Mideast Needs More Focus on Inclusive Growth—IMF
IMF Survey online
February 16, 2011
- Popular protests could unleash greater long-term growth potential in region
- More transparency, competition will help Egypt, Tunisia leverage their strengths and create jobs
- Governments in region are increasing fiscal spending in response to unrest
Masood Ahmed, Director of the IMF’s Middle East and Central Asia Department, says that one of the lessons from recent unrest in the Middle East is that governments should focus much more on inclusive growth and give better-targeted help to poorer households.
In an interview with IMF Survey magazine, Ahmed said that the events in Egypt will clearly have a negative economic impact in the short run, but over the longer term they can position Egypt to better exploit its potential to achieve higher standards of living and employment for all sections of its population.
Speaking on events in Tunisia, Egypt, and across the Middle East, Ahmed said that, partly in response, authorities in the region have announced an increase in fiscal spending, in some cases preemptively and as large as 3 percent of GDP. These include higher food and fuel subsidies, social transfers, including to the unemployed, tax reductions on staple commodities, higher funding for private housing and an expansion of civil service employment or salaries. Following is the full text of the interview.
IMF Survey online: What is the economic outlook for Tunisia, and what can be done to promote inclusive growth and job creation?
Ahmed: The recent events brought into sharp focus the need for more inclusive growth and better governance, but it is important to recognize that the Tunisian society has enduring strengths. In the short run, tourism and foreign direct investment (FDI) will certainly decline and this will have negative spillovers on the rest of the economy, including on the financial sector. The government is well aware of these issues and is working towards mitigating the impact on the population. Going forward, however, and to recognize the full potential of the Tunisian economy, there will be a need for programs to enhance job-creating and inclusive growth, and to design a well-targeted social safety net that would protect the most needy, especially in difficult times.
IMF Survey online: How will the Egyptian economy be affected by recent developments?
Ahmed: Let me preface this by noting that while the economic and daily life of Egyptians is beginning to return to normality, events are still unfolding and it is very early to make any firm assessment of the economic impact.
The recent popular protests and the associated political uncertainty will have a negative economic impact in the short run, but over the longer term they can position Egypt to better exploit its potential to achieve higher standards of living and employment for all sections of its population. No doubt, growth will take a hit this year, falling below the 5½ percent rate registered in the most recent two quarters, as tourism and foreign investment will decline. The budget deficit, already high, is likely to increase this year with lower economic activity, higher food prices, higher interest rates, and any new spending initiatives. Finally, unemployment has long been high—and especially so among the youth at 25 percent—and it could worsen this year with lower economic activity.
However, it is also important to recognize that greater transparency, competition and a broader ownership of the national economic reform agenda should enable Egypt to tackle some of the constraints that have held back an inclusive and sustainable improvement in living standards. This will then leverage the country’s inherent strengths: a dynamic and young population, a large domestic market, access to key markets, a privileged geographic position, a strong financial sector, and a comfortable level of reserves.
IMF Survey online: How can the IMF help Egypt?
Ahmed: The Egyptian government and the Egyptian people will define the economic policies that suit Egypt the best to emerge from this period of unrest. The IMF can help by providing the needed technical and policy advice to support the Egyptian authorities confront their short- and medium-term challenges and bring about more inclusive growth, based on its global experience. And this is something we are already doing. As with all other members, if the Egyptian authorities decide that financial support would also be useful, the Fund would be ready to help, based on an assessment of the financial needs.
IMF Survey online: What will be regional economic impact on the region of recent events in Tunisia and Egypt?
Ahmed: Recent events in the two countries have triggered protests in some other countries. Partly in response to the growing unrest, the authorities have announced an increase in fiscal spending, in some cases pre-emptively and as large as 3 percent of GDP. Measures include higher food and fuel subsidies, social transfers, including to the unemployed, tax reductions on staple commodities, higher funding for private housing, and an expansion of civil service employment or salaries.
The financial markets have not been immune to the unrest. Since the early January flash points in Tunisia, CDS bond spreads throughout the Middle East and North Africa region have widened and equity markets have fallen somewhat. These market movements reflect a tightening of financing conditions for sovereigns as well as the corporate sector, which could affect economic activity this year. The incipient recovery in domestic bank credit is likely to remain sluggish, a natural response of banks during political turmoil.
IMF Survey online: How should the region respond to rising oil and food prices?
Ahmed: Many countries inside—and outside—the Middle East and North Africa region are trying to mitigate the domestic impact of higher international fuel and food prices though subsidies and other measures, including higher wages, cash transfers, tax reductions, etc. Given fiscal constraints in many countries, governments will likely try to partially offset some of the additional cost of these measures through cuts elsewhere.
In our view, it is crucial that governments help poor households, and even more so during difficult periods. To address the fiscal constraint without necessarily reducing other important expenditures (such as on infrastructure), it is important to improve and modernize the existing safety nets to make them both well targeted and enduring. In contrast to generalized subsidies that benefit everyone, well-targeted social safety nets provide assistance only to those most in need of government help. Thus, needy people could receive benefits on a more enduring basis, yet at reduced fiscal costs.