Transcript of Middle East and Central Asia Department Press Briefing

April 20, 2018


Jihad Azour, Director, Middle East and Central Asia Department, IMF

Wafa Amr, Senior Communications Officer, Communications Department, IMF

MS. AMR: Good morning, this is Wafa Amr from the Communications Department, Welcome to the Press Briefing on the Middle East and Central Asia Economic Outlook. I would like to introduce Jihad Azour, Director of the Middle East and Central Asia Department. He will give brief opening remarks and then we’ll take your questions.

MR. AZOUR: Thank you, Wafa. Good morning everyone. Let me start by welcoming you all to the 2018 Spring Meetings. The forecast of our region was included in the world economic outlook. We will launch the update for the outlook for the Middle East, North Africa, Afghanistan, and Pakistan on May 2nd in Dubai. Later that month, we will launch the outlook for the Caucasus and Central Asia (CCA).

Today I would like to make a few remarks about the forecast for both regions and take your questions. Let me begin by focusing on the Middle East, North Africa, Afghanistan, and Pakistan regions. The good news is growth is improving in 2018 in both oil importing as well as also oil exporting countries. In the region’s oil exporters, economic growth bottomed out in 2017 at 1.7 percent but is projected to stage somewhat of a recovery this year and beyond, growing at 2.8 percent in 2018 and 3.3 percent in 2019. This is due in part to strengthening activity in the non-oil sector, which has helped mitigate the effects of lower oil production under the terms of the extended OPEC+ agreement.

As for oil importers, we expect the recovery to continue this year, aided by increasing external demand and, in certain countries, the impact of reforms. In 2017, economic growth in oil importers was 4.2 percent, and we project that to rise to 4.7 percent this year, then level off at 4.6 percent in 2019.

However, the improved outlook in the MENAP remains fragile, growth is projected to remain too low to meaningfully address the long-term unemployment challenge, and there are significant downside risks. The overriding question this raises is, why isn’t the region fully enjoying the benefits of a growing global economy? We see a number of reasons, such as:

  • Ongoing security concerns that weigh on confidence

  • The still relatively subdued medium-term outlook for oil prices

  • The need for continued fiscal consolidation in many countries

To take full advantage of the more favorable external environment,

  • Oil exporters should accelerate structural reforms to achieve economic diversification.

  • Similarly, oil importers should implement further reforms to secure resilience and foster job creation.

Finally, MENAP countries should sustain their efforts to address their long-term fiscal challenges in ways that protect the most vulnerable and are as growth-friendly as possible.

Turning to the CCA , growth exceeded expectations in 2017 as a result of strong external conditions and some country-specific factors. Overall, growth for the region last year reached 4.1 percent, an increase from 2016’s 2.5 percent growth.

Among oil exporters, which grew by nearly 4 percent, growth was largely the result of strong performances by Azerbaijan and Kazakhstan. In addition to the boost provided by increases in oil prices in the latter half of 2017, strong public investment in Azerbaijan and increased demand for metals and agricultural products in Kazakhstan helped the region’s two largest economies.

Growth rose to 5.9 percent last year in CCA’s oil importers boosted by rising remittances and external demand.

Despite this encouraging performance, we believe that the momentum is not sustainable and project the region’s growth to slip to 3.7 percent in 2018. In fact, the medium-term growth outlook for the region is well below the average reached during the previous decade. To avoid a new reality of low growth, the region needs reforms that help spur private sector development.

In conclusion, I would just like to reiterate our central point, which is that while growth is improving, the MENAP and CCA regions are not fully benefiting from the improving global outlook. That’s why more reforms are needed in MENAP’s oil exporters to better diversify economies; in oil importers to create jobs and boost resilience; and in the CCA to develop robust private sectors that will help the region avoid an extended period of low growth.

Before we move to questions, let me state that the IMF remains deeply engaged with MCD countries in their reform efforts. That includes providing not just policy advice and technical assistance but also financial support. Currently, we are providing financial support to seven countries in the MENAP region and three in the Caucasus and Central Asia.

With that, I’d like to field your questions, and I’d like to start with my colleague from the IMF, Wafa Amr.

MS. AMR: Thank you, Jihad. Following up on your opening remarks on why the region has not fully benefited from global recovery, could you tell us what are the main risks threatening economic growth in the region?

MR. AZOUR: Well, first of all, growing trade tensions could pose a threat to the region, especially through their impact on key economic partners of countries in both Middle East Asia and Caucasus. Consequently, we are currently monitoring closely the developments on that front, giving the importance of trade for our members.

Another issue could be sharp tightening of global financial conditions would also put pressure on countries who need to refinance their debt as well as to issue bonds in the international market. The third one is an increase in interest rates. That could affect debt servicing in some countries, especially oil importer countries where the level of debt in some cases exceed 80% of GNP.

MS. AMR: Thank you. Before turning to questions,

I’d like to turn to the CCA region. Can you tell us what are the main steps that countries can take to avoid subdued growth in that region?

MR. AZOUR: In addition to ramping up the

structural reform agenda, countries in Central Asia need to rebuild their fiscal buffers. This will help them increase their resilience and will allow them to weather any future shock, be it on trade or on return in their global growth cycle. In addition to that, countries and Caucasus in Central Asia need to strengthen their framework in terms of fiscal adjustment to make it as growth friendly as possible. This will help them increase the level of growth and for that, they could improve the efficiency in public investment as well as also better manage their fiscal risks.

Last, but not the least, strengthening or addressing the vulnerability of their banking system is one of the key issues. Without that, this will hinder the opportunity for private sector to grow and will also increase fiscal liability on those countries. Addressing governance is also an important challenge for countries in the Caucasus and Central Asia.

MS. AMR: Thank you very much. We open the floor for

questions now. Could you please introduce yourself and the organization you work for?

QUESTIONNER: About the loan to Egypt, the next tranche of the loan of the IMF to Egypt and with regard to the increase to the price of fuel. Many people speak about the increase of fuel prices will be delayed. When do you expect that fuel prices will increase in Egypt and how about the percentage regarding the procedures of restructuring price of fuels in Egypt.

Mr. Azour: As you are aware the structural program

launched by the government has made large strides so far and the procedures that have been taken in order to reach stability have been successful. Today, after about one year and a half from the launching of this program supported by the program, the Egyptian economy has made large improvements and the financial situation has improved and the increase of the reserves at the central bank have increased. Also, there is flow of capital, and recently we have seen a reduction in the level of inflation as well as other sectors that have flourished such as tourism and exports. As you are aware, today we are in the middle of the program. In fact, any reform program, you cannot be very specific and very accurate, but I would say that the first phase which is making and realizing stability has been achieved. Now the second phase on which the government focuses is structural reforms and the main aim is to enhance economic activity and to improve growth in order to provide working opportunities that the Egyptian youth deserve. About 700,000 youth enter the labor market every year. The next phase of this reform program, as set by the government, will improve the working environment, the business environment and improve productivity of the economy. The IMF supports these reforms through the program through technical assistance and also the mission that is going to do the assessment is going to visit Egypt in the coming few months or weeks by the middle of the year. When it the mission finalizes its work, it will assess the situation. In the coming weeks, maybe by the middle of the year – I don’t have a specific day or dates.

With regard to subsidy, as you aware, as part of this program, the procedures that have been taken in order to reduce subsidy and to have more targeted social programs such as the takafol and other programs, this is carried out gradually, there is a mechanism that is implemented by the government.

The question about the tranche, as you are aware, after the mission’s assessment, there is consideration and based on that, that tranche would be. I told you middle of the year, but I cannot give you exact time or date for that. It's by the middle of the year.

QUESTIONNER: Is there a specific time to include the price of fuel?

Mr. AZOUR: As I mentioned to you, it's the government that decides on the dates, and they have a program for that. As you are aware, reducing subsidy on fuel has contributed, to a great extent, to redirect these amounts to support social programs today. The weakest are benefitting from the reduction of subsidy on fuel and enabled the government to have more flexibility now.

QUESTIONER: Good morning, What about the Fund's opinion in the structural reforms in Tunisia, the main reason, according to the IMF, for the deteriorating economic situation in Tunisia. They are becoming more and more complicated every day, inflation is increasing, and how can we put and reduce that, put a limit to that, in order to help the population, and can we revise the exchange rate in Tunisia?

MR. AZOUR: In fact, as you are aware, Tunisia has implemented a number of bold reforms in a challenging situation. Inflation impacts the more vulnerable sectors of society and would obstruct economic stability. Sometimes, you need to use financial tools, such as interest rates.

On the other hand, the economy of Tunisia should increase its growth levels and it needs more competitiveness in order to improve economic activity. One of the tools is also flexibility in the exchange rate.

The government today has a number of economic tools that are being used in order to achieve certain targets. The first target is to reduce debt gradually which has become very high, and this would require fiscal consolidation, therefore, there are a number of procedures that the government has taken.

The second target is to reach stabilization of prices and to curb inflation and to reach economic stabilization.

Third, structural reforms, in order to increase the rates of growth and contribute in a positive manner to enhance stability, these are the tools being used today by the government and the mission that has visited Tunisia last week has discussed all these issues with the government, and had talks with the civil society and all parties concerned with the economy, such as the private sector and other parties.

`QUESTIONER: I wanted to ask you about two of the countries in South Asia, Afghanistan and Pakistan, which comes under your jurisdiction. What is the growth projection for these two countries? And on Afghanistan as specific, what impact to terrorism is having on Afghanistan’s economic development? Do you think it will ever become economically self-independent? Right now, it is dependent very heavily on outside financial assistance. And on Pakistan, IMF has given a lot of loans to financial assistance to Pakistan. Is Pakistan meeting the requirements of reforms, which IMF has a list? Thank you.

MR. AZOUR: Well, let me start with Afghanistan. As you rightly mentioned, security issues are having a big toll on the economic and financial stability there, yet the program that is being implemented by the Afghani government is progressing in terms of stabilizing the macroeconomic situation and addressing the vulnerabilities. Clearly, Afghanistan still needs grants and international support to sustain giving the weak level of revenues coming from their tax system, and therefore, some reforms need to be pursued.

Additionally, the political agenda is heading to election in almost year-and-a-half, and the priority is now to keep the momentum on the reform agenda even during this transition period. We, as a Fund, we are helping Afghanistan with a program, and the objectives of the program is to provide them with a macroeconomic framework that will allow them to stabilize the situation, as well as also allow the international community to provide them with assistance.

Any improvement in security conditions will immediately have a positive impact on the economy in Afghanistan. Any smooth and peaceful transition in power will also strengthen institutions, and this is, in fact, the purpose of our assistance to Afghanistan.

Pakistan had a relatively high level of growth over the last few years, but it came at high cost in terms of fiscal and external vulnerabilities, and those vulnerabilities need to be addressed in order for growth to be sustainable for the medium term. We hope after the election, that will take place soon, the government will reconfirm their resolve to the reform agenda that will allow gradually to reduce the level of deficit that grew in the past, as well as also to address the current account deficit that is currently impeding their economy from having sustainable level of growth.

QUESTIONER: Just more of a general question based on one of the things that you said. You said the region's economic activity was held back by basically three factors, and one of them was the need for fiscal consolation, by which, I guess, you were referring to more of the debt situation. So if you could kindly elaborate on, I guess what we can call two different groups within the region in terms of high debt levels. Which countries do you see more at risk of running into difficulties in terms of rolling your debt or refinancing existing debt?

And in your response, could you please elaborate on where do you think these countries could cut back on spending without hurting growth and without really hurting their ability to create jobs, which, I guess is one of the most critical issues for our region? Thank you so much, sir.

MR. AZOUR: Thank you. Well, clearly, the opportunity that the Global Recovery Office today to the countries in the region should allow them to expedite some of the peer reforms on the fiscal side to reduce the risk of the high-level debt. On average, countries in the region, especially the old importers, have higher level of debt and then there's compatible in the emerging market, and therefore, we believe that fiscal adjustment is still needed for those countries to address the debt dynamic at the time where still market conditions are favorable, and interest rates are still relatively low.

Going forward, as we pointed in our outlook, with the change in the global market and on the interest rates, it's really timely now for those countries to address this issue and benefit from this opportunity of high global growth that is getting into the region and allowing the region to grow faster. The fact that the markets are still relatively liquid and interest rates relatively low to accelerate on the reforms.

On your second question, how to achieve that on the expenditure side, there are many ways. You know, recently, we have issued a paper that showed, for example, addressing the wage bill in the public sector would create growth and would help, in fact, not only the private sector to thrive, but also to redirect some of the government resources for more productive use, namely, to spend on investment in infrastructure, especially economic infrastructure, and also to design new social programs. Therefore, I think we can and we should, in the region, achieve the two objectives of fiscal discipline and a kind of rebalancing the spending to be more productive and more socially focused.

Last, but not the least, the region and many countries in the region still can do a lot in terms of improving business environment, improving access to finance, and allow small and medium-size companies to grow. Recently, in Marrakesh, we had a conference on that issue, on inclusive growth, and when we put together various stakeholders, private sector, CSOs and government, it was clear that in order to create the 25 million job opportunities, for example in MENA, for the youth coming to the market, you need to create growth. You need technology to help. You need the state to be enabler, not an operator.

Therefore, I think it's now an opportunity, and we should not miss it, and also, we should make sure that when we do this, we use it in growth friendly way.

QUESTIONER: Good morning. My question is about the policy rate of the central bank. Those interest rates were increased. I think they increased by about 700 points. And then there was some gradual reduction lately. What is the effect of that in the coming period, and how it would affect the situation? What is the effect on inflation in the period ahead as well as its impact on inflation, because there is a possibility that the energy prices will be increased in July?

MR. AZOUR: You asked two questions, one about monetary policy. No doubt the measures of the central bank were effective in reducing inflation gradually, within a year it was reduced from 33 percent to about 16- 17 percent right now. And it is expected by the end of year to reach about 13 or 14 percent, and this is a great accomplishment by the central bank. And the measures and the way the market received those measures proved that it was a wise policy.

And in order to emphasize this, the Central Bank managed to reduce interest rates by 200 points, ie. 2 percent, at the time the global interest rates were increasing. There is inflation targeting right now and the ‑‑ and using modern tools in managing monetary policy.

About energy, reducing subsidies is an objective in order to enable the government to redirect a lot of their current expenditures to people who are of lower incomes, and to redirect it in order to support the vulnerable sectors. But how to exit the subsidy policy? This is something up to the government to decide on. The good point, at this time is that with the reduction of inflation, the negative impact of the gradual reduction of subsidies will be limited compared to last year, and this is very encouraging.

And it encourages projects as well. Of course, the middle class, through the measures that were taken in order to achieve stabilization, there was a cost on the middle class. But we shouldn't forget that there were so many positives because the middle class gets better off when they have more job opportunities. And we saw the job opportunities increase.

And of course, we have seen in the past, that for example, tourism and export sector, these improved. So after some sacrifices by the middle class, we saw that the recovery of growth will gradually benefit the middle class. And of course, structural reforms usually improve social protection for the middle class. And it enhance growth, and we hope that the middle class will be the first beneficiary.

QUESTIONER: Good morning, I'm from Egypt from CBC. Regarding oil subsidies, I know that there are negotiations with the government in order to set up a mechanism for that. Did you agree on a specific mechanism?

MR. AZOUR: We are talking also about the agreement with the Fund and the price of oil according to this agreement. Now about also the credit rating of Egypt, how would this affect the credit rating of Egypt and the exchange rate?

Mr. AZOUR: Regrading your second question, no, the credit rating of Egypt has improved actually. And in the last assessment by the rating agencies we have seen some improvement. But I would like to emphasize a point, and I thank you for your question.

The lower credit rating is ‑‑ comes faster than improvement of credit rating. And this is an incentive for the government to be serious in achieving and maintaining stability especially for people with high debts.

Right now with the changing environment, we see that the investors differentiate between bond issuers and the bond issuers whose countries are facing difficulties. Of course, I would like to emphasize that the policies adopted reflected positively on the credit rating.

About interest rates, interest rates dropped really tremendously. And also managing the monetary policy is something that should be very accurate and precise, and, you know, sometimes words used in some announcement and statement should be accurate. And that's why we have to be very balanced, and to give confidence in the mechanisms used.

Back to the first question, the general objective is that we redirect resources to highly productive areas, and studies proved that spending on subsidies is not effective, and it actually helps the rich. So the implementation mechanisms and the timing, this is up to the government and not to us.

The objective is by the end of 2019 we will have accomplished that, but for the details it's better that you ask the government about that.

QUESTIONER: How would you assess the economic plan in the kingdom of Saudi Arabia?

R. AZOUR: No doubt that in the past period the kingdom of Saudi Arabia has managed during the economic reform to make and achieve certain objectives in order to face the decrease in the oil price and the transformation in the world oil markets.

And these procedures were completed especially on the financial aspect to reduce the deficit and the government of the kingdom has certain reforms. Some of them have been implemented such as the VAT, Vand also reduced public expenditures. No doubt due to the reserves that the kingdom has, there was some sort of, let's say, execution, and the objective is to have sustainability in its financial management.

And this can be adapted based on the influence of these procedures on the economy. And managing these, in let's say, with less pressure, this is positive, and we welcome this, and we considered that it is moving on the right direction. However, the main objective is to diversify the sources of revenues for all oil countries. And these steps are being taken, are moving in the right direction.

The work to enable economy to make improvement and to grow based on the private sector, and led by the private sector more than the public sector, is another objective. So we have the vision 2030 for the kingdom. They have a precise way and a gradual way of reaching the objectives of this vision.

QUESTIONER: On Yemen, what are the IMF's predictions and what are its current actions, for example, in ensuring the payment of public servants? Relatedly, what is the impact of the war on Yemen on the Saudi economy?

MR. AZOUR: The situation in Yemen and the security problems has inflicted a big humanitarian and social toll on Yemen and on the Yemeni society. Also it affected, dramatically, the economic situation. The Fund is helping the Yemeni authorities in many ways.

We are helping the central bank in designing and managing the financial framework that will allow them to distribute salaries, as well as also to provide foreign currencies to be able to import some basic goods and medicines. And for that we provide technical assistant to the central bank.

In addition to that, also, through our regular consultation with the Yemeni government, we try to help them preserve the basic core functions of the government, namely, at the central bank, and at the ministry of finance. In addition to that, we are in the regular contact and dialogue with the community to raise the awareness of this community about the importance of helping Yemen by providing assessment of the current macroeconomic challenges that Yemen is facing, as well as also, what are the best instrument in terms of grants and support that would help alleviate the humanitarian and social pressure.

MS. AMR: Thank you. We have one last question. Please the gentleman in the first row.

QUESTIONER: Good morning. First question is about the Arab world, what's the number of Arab countries in where GDP, debt to GDP is more than 80 percent? And the second you have mentioned before that Arab countries have not benefitted from the economic upswing in the world. What are the external factors and internal factors that have affected that? And the second part is related to Jordan. Now we are talking about the mission, and the mission was supposed to visit Jordan again to have the second assessment, and this has not happened. Debt to GDP is about 95 percent. Jordan has increased the prices of energy with very high rate, and this is for the first quarter of this year, inflation has (inaudible) and the purchasing power is being affected. What is needed in Jordan specifically so that the mission would continue its work in Jordan?

MR. AZOUR: The question on debt is very important. In order to reply to this question, we need to differentiate between oil-importing countries and oil‑exporting countries. Oil-importing countries they have low levels of reserves. That's why they are suffering from debt issues.

Therefore sometimes the debt ratio is more than the percentages that can be acceptable. A number of countries have debt that has increased to beyond or more than 60 and 70 percent, and in other countries it has done up to more than 100 percent of GDP. This is the level of debt. First of all, it undermines the economic situation and also it uses up a large part of the revenue of the country in order to serve this debt.

Today we can see that the economic ‑‑ the global economy is growing, and the countries of the region are not benefitting enough from that growth, because this would happen through trade, or investment, or through other countries who have partnership with these countries of the region such as Europe that today are witnessing an upswing.

To benefit from that is a main factor in order to protect the economy, and also to be able to benefit more from the financial reforms. Therefore, we would like to emphasize the importance and the role to be played by reducing debt, not only for fiscal reason, but also in order to improve the economic situation. You may be aware that confidence is based on stability.

When debt increases, stability reduces, and also confidence is reduced. So there is a correlation between improving growth rates and reducing debt.

On Jordan in the past few years has made a number of financial procedures that have contributed to reducing the level of deficit in very difficult circumstances due to the low growth rates in Jordan which were about 2 to 2.5 percent. And Jordan is also suffering from external challenges. It has its borders with Iraq and Syria, and also the refugees issue. When debt is more than 90 percent, it's very important to maintain financial stability through a prudent fiscal policy. We support the program of the Jordanian government. As you are aware its program is divided into two parts. The procedures that are ‑‑ have been devised by the government of Jordan and supported by the IMF, would bear their fruit. So when they make progress, the mission would be ready to go back to Jordan, and to have this review.

But we have continuous communication with the Jordanian government, and with all the parties concerned in the government.

MS. AMR: ‑‑ This concludes the press briefing for the Middle East and Central Asia Economic Outlook. Thank you.

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