As the annual spring meetings of the World Bank and the International Monetary Fund (IMF) kicked off on Monday, attention has been turning to how the crisis in Ukraine could affect food prices and debt levels in many parts of the world, including the Middle East and North Africa (MENA) region and Egypt.
Division chief in the IMF’s Fiscal Affairs Department Paolo Medas explained the situation in an interview with Al-Ahram Weekly.
What are the IMF’s expectations for global food and basic commodity prices through to the end of 2022?
There is large volatility and uncertainty around the prices of commodities, given the different shocks we have been seeing. Prices were already rising as economies recovered from the pandemic-related recession, but Russia’s invasion of Ukraine caused further significant disruptions in the trade flows of commodities. The futures markets suggest significant price increases in 2022. For example, world food prices rose 34 per cent in March from a year earlier, according to the UN Food and Agriculture Organisation (FAO).
How might this affect the MENA region?
Countries in the MENA region are highly exposed to global food and basic commodities prices, particularly the price of wheat. The large dependency of several countries on wheat imports from Russia and Ukraine in the MENA region, along with disruptions in the supply of potash fertilisers, is exacerbating existing price pressures and food insecurity concerns. Average inflation in the MENA region is expected to remain elevated at around 14 per cent in 2022, and the poorest households will be affected more, given the higher weight of food in their consumption baskets.
But the situation differs considerably across countries. Some governments have limited the pass-through of higher global prices to domestic consumers via tax cuts, subsidies, and price freezes. This is especially the case for energy prices that remain well below international prices in several countries in the region. Such measures are aimed to protect households and preserve social cohesion. However, they can have undesirable consequences and can lead to even higher international prices and large fiscal costs.
They will also make the situation worse for low-income countries that do not have the fiscal space to implement them. A better solution would be to provide targeted, temporary, and direct support to low-income households, while allowing domestic prices to adjust at least gradually.
When do you expect the inflationary pressures to ease?
This is a period when making projections is particularly difficult, as the full impact of the different shocks is not yet fully known. The markets expect that commodity price pressures will ease somewhat in 2023, with oil prices falling from their highs as supply adjusts and food prices decline modestly due to the lagged impact from the 2022 harvest. Inflation in the MENA region is expected to decline to around 10 per cent in 2023.
However, the risks around the outlook are high, including a prolonged war in Ukraine and further sanctions on Russia. The war could lead to a greater economic slowdown than currently expected, but it could also further disrupt international trade and commodity markets, putting further pressures on inflation. A longer period of high inflation could risk de-anchoring inflation expectations (that is, people and firms could start to expect inflation to be above target for longer), which will require further monetary policy tightening to bring inflation down.
What do the MENA countries need to do in terms of debt management amid the ongoing challenges?
Public debt in the MENA region, after rising to almost 54 per cent of GDP in 2020, is expected to decline for the second year in a row in 2022 and then stabilise at around 44 per cent of GDP over the medium term. However, the outlook varies significantly within the region. Commodity importers are likely to face significant spending pressures and rising borrowing costs, which will make it more challenging to reduce fiscal deficits and debt, whereas commodity exporters are benefiting from a revenue windfall.
Countries will need to strike a balance to tackle urgent needs, including ensuring access to food by vulnerable households, and reducing debt vulnerabilities. Setting credible medium-term fiscal strategies to ensure debt sustainability over time could help give confidence to financial markets and limit the rise in borrowing costs. Marked divergencies across countries also call for diverse fiscal strategies. Commodity exporters can take the opportunity to rebuild fiscal buffers, while also strengthening social safety nets and make productive investment.
Commodity importers will be under greater fiscal pressure to help vulnerable households, while many may also face tight financing conditions and high debt vulnerabilities. Governments will need to reprioritise spending and mobilise domestic revenue to create space for the most urgent priorities. Low-income countries and fragile and conflict-affected states face significant food insecurity risks in addition to fiscal strain. Support from the international community is paramount to help especially those with high debt vulnerabilities, including with debt relief.
To what extent could the conflict in Ukraine affect Egypt’s fiscal balance and balance of payments?
Egypt is exposed to the war in Ukraine through disruptions to wheat imports and tourism flows, as well as higher commodity prices and financial market uncertainty. The recent rise in commodity prices will likely worsen the external current-account deficit. It will also put pressure on the fiscal balance through increasing the cost of food and energy subsidies. Tightening global financial conditions could impact the balance of payments and the fiscal balance. The government announced a package of fiscal measures to cushion the impact of global shocks and the depreciation of the Egyptian pound on 21 March that includes expanding the coverage of direct cash-transfers to the most vulnerable.
Immediate external pressures have come from capital outflows, with the Central Bank of Egypt (CBE) initially drawing down its foreign-exchange reserves before allowing the exchange rate to depreciate by around 15 per cent in late March. Continued exchange-rate flexibility will be essential to absorb future external shocks, reduce the vulnerability to volatile capital flows, and safeguard financial buffers.
What are your expectations for Egypt’s budget deficit through the end of the current fiscal year, 2021-2022, which ends in June?
In the current fiscal year, the primary surplus is expected to be 1.3 per cent of GDP. Going forward, Egypt’s high public debt and gross financing needs underscore the importance of preserving fiscal discipline and safeguarding debt sustainability.
What are the IMF estimates for Egypt’s debt-to-GDP ratio amid the ongoing crisis? How might the government best deal with this?
Egypt’s debt-to-GDP ratio is projected to reach 94 per cent in the 2021-22 fiscal year. Thereafter, preserving fiscal discipline will be important in maintaining market confidence and putting debt back on a downward trajectory. In addition, the government could pursue its debt-management strategy to lengthen debt maturity and reduce large gross financing needs.
*A version of this article appears in print in the 21 April, 2022 edition of Al-Ahram Weekly.