Transcript of the IMF Middle East and Central Asia Department Press BriefingThursday, October 12, 2012
Masood Ahmed, Director, Middle East and Central Asia Department
Randa Elnagar, Press Officer, External Relations Department
|Webcast of the press conference|
RANDA ELNAGAR: Welcome. My name is Randa Elnagar. I'm happy to present Mr. Masood Ahmed, Director of the Middle East and Central Asia Department at the IMF.
I am sure that you had a look at the documents for the REO, they're all available here. And, we have them in multiple languages, so feel free to take some. Mr. Ahmed is going to give a few introductory remarks. And, then he will take your questions.
MASOOD AHMED: Thank you very much. Thank you all for coming, it is very nice to see some old friends and also some new faces. So, as Randa said, what we would like to do today is respond to any questions that you have on our views on the Middle East, as well as on Central Asia. As background for this, we circulated to you two little documents, our summary of our outlook for the Middle East and North Africa, and also a similar document which is the summary for Central Asia. These documents are quite self-explanatory, so I'm not going to go into too much detail. But, let me just take a couple of minutes to give you the highlights, and then I will be happy to answer any questions that you have.
Let me start off by talking about the Middle East and North Africa first, and then I will say a word about Central Asia. As far as the Middle East and North Africa is concerned, our basic message is that the outlook on the region is quite mixed. If you look at the oil exporting countries in the region, most of them are doing quite well in terms of growth, which is expected to be about 6.5 percent this year. In terms of their financials, that is their fiscal balances and their current account balances, which are also expected to be positive, the current account balance this year for the oil exporters in the region is expected to be around $400 billion—which is nearly twice what it was just a couple of years ago. The challenges facing these countries are really how to use this current period of favorable international environment, as well as their own supportive policies, in a way that builds on their strengths, and prepares them for risks in the future.
In that regard, the main issues that face these countries for the medium term are how to create more jobs for their nationals, many of them have young and growing populations, particularly jobs in the private sector rather than in the public sector; how to diversify their economies; and also how to build more space in terms of their budgets, because their spending over the last few years has been growing even faster than the increase in oil prices, and as a result the break-even price, that is the price at which the oil price at which their budget are balanced has been rising, has become quite high in some cases.
Let me just say for the oil exporters, to finish with them, that like all groups, when we generalize, we miss some country-specific parts. In the case of oil exporters, there are also countries like Yemen or even like Iraq which face more fiscal constraints today because they're their spending needs are higher than their income.
Let me turn to the oil exporters to talk to you about the oil importing countries in the region, and including the countries that have been going through a—in some cases, a historic transition, political transition, which has with it its accompanying economic impact.
Now, if you look at these countries, there was a difficult year last year. Most of them were affected by both external shock and domestic pressures. The external shocks came from a slowing down of the world economy, particularly in Europe, with which a number of these countries are connected, particularly in the Magreb. With the increase in food and fuel prices, the domestic shock came from the political developments in some cases, from unrest, and for these countries, therefore, growth has slowed and this year will only be about 2 percent. Two-percent growth is well below the average that these countries have seen in the past, and it is well below the level that is needed to deal with already high and rising levels of unemployment, particularly amongst young people.
Going forward, for the next year or so, we see this continuation of a relatively modest rate of growth—some recovery in the growth rate next year, but even next year, 2013, the growth rate that we envisage—all these numbers are in the document, so I won't go into each one. But the recovery that is envisaged is still below the level that is needed to generate even jobs for the new people that are coming on to the labor force, let alone make a dent into the high levels of unemployment.
At the same time, because many of these countries, when they were faced with high food and fuel prices, reacted by increasing public spending and by increasing subsidies for energy products and for food. As a consequence of that, they have increased their fiscal deficits to an average of about 8 percent now. And, they have in that process also used up some of their policy and reserve buffers that they have. So, their international reserves have gone down, and consequently now, even though they face the same social pressures, their ability to postpone difficult decisions is becoming more limited. The next year will be a challenging year for the oil importing countries in the region.
I want to end that part, though, by saying while the short-term prospects are challenging, it is very important for us not to lose sight of the fact that the changes and transition on which these countries are embarked, which are aimed at providing more inclusive growth and a more equal access to opportunities for people who are connected or not connected, that those changes can only be a basis for a better and more shared vision of prosperity in the medium term. So it is important to keep your sight on the medium term as well.
Let me just say a word about the Central Asian and Caucasus countries. What I want to say for them, and you have a separate document, is that this group of countries eight countries that we're talking about, have continued to do in terms of economic levels of activity quite a solid recovery from the global financial crisis. Unlike in the Middle East, here there is not such a marked difference between the economic performance of the oil exporters, which are half of these countries, and the oil importers in the region. They both continue to do relatively well, growing at about 5.5 percent for this year and for next. In part, this is due to their continued high inflows of remittances on which many of these countries depend. In part it is due to the fact that for many of these countries, even if they import oil, they export other commodities, gold, metal, whose prices have also been quite high and remain high. So that has compensated a little bit for the increase in the price of oil.
These countries, though, also have some challenges, and the main challenges that face them in the short run are to strengthen their resilience by building stronger fiscal buffers, and what that will enable them to do is cope with any downturns, because for some of them now, the level of debt, public debt, is getting to a point where you want to be careful about letting it continue to grow.
So, let me stop with that, and then as I said, I'll be very happy to answer any questions you have, on either of those regions.
QUESTION: (Interpreted) (No English audio provided).
MR. AHMED: The question was on Tunisia, in case people haven't had a chance to switch on their interpretation sets. The question was what is our perspective, the IMF perspective, on the current policies in Tunisia and also in particular how do we react to the rather more pessimistic assessment done by some of the rating agencies.
Now, I think in the case of Tunisia what I want to start off by saying is that the Tunisian economy has been impacted by the same combination of external shocks, and domestic political transition. In the case of Tunisia, particularly what happens in Europe is very important, because Tunisia's exports, remittances, and tourism are all predominantly linked with Europe.
One more point about Tunisia, which is that in addition to Europe the Tunisian economy was also heavily impacted negatively by what happened in Libya. In fact, many Tunisian workers were in Libya, so the slowdown in Libya last year had a big impact on the Tunisian economy. The net result of this is that economic activity in Tunisia this year is likely to remain quite modest, about 2.5 to 3 percent, somewhere in that range, helped a little bit by acceleration of public spending, but private sector activity remains quite depressed.
The main reason for this is that there is still some uncertainty, because the political transition while it has advanced has not yet been completed. The external factors that I mentioned, with this low level of economic activity, in fact, the level of unemployment in Tunisia has been rising over the last 18 months. We think that the policy of the government to try and provide some counter-cyclical stimulus by trying to increase public spending at this time is a good policy, because their level of debt is low enough that Tunisia can afford to provide that stimulus, and it will help to moderate the downside effect that comes from a slowdown in private activity, and from the exogenous shocks that come from Europe.
As to the assessment of other agencies, I think we have done our own assessment. It is set out in the Article IV report that was published recently. Our assessment is that while in the short term the Tunisian economy will continue to be affected by this process of transition and will have relatively modest growth in the medium term, all the factors are there that could see a resumption of high growth rates in the case of Tunisia, something which it has seen already in the past.
QUESTION: I want to ask about Egypt. What about the agreement with the IMF and Egypt? It is late, and we want to know when we start to make the agreement and what is the opinion about the economy now in Egypt?
MR. AHMED: Let me start with the first of your questions about the state of the IMF discussions with Egypt. What we have said all along is that we, the IMF, stand ready to support an Egyptian program that would be developed by the Egyptian authorities, that would address the main challenges facing Egypt, which are imbalances of the fiscal and external side, as well as laying the foundation for growth. That would enjoy broad support, because it is important to have that support to ensure that the program that is developed will be implemented. That would have adequate financing underpinning that program. That still remains our view.
The Managing Director was in Egypt in August, and following her visit, the Egyptian authorities have started to prepare that program which they would like to propose to the IMF, for us to support. We have been in close touch with the Egyptian authorities, and on the basis of their current expectations of how quickly their work will advance, they have invited us to send a team at the end of this month that would then begin the process of negotiations and discussions, which we are ready to do. So we expect the team will be there by the end of this month and on that basis, we hope to be able to conclude a program in the weeks thereafter.
As to your question about the Egyptian economy and what our view is on the Egyptian economy, our view on the Egyptian economy is essentially what we have been saying for some time, which is that as in Tunisia, Egypt has also been affected over the past 18 months by the combination of external shocks, which in the case has been a slowdown in the world economy, as well as by the uncertainty on the economic activity, caused by the domestic transition.
We continue to see for Egypt for this year at a relatively low rate of growth. If you look at the growth rate for the year that just ended, the financial year that just ended in Egypt, it was about 2 percent. In the coming year it could be closer to 3 percent. Both of these numbers are well below the historical levels of growth that Egypt has seen over the last few years, and well below the level of growth Egypt needs to generate enough jobs. Over the past year, 750,000 people joined the labor force in Egypt, and with that growth rate, probably about 250,000 jobs were created. So 500,000 young people have joined the labor force that have not yet been able to get a job. In the medium term, again, Egypt has a strong economic base, diversified industrial and manufacturing and services sector, a strategic location, and there is no reason why Egypt should not be able to generate the kinds of inclusive growth that would generate jobs and prosperity for people.
QUESTION: Your support for Arab Spring countries and there are high expectations, what is your estimate for the kind of support and the amount of support that the IMF can give to such countries?
MR. AHMED: The IMF has been providing support in terms of advice and in terms of helping to deal with the shocks that these economies have been affected by, since the very beginning of the Arab Spring as you say, since the beginning of 2011. In addition to that, since some of these countries also need financial support, the IMF has already provided financial support to Yemen, which we did in April, immediately after the new government took office. We have provided in August financial support of a little over 2 billion dollars to be disbursed over three years in the case of Jordan, and financial support of a little over 6 billion dollars in the form of a periphery credit line for Morocco, which it does not need to draw now, but if things go worse, it should have as a form of insurance. As we just said, we are discussing with Egypt now how we could provide financial support to them, to help them go through the challenges of the transition. And, if other countries in the region feel that they need financial support, they can come to the IMF and we'd be very ready to address that.
QUESTION: Is there a certain amount in estimation of how many billions you think such countries need, any idea?
MR. AHMED: I don't think there is any amount that we have done in terms of how much the IMF could provide or how much the countries would need. There is in every year an estimation of the financing needs of the countries, which we do put out, and publish from time to time. But the more important point is that our own contribution in each country is determined by what their needs are and also by the strength of the program which we are underpinning.
MS. ELNAGAR: Online we have a question:
Some oil exporting states of the Gulf base their budget and public spending on high oil prices, like above 80 dollars. How do you see the impact long term with the oil price volatility, and these countries' inability to curb subsidy spending?
MR. AHMED: I think that question raises an important point, which is that for oil exporting countries, even though at the moment the price of oil is relatively high, and many of them have record levels of surpluses. We also remember that only in the recent past, the price of oil has been at much lower levels. So, the price of oil being quite volatile means that in budget planning purposes, it is always useful to introduce an element of a margin to be able to have some buffers to protect yourself against a period of low oil prices. At the same time, for a number of these countries, they have built up reserves, financial reserves, so if the price of oil were to go down for a short period, they can use those reserves to see them through that short period. Other countries which do not have the kind of reserves, and I'm thinking for example of a country like Yemen, find that they have to adjust their expenditure much more quickly when oil prices change.
As to the question of generalized subsidies, we in the IMF have been saying for some time that these subsidies, which amount to 200 billion dollars for the Middle East and North Africa region, over 200 billion dollars, are not an efficient way of helping the poor, because the bulk of these subsidies are subsidizing people who consume more energy, who are generally people who are better off. So in our view, it is important to protect the poor, it is important to have a safety net for the poor. But the better way to do that is with a more targeted form of subsidy rather than subsidizing energy products generally for rich and poor alike.
QUESTION: So you are negotiating, you will be negotiating the loan. But, I'm sure you must be aware that there is a popular resentment of the loan based on concrete, at least, three things. One is lack of transparency of where the loan is going, and how it is going to be spent; and the second thing, how it is going to be paid and if there are conditionalities; and the third point is that how the loan is not going to sort out Egypt's problems or even the fiscal deficit, it is a way to say the economy is okay so you get other people loaning Egypt more money. And, the people are really worried about the level of debt, the debt burden that Egypt will have, which will be far more than what was set up by the old regime after the big crisis in the 90s. So, there is a really huge worry about these three things, particularly the last one and if we don't know if the economic program you are talking about, how it is going to be inclusive, not only inclusive in the way it is made, but inclusive in the terms of inclusive growth and how it will benefit poor people? You know that the uprising, the revolution, whatever you want to call it, is about social justice and there is this big resentment that there is no plans for economic or social justice.
MR. AHMED: I think that you raise some very important concerns that a lot of people have. So, let me just say a couple of things about that.
First of all, insofar as the issue of transparency is concerned, from our point of view, we also believe that any program that is going to be successfully implemented, is a program that should be explained and where people understand exactly what is the contents of this program. In that process, they should also understand what we have been saying, which is that the IMF should be supporting a nationally developed program, and any benchmarks in that program should come from the own target, and benchmarks, that are set by the country, rather than as conditions as you say that are imposed from outside.
Of course, we also want to make sure that the program will address the issues that face the country. Because, otherwise, the financing that we would be providing would not achieve the purpose, and would lead us into exactly the worry that you raise, which is that if you provide financing that the program that you are supporting will address the problem. At the end of the program, you still have the problem, but you also have the financing. That is why the IMF takes a very close look at the program to make sure that it will achieve the objectives, and the money that the country borrows is well used, rather than simply added on to the debt.
Our side will publish on our website all the documentation for the program. This is our normal practice. And that way, anybody will be able to look at the documentation and see what it contains.
The final point I want to add on that is this question of the debt, it worries many people. So, you take on additional debt. But, of course, every day the Egyptian authorities, the government, is taking on more debt to finance the budget deficit. The IMF in some ways is an easier way from a financial point of view than to borrow that same money from banks or from other sources, where the rate of interest they pay to the banks is very high, and also because it deprives the financing for the private sector which will generate the growth. The last thing I would say is that the real issue is not so much whether you add all the financing from one source or the other, but that you undertake the policies that will reduce the budget deficit, because that is what is driving the need for this financing. Our objective would be, when we go and look at the program, to make sure, together, with our interlocutors in the Egyptian authorities, that the policies and measures that are being proposed will in fact achieve the objective of trying to reduce the deficit, but do it in a way that does not adversely affect vulnerable households and poorer people, and that does not have a negative impact on growth.
MS. ELNAGAR: Another online question:
Does the IMF believe that Egypt needs to devalue its currency as part of any IMF program?
MR. AHMED: We are going to have a discussion with the Egyptian authorities on the range of measures that will help to address the different challenges they face on the domestic side, on the external side. It is not for me at this stage to take a view on precisely which measure is needed for achieving those objectives.
QUESTION: How does the IMF evaluate the economic situation in Syria and what is happening now, and do you think as such the circumstances in this impacted on the economies of the neighboring countries, especially Lebanon?
MR. AHMED: Let me say that what is happening in Syria is first and foremost a human tragedy. The real cost of that is the enormous human costs being borne by Syrian population. Of course, this human tragedy has its economic impact as well. It has its economic impact within Syria, and we in the IMF have not been able to get direct information about Syria for at least a year. So our information is a little bit secondhand. But it is very clear that already you can see and in terms of the level of activity, in terms of exports of oil, where the sanctions from the European Union have a big impact on oil exports. As you know, oil accounts for three quarters of the exports and revenue of the Syrian budget.
Also, in terms of the impact on the banking sector, in terms of the impact on the exchange rate, and on reserves, you can see many indicators, all pointing in the same direction, which is that the Syrian economy is seriously negatively impacted by this civil conflict, which is what you would expect.
As to the impact on the neighbors, you are already now seeing the consequences of what is happening in Syria spread across to neighboring countries. First and most visible, of course, is the impact through refugees. There are about 300,000 refugees from Syria in neighboring countries, the largest number is in Jordan and in the case of Jordan, for example, it is having an impact already in terms of the additional pressure on the budget and on public services. There is also a spillover impact in terms of trade. You can see that transit trade which used to go through Syria and which came to both Lebanon and to Jordan, is all being seriously reduced as a result of the conflict in Syria, and there is an impact in terms of tourism because of the violence in Syria, tourism is being affected in neighboring countries. There, of course, are security issues which have also spilled over. There is clearly already in many ways an impact on neighboring countries from what is happening in Syria. But I think we need to remember that really the biggest cost of what is happening in Syria is being borne by the Syrian people.
QUESTION: Sorry to come back again to Egypt. I think the worry for people is the people understand that the rate, interest rate from the IMF is much lower than, say, internal debt. Plus the other problems with internal debt, but what people are worried about is, has the government actually looked at other ways of financing a program which we don't know. By the way, the program doesn't tend to be nothing, according to the government itself, so we don't know one, the program, and two, if they looked at other revenues. There is a lot of economists in Egypt who are saying, for example, about the money from the gold mines that we don't see the money, we don't see the tax, we don't see anything about it. Taxing rich people, the tax system in Egypt is so bad that they run out a small business and charge a hell of a lot more than they earn. So you basically encourage corruption and yet when the IMF comes to advise on tax, it is regressive tax like increasing VAT, which is the quickest way to get money, but it affects poor people. So, people are worried that we're not looking at the IMF by just offering Egypt a loan, even if they have a program, is not encouraging the government to look at other sources of financing that they can do, including the return of the stolen money from the previous regime and the monies that has been siphoned now. It hasn't stopped, as you probably know, so we get the IMF loan, we get loans from other people, and these debts are, our children are going to pay and grandchildren are going to pay, yet the money is stolen and we can't finance quite a lot. The other thing is bad policies, we in Egypt rely a lot on tourism. There is nothing to encourage tourism.
MR. AHMED: I just want to say one word about that, which is whether you get financing from the IMF, or from somebody else, this is only a temporary help. But the key is to use that period to deal with the structural issues on financing, for example, how do you improve your return on taxes? How do you try to get better expenditure? How do you rationalize your subsidies so that they are really targeted to the poor than to the rich. All of these things take a bit of time to be done but only get done if one focuses on them. I don't have a disagreement at all with the issue that you are raising, which is that it is important for all of these issues to be addressed, because those are the sustainable solutions in the long term, will come from financing the budget in ways that are not distorting the availability of financing for other sources, and that make the best use of the limited resources that there are. What the IMF can help to do is to ease that process by giving more time to deal with that, because of the financial support that we can provide. And, also, by sharing the experience of other countries who have tried to deal with these kinds of issues, so that Egypt can benefit from being part of a cooperate active in which there are 188 countries that have all dealt with similar issues.
QUESTION: Just another question on Egypt. One, how close is Egypt to entering an external financing crisis? Is there an imminent crisis of financing of its current account deficit? Secondly, just following on the previous question, what happened in Egypt, my impression was that the IMF was very closely identified with the structural adjustment program adopted under Mubarak and has a huge credibility problem. Would you defend all of the measures adopted in the '90s which were then so wholeheartedly rejected in the streets of Cairo?
When you talk about social inclusion, is that now something that is being incorporated into the negotiations that you are holding?
MR. AHMED: The first question that you raised, if you look at the economy of Egypt, certainly after a period of very high growth, the last two years, slow growth, rising unemployment, more uncertainty, running down of reserves from 35 to close to 15, have all increased the vulnerabilities in the economy. But, you have also seen that over the last few weeks, there has been a few months, I should say, three or four, there has been a stabilization in the level of reserves. Indeed, the uptick, a reflection in terms of the markets, if you look at the CDS spreads, the yields, they have come down. What this reflects is that people are beginning to see that the combination of the political transition advancing and economic program being put together, and the underlying strengths of the Egyptian economy action, are beginnings to come into play in terms of the assessment. So I think the Egyptian economy now, they're putting together all the elements which would enable it to deal with the short-term challenges and the short-term challenges are important. But, which also then lay the foundation for the medium term.
Then, let me turn to your second question, which is, what does this focus on inclusive growth mean and how has the Fund adapted to that? Of course, it is important to remember that we have not really had a program-type relationship in Egypt for over a decade. So, a lot of what has been happening over the last decade is not something that is directly associated with the IMF, although in peoples' minds, in peoples' minds there is still a connection.
I think the IMF, like other institutions, also learns lessons. One lesson we learned from the Arab Spring, as it were, is that you can't simply look at aggregate numbers of growth. You can't look just at the macroeconomic picture. You have to go behind the aggregate numbers, to see how the benefits of that growth are being shared. What is happening in terms of access to opportunity in economies, and what is the impact of growth strategies on employment and how much variation there is across different parts of each country.
These micro issues are not the traditional expertise of the IMF. But, because of their impact on the sustainability of macroeconomic growth, it is important for us working in cooperation with other agencies, like the World Bank, like the low, to try and get a better handle on that. And, what you will see now in the work that has been coming out of the IMF, both general work and country-specific work, is more of a focus in trying to make the linkages between the aggregate macro numbers, and the implications of them for employment and for inclusion. This is something that also is reflected in the design of our programs, and in some of our programs, for example, there is as often a floor on the level of spending that needs to be done in social sectors, as there is a ceiling on the level of spending that needs to be done overall. We are looking both at making sure that overall expenditure is sustainable, but that within that, there is a focus on protecting expenditures for the vulnerable and for social sectors. It is a learn process. It is a journey in a way where we're trying to see how best to incorporate these aspects into our analytical work, and in our operational work, but it is certainly the direction in which you see the work of the Fund now evolving.
MS. ELNAGAR: We will wrap up now. Thank you, Mr. Ahmed, and thank you everyone for coming.