Abstract

The conduct of exchange rate and fiscal policies in the small open Mena economies has recently become critical in determining those countries future economic and fiscal situation, due to the accumulation since the early 1990s of a sizable level of external debt, and the pursuit by some countries of a fixed exchange rate regime. This study presents thorough empirical analysis of the sustainability of exchange rate and external public debt using time series econometric models. The empirical results point to sustainable fiscal and exchange rate policies in Tunisia and Morocco, unsustainable external debt but sustainable exchange rate policies in Egypt and Turkey, and unsustainable external debt and exchange rate policies in Jordan. If Jordan still opts for maintaining a fixed US dollar exchange rate arrangement, it will have to implement crisis-prevention measures, namely by exercising fiscal discipline, and managing properly its external debt and foreign reserves.

Key words: MENA, exchange rate, foreign debt, sustainability, JEL classification:  C22, E31, H63.