Transcript of a Press Briefing on the Economic Outlook in the Middle East and North Africa

September 18, 2003

by George Abed, Director, Middle Eastern Department, David J. Robinson, Deputy Director, Research Department, Abdelali Jbili, Assistant Director, Middle Eastern Department, and Mohamad Chatah, Advisor, External Relations Department
At the Dubai International Convention Centre, Dubai, United Arab Emirates
September 18, 2003

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MR. CHATAH: Well, good afternoon and welcome to this press briefing on the IMF's assessment of the economic performance and outlook of the Middle East and North Africa Region. As a reminder, the region is defined to include Iran and Pakistan, in addition to the Arab countries.

MR. ROBINSON: And Afghanistan.

MR. CHATAH: Yes, Afghanistan, of course. Many of you were here this morning when a press briefing was given on the broader World Economic Outlook. This afternoon, we will cover the outlook of the MENA Region, that is, Middle East and North Africa, which is also included in the
World Economic Outlook document, which was made available just a short while ago, especially in Chapter 2.

But this briefing will also cover other and broader economic policies, economic policy issues that have been looked at in-depth by the IMF's Middle Eastern Department, issues which are also included in a number of studies or pamphlets which are made available outside for your use, both in English and in Arabic.

A reminder, there will be simultaneous translation. Arabic is on Channel 1, English is on Channel 4, and the time to switch to Arabic.

(Interpreted from Arabic): I shift now to Arabic.

My name is Mohamad Chatah. I am Adviser at the External Affairs Department at the International Fund. To my left is David Robinson, the Deputy Director of Research and Development; then, Mr. George Abed, the Director of Middle Eastern Department at the Fund; and Mr. Jbili, the Assistant Director at Middle East Eastern Department.

Before I take your questions, I now give the forum to Mr. George Abed; then, after that, the question and answer session.

Thank you.

MR. ABED: Let us introduce the subject with a few observations on the Middle East Region. As Mohamad mentioned, the Middle East Region for us includes Pakistan, Afghanistan and Iran, plus all the 21 Arab countries, plus, the Palestinian territories.

Briefly, the Middle East Region, approaching the Iraq crisis and then the Iraq war, had a great deal of uncertainty attached to its future because of the difficulty of divining what exactly the Iraq war was going to bring about.

The Iraq war was short, and the crisis that followed did not have such a large impact on the economies of the region, not as much as we had anticipated. And most economies in the region weathered that storm reasonably well and continued on their growth path since then.

Two reasons for the relatively mild impact of the Iraqi crisis and war: One is that a number of countries have taken some precautionary measures, such as tightening the fiscal accounts, adding to their reserves, and taking other measures to withstand the shock. Another reason was that a number of the countries that were affected by the Iraq war received some assistance from outside.

The growth prospects for 2003, therefore, will be governed, to some extent, by this recovery from the shallow crises surrounding the Iraq war, but also by the pick-up in oil prices. Oil prices are largely beneficial to the region because of the additional revenue and wealth it creates in a large number of countries in the region.

Growth for 2003, therefore, is expected to be around 5 percent for all of these countries combined in line with the growth of developing countries as a whole, as a group.

Some of the better performers, one must note, are among the GCC countries here in this region, including the United Arab Emirates, and North Africa, Morocco, and Tunisia, Pakistan, Iran, which is growing at a reasonably high rate.

And going forward beyond 2003, the outlook, of course, depends on how the price of oil and the production levels of oil will develop into the medium term and the continuation of reforms that have been begun or have been started in the past few years in a number of countries.

If one looks at these countries in a more detailed manner, one sees that many of the countries that have undertaken reforms, such as in the financial and banking sector, in the fiscal sector by introducing tax reform and budget restraint, in the labor markets to make the labor markets more flexible, and in trade liberalization, that the countries that have undertaken these reforms have generally done better, in terms of growth, than those that did not.

And if these countries, and others, proceed with deepening those reforms and accelerating the agenda of implementation of reforms, it is quite likely that the region will continue to grow at reasonably satisfactory rates.

However, the region is not likely to grow at sufficiently high rates to make material or to achieve material reduction in the levels of unemployment; the major problem that still plagues the region--unemployment--which in the larger countries ranges between 12 to 15 to 18 percent of the labor force.

In order to reduce unemployment materially and make a dent in this unemployment rate, growth rates would have to be in excess of 6 percent per year in real terms, and these kinds of rates can only be achieved if the countries in the region undertake deeper reforms, what we might call second-generation reforms, to reform the state institutions to create a more hospitable environment for private sector investment and growth, to liberalize their economies so they can benefit from the operation of market forces and from foreign direct investment and transfer of technology and skills, reforms in the judicial system, and in the educational system and in labor markets.

A long agenda of reforms, which obviously the region is currently contemplating, but the only way it can achieve high rates of growth would be to undertake these reforms.

I think I spoke enough on this. I'll take questions, but I would defer to my colleague, David Robinson, who can give you additional insight on the region and within the global environment.

MR. ROBINSON: Well, I think that George has already given you a very good overview, so I am going to be rather brief and simply talk a little bit about one of the special studies we did in this World Economic Outlook on the Middle East. That, for those of you who have the WEO, you can find it in Chapter 2. Our aim was to look more closely at what needed to be done to boost growth in the Middle East, given, as George says, the imperative of employing the unemployed and also those who are going to come into the labor force, which is growing very rapidly in many countries.

The approach we took was to look at what has boosted growth in other countries in the world and what can we learn from that for the Middle East. I am not going to go into too many details. Just let me state the conclusions and we can discuss it a little, if you like.

We found, interestingly, that the policies varied very much across the region. In some of the GCC countries, the key issue was the relatively large size of government, that resources were being directly into the public sector rather than into the private sector, and we found that there could be a fairly substantial boost to growth if the size of government could be reduced.

In many of the other countries, the issue was much more institutional quality, and, by that, I am talking about things like the quality of the bureaucracy, the quality of the judicial system, corruption, stability and so on. In those countries, improvements in institutions were the key issue. That wasn't a big surprise to us because we have done a lot of work on growth and institutions across the world and we have increasingly found that that is key.

There are many other factors, too, but let me just leave it there as those two things being two key things that came out of our cross-country study for the MENA region.

MR. CHATAH: (Interpreted from the Arabic.) Before we open the Question-and-Answer session, please wait for the microphone to come to you before giving your question and introduce yourself and your organization.

The second thing, please try to confine your questions to the assessment in general of the MENA region without delving into specific countries' situations. That might be appropriate elsewhere.

MR. ABED: (Interpreted from the Arabic.) I wouldn't miss the opportunity to express our deep gratitude and thanks for the United Arab Emirates and the Government of Dubai for the excellent arrangements for this meeting that takes place for the first time in the region. Apart from the presentation on the area, I am glad to attend to your questions in Arabic, if you like or I'll give you a summary in English, as you like.

QUESTION: Thank you. Could I ask the panel to give us their prognosis on Saudi Arabia, in particular, and their performance and also, in light of this year with the windfall from oil income the highest, I think, in 20 years--so I would be grateful for your thoughts on Saudi Arabia.

MR. ABED: Saudi Arabia, as you are aware, has been undergoing, since the late '90s, a series of structural reforms to improve the market environment for investment, both domestic and international. A number of laws have been passed in the area of financial and banking-sector reform. More recently, a capital-markets law has been passed to allow the development of deeper capital and diversified capital markets.

An insurance law has been passed. A number of other laws are either under consideration or have already been passed including, by the way, a major effort in the area of training and labor-market flexibility. A human resource-development fund has been set up to help train Saudi nationals for more appropriate involvement--employment in the private sector.

The gas initiative, as you know, has been restructured and is under implementation progressively and foreign direct investment has, of course, been encouraged. As a result of these reforms, Saudi Arabia has achieved reasonable growth rates. The non-oil sector has grown at about three-and-a-half to 4 percent per year steadily. The oil sector, of course, has been influenced by the fluctuations and the volatility of oil prices and oil production.

We expect, in 2003, that the Saudi economy will do well, growth in the range of 4.5 to 5 percent, and the fiscal accounts are likely to be either balanced or in a small surplus.

MR. CHATAH: Fourth row, second.

QUESTION: I have a couple of questions. Number one, where do you position UAE in terms of contributing positively in the overall economic progress worldwide or region and what is the formula that the UAE has adopted or implemented to take that front-line position?

My second question; you have put a long agenda of reforms to, you know, achieve the economic progress in all the Middle East and African countries. You have just referred to the constitutional reforms in the environment and whatsoever. Do you agree with me that that meets a lot of political, social and economical, especially political, changes in these countries?

Thank you very much.

MR. ABED: Briefly, on the UAE. As you know, the UAE is one of those countries in the region that has been, so to speak, open for business for some time. It has chosen the way of opening its economy for trade, for financial intermediation and for the development, especially, of transshipment trade and financial and insurance sectors. And, in fact, in this regard, the UAE has succeeded to a great extent.

Growth in the UAE has been highly satisfactory in part because of the strengthening of the oil market in the past year and a half, two years, but also because of the increased activity related to trade and banking and finance in Dubai and in United Arab Emirates as a whole.

The United Arab Emirates also has been one of the more diligent countries in terms of passing legislation and enforcing anti-money laundering and the integrity of its financial and banking system and has also, in the past year, this past year, or this year, published the IMF assessments of its economy. So the UAE has been one of the more transparent countries in terms of sharing the information that the IMF developed on its economy, its own assessment. The report that was submitted to our Board of Directors in Washington was, in fact, published and you can access it on the website of the IMF. These are all very positive steps for the UAE economy to have taken.

In terms of reforms, indeed, the ambitious agenda of reform requires deep going and thorough political, social and economic adjustments in our societies. Political reform, in many instances, is essential for the success of economic reforms. An example; my colleague, David Robinson, mentioned that one of the drags on the growth and dynamism of this region is the large size of government and the large size of bureaucracy and the very high wage bill that the government has to pay to keep the bureaucracy going which, if you could imagine a more streamlined government, more efficient, more modern with greater space allowed for private-sector investment, private-sector initiative, in an appropriately designed regulatory environment with rules and laws that apply to all.

You could see that these economies can begin to grow at much higher rates. Now, the reform of the state touches on both political as well as economic and administrative reforms. So this is one example that, indeed, illustrates your point that this ambitious agenda of reform requires major adjustments in the way business is done in this region.

On the other hand, we all understand the urgency of these reforms. This region has enormous assets. It has enormous financial resources. It has enormous natural resources, very well developed infrastructure in most of the countries, heavy investment in education, a strategic location, very close to all markets, especially European, African and Asian.

It should be growing at much higher rates. And the factors cited by my colleague, David, are among those that have impeded this region from going to higher rates. Our hope--and we continue as an IMF to work with these countries on policy advice, technical assistance and, in some cases, financing to help these countries achieve those higher rates of growth and to undertake these necessary reforms.

MR. CHATAH: First row, first gentleman there. Go ahead.

QUESTION: (Interpreted from Arabic) Thank you. In Dr. George's expose he said that it is necessary to introduce political changes and reforms in the societies of the region. Doesn't it make the IMF a political tool instead of a tool for economic development, especially in the Third World? Thank you, sir.

MR. ABED: (Interpreted from Arabic) In talking about economic and financial reforms, whether in this region or other regions, be it Africa or Asia, this issue is a perennial one in the debate agenda of discussions between the IMF and the member states. Including those issues in the discussion agenda is but a manifestation of the importance given by the country to the expertise drawn by the employees of IMF as a result of their work in different countries. They want to benefit from that expertise and experience with a view to putting it into action in the concerned country.

In many instances, the official is unresponsible. Other governments present questions to the officials at IMF regarding fiscal and financial reforms in the banking sector or in the tax sector. How fiscal reforms are implemented in advanced countries like Europe? How can a given country benefit from the experience and lessons learned from other countries in a given area?

Thus, the agenda of reforms is not imposed by the IMF on the countries. It is not an interference by the IMF. It is the fruits of many visits by IMF officials to the countries, and it is also a reflection of the countries' exercising their right to draw, benefit from the IMF competence and expertise in the implementation of reforms to achieve more prosperity and growth to their society.

This open dialogue is a sine qua non for any agreement between the IMF and a given country on a certain reform program, which in some cases need financing and in others does not need but is limited to giving advice to the countries and learning from lessons drawn from other countries.

MR. CHATAH: There in the middle; the blue one. The one in blue. No, the one in blue.

QUESTION: Mr. Abed, what is your view as to what needs to be done in Iraq, the cost of reconstruction, and the kind of pace of change that you realistically believe might take place over the next, say couple of years or so?

MR. ABED: Iraq, as you know, as an economy and as a society, as a country is going through very difficult times. We in the IMF, as our colleagues in the Bank, are involved as part of our mandate and as part of the declaration of the IMFC and the Development Committees in the Spring Meeting, that both institutions along with the U.N. should get involved in the reconstruction of Iraq, have been engaged in dialogue with the Coalition Provisional Authority and with Iraqi counterparts to see in what areas we can be of some assistance within the mandate of the IMF.

The mandate of the IMF, as you know, is that it is a macroeconomic financial, monetary institution. Our areas of expertise are in this area, in this particular instance, Iraq, which is a post-conflict country, as it has been in other post-conflict countries whether it be East Timor or Kosovo or Yugoslavia, the West Bank-Gaza, Rwanda, and other places, is to see how we can assist the authorities in rehabilitating and restructuring the financial and monetary institutions so as to stabilize the economy and prepare it for long term growth.

In this regard we have provided technical assistance and advice to the CPA and to the Iraqi counterparts on central bank legislation, the restructuring of the banking sector on budgetary systems to be introduced on the currency exchange that needs to be undertaken in the next few months, and a number of issues related to trade, to customs, to taxes and so on, which will help Iraq get back on its feet and help the economy get stabilized before it begins to grow.

Our role in this has been to provide technical advice and to provide technical support. Because of the events of August 19th, the tragic explosion that occurred in the U.N. building in Baghdad, our staff has not been able to go back for security reasons but we remain engaged through other means of communication.

The donors' conference will take place the 23rd, 24th in Madrid. It will be sponsored by the core group of donors which includes the U.S., includes the U.A.E., by the way, which participates, Japan, and the Europeans, and in association with the international financial organizations and the U.N. At that conference it is hoped that the assessments of needs, the point you raised, will have been completed. They are not now. We don't have a clear picture yet on the requirements for, financial or otherwise, for reconstruction in Iraq. The studies are still underway.

A good deal of the fieldwork has already been done by the UNDP, by the World Bank, and by ourselves, but we need to put these findings together in some coherent manner, and these will be presented at the donors' conference later in October.

We don't have a figure yet. We are still putting these different elements into a larger picture. We hope to have some meetings during this annual meeting with Iraqi representatives and representatives of the Coalition Provisional Authority to also get their inputs into the estimates that have been, assessments that have been prepared by the different U.N. organizations, the World Bank and ourselves. Only at the end of that process will we have even

an approximate idea of what the immediate needs are.

MR. CHATAH: Please identify yourself. Raise your hand. The lady in the black in the back there.

QUESTION: (Interpreted from Arabic) Some countries believe that implementing IMF prescriptions have not helped them achieve macroeconomic success or microeconomic success. Unemployment is high, inflation is high. Many productive sectors suffer from investment costs, and at the same time they say that opening the doors for trade rob them of their competitiveness and ability to compete.

What is the role of the IMF to provide advice to those countries in this field? How can those strengthen the flow of their exports while ensuring open door trade policies? Thank you.

MR. ROBINSON: Okay. Let me try and tackle some of the questions that you've raised there. And first let me say that I would really strongly disagree with the assertion that opening the doors for trade rubs a country of its ability to grow. I mean I spent a good part of my professional life working on Southeast Asian countries, and I have seen it firsthand what opening the doors to trade means for those economies. It brought in for them one of the most rapid periods of growth for a period of 20 or 30 years and a massive reduction in poverty and made an enormous difference to those countries. Another very good example perhaps is China itself which is a country which started almost closed in 1978 with a very large underemployed workforce, and its process of gradually opening up has been the driver of a loss of Chinese prosperity.

So I just want to underline that opening up to trade, in fact, we have seen over the last 20, 30 years being a major driver of growth.

MR. CHATAH: Please microphone, a quick follow-up, yes.

QUESTION: As you said, I agree it was a gradual process and China imposed serious blocks and barriers on imports. It imported the technology it needed and gradually with the strengthening of its export markets it started opening up for more imports. I agree. I'm asking about going gradual in this process.

MR. ROBINSON: I think in each case you need to suit the strategy to the particular conditions facing the country, but, in fact, in China, a number of sectors were opened very rapidly. The export oriented sectors in particular were opened extremely rapidly and if you look at what China is now doing joining the WTO and reducing barriers very fast by the standards of many developing countries, I think that you can see the importance that the Chinese leaders themselves attach to this, and let me add that it goes beyond just the benefits from trade.

I mean I think one of the things that's really important since we're on the subject of China to the Chinese leaders about the WTO is the way that it helps them create a political consensus in their country for other reforms. I mean this role of the WTO as an anchor for other reforms is very important in China. Similarly, for the accession countries in Eastern Europe, the role of joining the European Union opening up their markets, but also all the other reforms that go with it has been very important for them, and to finish, I think that, you know, this is a lesson that perhaps some Middle Eastern countries could also learn from in the sense that, for instance, the EU Association Agreements are a start towards that kind of thing.

But I think a faster opening up of Middle Eastern countries, many of which, not the GCC, but many of the other countries are relatively closed, can pay major dividends both in terms of growth, but also in terms of getting the institutional and other structures in place needed to generate the growth that George was talking about earlier.

MR. CHATAH: The bearded gentleman in the back there.

QUESTION: Thank you very much. Very nice to see you, Mr. Abed. The interview that you did with us will be in the magazine on Saturday about the issues you're talking about. But my question is about Iraq and its position in this meeting. I believe that Mr. McPherson is coming who is the director of the CPA. I've heard that Mr. Bremer may be coming, but I also believe that a representative of the Central Bank Governor of Iraq, Mr. Sinan, will be coming. Will they be granted the full participation in this meeting that has stood vacant?

Will the IMF, in effect, be recognizing the new Central Bank Governor of Iraq at this meeting, and he will be here and he will be able to speak and vote as Iraq has always done in the past?

MR. ABED: There will be an Iraqi delegation of Iraqi officials including Dr. Sinan Shibibi, the newly appointed Governor, the Minister of Finance, Minister of Planning and other ministers from the other sectoral ministries, and there is likely also a representative of the CPA. Arrangements are being made for them to be at these meetings.

I will simply refer to the UN Security Council resolution that has established the CPA as the occupying power in charge of Iraq. Iraq by definition therefore and by international consensus does not now have an internationally recognized legitimate government. It has an occupation regime sanctioned by the UN which has full control of its policies and resources and so on under the observation and the monitoring, of course, of the UN and the international community.

The representatives who will be here from Iraq will be, of course, here to participate in virtually all the meetings. They are also here for dialogue, discussions, as I mentioned earlier, with the senior staff of the IMF, the World Bank and the UNDP and UN organizations who will be joining later in the course of these meetings to discuss these assessments that I mentioned earlier, the needs assessments in the area of infrastructure, water, electricity, education, health and in the area of rehabilitation and reconstruction of basic institutions for the functioning of the Iraqi economy.

We and the entire international financial community are very keen on involving and listening to the Iraqis, Iraqi counterparts, and to the CPA which is in charge of Iraq, to their views so that we can come out with a coherent assessment of what the needs are and how to go about meeting those needs for the reconstruction if Iraq going forward. So the discussions will be technical and I hope will be very useful. Thank you.

QUESTION: Will they be allowed to vote? Will they be allowed to vote in these meetings?

MR. ABED: I believe you should probably refer that to the Legal Department, but I cannot answer that. I don't know. I don't know.

MR. CHATAH: The gentleman in the front. We have room for two more questions. The gentleman right here in the front.

QUESTION: (Interpreted from Arabic.) Indeed, there are many economic sectors in the country that are limited to the public sector and have not been open to the private sector. Another question regards Egypt and the Egyptian pound exchange rate vis-a-vis the dollar. I think the IMF has advised the Egyptian government to float the Egyptian pound in January, but the consequences have not been expected as was said by the IMF.

MR. CHATAH: (Interpreted from Arabic.) As regard telecommunications, most of the telecommunications sectors in the region have been public sector companies. Then a number of countries have sought to privatize the telecommunications sector. You know that this has taken place in Morocco, in Jordan, in Egypt and recently here in the Gulf region in the Kingdom of Saudi Arabia. The Kingdom of Saudi Arabia has put over 30 percent of the Saudi communications company to be bought on the public exchange. And this is the trend also to be followed by other countries. This is the trend we have witnessed to privatize that sector.

But privatization in and by itself is not an end in itself. What is more important is that telecommunications sector itself, for it to be a platform to develop information technologies and for the transfer of information technology requires more investments, and in many cases the investments come from the public sector for the technologies to be spread through the telecommunications channel towards other outlets with a view to facilitating the functions and activities of the banking sector, of the commerce sector and the economic sector in general. Thus, developing the telecommunications sector must be done under the aegis of the public sector.

That's why some governments take their time in privatizing the telecommunications sector waiting for the most favorable and hospitable environment before they can do that, but the trends will continue and grow in the future.

As to exchange rates of Egyptian pound to the dollar, the Egyptian government has floated the Egyptian pound on the 29th of January 2003, a step in the right direction, because the exchange rate as you very well know was a distortion of the reality. There were two rates, the black market rate and the bank rate, and one of the reasons why the government floated the Egyptian pound is to make the price uniform for currency traders but as well as the importers and for the tourist sector.

However, still there are some obstacles in the way of that floating stemming from a number of administrative measures taken by the Egyptian government and partly due to the economic imbalances in Egypt that distort the economic performance in Egypt

For instance, the budget deficit and pressure on foreign currency reserves because the inability of the Egyptian exports to provide to the treasury, the Egyptian treasury, the foreign currency it needs despite the floating. By itself, it will not solve the problem in Egypt and recently the market has seen a difference, a gap between the exchange rate on the market, on the black market, and the exchange rate of the Bank. The Egyptian government is following this closely. It has a number of proposals to address this problem. We are in constant contact with Egyptian authorities and the IMF will send a mission in October this year to Cairo, and this issue will feature high on the agenda of those discussions.

MR. CHATAH: Mr. Abdelali.

MR. JBILI: (Interpreted from Arabic.) We would like to draw your attention to the fact that the Middle Eastern Department has prepared a brief study. It is available in a booklet, "Choosing a Change Rate Regime or System in the Middle East and North Africa." It gives examples of country systems and what are the needed elements for the success of such exchange regimes, and for changing exchange regimes from pegged rates to a free or floated rates, and how best to manage the economic and fiscal policies in the country.

MR. CHATAH: The gentleman here in the front row, in the middle?

QUESTION: Could you perhaps explain where your assessment of Iraq's debt position has got. I know there's a conference next month. And as a supplementary, there's an idea from the U.S. Export-Import Bank to issue bonds against oil revenues, has the IMF assessed that plan?

MR. ABED: The data, with respect to Iraq's debt, are subject to wide degrees of uncertainty. The Paris Club has made an assessment of the debt owed to its members. The Secretariat has polled its members and come up with a figure I believe that was announced, something like US$21 billion in principal and up to US$40 billion, including interest and charges.

Now, the non-Paris Club members, including a number of countries in this region, also have extended credit to Iraq in the past, especially in the '80s and up to 1991, the first Gulf War. We, in the IMF, in the interest of facilitating addressing this issue, are in touch with the different countries to see if we can get some information on the debt, strictly as an information-gathering exercise. This exercise is not complete yet, but there is also substantial debt owed to non-Paris Club members. We hope to have some assessment in the next few weeks that could be useful for those who will then engage in dealing with this issue which is, as you know, very complex and will require a good deal of preparation and work, both on the part of the Iraqis and the CPA and on the part of the international community as well.

MR. CHATAH: (Interpreted from Arabic) Thank you very much for your presence, and we apologize for those who have not had the opportunity to ask their questions. Thank you.


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