INTERVIEW: IMF outlook on the Middle East

Doaa A. Moneim , Saturday 23 Oct 2021

Director of the Middle East and Central Asia Department at the International Monetary Fund Jihad Azour explains the economic outlook for the Middle East region to Al-Ahram Weekly


The International Monetary Fund (IMF) released its updated regional economic outlook on Tuesday as part of the World Bank Group and IMF annual meetings.

The update showed that real GDP for the Middle East and North Africa (MENA) region is projected to expand by 4.1 per cent in both 2021 and 2022, an upgrade of 0.1 and 0.4 percentage points, respectively, compared to April forecasts and following last year’s sharp contraction.

2021 is still being shaped by the ongoing Covid-19 pandemic and OPEC+ production curbs for oil exporters, Jihad Azour, director of the Middle East and Central Asia Department at the IMF, told Al-Ahram Weekly.

He said that recovery in the region would be defined by the speed of vaccination rollouts, noting that some countries have made good progress, such as the Gulf Cooperation Countries (GCC), Jordan, Morocco and Tunisia, but many other low-income countries are lagging behind.

Other factors affecting the recovery include the fiscal and monetary space in the region’s countries and tourism dependence.

“With high debt and rising inflation, policy space is narrowing for many countries in the region,” Azour said.

Meanwhile, countries that rely on tourism revenues, about nine countries in the region, are more likely to face headwinds from recurrent pandemic waves, Azour said. Exposure to oil markets, conflict, and political uncertainty also play a role in the outlook.

In this respect, Azour said that higher oil prices and expanding OPEC+ production would support economic activity for oil exporters. In contrast, for oil importers, higher oil prices will represent a headwind for their outlook.

Azour said that vaccine rollouts in the region were progressing, but overall vaccination rates remain low from a global perspective, reflecting a combination of supply and procurement bottlenecks and logistical obstacles.

He added that consistent with global trends, more affluent countries in the region — some oil exporters and emerging market and middle-income countries (EM&MI) — have procured vaccines from a more diverse number of sources and have had more successful rollouts than low-income countries (LICs), which have faced delays and uneven delivery so far.

However, he said that recent donations covering sufficient doses to inoculate seven per cent of the region’s LIC population on average have tripled the number of average daily doses administered in these countries since August.

“Countries that have made more progress towards vaccinating their populations will be more resilient to the emergence of new virus variants, which have increased uncertainty about how quickly the pandemic can be overcome,” Azour said.

Vaccine delays and further outbreaks, he said, represent important downside risks that could delay the recovery and threaten debt sustainability. “Strong global and regional cooperation is needed to achieve the goal of vaccinating at least 40 per cent of the population by the end of this year and 70 per cent by the first half of 2022,” he added.

Focusing on Egypt, the IMF has revised up Egypt’s real GDP growth projections for 2021 to 3.3 per cent while maintaining its expectation for 2022 GDP growth at 5.2 per cent. The forecast is supported by an easing of pandemic-related restrictions and the gradual resumption of tourism activity, according to Azour.

Egypt’s headline inflation is currently projected to converge to around seven per cent, in line with the authorities’ medium-term inflation target. The US Federal Reserve’s policy normalisation, and more generally the tightening of financial conditions in advanced economies as the global economy recovers, may have spillovers to emerging market economies, including on capital flows.

However, Azour warned that the pickup in global commodity prices represents upside risks for Egypt’s inflation.

On a more positive note, Azour said that Egypt’s fiscal deficit is projected to come in at seven per cent of GDP in fiscal year 2021-2022, down from 7.5 per cent in 2020-2021, in line with the authorities’ primary surplus target of 1.5 per cent of GDP.

This fiscal stance strikes an appropriate balance between supporting the recovery and putting public debt on a downward trajectory, he said, adding that the current projections do not anticipate a budget financing gap in 2021/2022.

“The authorities’ financing strategy continues to focus on lengthening maturities to help lower rollover risks, and the recent inclusion of Egypt in the J.P. Morgan emerging market government bond index should help broaden the investor base, deepen secondary markets, and facilitate longer-term bond issuance,” Azour explained.

Regarding his perception of the effects of rising gas prices on the Egyptian economy and its recovery process, Azour said that Egypt is a net exporter of gas and a net importer of oil.

On balance, he said, given that gas and oil prices have risen in tandem, higher gas and oil prices are not expected to have a significant impact on the current account. However, he said that higher oil prices would be passed through to retail fuel prices through Egypt’s automatic indexation mechanism and hence impact inflation upward.

Egypt’s Automatic Fuel Pricing Committee has already increased fuel prices three times in 2021 as a result of higher oil prices. “This is an important mechanism as it protects public finances from the return of expensive fuel subsidies,” Azour stressed.

He added that the impact of higher international gas prices on inflation in Egypt would depend on the extent to which they are reflected in the price of gas sold to energy-intensive industries, explaining that the price has been fixed since March 2020, when it was reduced to reflect lower gas prices and to support industry through the pandemic.

On the outlook for capital and foreign direct investment (FDI) inflows over the near and short term, Azour said that Egypt has experienced a strong return of portfolio inflows after the disruptive conditions in March-April 2020, adding that this was testimony to the authorities’ deft management of the Covid-19 crisis.

Going forward, these flows are expected to return to more steady-state levels, closer to pre-Covid-19 levels, thanks to the authorities’ continued structural reform efforts, the country’s inclusion in the J.P. Morgan index as of January 2022, and other ongoing reforms to widen the investor basis, Azour said.

“Nonetheless, Egypt’s high stock of non-resident holding of sovereign debt makes it vulnerable to changes in financial market conditions for emerging markets as monetary policy in advanced economies begins to normalise,” he noted.

Azour expects FDI inflows to increase in the coming period, albeit with large uncertainty as the global economy continues to be affected by the Covid-19 pandemic. He underlined the importance of continued macroeconomic stability and safeguarding debt sustainability amid high public debt and large gross financing needs.

He also emphasised that Egypt’s fiscal policy should aim to return to the downward trend in public debt that prevailed prior to the Covid-19 shock.

Egypt’s government gross debt to GDP ratio recorded 89.8 per cent in 2020 before jumping to 91.4 per cent in 2021.

Azour said that monetary policy should remain data-dependent to continue to anchor inflation expectations within the Central Bank of Egypt’s (CBE) target band of plus or minus seven per cent, and exchange-rate flexibility should be the first line of defence in case of external pressures.

“Deepening and broadening structural reforms will also be critical to enhance the ability of the private sector to lead sustainable growth and job creation,” he said.

*A version of this article appears in print in the 21 October, 2021 edition of Al-Ahram Weekly

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