"A Region in Change- Hopes and Challenges" Speech by Nemat Shafik, Deputy Managing Director, International Monetary Fund
May 10, 2012By Nemat Shafik
Deputy Managing Director, International Monetary Fund
Lebanon- Arab Economic Forum
Beirut, May 10, 2012
As prepared for delivery
Good Morning. I am delighted to be here. I would like to thank Prime Minister Mikati and the organizers for the invitation to speak in this Forum at this important juncture in the history of the region.
I last spoke at the Arab Economic Forum in Beirut about fifteen years ago. It has continued to be an important forum where high officials and policy makers from across the region and beyond converge on Beirut to exchange views on the major economic issues and challenges facing the region.
I would like to do three things in my speech today. First, because I represent the IMF and it is what the IMF does for a living, I will talk about the global economic outlook and where we see the risks. Second, I will talk about the region and argue that we need an “Economic Spring” to complement what has become known as the “Arab Spring.” And finally, I will talk about what the rest of the world can and should do to support the historic transition we are witnessing across the region. If countries fail in their “Economic Spring” we risk failing to deliver on the hopes and aspirations of the millions of young people across the region.
The Global Economy
The world today is in a somewhat better position than a few months ago. The US has started to recover slowly from the crisis. And there has been progress in Europe too as efforts by the European leaders and the agreement on having a firewall within Europe have eased financial strains, and the threat of a sharp global slowdown has been reduced. Emerging and developing economies continue to perform and have been a source of strength. The global recovery is on its way, although it is fragile. We now expect global economic growth to be 3.5 percent in 2012.
But risks are still high in some countries and they include: unresolved fiscal problems; troubled banks; lack of competitiveness; and a possible increase in oil prices due to geopolitical supply uncertainties. Countries around the world are trying to reduce these risks and the IMF is doing what we can to support the global recovery.
An important part of that is a strengthened IMF anti-crisis war chest. I am happy to report that as of last week, total commitments of $430 billion have already been made to boost our fire power so that we can more readily fight crises wherever these may arise.
The MENA Region and the “Economic Spring”
Now I turn to the MENA region.
2011 was a year of major political transitions in many countries of the region—Tunisia, Egypt, Yemen, Libya. And political reforms are ongoing in many other countries in the region. And while all eyes have been focused on the politics, the economic situation in the region deteriorated sharply in 2011. The exception is the oil exporting countries of the Gulf who, because of higher oil prices, grew at a robust 8 percent in 2011.
For the oil importers, most economic indicators moved in the wrong direction—growth halved; investment and tourism declined; fiscal deficits ballooned as governments increased spending on wages and food and fuel subsidies to respond to social pressures; and reserves and credit ratings worsened. This pattern can be seen across the Arab countries in transition.
Without an economic transition to accompany the political transition, we risk failure on both fronts. 2012 and 2013 need to be the years of the “Economic Spring” where countries in the region define new economic strategies that respond to the demand for jobs and fairness while preserving the macroeconomic stability that is essential for growth.
What are the key elements of such an “Economic Spring”? Obviously each country will be different and will have to define its own strategy. But let me outline some of the key elements.
Oil importers need to respond to legitimate economic and social pressures by freeing up resources to invest in future jobs. But to do this while maintaining macroeconomic stability will be a challenge. Some countries will have scope to increase revenues in a way that would not hurt the disadvantaged. In many countries there is considerable scope for freeing up resources through better targeting subsidies. Energy subsidies consume almost $200 billion in the region. Only 20 percent of that benefits the poor. Targeting resources only to the needy would free up resources that could be redirected to investing in education and infrastructure to create the 50-75 million jobs needed in the next decade for the generation that brought us the Arab Spring.
In addition to implementing measures to reprioritize budgets, mobilizing external support is important to help finance fiscal deficits, stabilize reserves, and restore investor confidence. Improving the investment climate is necessary to restore investor confidence and boost economic growth. And a more inclusive approach to growth that includes stronger and more targeted safety nets for the poor will be essential.
Looking beyond the short term, countries need to set out a medium-term economic strategy that is credible to their population and to investors. As an example, in Lebanon such a medium-term strategy would need to focus on continuing to reduce public debt (which remains high at 136 percent of GDP), investing in and reforming infrastructure, and improving the business climate and the labor market. Such a strategy will help achieve a higher and more inclusive growth that would reduce unemployment, especially among the youth and educated.
How the Rest of the World Can Help
Undertaking such wide ranging reforms is primarily the responsibility of the countries themselves. It will require difficult choices and trade offs often for new government keen to deliver on past promises, but faced with limited resources. But given the magnitude of the problems, domestic efforts and resources alone are not sufficient. Therefore, it is very important that the region and the international community at large rally to support domestic efforts.
One has to acknowledge that the circumstances are tougher for MENA than they were when Eastern Europe went through its historic transition. In the early 1990s, the world economy was booming, Europe was keen to embrace the transition economies and provide a policy anchor, and external financing was readily available. That is not the case today and we will need different approaches to this transition.
First, the region, and mainly oil exporters, will have a major role to play in supporting the transition. They can play such a role given their relatively better position and the high oil price. This is a shared responsibility and it will be in the interest of all countries if oil exporters contribute to the stability and prosperity of the region.
The international community should also help those transition countries and those affected by instabilities with financing to cushion the inevitable costs of change, provide protection for the poorest, and enable a phased and orderly introduction of reforms. Enhanced market access will be key for creating export opportunities.
The role of the IMF
For its part, the IMF is not sparing any efforts to support homegrown reform agendas. We are helping on three main fronts: Policy advice, capacity building, and financing.
On policy advice, we have adapted our analytical work to face the new realities on the ground. The IMF is integrating the concept of inclusive growth more systematically in its policy advice and capacity building. We are focused on five areas critical to achieving more socially inclusive growth than in the past—job creation, better-targeted social safety nets, strong governance and business environments, access to finance, and greater trade access and integration.
Regarding capacity building, we are providing assistance to the region in designing and implementing new policies in areas such as tax collection, improved statistics, public financial management, and banking supervision. Much of this important work is being done from our Middle East Regional Technical Assistance Center housed here in Beirut. Demand for IMF technical assistance exceeds supply by far. So we are keen to mobilize additional support to METAC, which is not fully funded.
Regarding statistics, which are essential for good policy making and informing public debate, I am happy to report that we are co-organizing next week, along with the Moroccan authorities, a conference in Rabat to launch a concerted effort to improve statistics in the region by establishing “Arabstat,” a statistical agency that would cover all Arab League countries.
On financing, the IMF has created new lending facilities and tools partly in response to the financing needs in the MENA region and is mobilizing other official financing to fill short-term fiscal and external gaps in a number of countries.
The IMF stands ready to provide financing to the oil-importing countries in the region. The IMF has recently approved financing under the concessional Rapid Credit Facility for Yemen to give the new government time to formulate a medium-term strategy to address long-standing economic challenges. The IMF is also in discussions with several other countries about their financing needs for the critical years ahead.
Let me conclude by saying the challenges that lie ahead are formidable. Policymakers will need to act swiftly to put in place economic transitions in tough circumstances. The region and international community should help as much as they can.
We should not let the hopes and aspirations of the people that took to the street unfulfilled. Spring is a time of hope and new beginnings. Let’s make sure that an “Economic Spring” happens in the years ahead so that the people of this region have the opportunity for a fairer and more prosperous future. We should strive to help them achieve it. The cost of failure this time will be unforgivable.