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IMF Backs G-8 Plan for Supporting Middle East, North Africa

Cairo market: Some countries have seen a downturn that affects tourism and investment, the IMF says (photo: Herve Champollion/akg-images)

Group of Eight Summit

IMF Backs G-8 Plan for Supporting Middle East, North Africa

IMF Survey online

May 27, 2011

  • G-8 leaders to forge partnership with Middle East, multilateral institutions
  • IMF to make available up to $35 billion for the region
  • GDP growth of over 7 percent needed to boost employment

Launching the “Deauville Partnership with the Middle East,” the Group of Eight (G-8) has pledged to support Middle East and North African countries that are transitioning to free and democratic societies.

“The region needs to prepare for a fundamental transformation of its economic model,” said Masood Ahmed, Director of the IMF’s Middle East and Central Asia Department, who attended the G-8 summit of major industrialized countries in Deauville, France. “However, the immediate concern is that this promise should not be derailed by the multiple pressures the emerging markets of the region are now facing.”

The global partnership is being formed with countries wishing to support transition in the region, the International Monetary Fund, the World Bank, as well as other United Nations agencies and multilateral and regional development banks.

Leaders of the G-8 countries, meeting May 26 and 27 in the French seaside resort, focused on how best to aid successful transitions toward democratic societies and more inclusive, job-creating economies in light of the Arab Spring movement.

The G-8 initiative is designed to support countries in the Middle East and North Africa during this transition, while ensuring that instability in the short term does not undermine the process of political reform. Social cohesion and macroeconomic stability must also be sustained, the IMF said in a report released at the summit.

Need for outside support

Some of the region’s countries have been hit by a downturn in confidence that is affecting tourism and investment, and are relying on higher public spending to maintain social cohesion and support domestic demand, the IMF report said, noting that additional spending in the short term was understandable.

But with a fiscal deficit projected to increase to $46 billion in 2011, oil importers cannot afford to strain public finances and jeopardize the new inclusive growth agenda. Some countries will thus need external support to meet their financing requirements.

The IMF, which has already been assessing the region’s financing needs, announced it could make available as much as $35 billion as part of a broader international effort. An IMF mission is currently in Egypt to discuss possible financing with the government.

“I had the opportunity to meet with the Egyptian and Tunisian leaders, who were invited to the G-8 Summit,” said the IMF’s Acting Managing Director John Lipsky in a statement following the summit’s conclusion. “More work to define goals and strategies remains. But the Fund is prepared to work actively with member countries in the region to meet their urgent financing needs and develop the necessary strategies to medium-term success.”

The Deauville G8-MENA Partnership topped a wide-ranging agenda for the summit. Nuclear safety, Libya, aid to Africa, the Internet, and the global economy were also discussed.

Multi-year agenda

The IMF report stressed that a multi-year agenda of social and economic transformation must accompany political transformation in order to generate a prosperous future for the region. The presence of the regional donors alongside the G-8 will be key to the success of this partnership, the IMF report said.

While each country must identify its specific policies, a broad regional strategy should address four main issues.

First, overcoming high unemployment will require a substantial increase in the pace of economic growth. To absorb the unemployed and new entrants to the labor force, MENA emerging economies would require annual real GDP growth of more than 7 percent—almost 3 percentage points higher than the average achieved in the past decade.

Achieving such growth rates will entail both additional investment and improved productivity. While some increases in public investment may be required, for instance to improve the quality of infrastructure and services in less developed rural areas, the key role will have to be played by the private sector, including by attracting foreign direct investment.

Growth also needs to be more inclusive; governments need to create an environment that allows all segments of the population to contribute to and benefit from economic growth, not just a privileged few, while providing social protection for the most vulnerable.

Underlying these goals is the need to build modern and transparent institutions to foster accountability and good governance, and to preserve macroeconomic stability throughout the process.

Financing requirements

In the initial years, some countries will need external support to meet their financing requirements. In the current baseline scenario—which does not yet include the reform agendas that countries would develop—the external financing needs of the region‘s oil importers is projected to exceed $160 billion during 2011-13.

Over the medium term, the financing requirements of a new growth agenda will likely be higher, and will be determined once countries develop their economic and social strategies.

In the next 18 months, a greater part of these financing needs will need to be met from the international community because of more cautious market sentiments during the uncertain transition.

Private financing will eventually resume its traditional role in light of the creditworthiness of these countries, and such financing will be necessary to meet the scale of growth envisaged.

“Oil importers in the region will require substantial financial support to help generate jobs and growth over time,” Lipsky said. “Though the challenges may be great, we are optimistic that a commitment to sound policies and consistent implementation of reforms will bring positive results.”

Role of the international community

The IMF report said the Middle East and North African countries themselves should lead this transformation, and they will determine its ultimate success. However, the prospects for success will be much higher if the efforts of the region are accompanied by a multifaceted program of support from the international community.

Critical aspects for success include:  

• Ensuring that the scale and scope of support measure up to the needs of the transformation;

• Tailoring support to each country’s objectives and pace of reform. It will be important to think of innovative incentives adapted to national objectives, including in the political sphere;

• Securing the participation of the regional donors and institutions, including the Gulf Cooperation Council, which will be key for domestic and regional ownership; and

• Leveraging the participation of the private sector.

“We welcome the Deauville Partnership, which will enable the transformation of the region,” said Ahmed. “We need to work creatively with all partners in the coming months to establish a collaborative monitoring process to advance this agenda.”