Transcript

April 11, 2014
Washington DC

SPEAKERS:

MASOOD AHMED
DIRECTOR, MIDDLE EAST AND CENTRAL ASIA DEPARTMENT
WAFA AMR
SENIOR COMMUNICATIONS OFFICER, COMMUNICATIONS DEPARTMENT

MS. AMR: Good morning. I am Wafa Amr from the Communications Department.

Welcome to the Middle East and North Africa Economic Outlook that will be presented by Masood Ahmed, Director of the Department of the Middle East and Central Asia.

With us today also is Harald Finger, Deputy Division Chief, chief author of a new IMF paper that was released today and is entitled "Toward New Horizons: Arab Economic Transformation and Major Political Transitions."

I would like to remind those on line to please send their questions.

Please, Masood.

MR. AHMED: Good morning, and thank you all for taking the time to be here.

What I would like to do is just walk you through a little bit our current thinking on the economic outlook, and then I want to say a word about the paper that Wafa just referred to, and Harald, who is sitting next to me, will also be here in case you have any questions about the paper.

In terms of the economic outlook for the Middle East and North Africa, as always we think it is useful to divide this between the prospects for the oil-exporting countries and the oil-importing countries, because they have rather different factors driving their economic performance.

Let me say a word about the oil-exporting countries first, and then I am going to turn to the oil-importing countries.

If you look at the overall growth numbers for the oil-exporting countries, we see growth strengthening this year. From about 2 percent last year, it was expected to be closer to 3.5 percent this year. This is driven in part by regional oil production being largely stable, but by quite robust non-oil growth which is being driven both by high public spending in some countries and by continued activity in the private sector in others.

Risks to this outlook, as always, come through the oil channel for them, so it depends a bit if global demand slows for oil or if global oil prices soften as a result; this will have an impact on both growth numbers and their financials.

Similarly, if for any reason including geo-political tensions, you see an increase in the price of oil that would have an impact on the upside. Similarly, for some countries like Algeria which are suppliers of gas to Europe, there is a possibility that if there is a need for additional gas supplies to Europe, that would have an upside effect.

Our basic policy message for countries that are oil exporters in the Region continues to be around two themes. One, there is pretty much across the Region now, with growing private sector activity, opportunity to pull back on some of the fiscal stimulus that a number of countries have been undertaking over the last few years. And indeed in some countries, that becomes even more urgent, because if you look at the fiscal numbers in the oil exporters, every, single oil exporter in the MENA Region outside of the GCC, and two within the GCC, Bahrain and Oman, are already running fiscal deficits. So that becomes even more urgent for them.

The second area that we have been focused on for some time is of course to support these countries in terms of their effort to diversify their economies, and diversify their economies not just to reduce their vulnerabilities to dependence on a single source of growth but also to provide an opportunity for jobs, particularly in some countries, jobs for nationals in the private sector.

And I just want to refer you to the fact that at the end of this month, we will be holding a conference in Kuwait jointly with the Government of Kuwait which will look at the experiences of economic diversification in oil-exporting countries. If any of you have any further interest in that, do contact us, and we will be happy to give you more information on that.

Let me now turn to the oil-importing countries. For this set of countries, 2014 is likely to be another year of tepid economic activity. Overall growth is slightly short of 3 percent for this group of countries, more or less the same number that we had last year, as you will see from the handout. The main reason for this continued modest economic activity growth is the still weak confidence, particularly in countries where there are ongoing political transitions in addition to spillovers from regional conflicts, especially Syria, which is holding back recovery in terms of private sector confidence associated that is needed to drive the recovery forward.

I should say that there are some positive signs this year that we are beginning to spot in some countries. Exports are beginning to strengthen a bit, driven in part by the fact that in export markets, particularly in Europe, there is a little bit of stabilization.

The drivers of growth are beginning to change from being consumption to being more investment-oriented. That is important as a basis for future growth. You can see this also in terms of public investment which is increasing, in part financed by reallocation of government spending from the current spending particularly on subsidies toward spending on investment. You will remember that for the last two years or so, we have been very focused on trying to work with individual countries in the Region, trying to help them see what opportunities there are for reallocating some spending away from generalized subsidies, which we think are not a very efficient way of providing support for the more vulnerable parts of society, toward a more targeted form of subsidies and then to use the remaining savings to finance investment. You are beginning to see some of that happening, so that is also a good sign.

Also, you are beginning to see some improvement in private investment, particularly in those countries where political transitions are coming toward the final stages, so it is becoming a bit clearer.

Having said that, I should also say that there are still risks to this outlook for this year. The political transitions in some countries are moving ahead further and faster than in others. In addition, there is the issue of Syria which I mentioned earlier.

I think the more fundamental point that we want to raise is that apart from the short-term risks, the kinds of growth rates that we are looking at--about 3 percent or so--are just inadequate to deal with--to address--the fundamental question of generating more jobs for these countries.

Unemployment is still running at about 13 percent if you just look at the Arab countries in transition. For young people, it is almost double that. That problem is still very much ahead of us.

In our view, there are two aspects to addressing this. In the short term, we do think that in a number of countries, there are opportunities to increase public investment and public job creation as long as this is financed from additional resources, particularly from additional resources on concessional terms that would not add to the debt burdens of these countries and as long as this is done in a way where the projects are carefully selected and where these are short-term investment or job creation projects and don't lead to a long-term liability in terms of employment in the public sector that would then have to be managed.

We have been doing some work in this context jointly with the World Bank over the last few months, and what that has shown us is that indeed, if you look at, for example, the Arab countries in transition--Egypt, Jordan, Morocco, Tunisia, Yemen and Libya--if you look at these countries, there are indeed opportunities to create between 400,000 and 800,000 new and permanent jobs if there were carefully-crafted programs of investment and job creation that were financed from concessional resources.

But beyond the sort of short-term job creation, the other track on which we want to encourage more discussion is to start looking at what could be done in each of these countries to begin to move toward a more inclusive and job-creating model of economic growth. And it is in that context that we are launching this paper that Wafa referred to, which looks at the key reform areas that are likely to generate--get rid of, if you like, the obstacles to faster and more inclusive growth.

There is a press release on the paper which I think you will have before we finished today, if you haven't already picked it up yet. I am not going to go over the details of the content of that paper. I want to make a couple of points about it before finishing.

The first is that if you look at the main elements of the structural reform areas, they are not unfamiliar. They are the kinds of things that people have already studied, both at the individual country level and more regionally. They look at the deepening trade integration, because as you know, many of the countries in the Middle East and North Africa are not very integrated into the world economy, so trying to increase trade both within the Region and between the countries in the Region and the rest of the world.

They look at the issue of strengthening access to finance. This is a particular area where particularly the Arab countries in transition but other countries in the Region also do lag behind developing countries and emerging markets and the rest of the world.

They look at ways in which business environment can be improved through the regulatory framework for business and reducing informality and the opportunities for corruption.

They look at the issue of labor market and educational reform which is an area where, particularly in this Region, there is a bit of a mismatch between the skillset of people coming out of universities and schools and the skills that are needed in the private sector.

And finally, the paper also looks at the issues of how to move toward more targeted safety nets for vulnerable populations, which would then progressively replace the current model which is to provide support to people largely through price subsidies across the board rather than through targeted safety nets.

The other point I want to make about this paper is that, as I said, the range of tasks that need to be done is relatively clear and familiar, but the challenge in many cases is how you build a consensus within each country on the prioritized list of measures that would both make sense for that country and for which there is enough broad support to take it forward. And from our point of view, it is the political economy of managing the reform agenda going forward, particularly during a period of social transitions, of political transformations and transitions in some countries, that will require careful handling and wide consultation to be able to make that work.

And supporting all this, of course, there is the role of governments who are going to be the main drivers, but the international community can help through a combination of financing, through a combination of technical assistance and the sharing of expertise and experience from other parts of the world, and by opening markets, because when we talk about trade integration, that will only help in part by actions that the countries in the MENA Region take but also by actions that are going to be taken by their partners.

Let me conclude on this part by saying that we have two events coming up related to this agenda that I want to bring to your attention.

First, tomorrow afternoon at 1:30, we will be hosting a high-level panel discussion bringing together both policymakers from within the Region as well as some experts from other parts of the world to discuss exactly how to move forward and build consensus on this agenda. This is going to take place at the Jack Morton Auditorium across the street at GWU, and I do encourage you, if you are interested in this set of issues, to come to what is likely to be a good and lively discussion.

Then, this work will also feed into a conference that the Government of Jordan, the Arab Fund for Economic and Social Development, and the IMF together are organizing in Amman in the month of May. That will be an opportunity to bring together not only key policymakers from around the Region, for the institutions that are working in the Region, but also representatives of civil society and other stakeholders to be able to get a broader discussion going on how we now move to make progress on this issue.

Let me conclude by saying a couple of words on the IMF's own engagement with the Region and particularly with the Arab countries in transition. This is a topic that I know a number of you have asked for an update on.

As you know, we have at the moment financing arrangements with Jordan, with Morocco and with Tunisia. You may have seen recent press releases of staff-level agreements that have been reached under the programs that are in place in Jordan and Tunisia. If you don't have them, there are spare copies of the press releases outside this room.

These reviews will be presented to our Executive Board later this month, and if the Board approves them, they will release $264 million and $225 million to Jordan and Tunisia, respectively.

In addition to the financial support, we have also been, as you know, active in providing technical assistance and training opportunities. Just to give you a number on that, over the last year, we have done more than 60 Technical Assistance Projects and three dozen training events bringing together policymakers and other stakeholders from the Arab countries in transition. That is just to give you a sense of that, as I mentioned the analytical work, and I have already talked about the paper that we are putting out.

Let me stop with that. I am very happy to answer your question on any individual country or on the numbers, as well as on the paper.

QUESTIONER: Can you give me a sense of what you think of the proposed economic reforms in Egypt, particularly the energy subsidies, expanding the tax base, and I think there is a stimulus package.

MR. AHMED: Well, I think the first thing I should say about Egypt is that, of course, it has been going through the same difficult set of transitions as the other Arab countries in transition, and it faces two sets of challenges. The first one is to address the growing imbalances, particularly the pressures that are put by the imbalances in the budget. And the second is to try to move beyond the immediate dealing with the imbalances to generating the kinds of high growth rates that would address the employment and job creation and improved living standards for people in Egypt.

In terms of the specific policy areas that you mentioned, our view is that at the moment, it is very useful to move forward with encouraging investment, investment in finance in this case, through very welcome financing from the neighboring countries in the Region, particularly from the GCC, will help to lay the foundation for the acceleration of growth. The stimulus package, particularly insofar as it includes investment, is part of that agenda.

In terms of subsidy reform, as you know, subsidies at the moment, generalized subsidies, take up a large chunk of spending. And we have pointed out in the past that this not only has the crowding-out problem of not leaving resources for other spending, including for investment, but it is also not a very effective way of targeting help for the poor because the majority of the benefits tend to go to people who are better-off.

As you have seen, the authorities have been moving toward trying to build a program that would progressively reduce and target the generalized subsidies. I saw a quote from Minister El Araby a couple of days ago--I think it was in Reuters--saying that there is never a good time to start focusing on subsidy reform, but the longer you wait, the more expensive it gets. And I think that also captures our own thinking on it.

Our own view has always been that as you move forward on reforming subsidies, which you mentioned, it needs to be done in a way, however, that is gradual, that takes into account the impact on poorer and vulnerable households and needs to protect them, so it needs to be done as part of a package of that.

QUESTIONER: Thank you. I wanted to ask about Iran. There is a forecast for contraction this year and then a return to expansion in the subsequent year. How much of this is contingent on progress on the geo-political concerns, namely, the international sanctions. Without that coming to fruition, would Iran still be in the forecast for growth next year?

MR. AHMED: The outlook for Iran is both uncertain and difficult, partly for the reasons that you have outlined. When you look at what has been happening over the past two years, there has been a difficult period for the Iranian economy in that there has been a contraction in both the economy in the year 2012-2013 which ends in March, as well as in the current year, we expect there to be a further but smaller contraction as the economy is now beginning to level off.

We do think that in the year going ahead, growth is likely to stabilize, and we see a small increase in the size of the economy.

These projections are dependent both on the progress in dealing with policy issues within Iran but also on what happens in terms of the international environment within which Iran is working. And we do think that if there is a permanent improvement in that international environment, if there is a set of policy measures on which the Iranian authorities have begun to embark that are followed through, this should have an impact in terms of generating growth rates in the medium term that are substantially higher than the numbers that we are looking for.

In terms of the policy priorities that we want, what we think the Iranian authorities could focus on right now, they come around two sets of measures--one set of measures addressing the short-term stabilization of the economy, which is around tightening of monetary policy as well as some fiscal consolidation, particularly on current expenditures, and then a set of measures around supply-side reforms which would then begin to address the structural problems that are holding back growth in the economy.

Some good news is that inflation in Iran has now begun to come down quite dramatically. It was about 45 percent in July last year, and we expect it to be almost half by the end of this current year which has just ended. So there has been a big improvement in that. And the actions that they took in terms of their foreign exchange market have now also begun to improve competitiveness in some of the productive sectors.

QUESTIONER: [Interpreted from Arabic]: How could Egypt implement reforms during a period of political uncertainty and whether aid from the Gulf countries to Egypt could impede the work of the Fund in Egypt?

MR. AHMED: I think there were two parts to the questions that you raised. One is how to implement reforms during a period of uncertainty, and the second is what is the role that has been played by Gulf aid in terms of either facilitating or not the reform process.

In terms of the first part, there is no doubt that it is harder to implement reforms during a period of uncertainty and during a period of transition. If you look not just at Egypt, but look at the experience of a number of countries in the Region, you will see that it has been harder for policymakers to move forward particularly on those reforms that require broad political consensus.

Having said that, as I said, if you look at what has been happening in Egypt, there is now not only some reorientation of spending toward investment and away from current spending, which is something that we think is useful, but also, I think there is a broader discussion underway about the priorities for reform and the need to move forward with reform.

So, I think if you look at Egypt and if you look at other countries, the experience is that while it is a little bit harder to undertake reforms, it can be done, and many countries indeed are doing that.

In terms of financing from the Gulf countries, our view has been that we welcome this financing. It provides Egypt with much needed breathing space and help during this process of political transition and to deal with the current economic pressures.

At the same time, as the Egyptian authorities have themselves said, this financing is not a substitute for the kinds of reforms that will be needed that will address the underlying problems so that in the long term, Egypt will be able to finance its own economic development and its economic needs.

So we think it is very helpful, but in addition to the financing, there will be a need to move forward with the economic measures.

QUESTIONER: Mr. Ahmed, thank you for giving me this chance. If you will allow me, I will ask my question in Arabic to be clear. You had conditions for supporting Arab countries at the beginning of the Arab Spring, do you still have the same conditions? Do you support the GCC governments’ investment expenditure?

MR. AHMED: So, on the first question, I think our position on supporting the countries in transition following the Arab Spring has been and remains the same, which is that we are ready to support countries through technical assistance, policy advice and financing. Some of the countries have already asked for support in all of those areas--financing, technical assistance and policy advice. As I mentioned to you at the beginning, Morocco, Jordan and Tunisia, we have financial programs with.

In the case of Yemen, we had a financial program in 2012 just after the transition government took over. We are discussing with them a follow-up program that would support them financially.

In the case of Libya, we did not see that there was a need for--they did not feel that there was a need for financing. However, we are very actively involved in providing technical support and advice.

In the case of Egypt, the government has not asked us for financing support, but we will be ready to consider that in the same way that we would for any other member.

So I think our approach remains exactly the same.

On the second question that you raised about investment financing in the GCC, I am assuming that you are referring to investment within the GCC rather than investment outside; yes.

I think our view on financing and public investment in the GCC has been that it is very important that these investments that are being done, which do lay the foundation for the continued modernization of infrastructure, the foundations for growth outside of the public sector in the GCC, that we think these are an important part of the economic strategy for these countries. But we have also taken the view, as you know, that it is important not only that the projects themselves be carefully scrutinized, as countries do indeed want them to be, but also that in terms of the overall level of fiscal stimulus required, as the private sector activity is beginning to pick up, countries can afford to pull back a bit on the pace of public spending growth, and indeed, that is what a number of countries are doing.

In some countries, as I said--and this is not so much GCC as outside the GCC, oil exporters--the pressures on trying to pull back on fiscal stimulus are also being driven by the near-term fiscal deficits that some of them have.

MS. AMR: We have a question on line from Matthew B., with Inner City Press on Jordan.

"It is reported that the IMF will lend $264 million for Syrian refugees. Since requiring repayment on humanitarian issues seems strange, can you explain the relationship between this Stand-By Arrangement tranche and the flow of refugees from Syria?"

MR. AHMED: Thank you very much, Matthew. On Jordan, just to explain, first of all, it is absolutely right that they have just reached a staff-level agreement on the next tranche of financing under an ongoing three-year program of the Government of Jordan that the IMF is supporting, and the amount of financing associated with this particular tranche is $264 million, if I am not mistaken.

Now, the IMF's financing supports a macroeconomic program that the Government of Jordan is undertaking which is aimed to reduce its vulnerabilities in the face of two shocks. One was the shock of the increased cost to the economy and to the government of the spillovers from Syria--refugees being one big dimension of that, but the Syrian crisis has affected Jordan also through other channels including through the impact on transit trade, including through the impact on tourism in the Region which has gone down as a result of the spillovers from Syria.

The other shock that the Jordanian economy was affected by was related to the disruption of the supply of natural base from Egypt, where the pipeline that was connecting the two was sabotaged, and that led to disruption of gas supplies and the replacement of cheaper natural gas by much more expensive alternative fuel.

To help them address these two external shocks, the Government of Jordan came up with a program that over time would reduce their budget deficits and build up their resilience as an economy and also to use this period to undertake some measures that would then create the foundations for returning to the sorts of growth rates that Jordan had enjoyed between 2000 and 2009, which were in the high single digits, as opposed to the 3 percent or so growth that they are now looking at.

Now you begin to see the economy strengthening. Reserves are beginning to pick up. The economy overall is beginning to look better. There are still some things to be done, and that is what the continuation of this program is supporting.

This program and the IMF in general do not provide financing for specific projects, whether development projects or humanitarian aid. Our financing is to help support balance-of-payments needs for countries at the macroeconomic level.

There are, however, other agencies that have been providing financial support to the Government of Jordan to take into account the cost to the budget of the Syrian refugees who have been welcomed by the Jordanian population.

QUESTIONER: In your view, what is the outlook for oil prices as the transition in the Arab world moves on, and what is your advice for the oil-importing countries?

MR. AHMED: The outlook for oil prices--if you look at futures markets--and the IMF for our own projections does not make independent projections of oil prices; we rely on the markets and the futures markets in particular to give us a sense of what market expectations are--if you look at the outlook for oil prices, what you see are two things--one, a slight softening in terms of oil prices as the base case, as to what the markets are saying, but also quite a wide range of uncertainty around those prices. I don't have a chart here, but there is a very nice fan chart that you will find in the World Economic Outlook which actually shows the range of oil prices that you can expect, giving various degrees of confidence to your expectations.

And if you look at, I think, the 95 percent confidence level--which is to say that with 95 percent confidence, you can say the price will be within this range--I think the last set of number I saw ran between 50 and 150, so just to give you a sense of how wide the market expectations are about oil price numbers.

Having said that, the message is that because there is uncertainty, and because the softening is still a relatively modest softening that is expected, oil-importing countries need to be building the buffers that enable them to deal with shocks that might come from unexpected increases in import prices of energy and particularly of oil. And that is the reason why we have been encouraging countries in the Region, including Pakistan, to take advantage of this opportunity to try to strengthen their buffers on the one hand, particularly in terms of foreign exchange reserves, but also to use this opportunity to try to ensure that they progressively move away from subsidizing oil products, because if you subsidize oil products, as we were discussing earlier on, that is not a very efficient way if you have generalized subsidies; it is much better to target the subsidies on the people who need them the most.

MS. AMR: We have one more question, here.

QUESTIONER: You spoke about Jordan and the impact of the refugees. Is the case in Lebanon different? How do they differ? What does it look like in both cases?

MR. AHMED: I think both Jordan and Lebanon are two countries that have been affected by the spillovers from Syria.

In the case of Lebanon now, the number of refugees that are there are close to a million, and taking into account the fact that the population of Lebanon is smaller even than in the case of Jordan, you can see that a million refugees in the context of the Lebanese population clear has big spillover effects on the budget and then outside of the budget.

The World Bank and the United Nations recently did a study that looked at the cost to the Lebanese economy of the refugees from Syria, and if I recall correctly off the top of my head, I think the fiscal cost alone was in the neighborhood of $2.6 billion. In addition to that, there was an even larger cost in terms of the cost to the economy--not to the budget, but the cost to the economy of Lebanon--in trying to address the needs of the Syrian refugees that are now in Lebanon.

So I think the short answer to your question is that both of those countries have been affected quite substantially by the refugees coming over from Syria, but I do want to emphasize that it is not just the refugees that are the spillover channel. There is also a consequence in terms of trade, in terms of tourism, and in the case of Lebanon also, there have been some spillovers in terms of increasing tensions and security issues across the border.

MS. AMR: The last question, please.

QUESTIONER: Hi. Can I get a clarification on your answer regarding the Iranian economy? Do your projections assume that the Joint Plan of Action ends on July 20, and do you assume any changes in the sanctions regime as you figure out what the economy will do this year?

MR. AHMED: Yes, let me give you an answer on that just to be very clear on that.

Our assumptions for the projections for Iran are that we would revert to the existing implementation of sanctions at the end of the period. That is what the current numbers are based on.

However, as I said earlier, if that were to change and there were a permanent improvement in the international environment and sanctions, that would lead to a realization of the higher growth rates that I had mentioned were the potential of the economy.

MS. AMR: Thank you very much. One more question.

QUESTIONER: Excuse me, I will ask in Arabic if Ms. Wafa Amr will translate.

MS. AMR [Off-mike]: He asked what is your expectation of the economic performance of Yemen in light of the deficit, and the donor’s pledges that have not been met.

MR. AHMED: On Yemen, I should say that I think you begin to see some stabilization of the economy. Let me give you the exact numbers that we have as well for [unclear] this year, which will give you the details. I don't want to get them wrong, so I am going to look up the exact numbers for you.

So, we are looking for--in terms of the deficits, I think this year, the budget deficit that is being targeted by the Yemeni Government in terms of the budget is 6.7 percent of GDP. And in terms of the economic growth performance, we do see a strengthening of growth this year from around 4.5 percent last year to a little over 5 percent this year. So that shows an improvement.

Now, having said that, I would say that investment is still too low in relation to the overall spending. The share of spending, the budget that is being spend on current spending, particularly on generalized subsidies and on wages is very high in relation to investment spending. So our view would be that, progressively, you want to reallocate money toward investments to generate growth in the future; and secondly, that a lot of these projections in Yemen depend on the political transition continuing, because as the political transition continues, it gives more stability and more sense of certainty that will help to bring in the private investment which is still holding back because they are waiting for the clarification or the resolution of some of the uncertainty on the political side.

MS. AMR: Thank you all for joining us. If you have further questions, please feel free to email us, and we will get back to you.

Thank you for joining us for this press conference.

MR. AHMED: Thank you.