Transcript

Middle East and Central Asia Department

April 12, 2019

Speakers:

Jihad Azour, Director, Middle East and Central Asia Department

Wafa Amr, Senior Communications officer, Communications Department

MS. AMR:  Welcome to the Press Briefing on the Middle East and Central Asia economic outlook.  I'd like to introduce Jihad Azour, Director of the Middle East and  Central Asia Department.  He will make a few opening remarks and then we will take your questions.  I'd also like to invite journalists online to start sending their questions, thank you.

MR. AZOUR:  Thank you Wafa. Good morning, everyone. Let me start by welcoming you all to the IMF’s 2019 Spring Meetings.

The forecasts for our region were included in the World Economic Outlook. For countries in the Middle East, North Africa, Afghanistan, and Pakistan region, and the Caucasus and Central Asia, the main takeaway is this: Global economic headwinds are making policy efforts more urgent and more challenging.

Let me begin by focusing on the MENAP region, where slowing global growth and trade, as well as geopolitical tensions and other potential external shocks, will pose economic challenges. These trends heighten the urgency of implementing reforms that bolster economic resilience and secure inclusive growth.

In the region’s oil exporters, economic growth is projected to remain subdued this year at 0.4 percent, a modest decline from 2018’s 0.6 percent that’s largely driven by a sharp contraction in economic activity in Iran following the renewal of sanctions. In GCC countries, growth is expected to remain mostly unchanged, going from 2 percent in 2018 to a projected 2.1 percent this year. For oil-exporting countries, lower and more volatile oil prices are also weighing on fiscal and external balances.

With a stalled near-term recovery, countries should pursue deeper reforms to spur inclusive growth. This includes resuming growth-friendly fiscal consolidation efforts, which slowed last year following the surge in oil prices. At the same time, countries should work to achieve sustainable spending levels that would help insulate their economies from oil price swings. Further efforts are also needed to develop small and medium-sized enterprises, a critical source of jobs for a region where unemployment remains far too high. Finally, social spending and measures to protect the poor remain urgent needs.

For oil importers, growth is expected to slow from 4.2 percent in 2018 to a projected 3.6 percent this year, a result in part of the weaker global economic environment. There is variation across countries, however, with Egypt’s growth expected to continue its rise and Pakistan’s economy projected to slow significantly and weigh on the region’s aggregate growth rate. Overall, growth remains insufficient to reduce unemployment, especially among young people.

In many oil-importing countries, rising debt levels are becoming a more urgent challenge for their macroeconomic stability. High debt is also limiting fiscal space for critical investments in health, education, infrastructure, and social programs. These budget pressures underscore the urgency of lifting medium-term growth with structural reforms such as measures to improve the business environment and governance, enhance labor market flexibility, and strengthen market competition.

Turning to the CCA, growth in the region has stabilized since the shocks of 2014-16, in large part a result of strengthened policy frameworks, such as reforms to the tax code in countries like Armenia, Georgia, and Uzbekistan, and greater exchange rate flexibility. We project growth to be 4.1 percent in 2019 and 2020, little changed from 4.2 percent growth in 2018 and generally in line with our October projections. However, growth remains well below its long-run potential and too low to meaningfully raise living standards. This is a concern, particularly in view of a number of risks to the regional outlook, including lower growth among key trading partners and oil price swings.

A top policy priority is the need to address banking system issues, including, for many countries, the prevalence of problem assets. While some reforms have been undertaken, further action is needed to improve financial soundness and to ensure that banks’ lending abilities are not inhibited. Additional structural reforms are also needed to complete transitions to fully credible monetary policy frameworks, promote private sector development and diversification, and improve governance.

Before we move to questions, let me state that the IMF remains committed to helping countries in both regions in their reform programs. Currently, there are nine ongoing lending arrangements with countries in the two regions, with our arrangement with Egypt the largest. A staff-level agreement was also recently reached with Armenia that will aim to support their economic program to achieve inclusive growth. Capacity development and technical assistance are also critical IMF priorities. Somalia, for instance, is one of the largest beneficiaries of Fund-provided TA. We look forward to continued engagement in the years ahead with countries throughout both regions.

We’ll have detailed presentations on the MENAP region at a launch in Dubai on April 29. On that same day, we’ll launch our outlook for the Caucasus and Central Asia region. We are also pleased that our managing director, Christine Lagarde, will be visiting the CCA region in May.

With that, I’d like to field your questions.

MS. AMR:  Thank you Jihad, we will take your questions now.  Please identify yourself and the media organization you work for please; the mic.

QUESTIONER:  I have two questions for Mr. Jihad.  We have an economic reform program that is being finalized in Egypt.  How do you assess the macroeconomic indicators for Egypt when it comes to inflation, the restructuring of subsidies, and exchange rate of the guinea, and if the slowdown is only temporary or if it will continue?  I mean, you do support stable exchange rate on the long range and second, the last part of the program, when will it be disbursed?

MR. AZOUR:  Well, in the first part of your question, the economic indicators for the Egyptian economy, these indicators improved the larger in the last two years.  The program that was set by the government was supported by the IMF, and it contributed in improving the economic stability in Egypt.  For example, growth increased to 5.5 percent in the last two years and we expect it to remain as is, while inflation, after reaching more than 30 percent in 2007, is lower at nearly 14 percent.

Also, unemployment moved from 12 percent to 9 percent and other economic indicators like the improved exports and tourism have been improving as well.

So, first we have reached in first phase of economic stability which is of essence for the structural reforms.  We need to allow for growth to create jobs, for the new youth who enter the work markets, 700,000 to 1 million every year, this will allow for the economy to adapt with international changes, and to provide a bigger role to the private sector.  And this also will allow to -- improve the level of social protection which was an important part of the first program.

Now, moving to inflation.  As I said, it's been improving, as for the measures concerning subsidies, subsidies now are being targeted for specific social classes.

As for the exchange rate, the market sets the exchange rate and we follow on the development of the exchange rate.

As for the last phase of the program, as you know, the program is about to be completed.  We still have one last review which should be in June.  We had another review that was published in the report, and in the report we have the main access about the last phase.

And we had meetings with officials in Egypt from the Government and Central Bank, and they said they are committed to the reforms.  And we expect also to have detailed discussions by the missions in June, and the program, as you know, ends in November.  And the IMF, as always, is willing to cooperate with the government at any level.

MR. AZOUR:  The mission will be in Egypt in the next few weeks in order to complete the review successfully but it's too early to talk about it.  We will wait for the mission to be in Egypt, and then we will see how the work is moving forward.

The program so far was very well implemented, and we do hope that the discussions and the review will keep going on, as they did previously. 

QUESTIONER:  My first question is, what are the points which are still pending in the discussions between the IMF and Tunisia?  My second question, when do you think that you will conclude an agreement, and what would be the dates when the last tranche would be set?

MR. AZOUR:  Thank you for your question.  As you know, the IMF has supported Tunisia for several years with the Extended Fund Facility arrangement.  A mission went to Tunis last week, and it met with authorities from the Finance Ministry and the Central Bank, and discussions are ongoing in order to look into the details of all the issues which have been discussed during the last review.

As you know, the purpose of the program at present is to achieve three goals.  First of all, stability in order to build confidence and this is very important for the Tunisian economy which is beginning to see some modest but important recovery.

So, the first goal is stability in order to build confidence.  The second goal is to make it possible through the program to have the utmost support for Tunisia and the Tunisian economy, and it is important to ensure in terms of monetary policy and also budgetary policy, and in particular the deficit levels in the budget.  The impact of monetary policy on capacity and inflation.  Those are technical points which are important.

And the third goal is to see how the support for the more vulnerable social groups can be assured by redistributing the limited budgetary resources and thus the importance of the reform of the subsidies.

And during this press conference, discussions are ongoing between the IMF and the authorities, and in the next few days, we'll be able to clarify issues further.

So, these are still in growth or -- well, I don't want to go into more technical details which are still under discussion.  Generally speaking, when there is a negotiation ongoing at the end -- until the end of the negotiations, we don't go into those detailed discussions.  Our teams are working to resolve the last issues.

As for the tranche, our goal is to make as much progress as possible, we are very aware of the importance of economic and social stability.  In Tunisia the Fund has always been committed to Tunisia in all of its transition periods, and will remain so.  Thank you.

QUESTIONER:  I would like to know what are -- your focus regarding economic growth in Morocco for 2019?  Since the Central Bank's initial projects were revised downwards, so what is your overall assessment of Morocco's economy, since it's heavily agriculture based? 

And my second question concerns the exchange rate and making the exchange rate flexible, the dirham rate flexible?  And do you think that they should move to the second stage and make the fluctuation range broader?

MR. AZOUR:  Thank you for your question.  For 2019 for Morocco, the growth is at 3.2 percent, that's the projection.  Agriculture is an important sector, and so climate developments have an impact on growth.  If we look in detail, economic growth outside of agriculture is higher than overall growth.

Morocco, in recent years, has managed to carry out some significant reforms, reforms aimed at stabilizing its economy and improving the macroeconomic framework, and this is very important for both growth and investment, and for making it possible for the country to invest in the future in education, and in social sectors.  So, several reforms have been successful, and the Fund has been one of Morocco's very strong partners.

A program, a new program was recently signed, as you may know, and there we have been emphasizing reforms to help the country make progress in the business climate, in stability.

And that brings me to my second point.  The private sector also succeeded in transforming itself to cover new markets such as in Africa and to engage in investments that are high value-added. And so Morocco is more exposed to commerce and the global economy, and therefore needs to create a more strategic situation in a stable economy.

With regard to your second question, Morocco has succeeded in putting in place a flexible exchange rate, but managing a flexible exchange rate requires having a stable economy as well as a macroeconomic policy that strengthens investor confidence by reducing inflation and by reducing into internal and external inequalities and (inaudible) and by boosting growth in the economy.  And we believe Morocco is moving in that direction.  Use the mic.

QUESTIONER:  My second question on the broadening of the fluctuation band is Morocco ready to go to the second stage?

MR. AZOUR:  Well, there's not one stage or another.  Its market forces that, in fact, determine the current exchange rates because the exchange rate has become flexible.  And so, it's the macroeconomic situation that determines what happens.  So, this change to a new exchange rate regime was done under good conditions and it's not our role to determine whether the exchange is adequate or not.

QUESTIONER:  Jordan has introduced a lot of financial reforms at the last year.  Do you think this is a financial reform is enough for Jordan to improve growth and do you think Jordan needs to extend its program with the IMF.  At my last question, is there any new reviews for Jordan for the economic performance?

MR. AZOUR:  Thank you.  Let me first remind you that the IMF is committed to supporting Jordan and the Jordanian economy which is facing a set of challenges party due to the economic and political developments and new political external factors.  The IMF, on several occasions, contributed to supporting Jordan by supporting reform programs undertaken by the government. The last contribution was the fact that Mme Lagarde attended a conference in London where the IMF participated significantly in urging the donor countries to provide the maximum magnitude of aid in support of Jordan.

The weakening of the economic growth in Jordan requires a number of structural reforms that would strengthen inclusive growth and create jobs.  Jordan suffers from an 18 percent unemployment, mostly among the youth.  For this reason, one of the goals of the program is to accelerate the structural reforms in sectors such as energy, tax reforms, so that there is a wider participation by all segments of the society, particularly, the high income sectors, and to reduce the costs of energy and labor to accelerate employment. 

Because of the growing debt in Jordan, it is important to maintain financial stability.  This requires prudent financial and fiscal policies to reduce deficit.  This is the main key to allow Jordan to maintain stability and attract additional investments.  At present, there are positive external developments, such as open trade with Iraq and the growing volume of trade with Iraq.  Also, reactivating the gas deal with Egypt.  All these are additional factors.  It is important to maintain a set of reforms.

As regards the second review, the review is underway and part of it is on two tracks, the reforms and the subsidies.  Along these two tracks, discussion is underway this week actually with the Jordanian authorities towards that end.  As regards the future stage, we are in a review mode.  As the IMF stated before, the IMF is willing to support Jordan because of the social economic challenges and if Jordan requests additional support, we are ready to help.  In addition to the financial support, the IMF, for Jordan and other countries, provides important support through technical assistance and training provided by an institute in Kuwait and technical assistance center in Beirut.

QUESTIONER:  So, in Armenia, where was a revolution last year declared fight against corruption, so what's your evaluation of Armenian government's actions, new government's actions and what would be your advice to them maybe?  And what are your expectations for Armenia this year and do you plan to extend the cooperation with Armenia, thank you?

MS. AMR:  Thank you very much.  The Fund has reached a staff-level agreement with the Armenian's authorities on a new program. And the objective of this new program is to raise the level of growth as well as also to tackle issues of inclusion.  And it's based on certain number of structural reforms that big part of those reforms are, in fact, to expand the role of the private sector by improving the investment environment, and during our meetings with the authorities, we were told that they are preparing five-year strategy in this direction.

There is another pillar of reform which is reforming the tax system in order to make it more transparent and also conducive for investment.  And this is -- goes in the right direction, the IMF provided technical assistance in the design of this reform that is important pillar, both for the adjustment and stability at the fiscal level, as well as also to improve growth potential for Armenia.  Of course, Armenia is very much attached to the fiscal rule and the fiscal rule is anchoring the debt dynamic and this is something that will help Armenia by reducing the level of debt increase its macroeconomic stability and hence, increase capital flows that will go into the private sector.

Of course, Armenia, like any other country in this part of the world, is also affected by the regional and international development and it's very important for Armenia to keep on the reform journey, increase governance, address some of the bottlenecks and the cost of doing business.  Maintain strong macroeconomic stability and we expect growth for Armenia this year to be at 4.6 percent, 4.5 for 2020, which is, I would say slightly lower than in 2018, but I think it's still fairly good level.

QUESTIONER:  I have a question regarding the -- in the last review for the IMF, they said that Egypt needs more taxation reforms to complete the program and it is committed to the program already.  So, in your opinion, what are new taxes needed, some like, capital taxes, other taxes to promote the economy, achieve growth and to achieve also social protection.  Thank you.

MR. AZOUR:  Thank you very much.  This next review will not have any request or issues related to taxation in it.  The main objective of this review is to strengthen some of the structural reforms that will help the economy to grow faster and to be led by the private sector.  For example, the key reform area. 

As in fact it was published in the last review document will be on how to improve business environment, passing the law on public procurement in order to allow additional transparency on the process of procurement and attract additional FDI's. 

And also the land reform that the government is committed to in addition to a certain number of other structural reforms like finishing the well started job on subsidy reform. 

Therefore, for the next review, it is going to be more on those issues as well as also anchoring the macrocosmic stability with the next budget with an objective of achieving a level of primary surplus, the balance between government revenues and government expenditure outside the debt servers to a surplus of two percent which will help Egypt achieve in the medium term a debt trend that will help lower the debt which is one of the main objectives of the program. 

Therefore, those are in fact the key issues that or the key pillars of the last review of the program.  As I said they are more targeted toward growth, attracting by improving certain number of legislations, FDI, addressing some of the issues related to social protection and maintain the consistent trend since the last two years in terms of deficit and debt on downward dynamic. 

QUESTIONER:  When will the Egyptian people feel the benefits of the program with the IMF?  Second question about Madame Lagarde's statement yesterday that Egypt in terms of entrepreneurship and supporting the private sector needs to work more given that the state is intervening in certain sectors.  Thank you. 

MR. AZOUR:  Thank you. This was an important question.  The reform track is a long track.  The first phase is to let the Egyptians feel stability.  The aim of the first program or the first phase of the pogrom was to reduce the economic risks particularly in terms of the imbalance in the fiscal and external balances which impacted Egypt's trade significantly.  And this was achieved. 

The second is the financial stability with the growth in reserves which allow the Egyptian economy to attract billions of investment though the part of the investments went into fiscal or securities but we have seen direct investment rise and we hope the rise in direct investment will further enhance the ability to create jobs. 

We have seen in the past two years also a decrease in unemployment.  Of course the ambitions are greater but from 12 percent to 9 percent at a time when the region is seeing a rise in unemployment, this is a good sign. 

To get into more details, we want to separate among the sectors the vulnerable sectors benefitted from that Takafol and Karameh program which made up for some of the negative impacts of reforms.  There were also other programs that provided subsidies. 

In my last meeting with a group of officials in February in Egypt, I noticed how much these programs provided more protection, particularly for the women in rural areas.  70 percent of the beneficiaries were women who had no skills, were illiterate.  These programs provided a minimum level of dignity for the people.  Continuing these programs is important and the people will feel that reforming part of the subsidy regime is now paying off. 

The second part that needs to be focused on is the middle class.  The private sector is the main engine of growth now because of its dynamism and because the public sector cannot handle greater numbers and because of the dynamism of the Egyptian youth which also during my visit to Egypt, it was opportunity for me to interact with Egyptian youth. 

There is huge potential in the youth. Very promising.  So strengthening investment in the economic infrastructure, digital economy, education, enhancing the role of the private sector and the market, giving a greater sense that stability in the economy will continue into the next phase, this is very important. 

Also, giving a greater space and flexibility to the fiscal policy meaning allowing more money from the budget to be used in offering more social protection.  This is key.  These are the one -- this is one of the pillars of the programs that the IMF supported with Egypt. 

QUESTIONER:  I would like to ask you about statements by Madame Lagarde during the press conference when she said that there will be assistance to Egypt after the end of the program in the field of entrepreneurship.

How are you going to assist Egypt in this regard?  This is a very important topic. 

The second question is what is your assessment about the level of debt in Egypt, public debt, particularly after the shift in numbers lately.  And what are your expectations of the final review.  Thank you very much. 

MR. AZOUR:  Thank you for the first question which is very important.  One of the main issues that we work on in the region is how to support medium and small enterprises in the economy. 

We identified the importance of funding and financing medium and startups, enterprises and startups.  Because Egypt is important, we launched the report in Egypt.  Madame Lagarde stressed the importance of this issue.  There will be a meeting in less than 15 minutes with governors of the central bank on this particular issue. 

There will be a study to be published at the end of the month at the meeting of the Arab finance ministers in Kuwait on this issue.  There will be also another meeting in September with governors of the central bank and Arab financial institutions on this vital and key and important topic that the IMF is working on. 

As you know, the IMF does not provide project loans but macroeconomic loans but we are ready to support this endeavor. 

The second question is also important about public debt.  The importance of the drop in public debt is that it allows the economy to grow and to remove some of the burdens on the public sector.  The purpose of the last or final review is to make sure there is an initial surplus in the budget to reduce the debt gradually. 

Raising growth is important.  In 2019 we expect the growth in Egypt to be 5.1 percent and we hope this level of growth will continue and even reach 6 percent.  This is very important. 

Through the IMF program, public debt in Egypt has dropped from 103 percent in 2016/17 to 86 percent of GDP in 2018/19 fiscal year. It is projected to decline further to 80 percent in 2020.  Because of this, working on continuing the prudent financial management to reduce debt is extremely important for the Egyptian economy. I expect the final review to be concluded in June in Cairo.

MS. AMR:  Thank you, Jihad.  Thank you everybody.  This ends the press conference on the Middle East and Central Asia. 

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