Transcript

April 19, 2013

Ms. Amr - Alright. Thank you for coming. This is the IMF’s Regional Economic Outlook for the Middle East. I would like to introduce Mr. Masood Ahmed, Director of the Middle East and Central Asia Department. He will give a few remarks and then we will take your questions.

The Director of the Middle East and Central Asia Department (Mr. Ahmed) - Thank you all for coming. Let me take a few moments just to give you our overview of how we see the outlook for the Middle East region, and then I will be happy to take your questions.

Let me begin by looking at developments in the oil-importing countries of the region, and then I will say a word about the oil exporters as well.

Now, the first message that I would like to convey from the work that we have done is that, as you know, the past two years have been difficult for the region’s oil-importing countries, many of which are also Arab countries in transition. The situation, in our view, will remain difficult in the near term. There are four reasons for this.

First, the political transitions in many of these countries are complex; they are turning out to take a certain amount of time. Many countries have yet to adopt new constitutions and elect governments under those new constitutions. The uncertainty is affecting policymaking and also holding back investors.

Secondly, during the past two years, unemployment has risen. Employment prospects have been limited and the cost of living has been rising, adding to social tensions in these countries, which has also made it harder to manage economic policy.

Third, regional instability has had a spillover effect and, in particular, of course, I am referring to the tragic conflict in Syria. The first and biggest consequence of this, of course, is the human tragedy that is unfolding on the people of Syria themselves and the economic consequences of that for the people of Syria. Beyond that, it is already having an impact on the neighbors, not only through refugees but also through the impact on trade, through the impact on transit, and also on holding investors back in terms of regional instability.

Finally, the external environment continues to be challenging. We did not see any growth in the European periphery. Europe is an important partner for many of the countries in the region, particularly the countries of the Maghreb, and that will continue to be the case this year. For the oil-importing countries, high food and fuel prices are also weighing on the import bill. While we see some pickup in tourism and we see some pickup in remittances, these are still well below, in some ways, the pre-2011 numbers, and so all that is weighing on the prospects.

The net result of all of this is that last year the oil-importing countries in the region grew at less than 2 percent: 1.9 percent on average. You have detailed numbers that are available; the aggregate average was 1.9. This year we see some modest improvement, closer to 2.7 percent, but that still is not a number that is going to make an inroad into the high levels of unemployment that you see.

Over the past two years, governments have also responded to these pressures by expanding spending in subsidies, spending for social transfers. One of the consequences of that has been that their fiscal deficits have increased over this period to about 8 percent. Public debt as a result has also risen, on average, to about 75 percent of GDP. In many cases, their international reserves have declined significantly.

So, their buffers, if you like, the cushion that they had on their fiscal side and on the external reserves side have been used up a fair amount. In light of this, one of our messages at this point for policymakers in the region is that it is becoming increasingly urgent to begin the process of consolidating both the budgetary balances and consequently also on the exchange rate side to that the macroeconomic stability can be maintained during this transition.

One issue in this context that I want to bring to your attention is that for many countries in the region it will be hard to achieve fiscal consolidation without addressing the question of targeting what are now generalized subsidies. As you know, generalized subsidies, which are energy subsidies, the largest share of them, account for close to $240 billion in this region in 2011. The IMF recently did a piece of work on this.

I do not if you have had a chance to look at it yet, but, if not, I recommend to you this little four-pager which is on the table outside which is on energy subsidies in the Middle East and North Africa region which will provide you with more details. The upshot of it is that energy subsidies in the region, at 240 billion, account for about 22 percent of the budget in a number of countries of government revenue. They account for about half of the total subsidies in the world on energy. So, it is a big issue for the region.

As you know, we have been concerned about this not only because of the size but also because that money which goes disproportionately to better-off people, who are really the ones who consume energy, could be better used to provide schools, hospitals, roads, and other infrastructure investments that will generate jobs and growth. So, that is one of the arguments we have been making.

Now, beyond the immediate short-term issue of consolidation, there is the medium-term agenda, which is an agenda of creating a more inclusive model of growth that is going to create jobs and that will create more hope for the young people who are concerned about these issues which led to the uprising in many cases. Of course, the agenda for this is going to come from each country, but we do feel that the region has a large untapped potential for a prosperous future, and designing that reform agenda to begin realizing that potential is a priority.

In this context, support from international partners, regional and international partners in the form of financial assistance, market access, policy advice, sharing the experience of other countries, will all be helpful. In the case of the IMF, as you know, we have been involved with the region, particularly with the Arab countries that have been going through a transition, in supporting them both through policy advice, technical support to strengthen institutions, and in some cases financing over the last few months.

The IMF has allocated, as you know, a total of a little over $8 billion to Jordan, Morocco and Yemen, to support their home-grown economic programs. We are also engaged in the discussions right now with Egypt and Tunisia, and on a possible second program in Yemen. I am sure you will have some questions on that and I will come back to that in due course.

Just before finishing, let me say a word about the oil-exporting countries. Now, the oil-exporting countries in the region have had a different outlook and experience over the past year. As you could imagine, they have been growing at relatively healthy rates, being able to use the proceeds from high oil prices to sustain growth despite a weak global environment. The group as a whole, their average growth rate in 2012 was 5.7 percent driven, to a large extent, by the almost complete restoration of oil production in Libya, as well as a strong expansion of the GCC.

Now, when you look at the numbers for 2013 for the oil-exporting countries in the table that you have, you will see that the headline number for growth drops to 3.2 percent from 5.7. Why is that; why is there a slowdown in these countries this year? A relatively simple answer to that is that it is almost all due to the scaling back of the growth rate in oil production, oil demand. So, since oil is a big part of their economies, as oil demand falls, you will see that the headline number for growth goes down. But if you look at the non-oil part of these economies, which is in many ways often more important in terms of generating jobs and as a measure of the level of economic activity, that continues to grow, on average, of about 4 1/2 percent this year, a quite healthy rate.

In terms of the current account, they continue to see a large surplus. Last year we had close to $440 billion as the current account surpluses for these countries. This year, slightly lower oil prices, slightly higher consumption levels. The number is going to be $370 billion, or thereabouts. As you know, projections of what the current account surplus is going to be at the end of the year that I make to you in the month of April are going to depend very much on what happens to the price of oil during the course of the year. This, of course, is subject to some degree of uncertainty.

Our main policy message for the oil-exporting countries that I want to just leave you with is that, while there are many of them still in a very comfortable position in terms of their buffers both on the fiscal side, on the reserves that they have built up, they are beginning, because of the increased spending that has taken place over the last few years, to get to the point where to build more resilience to offset the risk of any sustained reduction in oil prices, it would be useful for them to begin to moderate the rate of fiscal expansion, fiscal spending, particularly in terms of hard-to-reverse current government expenditures such as the wage bill and subsidies, which are harder to cut back.

A medium-term challenge for these countries, many of them are still very much on how do you move forward with a program of building more diversified economies that are less dependent on oil, in part for diversification, but also for many of them, increasingly to provide jobs for young people and for nationals, which in many cases are still very heavily employed in the public sector.

So, that is a little bit the overall outlook for the region. As I said, I will be very happy to answer your questions. I am assuming that you have all had a chance to get not only the Subsidy paper but, of course, this little two-pager that we have which gives you the summary of the outlook.

Now, I am sure many of you will have questions about countries and also more general questions. I am happy to take them. Perhaps for the benefit of just order in this a little bit, what I would like to do is to see if people have any non-country questions that they would like to raise first. Then I will come back, then I will go to individual country questions. So, does anybody have non-country questions they would like to raise? I see three hands here. Please go ahead.

Question - You were speaking about the needed austerity by some countries which are importing the oil, including Egypt. I want to ask how in a country like Egypt this austerity in general would push the GDP forward. I mean, we know that expansion means more growth, but how with austerity? That is No. 1.

No. 2, regarding the targeted loan to Egypt, is there a feeling you should speak with the authorities of Egypt about GDP, what is the targeted GDP regarding the loan itself and regarding the program you are negotiating about with the authorities of Egypt?

The Director of the Middle East and Central Asia Department (Mr. Ahmed) - I want to answer the first question you raised, which I think is a general question and has a consequence for many countries, which is how do you move forward now with fiscal consolidation and growth at the same time. This, of course, is a big challenge facing many of the countries in the region. I would say that if you look at the past two years, there has been a big expansion in government spending, but there has at the same time been a stagnation in growth.

So, the message is that government spending over the past two years has not been able to generate the kind of growth we need. Now, why is that? Because the growth in these countries is going to come mainly from increased activity in the private sector. The private sector is what is going to drive the growth process.

One of the things that is holding back investment in the private sector, holding back the level of activity in the private sector is precisely uncertainty for them about how the large budget deficits are going to be financed. Also, the larger your budget deficit, the more you borrow from the local banks, two things happen. One, you have less credit available to go to the private sector, as private sectors are not businesses and do not have access to be able to expand; and secondly, interest rates go up. You gave the example of Egypt. If you look at Egypt, interest rates have gone up a lot. As a result, the cost of borrowing has become very expensive for the private sector.

So, I think the programs that the countries are putting together are programs that generate confidence in the private sector that will generate investment, generate the growth, and that, I think, is the model of the future. The specific question of Egypt that you raised I will come back to when we do country questions.

Question - I will ask my general question and postpone my local one. There are some things called in our region IMF recipes, review of subsidies, privatization, something like this. Implementing this in our region may not be on the standards of the IMF; for example, in some areas like my country Syria, when they withdraw, if we can say, the subsidies from people, even if they deserve it.

For example, the farmers, they need it to compensate them immediately for another recipe or something to target them immediately, but this has happened after four years. This is for subsidies. For example, when you look to privatization, implementing privatization with a high rate of corruption in a country would be damaging; it is not a good recipe. So, do you have simultaneously, when you put such solutions for some countries, how should they implement them, because at the end they blame the IMF for their bad recipes.

The Director of the Middle East and Central Asia Department (Mr. Ahmed) - That is a very good question. I think you are absolutely right that it is not just the policy but how you implement it which is ultimately what has an impact in terms of how people view the outcome. I will give you the example of subsidy reform that you mentioned.

In the paper that we launched, that David Lipton made a presentation on when we launched it for the world as a whole, one of the lessons of subsidy reform of 22 countries that the IMF has looked at is that it only works well if certain conditions are fulfilled. One of those conditions is that you have to have in place at the same time mechanisms to protect those who clearly need assistance. You can do it through cash transfers, as some countries in the region have done. I mean, if you look at Jordan, if you look at Iran, these are both countries that have done cash transfers. You can do it through other mechanisms like smart cards, as Egypt is thinking about doing. There are different ways of doing it, but you have to do that.

The other thing that this is important which applies not only to subsidies but I would say to other reforms as well is that you have to explain why you are doing this, what is the cost of the current system, what are the benefits and how will they be felt. If you do not explain the programs, you do not really get the support for them and that makes it very hard to implement it. So, communication, I believe, is going to be a much more important part of that. I think that same approach in a way applies to other areas.

Question - I have two questions, a general one as you requested, and a specific. The general question is it just seems that Arab governments in transition are having a hard time putting together a solid economic reform program. This includes Egypt, Tunisia and perhaps Morocco, but I do not know Morocco very well. I am wondering from the IMF’s point of view how sure can you guys be that these governments will deliver on the programs that they are showing you or presenting to you, and can you speak to any sort of frustration that you or technical teams may have experienced in dealing with these new governments.

The Director of the Middle East and Central Asia Department (Mr. Ahmed) - I think it is fair to say that over the last two years the focus in a number of countries—I do not think all but in a number of countries—has been on dealing with the immediate issue, which is the growing macroeconomic imbalances, so the fiscal issue, the declining reserves, how to rebuild reserves, how to strengthen your fiscal.

The task of putting together a medium-term economic transformation program which would bring about faster, more inclusive job-creating growth with a vision for what the private sector will be, has been coming behind that work. So, certainly I think it is a fair assessment on your part that that has been slower in the making.

It is not the case, however, everywhere. I would say that if you look at the program that, for example, the Moroccan authorities have put together which the Fund is supporting through the precautionary and liquidity line,  it is very much based on a set of medium-term objectives, medium-term targets, and that is what drives the agenda for the short term.

In the other areas, also, governments have started to begin to address. Subsidy reform is very much an issue which is not just short term but really part of the transformation of how you spend government money and what kind of social protection you have in place. So, it is certainly coming behind, but I do see that as beginning to happen, and in some countries it is more advanced than others.

Question - ...[Spoke with no microphone]...

The Director of the Middle East and Central Asia Department (Mr. Ahmed) - In all of our work, we are working as a partnership. We are supporting countries as they embark on sometimes difficult, sometimes analytically challenging, sometimes politically complicated reform agendas. For us, I think it is very important to continue to be partners, to continue to support that. Sometimes that work goes more easily; sometimes it takes a little longer. That is the nature of the work of the IMF and it always has been.

Question - ...[Language spoken other than English]...

The Director of the Middle East and Central Asia Department (Mr. Ahmed) - Thank you. You had two questions about Saudi Arabia which I will come back to, but you had one question which was a general question that you raised about what is it that the IMF can do to support the oil economies in terms of moving toward more diversified non-oil sectors. Actually, the IMF can do a number of things in that regard and that we are doing. Let me give you two examples now of what we are doing.

One is that we have been working with a number of countries, including GCC countries, to look at how to strengthen their domestic capital markets, financial sectors. Why is that important? It is important because if you want to develop a non-oil private sector, particularly if you want to develop small and medium enterprises rather than a few large enterprises, then better access to finance and more diversified sources of financing than just bank-based financing will become an important part of that.

The IMF has been working on that. Recently, for example, we had with the Central Bank of Qatar a conference that brought together policymakers, market practitioners, academics looking at domestic bond markets and domestic debt market development. That is one example. Another area is in a number of countries we will be looking at labor market issues because a better functioning of the labor market is one of the keys to a more effective deployment of the private sector outside of oil, particularly if you want to use that also to encourage greater employment of nationals in the private sector as well. So, we have been doing a number of things in that regard. On Saudi Arabia I will come back to you.

Any more general comments?

Question - Good morning. I was wondering, you were talking about fiscal consolidation in all these countries. How much should they be consolidating? The other one is on the oil price. Oil is down by under the important kind of the budget break-even level of a hundred dollars. Is it time to re-look at the break-even number in countries such as Iraq, Algeria and Iran, I think it is, and how should these countries be going forward if the price continues to slip?

The Director of the Middle East and Central Asia Department (Mr. Ahmed) - Let me take the oil price question first because it is a little bit linked to the earlier question. One of the reasons why we have been developing the policy message that I articulated at the beginning that now is the time to begin to moderate the pace of fiscal expansion is because if you look at what has been happening to the level of spending in the oil-exporting countries over the last five or six years now, you will see that the pace of expansion of spending has been faster even than the increase in the price of oil and, as a result, the break-even price of oil, which is the price at which the budget is in balance, has been rising for some countries, and for some today it is at or even above a hundred dollars. For most of them, it is below that number.

There is a table in the last Regional Economic Outlook—if you are interested, I am sure we can provide you a reference to it—which provides our assessments of what is the break-even oil price for individual countries. But for some of them, they are now actually, even at today’s oil prices, running a current deficit. That current deficit is financeable for a few years because they have the resources they have built up to be able to finance that deficit, but it is not financeable indefinitely. That is one of the reasons why we think it is important—and in some countries it is more urgent and others less urgent—to begin to look at the pattern of spending for that reason.

The other question raised is what is the pace of fiscal consolidation, and how much? I would say again that it is very important to be aware of two things. One is that fiscal consolidation needs to be done right, getting the balance right between making a credible dent on the borrowing requirements for next year so that you begin to see some improvement in confidence, you begin to see some improvement in lower interest rates because of the benefits that come from that, but not to do it so quickly that you have a big short-term impact on growth before the private sector comes back, or to do it so quickly that you have a social reaction, or you cut back investments, which really means you are mortgaging future growth.

That is the second point, which is that it is very important to do the fiscal consolidation in the right way, which is what is it that you are cutting back. One of the things that I find a little bit worrying is that if you look at what has happened over the past two years in most of these countries, their budget deficits have gone up, but capital spending has gone down. In fact, current spending has gone up even more than the budget deficits. As a result, the investments that would generate future growth have begun to go down.

So, this year, if you look at the 2013 plans, in most of the countries you actually see now a reversal, that they are beginning to invest more in capital. I think that is a great thing. If that means that that capital investment can be financed and the resources for financing it are there, then that will affect the pace of consolidation.

Finally on fiscal consolidation, the numbers will vary country by country. You have seen the numbers in the case of Morocco and in the case of Jordan. You will see that in the case of individual countries, this pace of fiscal consolidation is also driven by financing availability in terms of how they can mobilize financing.

Question - ...[Language spoken other than English]...

The Director of the Middle East and Central Asia Department (Mr. Ahmed) - Okay. That was a question on Jordan, which I will come back to. That still leaves me space for one final general question.

Question - ...[Spoke with no microphone]...

The Director of the Middle East and Central Asia Department (Mr. Ahmed) - I do not think there is a magic formula for fiscal consolidation. Our colleagues in the Fiscal Affairs Department have actually recently been looking exactly at how you can structure fiscal consolidation in a way that has a minimum impact on growth and also that protects the poor.

I will point you to one thing which is quite interesting, and again it is a chart from the Regional Economic Outlook we did a year ago. Again, I can send you the reference for those who are interested in following up. What this chart does is it looks at what is the growth friendliness of taxes and spending in the different countries in the MENA region. What that tells you is that in some countries, by switching the nature of your taxes, you can raise the same revenue with a better outcome on growth, because your current taxes are more growth-distorting, if you like, and the same applies to spending.

So, I think that fiscal consolidation, there is no magic formula, but in each country there are opportunities to do it in a way that will be more or less impactful in terms of growth, and I think that is the practical technical work that needs to be done. So, let me now move to country—

Question - Growth in jobs.

The Director of the Middle East and Central Asia Department (Mr. Ahmed) - Well, growth to me in a way is because of jobs. At the end of the day, growth without jobs is not very meaningful for most people.

Now let me go to country questions. What I would like to do is, just to make it easier, structure them and I will take all questions on one country and then answer them, just to avoid people having to go over it. So, shall we start with Egypt, because I think that was the first question you had. I will take questions on Egypt, first.

Question - There is an assumption by the IMF that growth will rise in 2014 in Egypt, but there is another assumption that consumer prices will rise and unemployment will rise, too. It looks like it is not a growth that employs people and it is not getting down the prices. Why do you think this will happen and how to avoid it?

Regarding the consumer prices, too, do you not think it is dangerous to the growth itself, dangerous for capital investments to have a big rise in consumer prices always going on?

The last one. Regarding the loan, what happened until now? We know that until now nothing happened even after the last visit to Egypt. It said in the Egyptian press that it has failed until now, the negotiations.

The Director of the Middle East and Central Asia Department (Mr. Ahmed) - Let me take other questions on Egypt and then I will come back to it.

Question - Yes, we would all very much like an update to the talks. Madame Lagarde said yesterday that the talks were ongoing but some numbers need to be aligned. I was hoping you can get into a bit more detail on what those numbers are; what are the sticking points that we hope to overcome in the next few days to have a loan.

The Director of the Middle East and Central Asia Department (Mr. Ahmed) - One more question on Egypt.

Question - We have been hearing that there might be an agreement to the loan that we could wait for during those meetings? Another question is on the subsidies, on subsidy removal and the increasing of taxation. For example, we have heard from the updated economic plan that Egypt has submitted to the IMF that there will be taxation on stock transactions. However, the Prime Minister came out last week saying that those will not take effect while we can see other taxations that are on the average Egyptian actually taking effect.

The same goes for energy. During the November 2010 Social and Economic National Plan, there have been talks about increasing the prices of heavy industry, the energy prices up to 30 percent, but those have not taken effect, while butane gas cylinders, for example, in the household centers have risen. So, is the IMF planning to align or will it go on with the loan while the National Plan seems to be implementing reforms on the average Egyptian and not on investors and businessmen?

The Director of the Middle East and Central Asia Department (Mr. Ahmed) - Yes?

Question - I was wondering, the Egyptians have managed to borrow money from Qatar, Libya, Iraq, I believe, although that is not confirmed. Is that fully financing the program or is that just a whole separate set of loans? It is not clear. The other one, can you also explain to us—and I think my colleague actually has been asking that—exactly what is holding up these talks right now and what needs to move beyond that?

The Director of the Middle East and Central Asia Department (Mr. Ahmed) - Let me start with where we are in terms of the discussions with the Egyptian authorities, and then I will come back to the two substantive points that were raised about the nature of the program.

So, on where we are, our team in Egypt for the last two weeks has made good progress. They have come back and we are continuing those discussions. Those discussions are both to try and make sure that we have a complete and full set of data to start with and there are still some areas in which we are trying to—the authorities are making sure that the data that they have is the most recent and then we will look at that.

Also, we are working together with them to make sure that the program will address the challenges that face Egypt and that we will do so in a way that will protect the more vulnerable parts of society, and that it will unleash what we all believe to be the considerable economic potential of Egypt. If you objectively step away for a moment from the current discussions on the short-term difficulties that Egypt is facing, it does have a huge potential in terms of a strong financial sector, a diversified industrial base, a strategic location, a strong vibrant population, so there are all those facts that now the program begins to unleash.

So, those discussions will continue. I do not have a date for when those discussions will be completed precisely, but the Egyptian authorities and our own team are working very diligently to try and bring that set of discussions to a conclusion as quickly as feasible.

Now, in terms of the link between that and financing that has recently come from Qatar and Libya, well, I think the point I want to stress here is that in a technical sense, of course, there is a financing need that Egypt faces for the next 12, 18, 24 months. Any financing that is provided is very helpful in meeting that need.

What is important, and I think this is what the Egyptian Prime Minister has said, is that the reason they are developing, implementing, and moving ahead with the program to address the challenges Egypt faces is not because of the IMF, not because of financing from other countries, but because they believe this is the right thing to do; this is what Egypt needs. In that context, therefore, having this financing is helpful, but it is not a substitute for the kinds of measures that they have been putting together and that they want to move forward with, and that, if we can reach agreement, would be a basis for an IMF-supported program.

Now, in terms of the specific questions that you raised, one of them is what will be the nature of the program and how will the burden of it be spread. I think it is very important, from our point of view, that when we look at the final package, when it is finally put together, that the aggregate package is one that does not only generate the outcomes that you need in terms of revenue, in terms of expenditures, but also does so in a way where the burden is shared, falls more on the people who can afford it, and that is something that we will be looking at.

In terms of whether there is a specific target I think you were saying for GDP, you know, do we have some sort of specific target for GDP, I do not think there is so much a specific target for GDP. It is a bit linked to your question also about how is it possible to have an increase in GDP when you are looking at an increase in unemployment. Of course, it is possible to have both an incremental increase in aggregate output and an increase in unemployment at the same time, because there are more people are coming into the labor market every year. The question is whether you are able to grow fast enough to reduce unemployment, not simply employ some of the people.

Now, our own view is that the recovery in private investment is what will drive the growth prospects for the coming year and that will begin to have an impact on employment in Egypt. As to what will be the exact outcome in terms of both growth and in terms of employment is a little bit a function of how quickly can confidence be restored.

On consumer prices, well, I think it is certainly the case that a long period of high inflation is not something that we would be in support of, if only because it is destabilizing in a macroeconomic sense, but also the burden of inflation falls mostly to poor people who cannot protect themselves against rising prices.

However, what you are seeing now is that, of course, sometimes you have to have one-off adjustments in administered prices. For example, the prices of some of the energy products, if you can protect people against that by providing them with either cash transfers or through other mechanisms, that help the markets for those products to function efficiently.

You mentioned the example of butane. Most of the colleagues and friends I met in Egypt recently have been telling me that it has been very difficult for them to buy butane at the original price and so many people were actually already paying a much higher price for it in terms of middlemen. So, sometimes one has to actually look at the price people are paying rather than the price that they were supposed to pay as well. So, I think that is what I can say on prices.

Now, can I move to another country, just because I know we are running out of time. I believe there was a question that you had on Jordan, which was on the impact of how we are going to take account of the pressures that Jordan is under and would we still recommend Jordan to go ahead with its economic program. I think the answer to that is, yes, we would, because Jordan has been subject to a couple of exogenous shocks.

One shock, of course, is regional instability, Syria being one important factor. The other shock is the disruption in the supply of gas that it has been using and having to substitute natural gas which came from Egypt by fuel oil, which costs much more. Both those shocks need to be managed in a way that can ensure that the growth rate in Jordan begins to pick up again. Remember, Jordan used to grow at 6, 7, 8 percent but has been growing much less over the last two years.

Now, the impact of Syrian refugees is very important on Jordan. The government estimates that it was about 0.7 percent of GDP last year. The program that they have which the IMF is supporting has built into it an allocation to take account of that and also has built into it an allocation to take account of the costs of dealing with Syrian refugees in 2013.

If the cost of that spillover, the tragedy that is happening in Syria turns out to be greater, then we will have to look at the program to make sure that it is flexible enough to take that into account. So, I do not think that that is a reason to stop with the program, but it is important to make sure the program accommodates that.

You also had a question on Saudi Arabia, which was asking both about what we saw as the risks and also what explains the decline in the growth rates. You gave the answer to the second one, which is that the decline in the growth rate in Saudi Arabia is very, very driven by stabilization in oil production, which is what is driving the overall prospects.

Now, Saudi Arabia is, of course, in a very comfortable position, because even after that, you will see that non-oil growth this year in Saudi Arabia is about 6.3 percent, which is higher than the 4 1/2 that I mentioned for oil exporters on average. Saudi Arabia has still got a good level of non-oil activity. They, unlike some of the countries that we heard Leslie referring to earlier, in fact continue to have large fiscal and external surpluses. So, in that regard I think it is in a very comfortable position.

I should also point out that there is an important role that Saudi Arabia has played and continues to play in terms of providing stability in global energy markets. At a time of a global uncertainty, that contribution is one that is very valued by the international community and it is worth recognizing that.

Now, in terms of the challenges, I will say going forward perhaps there are two that are important. One is to ensure that the diversification of the economy beyond oil, which the Saudi authorities have been embarking on, is a process that continues and, in that context, looking at issues relating to labor markets, how to ensure that nationals are able to find the kind of productive employment in the private sector is going to be a key challenge. As you know, there are some programs in Saudi Arabia already to do this. There is the Hafiz program and the Nitaqat program. There are other ways as well that are beginning explored now. Those are the two challenges, diversification and then providing jobs.

Question - My question is on Syria, my country, and the ongoing conflict. There is a dire need for a reference doing studies about the economic side of what is happening in Syria. This need is for local organizations who want to help people, refugees, inside or outside. Now, we are seeing countries like Jordan, Lebanon, releasing some figures about their loss, their needs, to help Syrian refugees, and we see many private research centers releasing some different figures.

Because the conflict in Syria so far, we see many controversial figures. There is no reference for that. Sometimes some media accuses, for example, Jordan or Lebanon, they are releasing exaggerated figures, so they get help more from UNCHR or other organizations. I suppose, and maybe I am wrong, that some job must be done by IMF as a neutral reference to do so.

The Director of the Middle East and Central Asia Department (Mr. Ahmed) - Let me say that on Syria we do not have a lot of firsthand information as to what is happening in the economy because we have not been able to engage directly with the Syrian authorities or have a firsthand engagement with economic actors now for some time. What we know and what we have been able to piece together really comes from a variety of sources and estimates people are making. Therefore, I am a little bit cautious about making an assessment of what is exactly the impact on the Syrian economy.

What we can say is that all the analyses that have been done, while they may differ with their assessment of the exact impact, the magnitude of the impact, agree that the consequence of the conflict that has been unfolding in Syria has been very substantial in terms of reducing the size of the economy, in terms of contracting the economy, and not just in hydrocarbons, oil, but also in terms of agriculture, in terms of economic activity.

You have numbers on bank deposits which show that bank deposits have been shrinking, probably at least by 20 percent. You have seen the impact on the exchange rates where you have seen the sharp depreciation in the—increase in the gap between official and free market rates. You have seen inflation increasing by all estimates to close to 50, or more, percent. So, I think there are many estimates. If you try and find what is the common feature, they all paint the same picture, which is that, apart from the human tragedy, the economic cost of Syrian conflict is now beginning to take a big toll on itself.

Question - Since the IMF has approved the PLL line to Morocco, $6 billion, back last August, two main things happened. The first one is a rather abnormal worsening of budgetary conditions. There is an issue with the quality of information that has been provided because the budget deficit worsened in abnormal ways. It is not only a matter of real economic conditions; just to do with the way the Moroccan authorities are gathering and providing their finances.

The second thing that happened, which is very recent, is that the Minister in charge of the Compensation Fund, which is the main subsidization mechanism in Morocco, has declared two days ago that, in fact, the reform is being shelved. They have promised to have it undergone in June and now they are saying it is premature; they are not saying it is cancelled but premature to do it. The IMF has said yesterday, Mr. Cottarelli has put Morocco in the group of countries in the world which need more urgent things to be done mainly in terms of dealing with this subsidy thing.

So, my questions for you are the following: What are exactly the reforms that Morocco has promised to get the PLL from the IMF? Are you comfortable with the quality of information the Moroccan government is giving to you? Secondly, when Mr. Cottarelli is saying more urgent, how urgent is it? If it is not urgent enough for the Moroccan government to say it has to be done in June, what is the IMF’s view on when should it be done?

The Director of the Middle East and Central Asia Department (Mr. Ahmed) - I think the first thing that is very important to say about Morocco is that the policies that the Moroccan authorities have had and the strong basis which they built in the Moroccan economy over many, many years have served them well in terms of being able to weather the international crisis relatively well. We know that, despite that, in 2012 growth slowed. You could see, in particular, the impact coming from Europe, but also because agriculture output last year was low. That had resulted in a marked increase in both the current account and in the fiscal deficit for the year.

The priority for the Moroccan authorities they have set them out themselves, so it is not the IMF priorities but priorities the Moroccan authorities set out, is to rebuild their fiscal and external buffers by moving ahead with the important reforms they have outlined which aim to bring the fiscal deficit in the medium term to a level which is sustainable with their long-term objectives. It is in that context that the Fund’s PLL, the Precautionary and Liquidity Line, is supporting that medium-term reform agenda laid out by the Moroccan authorities.

It is true that at the end of last year the budget deficit turned out to be higher than had been anticipated. There were some difficulties in terms of getting that information together in time. I think the authorities have since put in place a series of measures that will ensure that the flow of information and the monitoring of spending is done in a way that they are aware in a kind of real-time sense of all the plans and commitments that are being made. I think that will give us a very strong basis for having a good and timely monitoring of the fiscal numbers.

I was not personally aware of the statement that you mentioned; maybe my colleagues are and we will follow up on that. I think the important point is that, in moving forward, we do say on subsidy reform everywhere that it is important to get it right. At the same time, we do also say, and that is the case in Morocco, that given the fiscal objectives that the authorities have themselves set for this year, which is to arrive at a budget deficit of around 5.5 percent, what they will want to have for themselves and for the IMF also at the time of looking at the Moroccan economy is to be able to see how we will be able arrive at that outcome. I think we will have more discussions with them in the coming days and certainly we will be able to get a better sense of how the different plans will achieve that objective.

So, for us the main objective is to ensure that we can make progress year by year toward the medium-term fiscal number that they have set themselves, for which this year they have a target of 5 1/2 percent.

Question - ...[Spoke with no microphone]...

The Director of the Middle East and Asia Department (Mr. Ahmed) - My concept of the reforms is that I do not think—Sorry. I should have mentioned that. It is not so much that the Moroccan authorities have made commitments to reform for getting the PLL. The Moroccan authorities have a series of reforms that they are undertaking on the fiscal side, on increasing productivity, on trying to promote foreign investment, on trying to look at pensions, on trying to look at taxation, and all of these are part of their medium-term agenda which is aiming to bring macro imbalances to a good level and to provide a basis for sustainable growth.

Let me take one more question on Libya before I close.

Question - I was wondering whether you could talk to us a little bit about the challenges that Libya and the Libyan economy faces. It is not different from our neighbors. We have huge unemployment, huge youth unemployment, with the added fact that they are armed now as well as unemployed. We are still coming out of a centralized state under the Gadhafi regime. Most of our revenue is from oil. There is the need for diversification, creation of new jobs. We have a poor banking sector that does not act as an intermediary, does not provide banking services.

We have had, of course, technical assistance agreements with the IMF; the IMF has been visiting Libya for ages. But not much seems to have happened with regard to the way the budget is distributed and organized. You mentioned the SMEs with regard to another country, the need for SMEs in creating other jobs. I wonder whether you could talk to us a little bit about the challenges Libya faces.

The Director of the Middle East and Central Asia Department (Mr. Ahmed) - I thought you did a pretty good job yourself. I think you laid out many of the challenges that Libya faces. All I can add as a footnote really to what you are saying is that I think there is a short-term challenge and there is a medium-term challenge for Libya.

The short-term challenge for Libya is to consolidate security because, without that, it is very hard to move forward on economic reform; to ensure that the immediate increase in the budget that is talking place and spending is being done in a way that does not disproportionately go into current spending, and that it is being done in a way that is monitorable and transparent; and to begin to put in place the refunctioning of the instruments of the economy, whether it is banks or other areas.

The medium-term challenges which I think you were alluding to is really how do you create a vibrant, non-oil economy that is going to provide employment for people in Libya, and how you are going to put in place the institutional market systems that underpin that economy, because up to know, in many ways, if you look at those institutions, you look at market systems in Libya, whether its banks or the role they play, it is not commensurate with the needs that you would expect of an economy of that size and of that income. So, that is really the medium-term challenge facing Libya. The other medium-term challenge facing Libya is to ensure that the oil wealth is used in a way that is productive and transparent to ensure that there is good public financial management.

Now, the IMF has been very actively engaged with the Libyan authorities since the revolution in terms of providing advice, in terms of providing technical support. They have just completed our Article IV discussions with Libya after a gap. Our expectation is that this will be discussed by the IMF Board in May and, if all goes well, we will put it in the public domain. At that point I will be very happy to actually ask my colleagues who are working on Libya, for any of you who are interested, to organize a press briefing on that Article IV.

Question - I know you oversee Somalia, too. It is a bit of an odd one. There is a donor conference roundtable tomorrow on Somalia. The IMF has also just recognized and re-engaged with Somalia. How do you see moving forward with Somalia? Is debt relief part of those discussions? We know that the President has expressed an interest in writing off some off the debt. Who is going to pay off that loan? Is there a plan for a bridging loan?

The Director of the Middle East and Central Asia Department (Mr. Ahmed) - On Somalia, for those of you who have not been following it, you may know that the IMF recently moved forward with the recognition of the federal government in Somalia as a representative of Somalia. So, we have now, after a gap of two decades, resumed a relationship with them. As a result of that, now the IMF staff can provide both analytical and policy support, including the kind of health checks that we do which we call the Article IV, as well as providing technical assistance in different areas.

Somalia is not eligible to borrow from the IMF now because of the arrears that Leslie referred to. Somalia has arrears to the IMF that currently stands at about $352 million. These arrears would need to be cleared before Somalia would become eligible to borrow from the IMF.

Somalia also has arrears to other institutions, and in a way that leads one to the question of how one is going to move from the current situation through a process that will enable them to clear those arrears and subsequently be eligible to borrow. As part of that, there will be a discussion also, as Leslie pointed out, of what will be the process, including the Debt Sustainability Analysis that would accompany it.

Now, we will have our first discussions with the Governor of the Central Bank and the Minister of Finance, who are here during these Spring Meetings. That will help also chart what will the initial focus of the IMF’s own work in supporting the Somali authorities. I know that there is a Donors Conference and I know there is also one planned a little bit later in May and the IMF will be participating in those. I do not have the precise agenda of what those conferences will cover. Whatever the focus is, the IMF will be there to contribute in our own areas of expertise.

Okay. Thank you all very much for your time.