity grid development and demand-side management. Of the committed projects in the MENA power sector in 2022 to 2026 – valued at US$102 billion, or 30% of all energy investments – the bulk are in renewable energy and natural gas generation; investments in grid expansion and modernisation account for only 8–12%.45 Underinvestment in the grid, especially in transmission and distribution networks – which in MENA is chronically low – adds to the challenges of integrating variable renewable energy into the system; utilising variable renewable energy carries its own risks, such as curtailment46 and non-reliability.47

Down the line, plans to accelerate installed renewable energy capacity in tandem with initiatives to achieve net-zero targets, such as the electrification of transport, will add to the challenges and complexity of energy management and grid stability. Government-mandated targets range from 15% in Kuwait to 50% in Saudi Arabia to 52% in Morocco by 2030.48 Morocco and Jordan are frontrunners, achieving 37% and 20% of total installed capacity from renewable sources, respectively, in 2020. Countries like Saudi Arabia and Egypt currently have a low share of renewable energy in their respective power mixes but have committed to substantial capacities within their project pipelines. Meanwhile, the electric vehicle (EV) industry is gaining traction in many MENA countries with the aid of government support for the establishment of manufacturing and assembly factories. Distributed energy systems such as rooftop solar photovoltaics and mini grids, which transform the consumer into a producer of energy, are becoming more common too and will require a different governance framework; the solar power distribution market is expected to grow at a compound annual growth rate of 6.5% until 2028.49

Increasing deployment of renewable energy systems in MENA: Ute Grabowsky/Photothek via Getty Images

Growing need for collaboration

As energy systems become more complex, MENA countries will be prompted to increase regional collaboration to safeguard their energy security and meet renewable energy targets and climate change commitments. The region’s ambitious renewable energy targets can only be achieved through collaboration. Likewise, many of the challenges arising within the power sector require innovative and integrative solutions that are best achieved through financial, technological, and resource sharing; for example, integrating renewables successfully into the grid requires a more flexible system that includes interconnections, forecasting and integration centres, and the development of energy storage solutions and more efficient demand side management.

“As energy systems become more complex, MENA countries will be prompted to increase regional collaboration to safeguard their energy security and meet renewable energy targets and climate change commitments.”

One of the biggest drivers of regional collaboration is financial. Many of the region’s economies face chronically low prospects in attracting both foreign direct investments and climate funding to pay the high price tag of decarbonisation. A look at the investments of one of the region’s forerunners in this area, Morocco, showcases just how much cash is needed. The country requires in excess of US$30.6 billion in energy, industry, and transport to meet its 2030 target for greenhouse gas reductions.50 It also needs US$38.8 billion for climate change mitigation measures, of which US$21.5 billion is conditional on international support through climate financing.51 Of the 12 climate funds active in the MENA region, the total volume of climate financing it has secured is among the lowest globally: the region is estimated to receive US$3.6 to $4.9 billion climate finance flows per year;52 this compares to US$83 billion delivered in 2020 alone to developing countries globally, a figure that is expected to reach US$100 billion per year in 2023.53

For low- and middle-income countries in MENA, the expansion of low-carbon projects within their borders funded by wealthier neighbours will help to reduce barriers to market entry and attract further foreign direct investment and foster local job creation. High-income countries will benefit economically from their investments, and all participants will see wider economic growth and development benefits. For example, technology and knowledge transfer and collaboration on research and development will foster innovation and entrepreneurship – two areas that are viewed as vital pillars of sustainable economies in a fast-changing world, while the region overall will benefit from the improvements to environment and climate resulting from less carbon-intensive energy systems.

Energy access will be another driver of collaboration. The MENA region has abundant renewable energy sources but some, such as hydropower and geothermal energy, which are important for baseload power generation, are unevenly distributed across geographic locations. Extending renewable energy infrastructure across borders from areas of abundant resources and better prospects for project bankability to low energy access areas low-income or conflict countries will increase the share of renewable energy and improve energy access overall. Collaboration will also be needed to access the technology and knowledge to develop and optimise the use of these resources. For example, to develop geothermal, which has a lot of potential to power desalination plants and provide district cooling, the region can call on the extensive drilling experience of the petroleum-producing countries.54

“Yet, the biggest driver – and potentially the most challenging area of collaboration – is in the development of a regional integrated electricity grid to achieve net-zero targets.”

Yet, the biggest driver – and potentially the most challenging area of collaboration – is in the development of a regional integrated electricity grid to achieve net-zero targets. Several MENA countries have joined 130 others across the globe in pledging to reach net-zero – setting deadlines in 2050–60; other countries in the region are expected to follow suit. A cross-border grid interconnection will be necessary to reap the benefits of the geographic diversity of renewable energy resources; to ensure that electricity generated from variable renewable energy is not curtailed; and to ensure there is a balance between the load and demand.

Moreover, as power demand grows, the interconnection will halt the capital-intensive race to add power generation capacity and reserve margins. It will provide additional revenues to countries with significant power generation capacity while providing reliable power to the many countries in the region facing power supply shortages and disruptions, especially in post-conflict states and during peak periods.

Contours of future energy cooperation

The technical and financial requirements of increasingly complex energy systems require regional collaboration on multiple fronts: in electricity grid interconnections and exchange markets and cross-border renewable energy investments, and in knowledge and technology sharing. To what extent collaboration occurs and what the benefits will be, however, remains an open question. If collaboration is between small groups of countries and is exclusive rather than inclusive, advancements will be incremental and benefits uneven – with some groups enhancing energy security and others recording bigger energy crises.

Any form of collaboration will need to be supported by joint research and development programmes on energy technologies, as well as partnerships to scale up and commercialise low-carbon energy technologies. Additionally, governance and data sharing frameworks need to be put in place; these are easier planned than implemented and so may create bottlenecks and deal-breakers. However, frameworks are key to addressing management, ownership, and sovereignty over energy resources and infrastructure, while data protection directives will be critical to ensure transparency, as well as privacy, and to reduce security risks. Building the required frameworks and infrastructures will take time, yet energy collaboration is vital to accommodate the complexities of the energy systems of the future, to meet ambitious climate targets, and to create a more resilient region.

Conclusion

The Middle East and North Africa (MENA) region is at a critical juncture. The shifting sands of the global order, economically, politically, and in terms of energy sources and systems, have created a unique opportunity for the region to assume greater responsibility for its stability, security, and prosperity. By utilising the advantages afforded to each country – be that political strength, capital, or energy resources – the MENA region can cooperate to drive its own development and prosperity, build resilience to future shocks, and contribute to global stability. However, this opportunity is time-sensitive; the region must capitalise on the current momentum and lay the foundations for long-term, region-wide collaboration if it is to successfully address longstanding challenges for mutual gain.

“By utilising the advantages afforded to each country – be that political strength, capital, or energy resources – the MENA region can cooperate to drive its own development and prosperity, build resilience to future shocks, and contribute to global stability.”

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Part 3: Energy

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