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Transcript of a Conference Call on Jordan’s Stand-By Arrangement, Morocco’s Precautionary and Liquidity Line and the IMF’s Engagement in the Middle East and North Africa
August 3, 2012
MR. ANSPACH: Hello, everybody, and thank you for joining this conference call on Jordan, Morocco, and the IMF engagement in the Middle East. With us today is Mr. Masood Ahmed, who’s the director of the IMF’s Middle East and Central Asia Department, as well as Ms. Kristina Kostial, who is the mission chief for Jordan; and Mr. Dominique Guillaume, who’s the mission chief for Morocco.
Before we start, let me just remind you that the embargo for this press conference call and the press releases I sent to you belatedly, and I apologize about that, is [5 p.m.] Washington time. With that, I’ll turn over to Mr. Ahmed for introductory remarks and then we’ll be happy to take your questions. Thank you.
MR. AHMED: Thank you very much, Raphael. Welcome to all of you. As Raphael said, I’m Masood Ahmed. I’m the director of the IMF’s Middle East and Central Asia Department, and I’d like to make some introductory remarks before we turn to you for your questions. And then Kristina Kostial and Dominique Guillaume will be here with me to respond to those questions.
Let me just, by way of background, say that in the year and a half since the onset of the Arab Spring, the Arab countries in transition have been going through a lot of changes apart from the political transition. We’ve seen, on the one hand, the uncertainties within the countries and the strained outlook from Europe as well as the international economy, which have affected economic performance in these countries: activity has slowed sharply, unemployment has risen. And this has been documented in a number of our own reports, including the most recent Regional Economic Outlook update that we issued in May of this year. At the same time, within the countries, in response to higher energy prices and higher demand for social spending, fiscal deficits have risen, international reserves have declined, and buffers have been used up in a number of countries. And at the same time, investor sentiment has weakened, which has led to higher sovereign borrowing costs and the weakening in financial market indicators.
Against this background, the IMF has been engaged closely with these countries. We have recognized from the outset that one of the important lessons of the uprisings, of the Arab renaissance as it were, has been that macroeconomic stabilization needs to be accompanied by a program of inclusive growth that will generate jobs and ensure that economic activities are distributed more equitably. We have been listening to and working with the authorities to help them develop economic policies that are homegrown and are based on broad political consensus. So, one part of our activity has been to advise and to work with authorities on the design of these policies. And another dimension of our engagement has been to provide technical assistance in the region to help build capacity and stronger institutions. Perhaps as important, as we said from the beginning, we in the IMF have also been ready to help countries meet their financing needs.
And in this context, I’m very pleased to announce that the IMF Executive Board earlier today approved two financing arrangements in support of economic reform in two countries - one of them is the stand-by arrangement for Jordan, the second is a precautionary and liquidity line for Morocco. You got the press releases for both of them, but let me just say a word on each.
Let me start with Jordan. This is a 36-month, 3 years that is, stand-by arrangement in the amount of SDRs 1,364 billion, which is the equivalent of about just over $2 billion. This stand-by arrangement, in support of the Jordanian authorities’ own national economic program, comes at a time when Jordan is facing external and fiscal challenges stemming largely from exogenous shocks. As you know, there’s been the impact of an interruption in gas supplies, higher oil prices, and regional unrest, which have all put pressure on the current account and also pushed the combined deficit of the central government and of the national electricity company into double digits.
In response to these shocks, the Jordanian authorities have adopted a national reform program with significant measures to bring fiscal and energy policies to a sustainable path while providing targeted support to the vulnerable part of the population. Obviously, further consolidation is needed over the medium term and the stand-by arrangement indeed is in support of this agenda for a socially acceptable fiscal consolidation over the medium term. The objective of this program, which will provide liquidity over the next three years, is to help the authorities correct fiscal and external imbalances while fostering high and inclusive growth.
Now, to meet these objectives, the authorities plan to undertake three kinds of measures. First, short- and medium-term fiscal consolidation underpinned by expenditure reforms and tax reforms.
Second, a comprehensive set of reforms in the electricity sector, in collaboration with the World Bank, to bring the electricity company back to cost recovery. And this will entail both reforms of electricity tariffs as well as the diversification of energy sources. And finally, structural reforms that are aimed at improving the business environment, enhancing transparency, and fostering trade.
Now let me say a word about Morocco. The program for Morocco is a 24-month PLL as we call it, a precautionary and liquidity line, in the amount of SDR 4,117 million, which is just over $6 billion; $6.2 billion to be precise. This is a financing buffer, or a sort of insurance against potential external shocks.
Morocco, as you know, has a track record of sound economic policies that has contributed to solid macroeconomic performance, including robust growth, low inflation, and a resilient banking system. These sound fundamentals have helped Morocco to cushion the impact of the global crisis and respond to pressing social needs. However, as has been illustrated by the recent negative impact of high oil prices on Morocco’s economy, Morocco also faces external risks which are linked mainly to uncertainties emanating from its trading partners, mostly in Europe, as well as from the oil price.
And I’d like to just say for a moment that we’re very happy that the IMF now has in its toolkit an instrument like the PLL for countries, such as Morocco, that have sound policies and fundamentals, but some vulnerabilities, and which provides a sort of insurance against a sharp deterioration in the global environment. The PLL in this case supports the authorities’ own medium-term policy framework and it facilitates, we believe, continued market access and provides rapid access to financing should those downside risks materialize.
Let me conclude by saying that our engagement in Jordan and in Morocco follows on our earlier concessional loan for Yemen under the rapid credit facility. And it’s reflecting, in a concrete sense, the implementation of the commitment that the Managing Director made regarding the Fund supporting the Arab countries in transition as they go through a period of historic transition.
Of course, the road ahead will continue to be challenging. The world economy is going through a difficult period and there may be setbacks along the way, but these programs are an important step in helping these two countries to sustain macroeconomic stability and to lay the foundations for more inclusive and sustainable growth.
So let me stop with those introductory remarks and, as I said, my colleagues and I would be very happy to clarify any points, to answer any questions. I appreciate that you’ve only just received the press releases a few minutes ago, but if you do have any questions on those, we’d be happy to try and explain those as well.
MR. ANSPACH: Thank you very much, Masood. We have a first question. Please go ahead.
QUESTIONER: Thank you for the call. Also, thank you for your succinct summary of what’s been happening in the MENA region. Two questions. Isn’t this the first use of the PLL? And secondly, can you give us some -- since we’re talking about the region as a whole, can you give us some indication of where things are, where things stand with Egypt, and how much time, if any, the government has before it needs external help, runs out of time?
MR. AHMED: Let me answer most of your questions. This is indeed the first PLL that has been approved by the Fund Board. There used to be a facility called the PCL which had previously been approved for FYR Macedonia. But that facility has been revised and revamped and this is indeed the first approval of the PLL.
Now, as for your question on Egypt, as we have said, we have been working with the particular parties over the past year or so, year and a half, and the Managing Director spoke to President Morsi after he was elected and reiterated our commitment to engage. The new government has just been formed and we look forward to working with them in terms of defining how best the Fund can support them in financing implementation of the program that the new government will be putting together. We don’t have an exact date for a mission to go out, but I anticipate that we will be engaging with them in the coming weeks.
QUESTIONER: I was wondering if you could point out -- it’s interesting that two countries here have come to the IMF at similar times and encountering very similar issues, the higher oil prices, although prices are down if one looks back more than a year ago. I was wondering and how much is the impact from the euro zone really affecting these countries? What is the uncertainty about these countries? We know that some of them have felt some political pressures. How much of that is part of this weighing on the economy? Can you just give us some sort of breakdown as to the similarities, what’s occurring here?
MR. AHMED: Thank you. I think the main point I would make is that, of course, there are common factors running through a lot of these cases, not just Morocco and Jordan, but if you look at the economies in Egypt or Tunisia, there are some common shocks that they have had, but the impact of these shocks varies, and that’s why the response from the countries and our own responses have been different.
So, for example, in the case of Jordan, energy prices have been a very big factor in terms of the impact because remember, for Jordan, this is not just the higher price of oil, but also the impact of the electricity having to switch from gas coming from Egypt to using oil, which was more expensive.
In the case of Morocco, the effect has been more from the euro zone because Morocco has a much closer trading relationship with Europe than Jordan does. Similarly, Tunisia has a trading relationship with Europe. So, for countries in the Maghreb, what happens in Europe has a bigger impact than what happens in the countries affecting the Mashreq.
So, when we published the regional economic outlook update, we tried to break out a little bit more clearly how the effect varied across countries and you see that in terms of the differentiated performance also of countries. So, last year in 2011, despite the challenges that came from the rest of the region and from the world at large, Morocco actually managed to register a growth rate which was close to 5 percent, which was actually pretty much the highest growth rate amongst oil-importing countries in the MENA region. On the other hand, as we’ve noted earlier, in the case of both Tunisia and Egypt, the growth rates during 2011 were closer to zero. Jordan had a growth rate last year of close to 2.5 percent.
So, the outcome has varied, the impact has varied, and that’s why the financing requirements also vary. So, in the case of Jordan, we’re actually providing a Stand-by arrangement on which the Jordanian authorities can draw to build up their reserves. In the case of Morocco, the authorities have indicated that they want to treat this as a precautionary arrangement. They’re not planning to draw down the resources that are available under the precautionary and liquidity line unless there is a substantial deterioration in their position as a result of
QUESTIONER: Hi, Mr. Ahmed. Hello from Dubai. I actually have two questions for you.
One is regarding Morocco and the fact that will your new loan help Morocco bridge the gap they have in their foreign reserves? I mean we know there was a sharp drop in foreign reserves thanks to varying import costs in Morocco and was down by nearly 18 percent by end of June. That’s one thing. The International Monetary Fund has asked repeatedly for Morocco to introduce new fiscal measures and tighten expenditure. Do you think that the new loan would help in that? That’s one thing. And has Morocco made an attempt in introducing new fiscal measures according to IMF’s or based on the IMF’s [recommendations]? That’s the first country.
The second country is Jordan and I really wanted to know if the loan that was extended to Jordan at a time falls under the Deauville pledges. And basically you have also called upon Jordan to introduce new measures and tighten budget public expenditure. The problem with Jordan at the moment, they have several governments being changed every now and then. Do you think the loan would help?
MR.AHMED: Thank you. I’m going to ask Dominique Guillaume to respond to your questions on Morocco and then Kristina to talk about Jordan.
But let me just say one part before I turn to them, is that in terms of how these loans from the IMF are part of the Deauville Partnership. Well, you know the Deauville Partnership really brings together different international and regional institutions, as well as bilateral agencies and is a platform for them to work together to coordinate, share information, and to support these countries. There was a figure that was used, if you remember, of $38 billion under the Deauville Partnership. That figure was an adding-up of the programs of financial support that were being envisaged by the international financial institutions that were a part of the partnership, except for the IMF. Because in the case of the IMF, as you know, we don’t actually start off by saying this is the amount we are envisaging for any country. It’s a function of when a country requests assistance, we look and see what is the appropriate need and then in response to need and the strength of their policies, we define financing support.
So, the $38 billion number was one that covered the international financial institutions, regional and global, but did not include the support of the IMF. But, of course, the IMF contribution to these countries is very much part of the spirit of the Deauville Partnership in that the partnership aims to provide for these countries financial support, technical support, and the sharing of experience in a way that would facilitate the historic transition that they are now undergoing.
Now, let me turn to Dominique for the two questions on Morocco and then I’ll turn to Kristina for the remaining question on Jordan.
MR. GUILLAUME: The credit line for Morocco is actually precautionary in nature. Morocco does not face a balance of payments need. Their reserves now are at a quite comfortable level of about four months of imports. What you see, a slight decline really reflects a seasonality effect that tourism and remittances are usually peaking up in the second half of the year. Also, we expect the disbursement of loans from bilateral and multilateral donors to take place more in the second part of the year. Therefore, we really don’t see that there is a balance of payments need for Morocco at this stage. This is really more a sort of insurance policy that Morocco is taking.
MR. AHMED: With regard to the fiscal measures, I should say that the fiscal measures that Morocco and Jordan are taking, that Dominique and Kristina will give you more details on in a moment, are very much measures that they themselves have decided that they wanted to take. It’s not that taking these measures is at the request or insistence of an external agency or the IMF; this is a national program that both countries have come forward with because they feel that they need to take steps, they are taking steps that would address the challenges they face. But let me turn to Dominique.
MR. GUILLAUME: Yes, in the case of Morocco, the government has taken already in early June some measures of fiscal consolidation by increasing the price of gasoline, diesel, and fuel, which will have an impact in terms of reducing the fiscal deficit. And we are quite confident that they have a broad set of measures both on the revenue side and on the spending side to reduce the deficit to 3 percent in the next few years and strengthen fiscal sustainability. Thank you.
MS. KOSTIAL: Regarding your questions on Jordan, and just reiterating what Masood said, this is a program with Jordan. It has been signed by the authorities, but it is a program with Jordan, it is a national program, a homegrown program which today our Executive Board decided to support under a stand-by arrangement.
You asked about the fiscal measures taken in Jordan and actually, the authorities have already taken very substantial measures this year. They’ve taken some measures of about 4 percent of GDP, which is a combination of some revenue increases, a combination of increases in fuel prices to reduce general subsidies, as well as electricity tariff increases yet again also to reduce the general subsidies on electricity.
So, they have taken already very substantial measures this year. What they have committed to do in the medium term is to do further measures to make sure that the macroeconomic situation remains sustainable.
QUESTIONER: My question is with regards to the arrangement itself. So, I was wondering is there a classical credit or is it some sort of new one? So, how would we qualify it? Is it a credit, is it a loan, or is it something else?
MR. ANSPACH: Just to clarify, you’re asking about Morocco, right?
QUESTIONER: Yes, that’s right. Thank you.
MR. AHMED: Well, let me say, as I said earlier on, that this is a PLL, as we referred to it, the precautionary and liquidity line is a new instrument that the Fund has come up with and what it does, in fact, is that it provides a line of credit which can serve as a form of insurance for a country. Dominique just said a few minutes ago in response to an earlier question, that Morocco does not have an immediate balance of payments need as it has a comfortable reserve position, but the Moroccan authorities know that the world at large is going through a difficult period, Europe is going through a difficult period, oil prices could increase. And so, in anticipation of any external shock that could affect Morocco, they have asked for this line of credit which serves as a kind of insurance. So, in that sense, it’s somewhat different from a country which comes to the IMF and asks for financing to meet immediate balance of payment needs.
And, as I said earlier, the PLL is available to countries that have a strong track record of good policies and of sound economic management and which currently have solid economic fundamentals, but which may be subject to some external vulnerabilities or risk against which they would like to be insured.
Dominique, you want to add something?
MR. GUILLAUME: Yes, so maybe in the same line, they need to qualify, there are a number of criteria to qualify and to assess whether they have the stronger policies, and Morocco does meet these qualifications. So it’s really in a way accessing this credit line that is certain about the strength of Morocco’s policies.
MR. AHMED: Exactly, that’s a very important point because, in a way, eligibility for access under the PLL itself is an indicator of the policies and of the strength of the country’s economic management record.
QUESTIONER: Why do you insist on SBA tool and why not the PLL as Jordan government asked for the first time? This is the first question.
The second question is you decided today to extend for seven months for Iraq. Is it over two or three years? And what happens if Jordan cannot implement your conditions? It might happen because of the uncertainty in the region about the situation. Could you extend it more than six months for Jordan?
And the last question is Jordan has a big problem in general with fuel and particularly with extra electricity generation. What is your advice in this field? And if the government increases extra electricity, the people, especially the poor people, will refuse this. What’s your advice? Is there any social security nets you advise Jordan to implement?
MR. AHMED: I’m going to turn to Kristina to answer the questions on Jordan. But let me just give you one answer on the general point about the length of the arrangement, whether it’s a question of Iraq as you mention now, or other countries in the future, including Jordan.
When we start a program, we start a program with a certain time period that the government has in mind during which they propose to implement a certain set of measures which they come up with and for which they would like financing from the IMF to help ease the process of transition. In some countries what happens over time is that either because of external reasons or because of domestic policy constraints, it takes longer than anticipated to complete those measures. And in those cases, the IMF is often quite flexible in saying okay, well if it takes a little bit more time, we can adjust the timing of the IMF’s own program to support that, if it’s still a coherent and sustainable effort. And so is the case of Iraq.
The Iraqi authorities asked for an extension to a program which was coming to its end because they felt they needed a little bit more time to complete some of the measures that had been anticipated for the last review. The program has thus and been extended, as you know, for seven months. The SBA is normally a three-year maximum length. But if there was a reason to extend the program by a couple of months, either at the end or at the time of individual reviews when our Board considers progress under the program, then sometimes those reviews also can be moved a little bit if it takes a bit of extra time for governments to complete the necessary measures.
But certainly our expectation is that this is a three-year program that the government has come up with. That’s what they’ve asked for our support for, and at this stage we’re very confident that those measures will be implemented in that time.
Now you have specific questions on Jordan itself, which Kristina will answer.
MS. KOSTIAL: On the choice of the instruments, the authorities and we agreed that for Jordan really the best instrument, the best choice, was a stand-by. And that goes also into the length of the program. On a PLL, the maximum length is two years and the authorities, therefore, opted to go for stand-by which could be up to three years. And what we have approved today is a three-year stand-by.
The reason for this longer period, as you know on the issue of no more gas supplies from Egypt and the authorities thinking that it will take them up to three years, maybe even less, to build a new liquefied natural gas terminal in Aqaba, which in three years would resolve the gas situation, the gas supplies to Jordan. And that was really the main reason for the choice of instrument for Jordan.
Regarding your question uncertainty, yes, there is a lot of uncertainty in the region. And with all of our programs, we have built-in contingencies into our programs should these uncertainties, risks, materialize. But, of course, as Masood said, we’re working very closely together with the authorities. I mean a program is a continuous dialogue with the authorities that we see how we can help. This is life. Life is uncertain. If changes are needed, then we sit together and we discuss on how to best respond to these changes.
On your last question regarding the electricity sector. There this is not directly within our mandate, so we’ve been working very closely here with the World Bank and we’re being very much advised by the World Bank who’s also, of course, advising the authorities. But one very important point to make here is whatever is going to happen in terms of tariff reform, what is crucial is -- and there are also elements in the program -- what is crucial is that the poor are being protected and it’s very important. And I think we all understand that the general subsidies which are now there, including electricity, they’re benefiting the rich to a very large extent. So converting them into targeted subsidies for the poor, that is clearly part of the program and that is part of the electricity tariff reform which the Jordanian authorities are envisaging in the medium term.
MR. AHMED: Thank you, Kristina. Let me just say as a more general point that in all of our work, not only in the Middle East and North Africa, but particularly here, where we are now focused in helping countries develop programs of inclusive growth, it’s very clear that there is a need to deal with generalized subsidies because they’re a drain on the budget and have been there for a long time. And while it’s the case that, as Kristina said, often the generalized energy subsidies are to the benefit of the rich and the well off more than the poor who don’t consume as much energy, in reforming these subsidies, it is equally important that we accompany that with measures that would have targeted safety nets for the vulnerable and the poor.
The important point here is how to ensure that the limited amount of government resources can be used most effectively to support the vulnerable and poor households adequately and not to dilute the benefits or to waste those resources by subsidizing people or households or companies who can afford to pay the market price of those products. So that’s a general point that I do want to emphasize.
QUESTIONER: Yes, I just want to follow up. How much of the program with Jordan is about securing aid from bilateral donors? This is one thing I’m interested in, considering it is an aid-dependent country.
And then the other thing is a question on Morocco from our correspondents in Rabat, saying that the government has spent 6 percent of GDP on subsidizing food and energy under a system that favors mostly the wealthiest. I think you partly answered that question. He’s also arguing that the reserves are barely covering four months of import needs, and they have to import more wheat and sugar this year after the drought. How much is that going to serve or put pressure on the fiscal sustainability?
MS. KOSTIAL: In our program, of course, we’re working very closely together with the authorities, but we’re working as well closely together with other donors because for us, in order to bring a program to the Board for Board approval, we need financing assurances; that is, that other donors are onboard as well in financing the authorities’ program. And just to give you a bit of an idea in terms of order of magnitude, Jordan is expecting grants to its budget of about 4 percent of GDP and is also expecting that as a smaller amount loans to its budget. Its main donors are the U.S., the GCC, the European Commission, France, as well as Japan.
MR. GUILLAUME: On Morocco, your correspondent is quite right in saying that the subsidies are not benefiting the poor. This is exactly what the government is now trying to do, is to reform the general subsidy system in a way that is better targeted and in a context of revamping the social protection system. And this at the same time will have beneficial effects.
On the details of it, on the design, they want to get broad support for these reforms and they are going to engage with civil society, with partners, on the specific way to reform the subsidy system to ensure it is better targeted.
MR. ANSPACH: Well, with that, I’d like to thank everybody for having joined us today, particularly those in the Middle East who have sacrificed part of their weekend to join us. So thank you very much for that. And I would like to remind you that this is now embargoed until 5 p.m. I would also like thank the speakers today, Mr. Ahmed, Mr. Guillaume, and Ms. Kostial, and I’ll see you soon. Thank you.
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