Regional Integration in the Union for the Mediterranean 2025

2. Finance

Abstract

The first part of this chapter presents the overall analysis of progress in financial integration since the 2021 Progress Report and introduces the policy recommendations. The second part presents, individually, the indicators that support the analysis and recommendations:

• F1. Financial market development

• F2. Banking system

• F3. Portfolio investment flows

• F4. Remittance flows and costs

• F5. FDI position and flows

• F6. FDI regulatory restrictiveness

• F7. FDI contribution to gender equality in employment and wages

The role of well-developed and integrated financial markets

In recent decades, financial market development and cross-border financial integration have grown rapidly in relation to global GDP. A strong consensus has emerged regarding the positive impact of a well-developed financial system on economic growth. A well-functioning and integrated financial market can enhance access to capital, reduce costs and risks for both creditor and borrowers, and enable a more efficient allocation of resources by broadening investment opportunities. As markets become more integrated, financial institutions benefit from economies of scale, leading to increased efficiency and risk management. Developed capital markets complement the banking system, providing additional sources of financing for investments that banks may be unwilling or unable to fund.

Financial development and integration are influenced by political, legal and institutional determinants These factors influence international financial flows, convergence in asset prices across countries, and foreign penetration in the domestic banking sectors - all key characteristics of global and regional financial integration.

In particular, financial liberalisation has long been considered a cornerstone of financial integration. Empirical evidence demonstrates a positive correlation between capital account openness and economic growth.

Financial integration, however, is not sufficient to ensure the domestic corporate sector access to financing. SMEs often lack the resources needed to fully capitalise on cross-border financial opportunities. It is thus crucial to foster strong local banks and capital markets by upgrading the financial market infrastructure, developing a strong domestic investor base and facilitating access to financing supported by a sound regulatory framework.

Monitoring financial integration in the UfM. The selected set of indicators (F1-F7) focuses on the overall depth and access of financial markets, banking, capital markets, remittances flows and costs, and foreign direct investment (FDI), with an added gender dimension.

Official development assistance (ODA) flows can contribute to financial integration by promoting economic development, but they are not per se an indicator of financial development or integration and therefore were not considered for the monitoring exercise.

What we have observed since the 2021 Report

The level of financial integration and development within the UfM varies significantly across subregions and countries. These disparities can be attributed to several factors, including differences in GDP per capita, subregional positioning, and the structure and openness of financial markets. For instance, the European Union (EU) exhibits one of the most advanced financial systems globally, although full integration remains incomplete. On the other hand, financial markets in the Western Balkans and the Middle East and North Africa (MENA) regions face challenges such as limited depth, access, and openness, arising from longstanding structural and institutional constraints.

A common characteristic of UfM financial markets is their continued reliance on banking systems as the principal mechanism for capital allocation in both EU and non-EU UfM sub-regions. This also reveals a shared imperative to diversify financing sources in response to global competitiveness challenges. The EU's Capital Markets Union initiative exemplifies the push for a more integrated and dynamic financial system, an ambition that remains critical for other UfM sub-regions.

Financial markets in the UfM continue to be fragmented

The fragmented nature of financial markets within the UfM underscores the need to bridge gaps in institutional harmonisation and financial access. In the Western Balkans, the absence of robust capital markets limits alternatives to bank-based financing, highlighting a shared struggle to broaden financial intermediation. Similarly, in MENA, market segmentation inhibits cross-border capital flows and restricts foreign bank penetration.

Geopolitical risks further complicate the landscape, particularly in MENA. Elevated sovereign borrowing costs, risk premiums, and tightening external financing conditions have heightened vulnerabilities. These factors have exacerbated net portfolio outflows and discouraged investment, particularly in highly indebted countries. Additionally, the heavy reliance on domestic funding across fragmented markets intensifies the sovereign-bank nexus, creating systemic risks. These dynamics underline the necessity of coordinated risk mitigation strategies that transcend national borders.

Attracting Foreign Direct investment

UfM economies continue to attract significant FDI flows, demonstrating resilience and competitiveness. However, regional disparities persist. The EU's single market facilitates robust intra-regional investment and serves as a benchmark for integration.

In the Western Balkans, proximity to the EU, competitive labour markets, and nearshoring opportunities highlight untapped investment potential. Leveraging these strengths could significantly boost the region’s economic integration and dynamism.

In the MENA subregion, although the EU-27 remains the primary source of foreign investment, FDI inflows have underperformed, hindered by perceptions of weak governance, a skills gap, and a lack of private sector competition. In Morocco and Egypt, notable efforts to open capital accounts and remove FDI restrictions are successfully attracting capital inflows and foreign investments to the region, despite external shocks and constant turmoil.

Remittances remain critical

Remittances across the UfM group, have exceeded FDI and ODA (World Bank, 2023[1]), becoming a vital source of external financing, particularly in times of various crises (COVID-19, earthquakes, global shocks, conflict).

Remittances should be seen as a critical vehicle to promote financial integration within the UfM group, given the many intra-UfM channels of transmission across countries. In Lebanon and Jordan, remittances account for about 35% of GDP, underscoring the critical role of the diaspora in those economies. The other MENA countries and the Western Balkans are also predominantly net recipients of remittances which represent more than 5% of GDP, with the exceptions of Mauritania, Algeria, and North Macedonia.

Remittance flows are conditioned by the existence of rigidities in the financial markets and lack of financial instruments in the recipient countries, as well as the costs imposed on such transactions. Improvements in those two areas would be conducive to increasing remittance flows and their economic and social impact across countries and sub-regions.

Contextual approaches to financial market development

The diverse experiences of UfM countries affirm that financial market development and integration are deeply intertwined with broader economic and institutional reforms. The EU’s progress in regulatory harmonisation offers valuable lessons, while the gradual liberalisation seen in MENA and the Western Balkans highlights the importance of context-specific approaches.

Measures designed to address these structural challenges - such as diversifying financial instruments, modernising regulatory frameworks, and fostering cross-border cooperation- will be essential to overcoming fragmentation. Tailored solutions that reflect national and regional contexts can enhance market efficiency and resilience, paving the way for a more cohesive UfM financial system. This, in turn, will better position the region to navigate global economic transitions and support inclusive, sustainable growth.

In addition, significant international developments, including the post-COVID-19 economic recovery, tighter global monetary policies, Russia's full-scale invasion of Ukraine, and the ongoing conflict in the Middle East, have had a profound impact on UfM countries. These challenges could hinder progress in economic growth and reforms, particularly in the MENA and Balkan regions. While these countries have taken steps in recent years to support financial market development and improve access to finance, there remains considerable potential to implement further reforms that could stimulate private investment and enhance productivity. Strengthening reform efforts is crucial. In particular, fostering greater competition and reducing market distortions will be vital for reviving productivity growth and ensuring sustainable economic development.

Looking forward, what policy action is needed?

Given the diverse economic and geopolitical contexts within the UfM group, any dimension of financial integration process at the regional level must necessarily be grounded on the ability of each individual country to maintain orderly financial sector development, as well as macroeconomic stability and the capacity to attract and retain foreign direct investments and capital flows.

Banking, capital markets and remittances

Given the dominance of banking finance in the UfM region, strengthening macroprudential frameworks is crucial to mitigate risks, especially in countries with high sovereign debt levels. In addition, governments in the UfM region should promote broader access to finance by incentivising banks to increase lending to the private sector, particularly for SMEs.

In the MENA sub-region, countries should prioritise reducing the banking sector's exposure to public debt, as excessive reliance on domestic sovereign debt increases vulnerabilities and elevates credit costs for households and businesses. Furthermore, improving the governance of state-owned banks and fostering a level playing field are critical to limiting the preferential treatment often afforded to state-owned enterprises (SOEs), thereby promoting fairer competition. In this regard, the OECD Guidelines on Corporate Governance of State-Owned Enterprises provide robust standards for good practices, offering a framework to enhance the competitiveness, efficiency, and transparency of SOEs while enabling them to manage their responsibilities more effectively.

Actions can be taken to expand digital banking infrastructure, enhance financial literacy, and address gender disparities in banking services. In this context, improving financial literacy is essential for educating households and businesses on managing finances, navigating loan applications, and understanding financial products, thereby increasing their confidence in engaging with formal financial institutions.

Regarding capital account openness, eliminating current restrictions on capital flows, as set out by the OECD Code of Liberalisation of Capital Movements (OECD, 2024[2]), would help to foster capital market developments and market liquidity. However, evidence suggests that for foreign capital inflows to boost a country’s economic growth, it is essential first to increase financial depth and improve the quality of institutions that regulate the financial system.

Strengthening integration within the UfM between non-EU markets and the EU could significantly enhance cross-border capital flows and improve liquidity, particularly for UfM economies with less developed financial markets. A more integrated EU financial market would serve as a conduit for greater capital mobility and resource allocation across borders, offering substantial benefits for growth and financial stability across the UfM region.

Advance the EU financial integration to bolster productivity and competitiveness within the bloc. At the European Union level, significant efforts are underway to advance the integration of the European capital markets, with the recently launched European Savings and Investments Union plan. This initiative is widely recognised as a pivotal step towards reducing market fragmentation, broadening the diversification of financial sources, and fostering increased cross-border capital flows. The creation of an integrated and more accessible European financial market could play a crucial role in catalysing liquidity and capital inflows, and potentially generating positive spillovers towards other UfM economies and enhancing regional financial resilience.

Foster capital market integration and harmonisation with the EU in Western Balkans. Given these ongoing efforts at the EU level, it would be essential for Western Balkan countries in the UfM that are candidates for EU accession to work closely with their EU counterparts in modernising their financial sector frameworks and laws. In doing so, they should advance reforms to bring the legal and financial systems in line with the EU Acquis Communautaire, facilitating closer integration and cooperation. They should also implement key EU regulations, such as the Undertaking for Collective Investment in Transferable Securities (UCITS) to standardize investment fund rules (currently adopted only in Montenegro), adopt the Markets in Financial Instruments Directive II (MiFID II), the Markets in Financial Instruments Regulation (MiFIR), and the pan-European platform for securities settlement TARGET2.

Diversify the financial sector in MENA countries by developing capital markets. This is necessary to expand access to finance and attract foreign capital and reduce cross-border capital restrictions. Equity and corporate bond markets should be further developed in the sub-region, to be better aligned with regional and global markets. The establishment and development of domestic institutional investors such as insurance corporations and asset backed pension schemes could further support capital markets in the MENA countries.

To promote additional financial sector linkages within MENA and with the rest of UfM countries, individual countries should seek consistency in regulatory reform. Issues related to banking supervision, restrictions on risk management, and transparency of rules, among others, should be part of a technical regional dialogue among MENA countries.

Meanwhile, those countries with more advanced financial markets could become poles of attraction. Jordan, Egypt, Morocco and Türkiye are well positioned to become financial centres in the region, issuing cross-border equity and corporate bonds. This would require a certain degree of diversification in their financial markets, expanding beyond their current bank-dominated systems to include a wider range of financial actors and/or instruments that can best support cross-border investments and coordination of regulatory systems.

As cross-border barriers are progressively reduced and alignment with international regulatory standards is strengthened across the MENA sub-region, the foundation for deeper integration with other UfM economies, including Türkiye and EU member states, will be significantly reinforced. This progression creates an opportunity to promote cross-border banking and encourage a greater presence of European banks in MENA markets, enhancing financial interconnectedness and accelerating broader economic integration.

UfM and the broader MENA region. It is important to highlight the significant role of Gulf Cooperation Council (GCC) economies in exporting capital, especially within the MENA region. In this regard, reducing cross-border restrictions between GCC and UfM countries would further promote capital flows. Improving regulatory convergence, reducing capital controls, and enhancing measures to manage capital flows in times of volatility, can streamline financial transactions between these countries.

Focus on capacity building. For Mauritania and other MENA countries with emerging financial infrastructures, capacity-building should be prioritised in order to lay the foundation for financial sector development. In these contexts, technical assistance and cooperation from EU countries, with bilateral partnerships with individual EU members, can play a pivotal role in supporting timely, context-specific financial reforms.

Finally, regarding remittances across the UfM group, it would be essential to harmonise the costs of the legal transactions below 5%, in line with World Bank recommendations, and promote transparency of transfers. In addition, recipient countries should provide incentives to allocate remittance flows to productive capital investments, together with FDI and ODA, with the goal of maximising their effectiveness and impact on development (Box ‎2.5).

UfM and the broader MENA region. Remittances flows coming from the GCC countries to MENA are of vital importance, especially for Egypt, Jordan, and Morocco. There is significant potential to enhance the efficiency and accessibility of cross-border payments. Expanding access to banking and digital payment systems in both GCC and MENA countries would make it easier and more affordable for expatriates at the GCC to send money to their families. In addition, adopting innovative technologies, like blockchain, to reduce transfer costs would enhance the impact of remittances in the recipient economies. Overall, promoting trade and investment between the GCC and MENA countries would create a more integrated economic environment, indirectly boosting remittance flows.

Foreign direct investment

Release restrictions on foreign equity, simplify approval mechanisms, and eliminate barriers for foreign operators and operations (OECD, 2015[3]). This can significantly enhance the attractiveness of UfM countries to foreign investors, due to the Mediterranean region’s geographical position, the vast scale of the market, competitive salaries, and prospects of a closer integration between the EU and neighbouring countries.

Western Balkans countries should continue to benefit from their strategic positioning to continue attracting FDI and to become a nearshoring hub for the EU. By aligning with EU financial and banking regulations, they would create a more attractive environment for investment.

Türkiye continues to attract substantial FDI. With its deepening financial ties to the Persian Gulf states and Asia, Türkiye is well-positioned to serve as a strategic bridge for fostering greater economic and financial integration with MENA countries. This unique role underscores its potential to enhance regional connectivity, drive cross-border investments, and support economic development across neighbouring economies.

Reinforce the legislative framework for investment in MENA. Increasing the predictability and transparency of investment laws should help to reduce regulatory obstacles that can hinder investment and economic diversification. Policy measures should be implemented to improve investor protections, including intellectual property rights; remove restrictions to repatriation of foreign investments and the enforcement of contractual rights; and strengthen dispute resolution mechanisms to offer investors clear, reliable pathways for addressing conflicts.

In addition, specific measures could be implemented to boost investment attractiveness and drive economic diversification. For example, fiscal incentives could be tailored to promote investment in sectors like manufacturing and information and communication technology (ICT) and reduce over-reliance on sectors such as oil, gas, construction, and mining.

Given their geographical position, MENA countries should leverage multilateral trade agreements and the African Continental Free Trade Agreement framework, particularly the Investment Protocol currently under negotiation, to create an accessible regional market.

Finally, Mauritania should continue unfolding its potential as a recipient of new greenfield investments, particularly in the renewable energy sector.

UfM and the broader MENA region. GCC countries are major contributors to FDI greenfield investments in the UfM region. The possibility of linking the GCC-EU investment and partnerships, recently enhanced by joint plans, with the rest of the UfM could provide a great opportunity to increase investment flows in the region. Combining European know-how and technology with GCC financial capabilities and diversification ambitions could help invigorate the necessary and long-awaited integrated development process in the Mediterranean region. Moving forward, existing partnerships between GCC and EU countries could lead to positive spillovers in the MENA economies boosting economic and industrial diversification in the sub-region.

 

Main Findings	Key recommendations
Financial market development
In the UfM region, countries feature notable disparities in financial market development, with significant sub-regional heterogeneity.	Increasing the depth of financial markets and improving access to them are necessary goals for advancing financial integration in the UfM.
In the MENA sub-region, the segmentation of financial markets is partly responsible for the relatively low levels of access and depth of the financial sector.	Strengthening integration within non-EU UfM markets and with the EU could significantly enhance cross-border capital flows and improve available financing, particularly for UfM economies with less developed financial markets.
Banking, capital markets and remittances
The high volatility in portfolio capital inflows and outflows in UfM countries reflects the effects of past and ongoing regional crises, as well as exogenous global shocks.	Improving macroeconomic stability and putting measures in place to mitigate asset price volatility.
The banking sector in the MENA constitutes the primary source of financing, but it is highly protected and allows limited cross-border activities. The gender gap is particularly relevant in terms of bank accounts owners.	Expanding access to banking for households and MSMEs would foster private sector activity. In addition, the financial sector should be further diversified by developing capital market financing. Financial literacy would create confidence and mobilise savings towards capital investments.
Banks in the MENA sub-region are highly exposed to sovereign debt.	Reducing banking sector exposure to public debt would reduce risks and vulnerabilities.
Western Balkan countries exhibit lower levels of capital account openness than EU member countries. No noticeable improvements in financial markets depth and access have been observed since 2017.	Prioritising banking and capital market integration and harmonisation with the EU should be a priority in Western Balkan countries.
Countries in the UfM, particularly in the MENA and the Western Balkans sub-regions, should strengthen their financial infrastructure.	Building capacity should be prioritised to lay the foundation for financial sector development. In these contexts, technical assistance and cooperation from EU countries, with bilateral partnerships with individual EU members, play a crucial role.
Remittances represent a significant source of external financing for UfM countries in the MENA and Western Balkans sub-regions.	Facilitating the transfer of remittance flows through the banking sector should help recipient families to enter the formal financial sector. Reducing costs and taxation on the transfers should act as an incentive.
Remittance flows should also be considered in connection with other capital flows that are being mobilised in the Western Balkans and MENA sub-regions.	Creating specific financial instruments designed to channel remittance flows into the capital market could help increase the impact of remittances on local economies.
Foreign direct investment
Countries in the UfM, particularly in the MENA have higher FDI restrictions.	Releasing restrictions on foreign equity, simplifying approval mechanisms, and eliminating obstacles to foreign operators and operations could have tremendous benefits in attracting investments from foreign companies into the UfM countries.
FDI inflows in the MENA sub-region have underperformed, hindered by perceptions of weak governance, skills gap, and lack of private sector competition.	Reinforcing the legislative framework for investment in MENA, by enhancing predictability and transparency of investment laws would help to reduce regulatory obstacles that can hinder investment and economic diversification.

F1. Financial market development

Why this indicator?

Financial market development stands out as a vital indicator due to its comprehensive reflection of an economy's structural strength and growth potential. A well-functioning financial market ensures reliable access to financing, reduces borrowing costs, and optimises resource distribution, thereby enhancing economic dynamism and productivity.

From the perspective of financial integration in the UfM, it is relevant to consider the development of the financial market, including depth, access and efficiency, in the different economies of the region, as a pre-requisite to successfully promoting and enhancing financial integration in the overall region. While quantitative indicators provide valuable insights into structural aspects of financial systems, qualitative factors - such as the reforms enacted and the policies implemented - play an equally critical role in shaping the evolution and development of financial markets.

Key findings

In the UfM region, countries feature notable disparities in financial market development, with significant sub-regional heterogeneity. Notably, the Balkans and Middle East and North Africa (MENA) countries display lower levels of financial market depth and access, compared to UfM countries in Western Europe (Figure ‎2.1, Figure ‎2.2). To be noted, the analysis of this indicator is limited to data only available until 2021 and therefore does not include further developments that may have occurred since then.

The EU exhibits the highest level of financial market access and depth in the region, making it the most developed and integrated sub-region within the UfM. However, critical reforms aimed at further easing cross-border capital flows are still in progress and remain at the forefront of political debate. Further development and integration of European financial markets are considered a priority goal as the European Commission advances with the implementation of the Savings and Investments Union (Draghi, 2024[4]). This initiative is considered crucial in overcoming remaining financial fragmentation and mobilising capital within the EU market, to support the green and digital transitions. An integrated European capital market would also have beneficial spillover effects in partner economies in MENA and Balkan countries outside the EU.

Türkiye’s financial market is aligned more closely with EU countries, even scoring above the EU average in terms of financial market depth. Israel compares to the EU average in terms of financial market depth.

The Western Balkan countries, despite their geographical proximity, are not yet integrated into the larger EU capital markets and continue to rely predominantly on domestic capital markets and banking systems. Despite positive economic growth and moderate increases in GDP per capita, financial markets in these countries remain less developed relative to their EU counterparts in terms of depth and access. These differences in financial market development highlight the need for further reforms and deeper efforts to promote more robust financial sector development and ensure sustainable improvements in market access at the regional level, over the long term.

• Notably, in 2021 Western Balkan countries scored near zero on both the financial market depth and financial market access indexes, ranking below all other sub-regions within the UfM.

In the MENA sub-region, despite some incremental improvements, countries continue to exhibit low levels of financial depth and access. Their financial system reflects a strong concentration in favour of banking services over non-banking alternatives. Indeed, equity and corporate bond markets in MENA are significantly underdeveloped compared to other countries at a similar development stage.

In addition, MENA countries suffer from a predominant role of the state in economic affairs, where SOEs and political affiliates often enjoy privilege access to credit, especially from state-owned banks (Senbet, 2020[5]), distorting the level playing field between state-owned enterprises and privately-owned companies. MENA countries offer financial assistance to SOEs through various channels. This support may come in the form of direct subsidies and transfers, equity injections for bailouts or restructuring, and efforts to reduce debt or resolve arrears. Governments may also extend direct loans or engage in "on-lending" where the state borrows funds and then lends them to SOEs.

• For example, in Egypt, there are more than 700 SOEs with combined assets of around 50% of GDP (OECD, 2024[6]). Subsidies to SOEs account for about 1.3% of GDP (OECD, 2024), excluding implicit subsidies like reduced capital costs, lowered dividends, guarantees, or bailouts.

• In Tunisia, the public debt of 50 SOEs (out of 111) to state banks represented 59.2% of total debt due to banks (World Bank, 2024[7]).

Although, MENA countries have recently registered some progress in terms of GDP per capita, improvements in the depth of financial markets are stagnating. Persistent issues, such as inadequate financial infrastructure indicate that these economies are still trailing in financial market development.

• Notably, the only country showing a modest increase in the financial market depth index is Lebanon, which records the highest value among the peers at 0.32 in 2021.

• The rest of MENA countries remained below the 0.2.

MENA countries show a very low level of financial market access as well. As noted in the previous UfM report (OECD, 2021[8]), none of the MENA countries exceeded the 0.5 threshold for financial market access (see Graph 2.2 below). Morocco and Jordan, followed by Egypt, exhibited the highest levels within the region. However, the remaining countries in the MENA region continued to display significantly lower financial market access, with indices close to 0.

In recent years, several countries in the MENA region have embarked on structural reforms to address weaknesses in their financial markets and institutions. These reforms are designed to align with international standards, attract greater foreign investment, and strengthen domestic markets to reinforce the banking sector and expand access to financial services.

In Morocco, the government has outlined its ambitions through the "New Development Model," a strategic framework underpinning the 2021–2026 government programme. This model places investment at the heart of economic revitalisation efforts. In 2022, the government introduced a significant initiative with the adoption of the new Investment Charter (Charte de l’Investissement.) This framework seeks to stimulate business investment through financial incentives and measures to enhance the business environment, as noted by the OECD (OECD, 2024[9]).

• The Investment Charter sends a strong signal of Morocco's commitment to reform, focusing on investment support mechanisms, improving the business climate, and establishing unified investment governance at the regional level. The reform aims to attract approximately MAD 30 billion in private investment from domestic and foreign investors (OECD, 2024[9]).

• To support the implementation of the new Investment Charter, a National Investment Commission was established in 2022 with expanded powers. This body now approves investment agreements between the state and investors, designates “strategic status” to key projects, and oversees the alignment of these investments with the country’s broader economic development objectives.

In Jordan, the Central Bank is advancing efforts to strengthen the resilience of the banking system, which plays a pivotal role in the country by enhancing its supervisory framework and aligning prudential regulations, including asset classification, with the Basel Core Principles. Additionally, the Central Bank, in collaboration with the government, is developing comprehensive guidelines and instructions for Emergency Liquidity Assistance. Efforts are also underway to further enhance the effectiveness of the Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) framework, ensuring continued compliance with international standards.

• In parallel, Jordan has taken significant steps to advance structural reforms as part of its Economic Modernisation Vision. This ambitious initiative seeks to foster a stable and conducive environment for business and investment, underpinning sustainable economic growth and increased private sector participation.

In Egypt, reform designed to enhance access and depth of financial markets and attract foreign investment remain a key policy focus. This includes initiatives targeting the legislative framework, such as the 2017 Investment Law, which lifted most ownership restrictions for foreign nationals, alongside broader macroeconomic reforms under an IMF-supported programme aimed at stabilising the economy and improve macroeconomic conditions.

In addition, recent legislative reforms in Egypt have strengthened the regulatory framework, including significant amendments to the Companies Law, Bankruptcy Law, and Customs Law.

• One of the most notable advancements is the ratification of the Bankruptcy Law in 2021, a landmark reform that decriminalises bankruptcy for firms. This law allows businesses to restructure and continue operations during insolvency proceedings, drawing comparisons with the United States’ Chapter 11 Bankruptcy Code. By reducing the stigma and risks associated with insolvency, this reform is expected to enhance credit availability, fostering greater bank lending to firms. Additionally, expedited insolvency resolution processes are widely acknowledged as critical drivers of economic growth (OECD, 2024[6]).

Complementing these reforms, the Central Bank of Egypt (CBE) is implementing its Financial Inclusion Strategy for 2022–2025 (OECD, 2024[10]). This strategy prioritises improving financial literacy, strengthening the financial capabilities of consumers and micro, small, and medium-sized enterprises (MSMEs), and enhancing the capacity of financial sector personnel. It also includes “train-the-trainer” programmes to ensure the widespread dissemination of financial expertise. Collectively, these efforts are pivotal to establishing a more inclusive, resilient, and growth-oriented financial system that underpins Egypt’s broader economic development objectives.

Box ‎2.1. The role of payment systems in financial development

A modern payment infrastructure is fundamental to foster financial development as it enhances the speed and reliability of transactions, reduce costs, and improve access to financial services, which are critical for both businesses and individuals.

A noteworthy development in this area is the Agreement for the Creation of an Instant Payment System in the Western Balkans. The initiative, signed in January 2025, led by the Bank of Italy in collaboration with the Central Banks of Albania, Bosnia-Herzegovina, Kosovo, Montenegro, and North Macedonia, aims to extend the functionality of TIPS (TARGET Instant Payment Settlement), the euro system’s platform for real-time payment settlements, to these countries.

Under this agreement, the Bank of Italy will supply an instant payment system to the Western Balkans, based on a clone of the TIPS service. This new platform will enable real-time payment processing in the local currencies of the participating countries and will include a bilateral link to integrate payments between the TIPS-served areas and the Western Balkans. Scheduled to become operational within 18 months, the initiative provides a technologically advanced and cost-effective solution to enhance financial integration in the region.

By replicating the success of the TIPS, this initiative is expected to play a pivotal role in improving the efficiency and interoperability of payment systems, thereby fostering greater financial and economic cohesion between the Western Balkans and the Euro system.

What policy action is needed?

• Increase the depth of financial markets and improve access to them to improve financial integration in the UfM. Reforms should aim to at overcome financial fragmentation and further ease cross-border capital flows.

• Diversify financial systems in the MENA countries to promote alternative instruments for investors and develop capital markets as a complement to bank financing, such as equity and corporate bond markets.

• Encourage financial literacy among households and companies to stimulate demand for financial securities and direct savings into the capital markets.

• Create a better level playing field for private sector activities by eliminating privileged access to finance for SOEs.

Data limitations

While the analysis provides valuable insights into financial market development across UfM countries, it is important to acknowledge certain limitations. The data used in this indicator extend only until 2021, and therefore do not account for significant global events that have since unfolded. Key developments, such as the post-COVID-19 economic recovery, tight monetary policy, the impact of Russia's full-scale invasion of Ukraine, and the conflicts in the Middle East, are likely to have substantial implications for the development of financial markets in the region.

Higher inflation and interest rates have severely hindered financial market access, widening disparities in financial market developments within the UfM group of countries. For example, rising borrowing costs have substantially increased pressure on issuance by central governments in MENA sub-region where gross borrowing declined by 10% in 2023 pushing refinancing risks up – in Egypt the decrease is equivalent to 26% of GDP (OECD, 2024[11]). These conditions, especially in lower-income economies where affordability and market liquidity are already constrained, negatively impacted market liquidity and development. As a result, countries that were already facing challenges in their financial sectors may experience additional new pressures and an urgent need to reform.

Furthermore, in the MENA region, ongoing conflicts are exerting additional strain on countries such as Lebanon and Egypt. This could not only stall progress in financial market development but also lead to broader economic instability, with potential spillover negative effects across the UfM region.

Definitions

The IMF’s Financial Market Development Index measures the depth, access, and efficiency of financial institutions and financial markets. It is based on the Financial Institutions Access Index and Financial Markets Depth, which summarise how developed financial institutions and financial markets are in terms of their depth (market size and liquidity); access (ability of individuals and companies to access financial services); efficiency (the ability of institutions to provide financial services at low costs with sustainable revenues and the level of activity of capital markets).

Overall, “financial market development” refers to the ability of markets to function as intermediaries and stimulate growth by reducing information and transaction costs. It is driven by an increased demand for capital from companies and households, and supply of capital by investors, along with macroeconomic stability achieved through appropriate polices.

Source: IMF Financial Development Index Database https://data.imf.org/?sk=f8032e80-b36c-43b1-ac26-493c5b1cd33b

Further reading

Alter, A., Hlayhel, B., Kroen, T., and Piontek, T. (2024), Financial Stability in A Higher-for-Longer Interest Rate Environment The Case of the Middle East and North Africa, International Monetary Fund, https://www.imf.org/en/Publications/WP/Issues/2024/04/05/Financial-Stability-in-a-Higher-for-Longer-Interest-Rate-Environment-The-Case-of-the-Middle-546920

International Monetary Fund (2022), Monetary and Capital Markets Department, The Sovereign-Bank Nexus in Emerging Markets, Global Financial Stability Report, USA, https://www.imf.org/en/Publications/WP/Issues/2022/11/11/The-Sovereign-Bank-Nexus-in-Emerging-Markets-in-the-Wake-of-the-COVID-19-Pandemic-524070.

Figure ‎2.1. Financial market depth in UfM countries

0 (lowest level) to 1 (highest level); GDP per capita, 2021

Note: GDP per capita is based on purchasing power parity (PPP) constant 2021 US dollars. Data for Montenegro are not available.

Source: Author based on the IMF Financial Development Index database and World Bank data. Financial Development - Story - IMF Data

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Figure ‎2.2. Financial market access in UfM countries

0 (lowest level) to 1 (highest level); GDP per capita, 2021

Note: GDP per capita is based on purchasing power parity (PPP) constant 2021 US dollars. Data for Montenegro is not available

Source: Author based on the IMF Financial Development Index database and World Bank data, Financial Development - Story - IMF Data

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Box ‎2.2. Developments in Islamic finance

Islamic finance provides a range of financial products and services comparable to those in the conventional financial sector but operates under distinct principles. Islamic banks adhere to the precepts of shari'ah (Islamic law), which prohibit the charging of interest (riba), speculative transactions (maysir), and investment in activities deemed non-compliant, such as gambling or the sale of alcohol (OECD, 2021[8]). Islamic finance has an established presence in the broader MENA region, particularly in the Gulf Cooperation Council countries (GCC), as well as in Southeast Asia. It is expanding also in Sub-Saharan Africa, Western Europe, and Central Asia, in jurisdictions with significant Muslim populations.

The distribution of Islamic finance assets reflects the industry’s growing global reach. In 2023, the GCC region accounted for more than half of total global Islamic finance assets, underscoring its dominant role in the sector. This position is primarily supported by the region’s well-established Islamic banking sector, which continues to expand. Additionally, the GCC has witnessed the further development of market of sukuk (Sharia-compliant financial certificates representing ownership in underlying assets) and increased interest in Islamic insurance, although these segments remain comparatively smaller. Other regions, including Sub-Saharan Africa, Europe and Central Asia, and Asia, represent smaller but expanding markets. While their current shares remain modest, they offer significant potential for growth, supported by increasing awareness and demand for shari'ah-compliant financial products in largely untapped markets (Figure ‎2.3).

The Islamic banking sector has demonstrated strong growth and resilience over the past five years despite global economic challenges. Financing growth has been primarily driven by the household, real estate, wholesale, and construction sectors, which have benefited from improved economic conditions during the post-pandemic recovery.

Among the fastest-growing markets, Islamic banks in the GCC region recorded an annual asset growth rate of approximately 8.4% at the end of 2023. This expansion was supported by non-oil sector growth, a robust labour market, and fiscal policies that encouraged investment and economic activity. Key contributors to financing growth included the real estate, household, construction, and manufacturing sectors.

In the broader MENA region (excluding the GCC), Islamic banking assets grew at a more moderate pace, increasing by 3.17 %year-on-year in the fourth quarter of 2023. Growth in this region remained largely aligned with that of conventional banks. However, oil production cuts, rising inflation, and trade imbalances in oil-importing economies constrained overall performance (Islamic Financial Services Board, 2024[12]).

Figure ‎2.3. Islamic finance by world region, 2023

Percentage of the total

Source: Islamic Finance Service Board, Stability Report (2024). Islamic Financial Services Industry: Stability Report, https://www.ifsb.org/wp-content/uploads/2024/09/IFSB-Stability-Report-2024-8.pdf.

Islamic capital markets, particularly sukuk issuance, continue to be a key driver of growth in the industry. Total sukuk outstanding reached USD 850 billion in 2023, reflecting a 2.45%year-on-year increase. Sovereign and quasi-sovereign issuances accounted for 52.51% of total sukuk issuances, up from 50.41% in 2022. Positive trends were observed across the GCC, Europe and Central Asia, and Asia. The East Asia and Pacific and GCC regions remained the primary hubs for sovereign sukuk issuances. Notably, 2023 saw several debut sovereign issuances, including from Egypt and the Philippines, reflecting broader adoption and acceptance of Islamic financial instruments (Islamic Financial Services Board, 2024[12]) (Figure ‎2.4).

Figure ‎2.4. Islamic finance by type of asset and region, 2023

USD million

Source: Islamic Finance Service Board, Stability Report 2024.

F2. Banking system

Why this indicator?

Analysing the banking sector within the UfM region is pivotal for understanding the overall financial sector and its integration dynamics. Given the crucial role of banks as primary financial intermediaries, their performance and stability significantly affect financial stability, capital flows, financial inclusion, foreign investments, and overall economic resilience.

Key indicators, such as the ratio of bank-assets-to-GDP, shed light on the size and depth of the banking sector relative to economic output, highlighting the capacity of banks to mobilize and allocate resources efficiently within the economy. Capital adequacy ratios are also important to assess the liquidity and solvency of existing banks.

Domestic credit to the private sector, on the other hand, offers another vital perspective, as it measures banks’ capacity to extend financing to businesses and households - a fundamental driver of economic growth and inclusion. The analysis of these indicators helps understanding the role of banks in supporting financial sector development and fostering greater integration across the UfM region.

Key findings

The banking sector is the dominant component of the financial landscape in the UfM economies. In the EU, although banks are still the most important actor in the financial sector, non-bank financial institutions and capital markets are growing in importance, driven by initiatives aimed at diversifying funding sources and enhance financial stability. However, capital markets in the EU remain less developed than in the United States and the United Kingdom.

In the Western Balkans and the MENA sub-regions, alternatives to bank-based financing are more limited. Banks account for approximately 90% of total financial assets in most countries within the Western Balkans sub-region, as of 2022, compared to around 50% of total financial assets held by banks in the Euro Area (OECD, 2024[13]).

The banks’ assets-to-GDP ratios in the Western Balkans remain comparatively low relative to both EU and MENA economies, suggesting potential for banking expansion in the sub-region (Figure ‎2.5).

• Egypt, Jordan, and Morocco are exceptions, with ratios of bank assets to GDP around 100% in 2021, a relatively high level by emerging market standards (OECD, 2024[6]).

Regarding capital adequacy ratios, despite some regional differentiation, the banking sector in the UfM generally appears to be well-capitalized and liquid.

Western Balkan banks are notably conservative in credit provision, with outstanding loans from commercial banks at approximately 43.6% of GDP in 2021, significantly below the EU average of 63.4% (OECD, 2024[13]).

In the MENA region, banks are broadly well-capitalised and continue to generate profits, although vulnerabilities persist. Capital adequacy ratios across the sub-region consistently exceed regulatory minimums, even as most COVID-19-related relief measures have been withdrawn (IMF, 2024[14]). Overall, profitability has rebounded in MENA since the pandemic, with banks showing positive return-on-asset (ROA) levels, except for Lebanon, which recorded a negative ROA in 2021 due to periods of prolonged economic distress (Figure ‎2.6).

Deposits are the primary funding source for banks in the MENA sub-region, which brings structural risks; the potential for sudden withdrawals in response to regional instability raises the risk of liquidity shortages.

In addition, banks in the sub-region remain heavily exposed to domestic sovereign debt, creating vulnerabilities. In economies where banks hold substantial shares of domestic sovereign debt, heightened exposure to interest rate risk and deteriorating sovereign credit conditions could pose spillover risks to financial sector stability (Deghi et al., 2022[15]) (World Bank, 2024[16]). Additionally, the sector faces risks from interest rate volatility and potential monetary policy tightening since inflationary pressures are still threatening the region and the global economy.

Bank lending to the government can crowd out financing for the private sector through two primary channels. First, when governments engage in significant deficit finance by borrowing from banks, this drives up interest rates, raising the cost of capital for the private sector. Second, banks tend to favour investing in government bonds, which are perceived as safer assets, rather than extending credit to private enterprises, which are viewed as riskier ( (Ayadi, 2015[17]); (Shetta and Ahmed, 2016[18]). Moreover, state-owned banks and pension funds may be subject to "moral suasion" from governments, encouraging them to purchase government bonds rather than lending to the private sector, thereby further constraining access to credit for businesses (EIB, 2022).

Limited access to finance acts as a constraint for private business sector activity. For instance, in Egypt, Algeria, and Albania, domestic credit to the private sector is approximately 30% of GDP (significantly below the EU average of 80%) underscoring a major constraint on financial access and economic growth. Conversely, countries like Jordan, followed by Morocco and Tunisia, have private sector credit-to-GDP ratios closer to the EU benchmark, reflecting more developed and competitive banking systems that support broader financial access for businesses and households.

Morocco has seen improvements in banking sector competition in recent years, driven by regulatory reforms, liberalization efforts, and an increased presence of foreign capital (OECD, 2024[19]).

Regional data for the UfM group shows a decline in private sector credit in 2023 compared to 2020 (Figure ‎2.7). This contraction is largely attributable to tighter global and national monetary policies as well as relatively high interest rates, which have constrained lending activity across much of the UfM region. Credit constraints have been further aggravated by the spillover effects of high interest rates in the Euro area, which have dampened lending activities by European banks in the region. This is particularly significant given that many European banks are active in non-EU countries within the UfM. For instance, cross-border banking operations by French and Italian banks, which have a strong presence in Morocco and Egypt, have been directly affected by the interest rate policies of the European Central Bank. Similarly, this dynamic play a critical role in the Western Balkans, where credit markets are closely interconnected with the European Union, especially with Germany, Austria, and Italy. This trend underscores the impact of monetary tightening on financial sector development and reinforces the need for strategic policy adjustments to support sustained financial access and resilience amidst shifting macroeconomic conditions.

Access to finance remains a significant constraint also for individuals across the UfM region, with the EU maintaining the highest levels. Data on the proportion of adults with a formal bank account reveal notable disparities both between and within sub-regions (Figure ‎2.8). In the Western Balkans, Bosnia and Herzegovina shows a relatively high level of financial inclusion, with account ownership rates approaching those in the EU.

In contrast, MENA countries record substantially lower account ownership levels, with less than 50% of adults holding a formal bank account.

Gender disparities in financial access are also particularly pronounced, with account ownership rates significantly lower among women compared to men. This gender gap underscores ongoing barriers to financial inclusion and highlights the need for targeted measures to improve access to financial services for underserved populations.

UfM and the broader MENA region. Banks from GCC countries present in the UfM region seek to tap into new markets, diversify their portfolios, and reduce their reliance in their regional market. They are leveraging their strong financial markets due to their substantial oil revenues, to expand their footprint in Europe, MENA, Türkiye and the Balkans. GCC banks are forming strategic partnerships with European banks that can help them expand their reach and offer a range of services to European clients. In addition, they bring expertise in Islamic finance offering Sharia-compliant financial products that cater to a niche market in Europe, MENA, and Türkiye. Although MENA countries face liquidity constraints and funding challenges, as well as regulatory complexities that impact the operations and profitability of GCC banks, the growth of Islamic finance in the region is acting as a facilitator for GCC investments. For example, Al Baraka Bank, based in Bahrain, is offering Islamic banking services in Tunisia. Similarly, improving relations between the GCC and Turkey have boosted investment in Türkiye 's Islamic banking system. Emirates NBD and Kuwait Finance House (KFH) have a significant presence in Türkiye. In addition, Qatar National Bank (QNB) and Burgar Bank from Kuwait remain also active there. Despite being particularly affected by the economic volatility of the Turkish economy and the economic challenges involved, these banks continue to see its market potential and seek to further diversify.

What policy action is needed?

• Strengthen macroprudential frameworks to mitigate risks in the banking system across the region, particularly where reliance on sovereign debt and deposits heightens liquidity and interest rate vulnerabilities.

• In MENA and the Western Balkans, governments should incentivise financial institutions to increase lending to the private sector, with a focus on SMEs.

• Promote financial inclusion, particularly in the MENA region, by expanding digital banking infrastructure, enhancing financial literacy programmes, and addressing gender disparities in access to banking services.

• Enhance governmental collaboration to promote regulatory convergence within the UfM and with the GCC to reduce operational barriers and support the regional expansion of financial institutions.

Definitions

The ratio of bank assets to GDP is calculated based on total assets held by deposit money banks as a share of GDP. Assets include claims on the domestic real nonfinancial sector which includes central, state and local governments, nonfinancial public enterprises and private sector. (Deposit money banks comprise commercial banks and other financial institutions that accept transferable deposits, such as demand deposits).

The bank return-on-assets (ROA) ratio measures the profitability of a business in relation to its total assets. The ROA is a company’s net income over its total assets.

The share of people aged 15+ with a bank account is the percentage of respondents who report having an account (by themselves or together with someone else) at a bank or another type of financial institution, female (% age 15+).

Domestic credit to private sector by banks, as a share of GDP, refers to the financial resources provided to the private sector by other depository corporations (deposit taking corporations except central banks), such as through loans, purchases of nonequity securities, and trade credits and other accounts receivable, that establish a claim for repayment. For some countries these claims include credit provided to public enterprises.

Figure ‎2.5. Bank assets to GDP ratio, selected UfM countries, 2021

Percentage of GDP

Source: World Bank, Global Financial Development, https://databank.worldbank.org/source/global-financial-development

Figure ‎2.6. Banks return on assets, 2021

Percentage (after tax)

Note: Data for the Palestinian Authority are missing.

Source: World Bank, Global Financial Development, https://databank.worldbank.org/source/global-financial-development

Figure ‎2.7. Domestic credit to private sector by banks

Percentage of GDP

Source: World Bank, Global Financial Development, https://databank.worldbank.org/source/global-financial-development

Figure ‎2.8. Share of people aged 15+ with a bank account, 2021

Percentage of population aged 15+

Source: World Bank, Global Financial Development, https://databank.worldbank.org/source/global-financial-development

Box ‎2.3. Development of the banking sector in MENA

Among the countries in the area, Egypt, Morocco and Jordan represents interesting examples providing relevant insights on the banking system in the MENA sub-region.

In Egypt the total assets of the banking sector grew to EGP 11.2 trillion by the end of 2023, reflecting a growth rate of 32.7%, slightly lower than the 35.1% recorded in the previous fiscal year. These assets accounted for approximately 91% of the financial system's total assets and around 130% of the nominal GDP as of December 2022 (Central Bank of Egypt, 2023[20]). The banking sector in Egypt relies mainly on deposits as its source of funding, which reached EGP 8.6 trillion by December 2022, contributing to a 76% increase in the sector's financial position. Household deposits, in both local and foreign currencies, make up roughly 60% of total deposits, providing a stable funding base for the banking sector.

Credit risk remains a critical challenge, as it constitutes the largest portion of risk-weighted assets and contingent liabilities. To address credit and concentration risks, Egypt has implemented several reforms in line with international best practices for credit risk management. These include maintaining capital requirements for credit risk as per Basel’s Pillar I and holding additional capital reserves in line with Pillar II. Notably, the country's non-performing loan (NPL) ratio decreased to 3.2% (Central Bank of Egypt, 2023[20]). However, a key characteristic of Egypt's banking sector is its high exposure to the public sector, which is expected to remain elevated, as Egyptian banks continue to serve as the primary source of government financing.

Morocco has one of the most developed banking sectors in Africa. Domestic credit to the private sector as a percentage of GDP is the highest in the MENA sub-region, reaching 83% in 2023 (World Bank). Morocco's advanced banking system has allowed its largest banks to expand significantly across Africa, often supporting the growth of large Moroccan corporations. Moroccan banks currently operate in around 35 African countries, with cross-border exposure accounting for over 20% of their assets and contributing to a third of their profits (EBRD, 2023[21]). The sector's profitability has been further boosted by higher lending rates and continued credit growth, as well as the abundant availability of low-cost current and savings accounts, which account for around 77% of total deposits and grew by 3.3% in 2023. This development created a momentum contributing to an increase in net interest income (IMF, 2024[22]).

Morocco is also moving forward with a series of policy reforms aimed at strengthening the resilience of its banking sector. Bank Al-Maghrib, the country's central bank, has further strengthened the micro prudential framework by improving the methodology for its twice-yearly macro stress tests, expanding the mapping of systemic risks, and incorporating new macroprudential tools, particularly those related to the real estate market and systemically important banks (Bank Al-Maghrib, 2023[23]).

Looking ahead to 2024, Bank Al-Maghrib plans to implement the Net Stable Funding Ratio (NSFR) to ensure that banks maintain a minimum level of stable funding to meet short-term obligations. In addition, the Internal Liquidity Adequacy Assessment Process (ILAAP) under Basel Pillar II will be implemented to ensure that banks have sufficient high quality liquid assets to withstand periods of financial stress (Bank Al-Maghrib, 2023[23]).

In Jordan the banking sector is large and dominates the financial system. Banks’ domestically consolidated assets amounted to 97% of financial sector assets, and 180% of GDP, at end-2021. Notably, in Jordan cross-border interconnectedness through ownership links is significant. On a domestic consolidation basis, loans make up half of total assets, securities account for 22%, of which the bulk is Jordanian government securities, while the rest is mostly cash and cash-like instruments. On the liability side, the share of deposits is 77%, other liabilities are limited, while equity accounts for 13% (IMF, 2023[24]). In recent years the Central Bank of Jordan implemented a new supervisory framework introducing key elements of Basel III capital requirement framework (IMF, 2023[25]).

F3. Portfolio investment flows

Why this indicator?

Portfolio flows provide information on the level of financial integration, from the perspective of capital markets. Inward portfolio flows (liabilities) represent the volume of portfolio investment coming into UfM countries (including MENA, EU and non-EU countries) from the rest of the world. Outward portfolio flows (assets) represent the volume of portfolio investment from local investors in all UfM countries towards other economies outside the group.

While the level of portfolio inflows constitutes a clear indicator of the attractiveness and openness of capital markets in the recipient country, portfolio outflows respond to several factors related to the countries of origin of foreign investors, as well as exogenous shocks at the regional and global levels, as illustrated below.

Key findings

Portfolio investment flows in the UfM region also show relevant heterogeneity by sub-region and country, given the different levels of development of capital markets and their degree of restrictiveness.

Among the UfM countries, Türkiye stands out as a significant recipient of capital inflows, both in absolute terms and as a percentage of GDP, followed by Israel (Figure ‎2.9). In addition, the data show that portfolio capital inflows in the Western Balkans, as a percentage of GDP, are comparable to those in the MENA sub-region (Figure ‎2.10,

Portfolio investment flows are highly sensitive to domestic and global shocks. During the period analysed (2013-2023), countries within the UfM region, particularly the MENA sub-region and Türkiye, exhibited significant volatility in portfolio capital inflows. These trends were marked by sharp peaks and troughs, reflecting fluctuations in investor sentiment and heightened sensitivity to national financial market conditions.

The years following the 2008 global financial crisis and the 2011 Arab Spring recorded negative net portfolio investment flows. Similar dynamics were observed following the COVID-19 pandemic, with inflows declining sharply, though some countries experienced modest recovery starting in 2022.

• Egypt experienced substantial fluctuations in portfolio investment during the period analysed, recording its highest level - equivalent to 9% of GDP - in 2017. This was largely driven by increased investment confidence following significant economic reforms and an improved macroeconomic outlook (World Bank, 2017[26]). However, Egypt also experienced pronounced negative inflows, particularly during 2021-2022, when foreign investors repatriated more funds than they invested. This capital flight was driven by the worsening economic crisis, compounded by the COVID-19 pandemic and the global repercussions of the war in Ukraine. Domestic factors, including abrupt exchange rate movements and elevated uncertainty, further contributed to this trend.

• As in Egypt, Lebanon, followed by Tunisia, recorded negative capital inflows due to their significant macroeconomic vulnerabilities, exacerbated by international crises. In particular, capital inflows in Lebanon recorded a dramatic decline equivalent to15% of GDP in 2022. The other countries of the subregion have positive flows on average, with some positive peaks of around 3% of GDP for Morocco and Jordan.

The Western Balkan economies - Albania, Bosnia-Herzegovina, Montenegro, and North Macedonia - - also exhibited frequent fluctuations in capital inflows (Figure ‎2.10). Montenegro experienced a notable peak in portfolio inflows (11% of GDP) in 2020, before declining -9% in 2021. The COVID-19 pandemic triggered significant capital outflows from these economies, and the war in Ukraine has since impeded recovery, keeping inflows close to zero. Albania, however, demonstrated a marked recovery in capital inflows between 2022 and 2023, highlighting its relative resilience compared to others in the sub-region.

The scale of the reduction in portfolio inflows following the COVID-19 pandemic and the war in Ukraine was exceptional, exceeding the declines observed during previous global crises, such as the 2008 global financial crisis. The COVID-19 shock differed from earlier episodes of capital flow volatility in that it represented a simultaneous, exogenous global disruption to both demand and supply, with impacts of unprecedented magnitude. This negative shock was exacerbated by escalating international tensions stemming from the war in Ukraine, rising inflation, and the concurrent energy and food crises. These factors collectively led to a record low in net portfolio inflows for MENA countries, further impacted by the conflict in the Middle East.

Lastly, the analysis of portfolio capital outflows from the countries in the study between 2013 and 2023 provides useful insights into the movement of investment capital from domestic to foreign portfolios. These outflows reflect investor sentiment, economic conditions, and the degree of global financial integration of each country.

According to the European Central Bank, euro rea investors reduced their holdings of securities issued by residents of the United States and the United Kingdom significantly in 2022. Notably, capital outflows from offshore financial centres and emerging market economies were mainly driven by disinvestments in securities issued by China, Mexico and Russia (Lane, 2024[27]).

• At the end of 2023, the total portfolio investment of the EU amounted to EUR 12.0 trillion, with almost half invested in the United States and the United Kingdom and a consistent portion directed towards offshore centres. This pattern is consistent across all asset classes, including liabilities, equities, and securities, and has remained stable in recent years. This is consistent with data from the previous years, as the United States and United Kingdom represent two of the main recipients of global portfolio capital flows. Moreover, for debt securities, euro area holdings were concentrated in securities issued by US residents (36%), the United Kingdom (18%) and EU Member States and non-euro area institutions (16%).

Israel stands out with significantly larger portfolio capital outflows compared to the other countries analysed, reflecting its higher degree of integration into global financial markets (Figure ‎2.12).

In the Balkans, where portfolio capital outflows have historically been limited, the data reveal a sharp increase in outflows starting in 2021. Montenegro, in particular, saw its portfolio capital outflows rise to 7% of GDP in 2023 (Figure ‎2.13).

Most countries in the MENA region exhibit low levels of portfolio outflows, indicating their limited integration or participation in global financial markets. For example, Jordan recorded a consistent negative value in portfolio outflows (as a percentage of GDP), signalling a sustained reduction in the foreign investment positions of Jordanian investors.

What policy action is needed?

• Improve macroeconomic stability by introducing specific measures to mitigate extreme stock price volatility. Also, as capital markets options expand and become more sophisticated measures designed to improve financial literacy would help to create confidence and mobilise savings towards capital investments.

• Streamline cross-border restrictions and differences in financial regulations and capital control practices within the UfM to further promote capital flows. Specific measures to manage capital flows in times of volatility could also be considered.

Definitions

Portfolio capital inflows are calculated based on the Net incurrence of liabilities in the portfolio investment section of the Balance of Payments. This includes all cross-border transactions and positions involving debt or equity securities, excluding those associated with direct investment or reserve assets. A positive value for the Net incurrence of liabilities indicates that non-residents are purchasing more domestic financial assets than they are selling.

Portfolio capital outflows are calculated based on the net acquisition of financial assets in the portfolio investment section of the Balance of Payments. A positive value under Net Acquisition of Financial Assets reflects that residents are purchasing more foreign financial assets than they are selling.

Figure ‎2.9. Portfolio capital inflows: MENA, Israel and Türkiye, 2013-2023

Percentage of GDP

Note: Algeria is not reported as the value is too close to zero. Data for Mauritania are unavailable.

Source: Authors, from the IMF Balance of Payments and International Investment Position, https://data.imf.org/en/datasets/IMF.STA:BOP and World Bank World Development Indicators | DataBank

Figure ‎2.10. Portfolio capital inflows: Western Balkans, 2013-2023

Percentage of GDP

Source: Authors, from the IMF Balance of Payments and International Investment Position, https://data.imf.org/en/datasets/IMF.STA:BOP and World Bank World Development Indicators WDI - Home

Figure ‎2.11. Total portfolio capital inflows: UfM MENA and Western Balkan countries 2010-2023

USD million

Source: Authors, from the IMF Balance of Payments and International Investment Position, https://data.imf.org/en/datasets/IMF.STA:BOP

Figure ‎2.12. Portfolio capital outflows, selected countries, 2013-2023

Percentage GDP

Note: Algeria, Morocco, Tunisia and Türkiye, and Mauritania are not reported as the value is too close to zero.

Source: Authors, from the IMF Balance of Payments and International Investment Position, https://data.imf.org/en/datasets/IMF.STA:BOP and World Bank World Development Indicators | DataBank

Figure ‎2.13. Portfolio capital outflows: Western Balkans, 2013-2023

Percentage of GDP

Source: Authors, from the IMF Balance of Payments and International Investment Position, https://data.imf.org/en/datasets/IMF.STA:BOP and World Bank World Development Indicators | DataBank

Box ‎2.4. Stock market capitalisation in the MENA countries

Financial liberalisation in the Middle East and North Africa (MENA) region, which began in the early 1990s, has included efforts to revitalise domestic stock markets to attract greater international participation in listed companies. On average, the market capitalisation of the countries analysed in 2021 was around 35% of GDP.

Notably, Jordan had the highest market capitalisation in 2011, at almost 90%, but this has since fallen significantly to almost 40%.

Morocco, on the other hand, has maintained a relatively stable and upward trend in its stock market capitalisation as a percentage of GDP, with one of the highest ratios in the region. Between 2011 and 2024, Morocco's stock market performance reflected improved investor confidence, driven by factors such as a stable exchange rate and consistent real GDP growth.

Tunisia and Lebanon have also shown an upward trend over the same period, although they remain below the regional average at around 20%. Algeria has the lowest market capitalisation of the countries studied, with figures close to zero.

Egypt, however, presents a different case, as its stock market has experienced significant volatility and a sharp decline in capitalisation, reflecting the complex financial challenges facing the country.

Despite the financial sophistication and increasing global integration of MENA equity markets such as those in Egypt, Morocco and Tunisia, these markets remain vulnerable to regional and international financial crises. This vulnerability stems from weak regional economic integration, coupled with deeper financial and economic linkages with more advanced economies, making them particularly sensitive to external shocks (Neaime, 2016[28]) (Cherif and Dreger, 2016[29]).

A large body of empirical evidence and literature suggests that stock market development can play a key role in promoting economic growth by stimulating investment and improving the efficiency of capital allocation. However, for this potential to be fully realised, it is crucial that a sound regulatory framework is in place, as well as measures to mitigate extreme stock price volatility - conditions that are not yet fully met in the MENA region.

Figure ‎2.14. Stock market capitalisation of domestic listed companies, 2024

Percentage of GDP

Note: Algeria is not included as value is too close to zero. Data for Lebanon refers to 2021.

Source: Global Financial Development | DataBank (worldbank.org).

F4. Remittance flows and costs

Why this indicator?

Remittances are generally understood as financial or in-kind transfers made by migrants to family members and relatives in their countries of origin.

Remittance flows and costs represent a relevant dimension of financial integration in the UfM region as they shed light on a form of capital exchange that is particularly significant in term of GDP and economic magnitude for MENA and Balkan countries. While the volume of remittances is primarily determined by the presence of immigrants from a net remittance-receiving country in a net remittance-sending country, it also depends on the existence of financial structures allowing such transfer of money and on the costs imposed by such structures.

Key findings

Remittances represent a significant source of external financing for lower- and middle-income countries, with a rising trend in recent years, peaking at USD 657 billion in 2023 at the global level (World Bank, 2024[30]). Notably, remittances have exceeded both ODA and FDI, which dropped to USD 388 billion in the same year (Figure ‎2.16). This trend is also evident in UfM countries, where the decline in FDI inflows - resulting in a negative value in 2023 - has been offset by a rise in remittances, which have become a solid and reliable source of external financing (Figure ‎2.15).

Through the allocation of the migrant labour force in foreign, more productive markets, countries of origin capture income gains that they would not have access to otherwise. Remittance flows are thus the result of a cross-border reallocation of labour and represent a regional distribution of gains generated in the remittance sending economy.

The recent increase in remittances can be explained by the substantial recovery of developed economies after COVID-19, where migrants are an important share of the labour force (World Bank, 2023[31]). Moreover, the World Bank KNOMAD (World Bank, 2021[32]) report pointed out that at least some of the increases in recorded inflows must be attributed to the shift many senders and recipients made from informal to formal remittance channels as a result of the movement restriction imposed during the pandemic.

The UfM countries in the MENA and Western Balkans sub-regions are predominantly net recipients of remittances. Intra-UfM remittance flows are considerable, with 11 out of the 13 countries analysed having at least one other UfM member as a significant remittance-sending partner. The exceptions are Egypt and Jordan, though both still receive substantial remittance inflows from UfM countries, particularly from Europe.

When examining remittances as a percentage of GDP between 2019 and 2023 in selected MENA and Western Balkan countries, the data reveals some notable trends (Figure ‎2.15).

• In most countries, remittances account for a substantial share of GDP, exceeding 5% in almost all cases. Exceptions include Mauritania and Algeria, where remittances contribute less than 1% of GDP, and North Macedonia, where they still represent3% of GDP.

• Economies in the MENA sub-region where remittance inflows constitute a much more significant proportion of GDP include Lebanon, the Palestinian Authority, and Jordan. In 2023, remittances accounted for approximately 35% of GDP in Lebanon, around 20% in the Palestinian Authority and 10% in Jordan, underscoring the vital role of the diaspora in sustaining these economies.

• Similarly, in the Western Balkans, remittances serve as an important source of external financing. In Albania, Montenegro, and Bosnia and Herzegovina, remittances exceeded 10% of GDP in 2023, representing a larger share than FDI inflows and highlighting their critical importance to these economies.

In absolute terms, the top recipient of remittance flows between 2020 and 2023 were Egypt and Morocco, where inflows exceeded USD 10 billion.

• Egypt has the highest level among the focus economies, peaking at USD 31 billion in 2021 and then declining to USD 19.5 billion in 2023. This significant drop may be linked with the widening gap between the official exchange rate and the parallel market, which may have resulted in a substantial share of remittances being unrecorded in official statistics.

• Morocco's remittance inflows reached USD 11.7 billion in 2023, maintaining an upward trend over the past seven years. Remittance flows have consistently outpaced FDI inflows, providing a critical source of income for Moroccan families, particularly during the COVID-19 pandemic and the September 2023 earthquake. According to data from Morocco's Exchange Office, the pace of remittance inflows increased following the earthquake (Bettin and Zazzaro, 2018[33])

Overall, most remittance inflows to both the MENA region - especially North Africa - and the Western Balkans originate from the EU27. The scale and distribution of these remittance flows largely mirror migration patterns, as countries that host larger expatriate communities from a specific country tend to be the primary sources of remittances for that country. For example, within the UfM, France is the dominant source of remittances for Algeria, Morocco, and Tunisia, while Italy serves as the main source for Albania and Egypt.

• North African countries are the largest recipients of remittances from the EU. In 2022, the highest remittance flows from EU-27 Member States to North Africa were from France (USD 4.7 billion), Italy (USD 2.0 billion), Spain (USD 1.9 billion), Belgium (USD 589 million), and Germany (USD 531 million). Morocco received USD 6.0 billion in remittances from the EU-27 in 2022, underscoring the country's significant migrant diaspora across multiple EU Member States. This strong remittance flow highlights the deep economic and social linkages between Morocco and the European Union (Kalantaryan and Mcmahon, 2021[34])

A key element in analysing remittance flows is the cost of transferring money. The data on the average costs of sending remittances to the countries analysed reveals a significant decline over recent years. Between 2019 and 2023, the cost of sending 200 USD fell in nearly all examined countries.

• Notably, seven of the assessed economies have achieved average remittance costs below the 5% target set by the World Bank and United Nations, which represents a key global policy objective. Despite these positive trends, remittance costs remain relatively high in certain countries, such as Algeria, Albania, and Lebanon.

The cost of sending remittances varies based on regional and national factors in both sending and receiving countries. These include the development of financial markets and institutions, the level of competition, regulatory frameworks, and the number of service providers operating in the market. For instance, in EU sending countries, the period from 2016 to 2021 witnessed a consistent reduction in remittance costs. This was largely driven by enhanced competition, spurred by the introduction of the EU's Payment Services Directive 2, the broader availability of digital financial solutions, and expanded distribution networks. A notable example is the Italy-Morocco remittance corridor, where the number of service providers increased from 12 in Q1 2015 to 19 in Q1 2021 (ICMD, 2021[35]).

National and regional decision-making and cooperation can play a critical role in increasing the volume of remittances transferred through formal channels. For example, the Western Balkans economies are gradually integrating into the EU Single Euro Payments Area (SEPA), which is expected to reduce the cost and improve the efficiency and reliability of cross-border transfers. This development could have a positive impact on remittance inflows, by lowering transaction costs and facilitating more seamless financial connectivity.

Reducing transaction costs and strengthening the role of financial institutions in cross-border exchanges are effective measures to encourage the use of formal remittance systems. Enhanced cooperation within the UfM to lower remittance costs would not only facilitate remittance flows and improve household incomes for migrants' families but also foster financial literacy and inclusion through greater interaction with banks and other financial institution.

UfM and the broader MENA region. The GCC region remains a critical hub for remittances to MENA countries, especially for Egypt, Morocco, and Jordan. In this regard, enhancing financial inclusion in both the UfM and GCC countries, adopting innovative technologies to lower transfer fees, and offering incentives to expatriates in the Gulf region to channel remittances into productive uses in the MENA recipient countries could further benefit the UfM region. Actions between host and recipient countries, in line with UfM policies, could enhance revenue streams and growth in MENA countries.

What policy action is needed?

• Reduce the existing rigidities in the financial markets of remittance-receiving countries. In addition, harmonise transfer rules across the UfM countries to further enhance financial integration.

• Facilitate the transfer of remittance flows through the banking sector, with the goal of helping recipient families enter the formal financial sector and establish a credit record. In addition, governments could consider providing incentives for the migrants sending the funds to invest in their country of origin through special financing instruments such as tax-exempt bonds.

• Enhance the payment infrastructure systems to facilitate transfers and promote financial inclusion. It would also be necessary to keep the costs of the transactions below 5% in the whole UfM region and to ensure transparency of transfers in a safe and legal manner.

• Consider remittances in relation with other capital flows being mobilised in the region. In fact, they should be seen as an additional factor conducive to the diversification of capital markets and the mobilisation of funds for productive investments. In this respect, dialogue with the business associations of the diaspora living in EU countries should be encouraged to stimulate investments in their countries of origin. Further analysis is needed, country by country, to explore how remittance flows are being channelled towards consumption, investments, imports and other uses.

Definitions

The IMF defines remittances as comprising two components: (a) "Compensation of employees," which refers to income earned by temporary migrant workers in the host country, including those employed by embassies, international organisations, and foreign entities, and (b) "Personal transfers," which include cash or in-kind transfers made or received by residents (whether migrants or non-migrants) to or from individuals in other countries (IMF, 2009).

Further reading

Kalantaryan, S. and McMahon, S. (2021), Remittances in North Africa: Sources, Scale and Significance, Publications Office of the European Union, Luxembourg, https://doi.org/10.2760/085524.

Ratha, Dilip;Chandra, Vandana;Kim, Eung Ju;Plaza, Sonia; Shaw, William, Leveraging Diaspora Finances for Private Capital Mobilization, Migration and development brief; KNOMAD Trust Fund Washington, D.C.: World Bank Group. http://documents.worldbank.org/curated/en/099740408142422676

Figure ‎2.15. Remittances, 2019-2023

Percentage of GDP

Note: Data for 2023 not available for Lebanon.

Source: World Bank World Development Indicators.

Figure ‎2.16. Global trends for remittances, FDI and ODA, 2000-2023

USD billion

Source: Authors, from the World Bank and OECD ODA.

Table ‎2.1. Remittance flows and costs analysis in MENA and Western Balkan countries

Countries	Flows, USD million	Key corridors	Cost (%) 2019 to send 200 USD	Cost (%) in 2023 to send 200 USD
Albania	2 036	Italy, Greece	6.9	5.6
Algeria	2 824	France	10.8	7.8
Bosnia and Herzegovina	1 868	Croatia, Serbia, Germany	3.6	3.8
Egypt	19 532	Saudi Arabia, United Arab Emirates, Kuwait	4.9	3.3
Jordan	4 485	Saudi Arabia, United Arab Emirates, Kuwait	3.9	3.3
Lebanon	6 696	Saudi Arabia, USA, Germany	6.9	5.2
Mauritania	109	France	N/A	N/A
Montenegro	805	Germany	N/A	N/A
Morocco	11 750	France, Italy	5.1	4.1
North Macedonia	109	Germany	7.0	2.1
Tunisia	2 650	France, USA, Italy	9.5	5.5
Türkiye	868	Germany	2.9	2.3
Palestinian Authority	3600	Jordan, Syria	5.7	1.9

Source: World Bank, Average transaction cost of sending remittances to a specific country (%) - Egypt, Arab Rep. | Data (worldbank.org)

Box ‎2.5. Remittances flows and the potential of diaspora bonds

Remittance flows represent an important source of financing in the UfM economies, often accounting for a significant share of GDP and serving as a lifeline for households in these countries. These flows play a crucial role in sustaining consumption, alleviating poverty, and supporting economic stability. However, the low investment-to-GDP ratios observed, particularly in MENA countries, indicate that a substantial share of remittance inflows has been diverted toward financing consumption surges and rent-seeking activities, rather than being allocated to foster long-term economic growth or private sector expansion. Consequently, the potential of remittances to catalyse investment and drive sustainable economic development remains largely untapped. Leveraging remittances for broader developmental impacts requires innovative financial tools. One such mechanism to channel remittance flows into financial markets and productive investments is diaspora bonds.

Diaspora bonds represent a key mechanism for leveraging diaspora finances into private capital mobilisation, mobilizing foreign currency financing at a lower cost compared to borrowing from institutional investors. Diaspora bonds are typically issued in small denominations, targeting a broad base of individuals, many of whom may lack extensive investment experience. While the distribution costs for these bonds can exceed those associated with traditional sovereign bonds marketed to institutional investors, advancements in mobile and digital platforms offer a cost-effective means of streamlining distribution (World Bank, 2023[1]).

Diaspora investors are often willing to accept lower returns for several reasons: they face reduced risks from devaluation or local currency conversion, as they are more likely to use local currency for personal or investment purposes; governments may offer diaspora members preferential treatment, such as access to land or other assets, reducing the perceived risk of default; and diaspora investors, particularly those with lower incomes in host countries, may find these bonds more attractive than traditional investment options like low-yielding bank deposits.

Issuing diaspora bonds also diversifies funding sources while fostering stronger connections with the diaspora, which can further support trade, foreign direct investment, and the transfer of skills and technology. Globally, successful examples include Israel’s long-standing issuance of diaspora bonds since 1951, which has raised over USD 50 billion, and India, which mobilized USD 11 billion across three issuances in 1991, 2000, and 2003. The Philippines has also tapped its overseas workers for bond financing, while Nigeria raised USD 300 million in 2017 to fund infrastructure projects (World Bank, 2023[1]). Nigeria's diaspora bond was notable for its innovative structure, targeting both diaspora and non-diaspora investors, and achieved 130 percent oversubscription despite a low interest rate of 5.6%. To mitigate exchange rate risk and enhance appeal, the bond was denominated in U.S. dollars and registered in UK and U.S. jurisdictions (AUC/OECD, 2021[36]).

Despite their potential, the scale of diaspora bond issuances remains small relative to the significant volume of remittance inflows, leaving considerable untapped potential. In Africa, for example, only five countries—Ethiopia, Ghana, Kenya, Nigeria, and Rwanda - representing just 12% of African migrants, have issued diaspora bonds since 2000, with mixed results (AUC/OECD, 2021[36]). To successfully harness diaspora savings, countries must carefully design bond structures, secure regulatory approval in high-income jurisdictions where significant diaspora populations reside and ensure competitive pricing. International institutions can play a vital role by supporting the assessment of diaspora savings potential and developing innovative risk-mitigating instruments to bolster investor confidence and enhance the attractiveness of these bonds.

F5. FDI position and flows

Why this indicator?

Foreign Direct Investment (FDI) positions (stocks) and flows are key indicators for assessing a region's financial development and level of integration into the global economy. High FDI stocks indicate sustained foreign capital inflows, which play a vital role in capital formation, project development, and economic growth. On the other hand, FDI flows measure new investments during a defined period, revealing a country’s ability to attract or retain foreign investment during that time. These flows directly reflect investor confidence in a region’s economic stability, governance, and regulatory environment, making them essential for evaluating the long-term sustainability, resilience, and financial development of a region.

Key findings

Regarding FDI stocks and flows across the UfM countries, there are marked structural differences between sub-regions, alongside notable intra-group variations.

As expected, EU Member States hold significantly higher FDI stocks, supported by robust domestic markets, advanced financial infrastructure, and a stable regulatory environment. Intra-EU investment remains strong, fuelled by cross-border capital flows facilitated by the single market and harmonized regulations (Figure ‎2.17).

• Historically, the EU has been a major recipient of global FDI; however, inflows sharply declined from USD 266 billion in 2021 to USD -85 billion in 2022, before recovering to USD 59 billion in 2023 (UNCTAD, 2024[37]). Despite these fluctuations, greenfield investment growth has remained positive, accounting for approximately 25% of global greenfield investments.

The Balkan countries have remained net recipients of inward FDI, recording growing FDI inflows from 2005 to 2023 (Figure ‎2.19). FDI inflows as a share of GDP in these economies have consistently outpaced those of many UfM countries, reflecting sustained progress in removing statutory barriers to foreign investment, alongside a conducive business climate and strategic geographic positioning (Figure ‎2.18).

In fact, the primary sources of FDI in the Western Balkans economies are EU members, particularly Austria, Germany, and Italy. These countries have been increasing their investments in the region, as geographical proximity and competitive labour costs facilitate the nearshoring process of some value chains in sectors such as medical equipment and automotive manufacturing.

However, FDI inflows are still mainly focused on non-export-oriented sectors. For example, manufacturing accounts for less than 10% of FDI inflows in Albania and Montenegro as most investments are directed toward real estate (OECD, 2024[13]). A more sector-specific approach that leverages the economies' competitive advantages will be necessary. In this regard, the war in Ukraine in 2022 reignited political attention toward the stalled EU accession process for the Western Balkans. The comprehensive reform programs resulting from the accession processes, along with the anticipated deeper integration with the EU, are expected to enhance the attractiveness of these countries, leading to a rise in foreign investment.

The MENA region remains a net recipient of FDI, with intra-UfM investment dominating in most countries. The exception is Egypt, where extra-UfM investment, particularly from the United Kingdom, plays a more important role (Figure ‎2.19).

A regional breakdown of inward FDI stocks indicates that the EU-27 remains the primary source of investment in the MENA region, complemented by significant contributions from the United States (Figure ‎2.20). Gulf economies are also emerging as key investors, with substantial investments in Morocco (USD 11 billion), Algeria (USD 2.2 billion), and Tunisia (USD 1 billion) in 2023. Asian investments have also been present in almost all countries that are the focus of our analysis. Intra-MENA FDI flows remain limited, even among neighbouring countries, mirroring lagging regional integration.

Unlike other emerging and developing economies, FDI inflows in the MENA region have consistently underperformed, hindered by persistent structural challenges such as weak governance, corruption, insufficient competition, skills gaps, and a lack of private sector dynamism. These issues have been further exacerbated by oil price fluctuations and political instability due to the 2011 uprisings (OECD, 2021[38]) and subsequent external shocks. As a result, by 2023, FDI inflows in nearly all countries analysed are lower than in 2005. Yet, the strategic geopolitical location of certain MENA countries continues to preserve their market potential for foreign investment (Figure ‎2.22).

• Egypt has consistently attracted FDI inflows, averaging 7 USD billion per year between 2005 and 2023. However, the data show two major downturns: one corresponding with the January Revolution in 2011, when inflows registered a negative figure (USD -480 million), and the second during the economic crisis of 2020-2021. This trend was reversed in 2023, following a new investment law (2018) which provides a wide array of guarantees to new investments, a comprehensive macroeconomic adjustment program, and the beginning of a public divestment program. Furthermore, greenfield investment in Egypt remains strong, reaching USD 41 billion in 2021. Egypt is currently upgrading its FDI strategy, in collaboration with the World Bank, to monitor progress over time under a Monitoring and Evaluation Framework. A dynamic and interactive investment map is also being used to help investor navigate through different opportunities,

• Morocco has demonstrated the ability to attract relatively high levels of FDI, bolstered by proactive investment policies and a more favourable business environment. Regional centres have been established across the country, operating along four main axes: governance and the business environment; transparency and visibility of the investment promotion agency; local incentives; and adequate positioning for every region. The Moroccan Investment and Export Development Agency promotes investments and establishes targets, considering benchmarks from other countries. Between 2005 and 2022, Morocco experienced stable FDI inflows, suggesting a relatively lower-risk and conducive investment climate.

• Algeria, with a comparable FDI stock, continues to attract investment, primarily due to its substantial energy resources. Algeria is the only country with a substantial amount of FDI coming from North Africa (USD 725 million) in 2022.

• Lebanon has also introduced investment plans to attract FDI, mainly in infrastructure and technology, as well as additional measures to improve transparency by publishing all existing investment projects.

• Tunisia has undertaken several efforts to lift restrictions for foreign investors and make the country a talent driven destination by capitalizing on the know-how and skills existing in the country. In this respect, the Tunisia’s Investment Promotion Agency has aligned its investment promotion targets with the SDGs, giving priority to those investments that respect environmental goals and providing fiscal incentives to implement the green transition, while assessing more rigorously the sectoral impact of new investments.

In terms of sectoral concentration, FDI flows in the region are predominantly directed towards non-tradable goods and capital-intensive sectors such as real estate, construction, mining, and energy (primarily oil and gas). In contrast, a relatively small share of FDI has been allocated to the manufacturing sector. Evidence indicates that these capital-intensive sectors have made only a limited contribution to productivity growth and job creation (OECD, 2021[38]).

UfM and the broader MENA region. FDI from GCC countries in UfM economies is increasing substantially, particularly in Europe and the MENA subregion, where geographic proximity and cultural ties enhance cooperation. These investments are aimed at boosting economic diversification and supporting efforts to reduce oil dependence in GCC economies.

What policy action is needed

• Reduce FDI restrictions, simplify approval mechanisms and eliminate obstacles to foreign investments to further attract investors interested in the large potential Mediterranean market and relative competitive.

• It is essential that recipient countries establish their own requirements in terms of contributions of new investors to generating fiscal revenues, job creation, technology and know-how transfers, and overall spillover effects into local and national companies.

Definitions

FDI stock (position) represents the total value of FDI at a specific point in time, cumulative value of all past and ongoing investments by foreign entities in a country (inward FDI stock) or by domestic entities abroad (outward FDI stock).

Inward FDI measures investment by non-resident investors in the reporting economy. Outward FDI measures investment by residents of the reporting economy in partner economies.

FDI flows measure cross-border direct investment during a given period of time, usually a year or a quarter.

Greenfield investment has been defined as expenditures, regardless of the source of funding to establish new business Tunisia has aligned its investment promotion targets with the SDGs, giving priority to those investments that respect environmental goals and providing fiscal incentives to implement the green transition.

Further reading

World Bank (2023), The Western Balkans Should Leverage Foreign Direct Investment to Integrate in Global Value Chains, Washington, DC. https://blogs.worldbank.org/en/psd/western-balkans-should-leverage-foreign-direct-investment-integrate-global-value-chains

Box ‎2.6. Sustainable investment in MENA

The 2023 OECD Africa’s Development Dynamics report highlights that the majority of foreign investment in the region has been directed towards sectors with detrimental environmental impacts (AUC/OECD, 2023[39]). Despite North Africa contributing only 1.5% of global carbon dioxide (CO2) emissions—on par with Southern Africa and Latin America and the Caribbean in per capita emissions—over half of these emissions stem from power generation and transport, sectors that have attracted considerable private financing. For instance, more than half of the USD 14 billion allocated through OECD export credit agencies from 2012 to 2021 was directed towards the energy sector, followed by industry (27%) and transport and storage (19%).

Due to the significant natural resource reserves of Algeria, Libya, and Mauritania, around three-quarters of FDI in the energy sector over the past decade has targeted coal, oil, and gas projects. Between 2010 and 2020, only USD 21 billion of the USD 78 billion invested in the energy sector was allocated to renewable energy, with the remainder going to fossil fuels. A similar pattern was observed in Jordan, where renewables accounted for 10% of greenfield FDI in the energy sector between 2003 and 2018, while 90% was directed toward fossil fuels and nuclear energy (OECD, 2022[40]).

Only in recent years the region has become a destination for global green megaprojects. In 2023, Mauritania announced the largest greenfield project worldwide: a USD 34 billion green hydrogen initiative, equivalent to several times the country’s GDP. Egypt has also secured agreements for green energy projects totalling USD 10.8 billion, while Morocco is planning a USD 2 billion hydrogen project (UNCTAD, 2024[37]).

Figure ‎2.17. Inward FDI stocks in UfM countries, 2023

USD million

Note: FDI stocks (or positions) are a measure of the total level of direct investment at a precise point in time, usually at end year or quarter, reflecting the accumulation of investment in or by the reporting economy. Countries are ranked in order of decreasing share of intra-UfM investment position.

Source: Authors, based on IMF Coordinated Direct Investment Survey, https://data.imf.org/en/datasets/IMF.STA:DIP and the OECD FDI flows.

Figure ‎2.18. Inward FDI stocks in UfM countries, 2023

Percentage of GDP

Source: Authors, based on IMF Coordinated Direct Investment Survey, https://data.imf.org/en/datasets/IMF.STA:DIP, and the OECD FDI flows

Figure ‎2.19. Inward and outward stocks in UfM countries, by sub-region, 2023

USD million

Source: Authors, based on IMF Coordinated Direct Investment Survey, https://data.imf.org/en/datasets/IMF.STA:DIP.

Figure ‎2.20. Inward FDI stock by partner region, 2023

USD million

Source: Authors, based on IMF Coordinated Direct Investment Survey, https://data.imf.org/en/datasets/IMF.STA:DIP

Box ‎2.7. South-South cooperation: GCC investments

The Gulf Cooperation Council (GCC) countries are emerging as significant sources of investment at the global and regional scale. Companies based in the Gulf, for example, have intensified their activities across the African continent, pledging 73 greenfield FDI projects worth over USD 53 billion in 2022 alone (FDI Intelligence/Financial Times, 2024[41]).

The impact of GCC investments is particularly pronounced within the MENA sub-region. The United Arab Emirates (UAE) is the largest investor, accounting for more than half of all greenfield investments originating from MENA countries in the last two decades followed by Bahrain, Saudi Arabia, and Qatar (OECD, 2021[38]). GCC investments are concentrated in real estate and construction projects -GCC firms have been responsible for 70% of all real estate and construction investments over the last two decades.

In recent years, the GCC countries are increasingly channeling their investments into emerging technologies linked to the green transition, reflecting their strategic push to diversify from hydrocarbons. These investments are fostering greater intra-regional cooperation, generating positive spillovers in terms of technology transfer, sustainable development, and economic diversification. For instance, in 2023, Saudi Arabia’s ACWA Power signed a framework agreement to develop a green hydrogen project in Egypt’s Suez Canal Economic Zone. The initiative, with an investment exceeding USD 4 billion, aims to produce 600,000 tons of green ammonia annually in its first phase. Similarly, the Abu Dhabi National Energy Company plans to allocate USD 1.6 billion toward renewable energy projects in Morocco. In Mauritania, the UAE’s Infinity Power has signed a memorandum of understanding (MoU) for a USD 34 billion green hydrogen project, marking another significant GCC-backed venture. Additionally, investments are expanding into the digital economy, with a particular focus on data centres. UAE-based Gulf Data Hub has signed an MoU to develop three data centre complexes in Egypt, underscoring the region’s growing interest in digital infrastructure.

The most recent and significant investment from a GCC country is the United Arab Emirates' 35 USD billion pledge under a landmark agreement with Egypt in 2024. As part of this investment, the UAE secured development rights for the Ras El Hekma peninsula, with plans to establish a large-scale residential and tourism complex. This investment has played a pivotal role in mitigating Egypt’s near-term balance of payments pressures during a period of heightened macroeconomic stress. By bolstering foreign exchange reserves, the funds have provided critical support for rebuilding external buffers, facilitating the liberalization of the exchange rate regime, and advancing key reforms under Egypt’s IMF-supported program.

Figure ‎2.21. FDI inflows to the EU and at the global level

USD million

Source: Authors, based on UNCTAD, World Investment Report, https://unctad.org/topic/investment/world-investment-report

Figure ‎2.22. FDI inflows to MENA countries and Türkiye, 2005-2023

USD million

Source: Authors, based on UNCTAD, World Investment Report, https://unctad.org/topic/investment/world-investment-report.

Figure ‎2.23. FDI inflows to the Western Balkan countries, 2005-2023

USD million

Source: Authors, based on UNCTAD, World Investment Report, https://unctad.org/topic/investment/world-investment-report

Table ‎2.2. Value of announced greenfield FDI projects, by destination, 2013–2023

USD million

	2013	2014	2015	2016	2017	2018	2019	2020	2021	2022	2023
European Union	99 221	78 392	95 457	105 112	132 493	181 885	178 509	150 811	227 166	265 275	262 327
Albania	62	50	137	34	13	219	57	343	249	170	1 049
Bosnia and Herzegovina	827	976	3 089	822	639	737	532	465	356	693	1 905
Montenegro	852	1 136	43	614	49	2 009	572	581	103	140	1 702
North Macedonia	591	852	354	339	135	917	287	137	1 025	623	592
Israel	1 987	375	250	1 096	7 133	6 561	1 066	1 647	27 964	1 832	662
Algeria	4 173	1 111	779	7 353	1 357	9 270	959	80	818	240	691
Egypt	4 978	18 000	16 038	41 823	40 317	13 628	14 229	2 119	14 190	108 072	41 904
Morocco	2 588	5 253	3 970	6 607	3 931	5 115	3 352	2 826	3 797	15 590	20 362
Tunisia	283	2 077	309	340	744	615	2 645	429	298	407	412
Mauritania	8	1 373	-	21	37	-	158	7	379	55	34 000
Jordan	11 237	1 532	297	2 776	599	291	2 122	256	412	383	11 014
Lebanon	69	1 127	35	39	70	121	287	27	0	12	16
Türkiye	15 237	4 314	5 394	8 401	9 291	15 984	3 746	4 754	4 715	4 233	13 255

Source: Authors, based on UNCTAD, World Investment Report, https://unctad.org/topic/investment/world-investment-report

Box ‎2.8. Financial integration through nearshoring and investment treaties

The COVID-19 pandemic and escalating geopolitical tensions have prompted a strategic reassessment of global supply chains, with near shoring and friend-shoring emerging as key strategies for strengthening resilience and reducing dependency on distant markets. Near-shoring, which involves relocating supply chains closer to core markets, and friend-shoring, which focuses on deepening trade and investment ties with reliable partners, are increasingly seen as effective ways to enhance economic stability and improve the predictability of trade flows.

The geographical proximity of MENA countries and the Western Balkans to the European Union offers valuable opportunities to leverage these trends, particularly in sectors such as manufacturing, logistics and energy. Both the MENA region and the Western Balkans could significantly benefit from deeper financial integration to support near-shoring and friend-shoring objectives. The Western Balkan economies, in particular, have demonstrated consistent success in attracting foreign direct investment (FDI), supported by favourable business conditions and efforts to align regulatory frameworks with international standards. The continued high levels of FDI inflows can be attributed to the region’s strategic connectivity, attractive tax incentives, and relatively low labour costs, which have made the Western Balkans an increasingly appealing investment destination for EU companies, especially after the COVID-19 pandemic (OECD, 2024[13]).

However, maintaining investment attractiveness and mobilising investment will require improvements in infrastructure, governance and education systems, as well as the integration of small and medium-sized enterprises (SMEs) into global value chains. Fostering workforce upskilling and promoting innovation in high-value sectors are essential steps to unlock the region’s potential as a near-shoring destination.

Despite progress in regional economic cooperation, significant obstacles persist, particularly in relation to investment protection, regulatory consistency, and the alignment of financial standards across countries. Fragmented governance structures and inconsistent regulatory frameworks continue to hamper effective financial integration between the EU, MENA, and Western Balkan economies.

Investment treaties, especially those with strong financial integration provisions, can play a key role in addressing these challenges. MENA and Western Balkan countries have been active in signing bilateral investment treaties (BITs) and treaties with investment provisions (TIPs). Together, these countries have concluded 383 BITs and TIPs currently in force, with an additional 96 agreements signed but not yet operational. However, many of the existing agreements are outdated and do not sufficiently address modern issues related to financial integration, investment protection, or regulatory alignment (UNCTAD Investment Policy Hub, 2025[42]).

The OECD has stressed the importance of modernising investment agreements to include provisions on financial services, efficient dispute resolution mechanisms, and enhanced investor protections to create a more predictable and transparent investment environment (OECD, 2021[38]). Updating these frameworks could significantly improve the investment climate, facilitate cross-border capital flows, and strengthen economic resilience.

F6. FDI regulatory restrictiveness

Why this indicator?

The attractiveness of an economy to foreign investors is influenced by several factors, including market size, economic structure, and the policies and institutions that contribute to create a suitable and transparent business environment. For foreign investors, the regulatory framework governing their entry and operations in the host country is crucial. Many countries impose certain legal or regulatory restrictions on FDI, often aimed at protecting specific domestic industries or sectors.

Key findings

On average, MENA economies impose greater restrictions on foreign investors' entry and operations compared to peer UfM economies (Figure ‎2.24). In fact, restrictiveness scores for the FDI indicate higher levels of openness in Western Balkan and EU economies than in MENA economies.

• Morocco stands out as an exception within the region, maintaining a high level of openness across all sectors, including financial services.

• Since 2018, there has been a noticeable reduction in FDI restrictions in Lebanon and Algeria, though these countries still exhibit higher levels of restrictiveness compared to other UfM economies.

Western Balkan countries perform similarly to the EU average overall.

In the financial sector, restrictions on banking activities remain notably higher than in other financial services, such as insurance or securities trading. One exemption is Jordan, which has one of the lowest levels of restrictions in the financial sector compared to its peers in the MENA region (Figure ‎2.25). This is attributed to the advanced development of Jordan's banking sector, one of the most established in the region (OECD, 2021[38]).

• Otherwise, despite banks being the primary source of financing for both individuals and businesses in MENA countries, the banking sector remains highly protected, limiting cross-border activities and restricting the penetration of foreign banks.

• Opening the banking sector to foreign investments can offer several potential advantages. The presence of foreign banks can improve access to foreign capital and create new financing opportunities. In times of instability, foreign banks can help mitigate cross-border capital flight by providing a safe alternative for foreign investors to move their capital from domestic banks to locally based foreign ones. However, the successful integration of foreign banks into domestic markets, and the maximization of these benefits, depend on a robust legal framework.

• This also requires modernized legislation covering areas such as bankruptcy, risk management, accounting, capital requirements, and lending. Many countries have made efforts to implement international standards in these areas, though the degree of adoption varies.

The FDI restrictions examined refer primarily to discriminatory measures explicitly laid down in regulations or legislation. However, additional de facto barriers to foreign investment may also exist. These include institutional or informal barriers such as excessive red tape or corruption, inconsistent enforcement of regulations, market distortions due to state ownership in strategic sectors, preferential treatment of certain firms, insufficient competition, skills shortages, inadequate infrastructure, political instability, poor governance and weak regional integration.

UfM and the broader MENA region. In recent years the GCC countries have attracted substantial FDI inflows and are increasingly attracting EU investors especially in Saudi Arabia, Qatar and Oman. However, European investors find various obstacles in the region. These include barriers related to the predominance of the public sector in the business and job markets, ownership requirements, length and cost of legal procedures, investment screening processes, difficulties for foreign companies to participate in procurement bids, restricted financial markets, and difficulties in hiring locally. For example, in Saudia Arabia, the FDI restrictiveness index has improved since 2018, but it was still at 0.3 in 2023, comparable to Algeria and Jordan, as opposed to 0.1 in Türkiye and Israel, and almost no restrictiveness in the EU.

What policy action is needed?

• Foster coordination of reforms between MENA countries to harmonise legislation and regulations applied to foreign investors.

• Eliminate de facto institutional and informal barriers, notably with respect to excessive red tape or weak governance, market distortions due to state ownership in strategic sectors, preferential treatment of certain firms, and skills shortages.

Definitions

The OECD FDI Regulatory Restrictiveness Index assesses the openness or restrictiveness of countries toward foreign investment by measuring statutory barriers across four key dimensions: i) foreign equity limitations, ii) screening and prior approval requirements, iii) restrictions on key foreign personnel, and iv) other operational constraints on foreign enterprises. The index helps to explain differences in FDI attractiveness between economies. It should be interpreted in the light of other factors such as the implementation of FDI regulations, the presence of state ownership in key industries, the size of the domestic market.

In the financial sector, the index evaluates restrictions within banking, insurance, and other financial activities, including securities and commodity exchanges, brokerage, investment advisory services, trust and fund management, financial leasing, credit activities, factoring, and venture capital.

Source: https://www.oecd.org/en/data/indicators/fdi-restrictiveness.html https://www.oecd.org/en/data/indicators/fdi-restrictiveness.html

Figure ‎2.24. FDI restrictiveness, 2023

Index 0 (no restriction) to 1 (closed)

Note: Data for Cyprus, Mauritania and Malta are missing

Source: OECD FDI restrictiveness Index.

Statlink

Figure ‎2.25. FDI restrictiveness in the financial sector, 2023

Index 0 (no restriction) to 1 (closed)

Note: For Cyprus, Mauritania, and Malta data are missing. For Montenegro, Albania and Türkiye the value is 0. Other Financial Services include securities and commodity exchanges, securities and commodity brokerage, investment advisory services and related activities; trusts, funds and fund management activities; financial leasing, other credit activities, factoring, venture capital.

Source: OECD FDI restrictiveness Index

Statlink

Figure ‎2.26. FDI restrictiveness by financial assets, 2023

Index 0 (no restriction) to 1 (closed)

Note: For Cyprus, Mauritania and Malta data are missing. For the EU Morocco, and Montenegro and the value is zero.

Source: OECD FDI restrictiveness Index

Statlink

F7. FDI contribution to gender equality in employment and wages

Why this indicator?

Foreign direct investment can have a significant impact on gender equality in host countries by supporting the development of sectors with higher female participation, notably services (e.g. professional services, hotels and restaurants, information and communications). The operations of foreign affiliates of multinational enterprises can introduce good practices shaping the employment and working conditions of local women. Beyond direct employment, FDI can also affect gender outcomes in domestic firms indirectly through business linkages, competition and labour mobility.

Key findings

The analysis of greenfield FDI data in MENA countries reveals a concentration of investment in sectors with lower female employment and wider gender pay gaps (Figure ‎2.28).

• A significant portion of FDI in this sub-region is directed toward construction, the mining and energy sectors, and manufacturing (OECD, 2021[38]). In contrast, smaller shares of FDI are allocated to services and other sectors with a higher representation of women.

• The data from MENA countries further indicate that the gender pay gap is, on average, wider in manufacturing and services, but narrower in sectors like construction, mining, and energy—industries that employ fewer women but a higher proportion in skilled roles (Montinari, 2023[43]).

The OECD’s 2022 FDI quality review for Jordan noted that over the past two decades, about 70% of greenfield FDI flows to Jordan has gone to energy, namely oil and gas, and real estate services, two sectors with a labour force where men predominate. About 20% of greenfield FDI flows went to the manufacturing sector and only 10% went to market services such as finance, ICT, transport and tourism (OECD, 2022[40]).

• Greenfield FDI in manufacturing tends to be concentrated in industries with a relatively high proportion of female employees, especially in the clothing and textile sector. This pattern is common in several MENA countries with large food and clothing industries, such as Tunisia and Egypt. In general, there is a positive correlation between greenfield FDI in manufacturing and female employment in countries with a comparative advantage in low value-added industries. These industries typically rely on low-cost labour, including a significant number of female workers (IMF, 2018[44]).

• In Jordan, greenfield FDI in manufacturing is also concentrated in industries with a higher share of firms with female managers and main owners. These are the same industries that employ a higher proportion of female workers, namely food, clothing and textiles. This suggests that these FDI-intensive industries create jobs for women not only in low-skilled, labour-intensive positions such as assembly work, but also in higher-skilled jobs such as management.

The study shows that foreign investors in Jordan outperform domestic firms on several performance measures, but not always in terms of gender equality. While foreign firms tend to have a higher proportion of female employees, they are less likely to have female top managers and female main owners than domestic firms. Similar results are also found in Egypt and Tunisia (OECD, 2022[40])

A parallel study on Tunisia shows that FDI flows are relevant in sectors with relatively high female employment, such as textiles and electrical/electronics.

• Female employment in Tunisia's manufacturing sector is relatively high compared to other MENA countries; and even higher in foreign-owned firms. although women are often employed in lower-skilled positions

• In foreign-owned firms, women make up 58% of the workforce, higher than in domestic firms, where 37% of employees are women (OECD, 2024[45]).

All these elements suggest that, while FDI can have a positive impact on female participation in the labour force, its contribution remains limited. FDI is only one of many factors influencing female employment and wage disparities between males and females. The degree to which FDI fosters gender equality in employment and wages is also influenced by the presence of national policies promoting gender equality and supporting women’s economic empowerment, particularly in contexts with low female labour force participation.

What policy action is needed?

• Integrate gender-related provisions within their investment legislation to better balance investor rights and obligations. This approach would align national laws with international standards for responsible business conduct, such as those outlined in the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct (OECD, 2023[46]).

• Consider the implementation of policies such as labour regulations on minimum wages, employment protection, social security, maternity and childcare support, sexual harassment, and flexible working arrangements, as they also affect the quality of jobs created and supported by FDI.

• Promote policies aimed at increase access to education and health care to develop an active and well-educated female labour force.

Further reading

Montinari, L., 2023, 'Harnessing Foreign Direct Investment for Gender Equality', in Joining Forces for Gender Equality: What is holding us back?, OECD, Publishing, Paris, https://doi.org/10.1787/67d48024-en.

OECD (2022), FDI Qualities Review of Jordan: Strengthening Sustainable Investment, OECD Publishing, Paris, https://doi.org/10.1787/736c77d2-en.

Ouedraogo et al. (2018), Foreign Direct Investment and Women Empowerment: New Evidence on Developing Countries, International Monetary Fund, International Monetary Fund, https://doi.org/10.5089/9781484339732.001.

Figure ‎2.27. Female participation in the labour force in selected UfM countries

Percentage of the total labour force

Source: World Bank, https://genderdata.worldbank.org/en/indicator/sl-tlf-acti-zs

Figure ‎2.28. Greenfield FDI and ratio of female to male earnings

By percentage of female employees

Source: OECD elaboration based on fDi Markets’ greenfield FDI tracking database (2022), https://www.fdimarkets.com; and ILOSTAT Labour statistics (2022), https://ilostat.ilo.org/data.

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