Transcript

Transcript of an IMF Press Conference on the Middle East and North Africa Economic Outlook

October 11, 2013

MS. WAFA AMR: Good morning colleagues and good morning to journalists who are online, or good afternoon for those who are following us from the region.

This is the 2013 briefing on the Middle East and North Africa Economic Outlook.

For journalists who are online, please start sending us your questions.

Let me introduce Mr. Masood Ahmed, Director of the Middle East, North Africa, and Central Asia Department.

MR. AHMED: Thank you very much, Wafa, and good morning to all of you.

And as Wafa said, to those of you who are listening in online, good whatever time of day it is for you.

Well, thank you all for taking the time to come to this briefing. What I'd like to do is just take a few minutes to walk you through how we see the outlook and challenges facing countries of Middle East and North Africa, and then be very happy to take any questions that you have.

In terms of the outlook, let me start by saying a word about the oil-exporting countries in the Region, then I'll turn to the oil-importing countries.

For the oil-exporting countries, overall, their economic outlook remains quite favorable. The headline number in terms of economic growth that you'll see in the World Economic Outlook that was published recently and copies of which are available to you, the headline number, in fact, shows that the growth has dropped to 2 percent, but this is mainly reflecting the slowdown and, in some cases, reduction in the production of oil. That, in turn, itself reflects both supply disruptions in the case of Iraq and Libya. Oil production has been lower than what was expected, as the case of Iran, continued effect of sanctions on oil production, and modest drop in oil production in Saudi Arabia, reflecting a still amply supplied global oil market.

But if you look at the non-oil part of these economies which is, of course, a better measure in terms of economic activity and jobs, that continues to post a healthy 3.5 percent rate of growth for the non-oil part of the oil-exporting countries helped, in turn, by continued public spending, which is a driver of that growth as well as by a gradual recovery in private sector growth.

So, for this set of countries, there are really two kinds of challenges. One challenge is that many of them are using up their fiscal space. What do I mean by that?

Already, about half of the oil exporters in the Region are in fact spending more than their budgetary income. So, they're dipping into their fiscal reserves, and even more than half are spending more than they should in terms of saving oil wind fall for future generations.

Some countries have already started to moderate the pace of expenditures, but we do feel that this effort needs to be broadened and continued to ensure that they become more resilient in the event that there is a sustained drop in oil prices in the future.

Second set of challenges facing these countries is, of course, need to provide jobs for their national population. In some countries, aggregate job numbers have continued to grow, but many of the jobs in the private sector where the growth is taking place have been filled by expatriates. And for nationals, trying to build jobs for them in the private sector in these countries is a preoccupation of policymakers in almost all of the oil-exporting countries with whom we have had this conversation.

That in turn, of course, requires looking at the employment and the wage levels at the public sector to provide the right incentive for nationals to go to private sector. It also requires looking at the skill set of nationals so that they're able to have the kinds of skills that are needed for jobs in the public sector, and there are a number of specific schemes that are in place to try and encourage this. But this, of course, is a long-term effort on which many countries are embarked.

Let me turn now to the oil-importing countries in the Middle East and North Africa.

This group of countries has continued to have, over the past year--and indeed, over the past six months, since we last had a briefing on this nature--continued pressures on them which have made the economic outlook for them quite challenging.

Over the past few months, there are three sets of pressure in particular that have impacted the economic outlook for the oil-importing countries in this Region. First, heightened security concerns, in particular, spillovers from Syria, where the tragedy is not only one that affects now millions of people living within Syria, but has also had spillover effects across two neighbors.

Second, in a number of countries, there have been also a domestic political uncertainty and tensions associated with ongoing political transitions, and this has also resulted in a continuation of "wait and see" attitude by the private sector. So, the recovery that was going to come from the private sector has been delayed further.

And finally, the third reason is that we also find that in some of these countries social pressures continue to mean that the governments have had to respond to these pressures by providing continued support in terms of subsidies or expenditures in terms of public spending. And while this has helped a little bit in terms of providing a breathing space, it does add to the underlying imbalances with which they're trying to deal.

In addition, I should say that this outlook, this set of challenges, has resulted in a growth rate for this group of countries for about 3 percent for this year and not much better next year. And 3 percent growth rate, given the level of unemployment in these countries, given the number of young people that are coming onto the labor markets during this year and next year, and given also the expectations of people for an improvement in living standards is simply not enough to address those growing expectations and the level of impatience associated with it.

And consequently, we do think that it's very important now to take action to try and arrest this continued period of stagnation and to move forward to what one could think of as a higher equilibrium. And what would this higher equilibrium include? We think that the most immediate priority in these countries is to provide jobs, jobs that hope to sustain the sociopolitical transition.

Given that private investment and private sector activity has been stalled and is not likely to recover in many of these countries for the near term, we do think that governments will need to play, temporarily, a key role in shoring up economic activity and providing jobs in the near term. This will call for a reorientation in part--a reorientation of government spending towards investment and job creation, and way from the other forms of current spending, including some of the generalized subsidies, which tend to benefit mostly better-off people. At the same time, to spend more on creating better targeted safety nets for the vulnerable people who continue to feel the pressures.

Second, in addition to the focus on creating jobs through investment, for many countries this will also be done in parallel with the efforts of which they're embarked to try and reduce their borrowing requirements and their fiscal imbalances.

As you know, over the past three years, budget deficits in the oil-importing countries, the Middle East and North Africa, have increased. In some cases, they're now double digits. And every year, this adds not only to debt but to pressures on domestic markets--in domestic financial markets where governments have become the main borrowers. And to deal with this, governments have started to try and progressively and gradually contain and then reduce their budget deficits. So, to do this at the same time as they're reorienting investment is a big challenge. And that's why we do think that it's very important at this time that the rest of the world, the international community, supports the countries in the Region, particularly the countries that are going through transition, by also stepping up financial support so that the investment that is needed can take place and the jobs that are needed can be created and are not entirely financed from the limited resources within countries.

And finally, we do think that alongside this effort to create jobs in the short term, there is a continued need to pursue the structural measures that would make for a more attractive environment for the private sector so that the private sector can pick up the relay and continue to provide the jobs that ultimately are going to be the future of these economies. And for that, some of the measures that are needed take time to implement, reforming the business climate, creating infrastructure, providing better credit to companies. Some of this takes time, but there are some measures on which need to get started right away so that as the confidence begins to be restored, as political certainty begins to be established, the measures and the conditions are in place for the private sector to be able to pick on the relay without further delay.

So, that is the sort of policy messages that we have been conveying in the context of the discussions during the Annual Meetings, not only individually with countries but also more broadly in the meetings that we've had, including meetings of the Deauville Partnership which, as you know, brings together the G8, the Arab countries in transition, and the regional partners, GC, and other countries and regional institutions, but we do feel that this is a moment for a sense of urgency to tackle the growing problems in these countries.

Let me stop at that. And as I said, I'd be very happy to answer any questions that you have. Thank you.

As usual, if you could please introduce yourself when you speak. Thank you.

QUESTIONER: What's your assessment of Egypt's stimulus plan, about 3.2 billion? And do you find the Gulf money to Egypt at the moment a sustainable solution or not? Thanks.

MR. AHMED: Well, Egypt, per capita, has been going through a difficult and challenging period over the last three years. Growth has come down dramatically. Fiscal deficits have widened. And therefore, at this moment, we do think that it's a very good idea to come up with a plan that would provide stimulus in terms of investments, stimulus in terms of creating jobs in the short term, and we believe that the financing that Egypt has received from the GCC countries in particular that you referred to, provides both support for that kind of investment-based spending, but it also provides a window during which the authorities can undertake the kinds of reforms that would help to reorient some of their own expenditures more towards investment that would then create jobs in the medium term.

QUESTIONER: You have said that a stimulus package would be a good policy for the time being. From where the Government of Egypt is going to get some money for a stimulus package?

MR. AHMED: Well, as I said earlier on, the financing for investments--and I think the stimulus package, of course, has many components. I was focusing particularly on the elements which create investment in jobs. Because what we see as an immediate priority--for Egypt and for many countries in the Region, --is to create some jobs in the short term, and arrest this growing level of unemployment.

The financing for that package for investments is going to come from two sources: One, from a reorientation of some of the government's own spending, from other sources towards investment; and secondly, from external support, including the very welcome support that has come from GCC countries recently.

QUESTIONER: Thank you. I'm from Saudi Arabia. You mentioned the challenges facing the oil-exporting countries and mainly the Gulf--let me stress to the Gulf. One factor I noticed you haven't mentioned is the domestic consumption of energy in that Region. Doesn't this worry you a little bit here?

MR. AHMED: Thank you.

The domestic consumption of energy is indeed a source of concern. It's a source--or rather, I should put it more precisely, which is the rate of increase of the domestic consumption of energy is a source of concern.

Because if you look at the rate at which energy consumption is increasing in a number of countries which are oil exporters--so, many countries of the Gulf, but not only countries of the Gulf--what you see is that, progressively, this is beginning to eat into the exportable surplus.

And perhaps there are also a couple of other dimensions of this, which is that it encourages consumption that is sometimes wasteful. And also, it encourages a pattern of industrial production which is based on and only competitive if you have a very low-priced source of energy.

Now, in some countries in the Gulf, policymakers, I think, are becoming conscious of the need to moderate the pace of growth of energy consumption. There are already some discussions, and indeed, some actions to try and impose some standards in terms of constructions, new buildings, standards in terms of energy efficiency and industry, which are going to have some impact.

Over the longer term, though, we in the IMF do think prices matter, that the prices people pay do affect what they consume.

And as you know, energy products are heavily subsidized in most of the oil-exporting countries. The IMF did a study a few months ago which showed that, of the total volume of energy subsidies in the world, which is between $450-500 billion worth, that's just the difference between the international price of energy and the price at which energy is sold in countries. Of that total, half of it was accounted for by countries in the Middle East and North Africa. So, our Region accounts for half of the world's subsidies on energy. And we do think that these subsidies have a big problem in terms of the fiscal cost. Some countries can afford the fiscal cost, some can't, and we've been talking, for example, I mentioned in the case of Egypt, the case of Jordan, the case of Morocco, they're all countries where energy subsidies have been an issue for the budget.

But there's also a cost in terms of the right pattern of production and consumption. Tackling energy subsidies is not something that can be done overnight, because this is the pattern that has been there for many decades. And that's why the study that was done by the IMF made a point by saying that there are successful examples of energy subsidy reform.

They did this gradually. Big bang effort to try and fix energy subsidies don't generally work. They did this with a lot of communication. And I refer you, for example, to the effort that was done in successful efforts in the Region, including in Jordan last year in November, where they did raise energy prices successfully, and it's done with accompanying measures to protect the vulnerable and poor households. If you do that, then you not only protect them, but you also deal with some of the social concerns and opposition around that, and it has to be done in a way that takes into account the downstream effects.

So, for example, in the case of Iran where they did a very successful first round of energy subsidy reform, the next round was more complicated because they realize that many of the industries in Iran were only competitive as long as they had the cheap energy. And if you got rid of the cheap energy, all you did was transfer the losses into the companies, and then you had to deal with the downstream end, as well. So, it's not a simple matter, but there is example now of many countries in the world that have tackled this issue, and we think that's a priority issue for the countries of the Middle East and North Africa.

QUESTIONER: Sorry to go back to Egypt. Leaving aside the big issue of political stability, do you think that the new investment program and the GCC money is enough to reignite the economy and get it going ahead, or do they still need outside help? Do they--can they go ahead without the kind of reforms that were talked about last year?

Can they get--which is the question of--based on this current strategy, can they get going ahead on their own?

MR. AHMED: Well, I think that the kinds of investments that the current authorities have put forward as part of their plan will certainly help in terms of providing a short-term stimulus in terms of providing jobs, in terms of addressing some of the immediate concerns. And the financing that has been provided helps to make that possible in a way that is lower cost than trying to do it from domestic financing alone.

But the medium-term challenges facing Egypt remain the same, how to get the rate of growth up. And to do that, how to provide more jobs in a sustainable way.

That requires resumption of private sector activity, private sector investment, and the kinds of reforms that would help to provide an environment within which the private sector can function are still very much the same reforms that the authorities have been discussing for some time, as indeed the efforts to try and improve the resilience of public finances, which means to reorient public spending gradually away from current spending of the kind that has eaten up a lot of the budget towards more spending on investments and on infrastructure and on the social safety net. So, those challenges are still there, but that's an agenda that needs to be embarked on in parallel with the efforts to provide jobs in the short term for which, as I said earlier, we think that's a good idea, and the financing that's available helps to make that possible.

QUESTIONER: Just to follow up, so, does that mean that they could go ahead without a sort of program for helping stabilize their external accounts that the IMF was talking about?

MR. AHMED: I think the financing that has been made available certainly provides an additional cushion for the authorities.

And the important question, however, is that the medium-term agenda of providing a public financing--structure of public finances, as well as external accounts that are self-sustaining still has the same sorts of reforms that were on the table, but in the short term, certainly, the financing there provides a very welcome additional cushion for them.

QUESTIONER: The question is about Jordan. Where are you in terms of the discussions you have been having in the second review under the existing standby arrangement that you are supporting Jordan with.

MR. AHMED: Thank you.

First of all, let me just say one word about Jordan, the economy of Jordan, and then I'll say something about where we are with the discussions.

In terms of the economy of Jordan, the--as you know, this is an economy that has been subjected to a variety of shocks from the rest of the world, from the Region in particular. The impact of the spillovers from Syria has been not only substantial but intensifying over the course of the last year.

So, also, has been the additional impact in terms of the price for importing energy because of the disruptions to the supply of gas from Egypt to Jordan.

The Jordanian authorities have embarked on a program which is supported by the Fund to try and reduce their imbalances over time and to lay the foundations of returning to the kind of growth rates that Jordan experienced for a number of years, which were in the high single digits rather than the 3 or 2, 3, 4 percent numbers which simply don't provide enough jobs for young Jordanians coming on the marketplace, and to do so while protecting poor households, and that's a program the IMF has been supporting.

Now, despite these pressures, I'm very encouraged by the way in which the Jordanian authorities have taken measures throughout the course of--the first half of this year, to contain the imbalances despite the intensifying nature of the shocks. We've had very constructive discussions with them over the last few weeks, including during the last couple of days while they've been here, and I'm very hopeful that before the end of the Annual Meetings and their visit here, we will be in a position to reach agreement on the next review, but that work will probably take another day or two.

QUESTIONER: I wanted to ask two questions, one on Tunisia and one on Egypt. The first is--basically, what is your projection for the situation in Tunisia and [unclear] Tunisia, and the second question is about Egypt. What do you find to be the most pressing infrastructural problems within the Egyptian economy that are hindering growth right now? Thank you.

MR. AHMED: So, on Tunisia, first.

In the case of Tunisia, the economic outlook for Tunisia has become more challenged during the course of this year, in part because of the exogenous external environment has been harder for them, but in part also because the period of political uncertainty associated with the impasse while there was a process to form a new government over the last couple of months has led to both uncertainty for the private sector and also a slowdown in the implementation of some of the measures that the government itself was undertaking.

As a result, we have revised down our growth rate for Tunisia for this year, so it's closer to 3 percent now, rather than a number which is higher as we'd expected earlier in the year. I'm very encouraged by the fact that even this last weekend an agreement has been reached tentatively that would allow for the formation of a technocratic government, and we hope that the formation of this government, which we very much hope will be able to also take the necessary economic reform decisions which have been pending will help not only to stabilize the macroeconomic outlook, but also to provide confidence to the private sector so that we can begin to see some of the investors who have moved a bit to the sidelines, waiting, to come back into the economy.

Now, in terms of Egypt, I wouldn't say that there is a single area of infrastructure that would have the biggest impact in terms of returning of private investment. There are issues around energy, there are issues around transport, which are all important issues.

There is also what I would call the soft infrastructure. Soft infrastructure is the rules and regulations that govern the functioning of individual firms and businesses, and in that area also work that has been done over the past few years by Egyptian government agencies, by Egyptian academics, by think tanks, both within Egypt and outside, has pointed out that there are, in what you would call the Doing Business Indicators, some indicators where improvements can be made in Egypt in relation to others.

And finally, I would say that the provision of credit by banks to small and medium enterprises is another area which can have a relatively quick impact. And here, as you know, it's not just in Egypt, but in our Region, banks--or rather, let me turn it around. Small and medium enterprises have less access to bank credit than in many other parts of the world, and banks tend to focus more in our Region on the larger firms.

And of course, if government deficits become large, then the best client for banks--often is to provide financing for the government, which is necessary but doesn't help to get the kind of private sector-based growth.

MS. AMR: There are no online questions. If there are no more questions, then we'll end here. Thank you very much.