Typical street scene in Santa Ana, El Salvador. (Photo: iStock)

Typical street scene in Santa Ana, El Salvador. (Photo: iStock)

IMF Survey : Mideast Issues High on IMF Agenda

April 26, 2013

  • Arab countries in transition face economic and social pressures amidst weak domestic and external environment
  • Pressing stabilization policies and structural reforms face political realities
  • IMF committed to help transition countries, but international support is also needed

The challenges facing Arab countries in transition —Egypt, Jordan, Libya, Morocco, Tunisia, and Yemen—were a focal point for policymakers during the 2013 IMF-World Bank Spring Meetings in Washington last week.

Cairo, Egypt.

Cairo, Egypt. Weak domestic and external environment continue to pose challenges for Arab countries in transition (Photo: World Bank)

2013 Spring Meetings

The meetings brought together ministers and top officials as well as representatives of civil society, media, academia, and the private sector from all over the world to discuss the critical issues facing the world economy, with Middle East issues high on the agenda. Along with discussions with country delegations, IMF officials participated in regional and global forums with a focus on the Middle East and North Africa (MENA).

Discussions, led by IMF chief Christine Lagarde, IMF Deputy Managing Director Nemat Shafik, and Middle East Department head Masood Ahmed, covered a broad range of topics, including key challenges, the economic outlook, the reform agenda, and the IMF’s role in the region.

Key challenges

Arab countries in transition continue to face high political uncertainty and social pressures. Fiscal and reserves buffers have diminished sharply, underscoring the urgent need to maintain macroeconomic stability in an environment of sluggish global growth, high commodity prices, and still impaired domestic confidence.

IMF Managing Director Christine Lagarde met with ministers of finance and central bank governors to discuss these pressing issues, listening to their perspectives and exploring options for moving ahead. An IMF report, delivered at the Deauville Partnership Ministerial Meeting, took aim at the economic challenges that transition countries are currently facing. The report also emphasized the need for a resolute policy action and support from the international community.

The IMF report noted that it will be equally important for policymakers to move quickly on designing and implementing effective structural reforms to build dynamic and inclusive economies that generate the vast number of jobs needed.

“Promoting private-sector growth and international trade, as well as attracting foreign direct investment inflows, will be key components of success,” said the report, adding that financial assistance and technical expertise from external partners, including Transition Fund projects, can make a big difference in this endeavor.

Economic outlook

The weak domestic and external environment will continue to pose challenges for MENA oil importers during 2013–14.

“Economic growth in the MENA oil importers, projected at 2¾ percent this year, remains weighed down by a number of factors: continued political uncertainty and bouts of social unrest across the Arab countries in transition, significant regional spillovers from the escalating conflict in Syria, soft external demand from European trading partners, and persistently high food and fuel prices,” IMF Middle East Department Director Masood Ahmed told reporters in Washington last week during a briefing on economic developments in the region.

“Embarking on fiscal consolidation and promoting exchange rate flexibility will be crucial in maintaining macroeconomic stability,” Ahmed said.

“The MENA region has spent about $240 billion on energy and food subsidies in 2012, which represents 30 percent of fiscal revenues and 50 percent of the world’s total subsidies. Restoring fiscal sustainability will require reductions in inefficient spending on generalized subsidies and increased expenditures on targeted social safety nets, as well as boosts to public investment,” said Ahmed.

Beyond the short-term agenda, Ahmed called for formulating and implementing a credible and bold agenda for economic transformation that focuses on institutional and regulatory reforms, to enhance the business environment, bolster private sector activity, and create greater and more equal access to economic and employment opportunities. Formulating and communicating the economic transformation agenda alongside the short-term agenda will make it easier to build the necessary public support behind reforms.

Nonetheless, these sorts of short-and-medium-term reforms will have to face political economy considerations, which were also discussed in a high-level seminar during the meetings.

Political economy of reform

The uprisings in many Arab countries have generated the promise of a better life for 300 million people. However, forthcoming elections and constitutional reform, as well as populations anxious for jobs and higher incomes, complicate policymaking for many governments.

On the one hand, policymakers will need to maintain macroeconomic stability and respond to the growing impatience among restless populations for quick improvements in their livelihood. On the other hand, they have to manage political transitions, including contentious elections. So, the question is: how can governments implement economic reforms amidst political transition?

This question, among others, was tackled in a seminar on the political economy of transition in the Middle East, moderated by Al-Arabiya. IMF Deputy Managing Director Nemat Shafik participated alongside other experts.

“The issue is that economic affairs were left outside the political sphere for a long time. This is the first time in the region’s history that politics and economics are intertwined,” Ghassan Salamé, Dean of PSIA, professor at Sciences-Po and Columbia University, told the conference.

While there was a consensus among the seminar panelists that reform is inevitable, they disagreed on the timing of implementing economic reforms. Some argued that the political transition should come to an end before initiating economic reforms while others thought that both should go hand in hand.

Views also differed on how long it will take to implement reforms. According to Ishac Diwan, Director for Africa and the Middle East, Center for International Development at Harvard, “reforms could take a generation to be implemented.”

Regardless of the timing and sequence, the IMF stressed out the roles of communication, buy-in, and ownership in any reform plan. “Willingness to reform has been hampered by the high expectations and lack of truth-telling,” Shafik told the conference. “Economic reforms need to be more strategic, planned, and owned by the countries” she added.

IMF support

In addition to giving technical assistance and policy advice to many countries in the region, the IMF has provided about $8.2 billion of financial support to Jordan, Morocco, and Yemen, and has reached a staff-level agreement on a loan to Tunisia earlier this week. The global lender is also in discussions on a financial arrangement with Egypt and a second arrangement with Yemen.

“Tunisia will be another country in the Middle East where we will be helping and supporting,” Lagarde told reporters in Washington over the weekend. “We have to support the Egyptian population. But, it will take international support and international donors to also help Egypt,” she added.