INTERVIEW: Growth challenges in the MENA region

Doaa A. Moneim, Wednesday 12 Jul 2023

Egypt’s pursuit of key structural reforms will increase its economic resilience and boost confidence in the economy, World Bank Regional Director for Equitable Growth, Finance, and Institutions in MENA Nadir Mohamed tells Al-Ahram Weekly.

Nadir Mohammed
Nadir Mohammed


Growth in both the oil exporters and oil importers in the Middle East and North Africa (MENA) region is expected to slow during the 2023-24 fiscal year, with the 19-month conflict in Ukraine, regional instability, and geopolitical tensions weighing on the MENA economies and thus increasing their fiscal risks.

In response, World Bank Regional Director for Equitable Growth, Finance, and Institutions in the MENA region Nadir Mohamed suggests that the countries of the region adopt prudent fiscal management practices like improving and consolidating expenditure efficiency and enhancing revenue mobilisation. Reforming state subsidies as well as diversifying sources of income are good examples of such measures.  

In Egypt, Mohamed expects growth rates to decline and debt figures to increase during the current fiscal year, expressed in the ratios of debt and budget deficit to GDP. However, things will start to improve in the medium term as the country continues to implement structural reforms, he said in an interview with Al-Ahram Weekly.

What are the economic challenges the region’s countries are currently facing? And what are the key solutions that could mitigate such challenges?

The ongoing conflict in Ukraine, the aftermath of the Covid-19 pandemic, and regional instability and geopolitical tensions have impacted the economies of both oil-exporting and oil-importing countries in their ability to address fiscal challenges. However, and despite the tightening of fiscal and monetary policies across the region over the past year, stances and outlooks differ between oil exporters and importers.

In the oil exporters, government budgets are expected to remain in or close to surplus owing to strong revenues from high oil prices and spending cuts as Covid-19 measures unwind. In oil importers, by contrast, fiscal deficits are large and forecast to increase as debt-servicing costs rise. Monetary policy in oil exporters with currencies pegged to the US dollar has tightened in line with the rise in the US Federal Reserve’s policy rate. Among oil importers, policy rates have been hiked sharply to contain increases in inflation. In Egypt, for example, the Central Bank of Egypt (CBE) has raised policy rates by 10 percentage points since the start of 2022.

In terms of specific fiscal risks, the region is faced with significant fiscal challenges that demand urgent attention from governments. Let me highlight a few key ones:

Low revenue-raising capacity: Many countries in the region heavily rely on revenue from hydrocarbon resources, making their fiscal positions vulnerable to fluctuations in commodity prices. This reliance limits their ability to generate diverse and sustainable revenue sources.

High debt levels: Some countries have experienced a rapid accumulation of public debt, which strains their government budgets and limits fiscal flexibility. This high debt burden is crowding out public investment, increasing interest payments, and hindering the chances of economic growth. The increasing costs associated with servicing and repaying existing debts are straining public finances and limiting resources for essential public expenditures including on health and education. This is also associated with high sovereign exposure, particularly to external debt, which is exposing many countries to exchange-rate fluctuations, changes in investor sentiment, and global financial market volatility in general.

The dominance of state-owned enterprises (SOEs): The prevalence of SOEs in most of the regional economies is adding its toll, leading to financial losses, the drainage of public resources, and the undermining of fiscal sustainability.

To respond to fiscal risks in the MENA region, I believe that governments should implement prudent fiscal management practices, including fiscal consolidation measures, improving expenditure efficiency, and enhancing revenue mobilisation. I see subsidy reform, strengthening institutional capacity, and revenue diversification as essential steps. Investment in human capital, regional cooperation, adaptability, and resilience are also key.

How are these challenges reflected in the region’s growth projections?

As you might have seen in the World Bank’s just-released Global Economic Prospects report, the growth forecast in the MENA region is expected to slow to 2.2 per cent in 2023. Growth in oil exporters is expected to slow sharply to two per cent this year, reflecting lower oil prices and production, whereas growth in oil importers is projected to edge down to 3.4 per cent due to high inflation, dollar shortages, and fiscal and monetary policy tightening.

Risks to this outlook remain predominantly on the downside and include falling external demand due to banking stress or further policy tightening; rising violence and social tensions, perhaps arising from the high levels of unemployment in much of the region; a greater incidence of financial crises; and adverse weather events stemming from climate change.

How can the MENA countries, including Egypt, boost their real GDP growth levels amid the ongoing challenges?

During times of uncertainty, it is important to not be overconfident about the region’s growth prospects. This year, and potentially next, growth is expected to slow in MENA for the reasons outlined above. To restore growth, complex policy trade-offs must be made.

Policymakers will need to calibrate the policy mix carefully. In a way, governments would need to reinvent themselves — reducing inflation without triggering financial stress and excessive tightening while continuing to provide targeted fiscal support to vulnerable groups. All of this will need to be done while preserving debt sustainability and financial stability. The realities on the ground call on governments to accelerate structural reforms in order to bolster potential growth and enhance resilience. Given the fiscal constraints, attention should be directed towards attracting Foreign Direct Investments (FDIs) and improving the investment climate to maximise the private sector’s contribution to the growth agenda.

In light of the escalation of the confrontations in Sudan, to what extent do you expect the flow of refugees to weigh down the economies of the receiving countries, including Egypt?

The overall impact can be considered to be relatively limited, especially since migration flows were already on the rise even prior to the conflict that erupted in Sudan last April. With the uptick in these migration flows to Egypt, pressures on social services (education and health) may arise. Meanwhile, potential small-scale positive spillovers can materialise from an uptick in demand in concentrated areas of Egypt.

Trade volumes are expected to be only slightly impacted, as exports to and imports from Sudan represent a small portion of Egypt’s overall trade flows. However, declining food imports from Sudan, as well as the uptick in demand, could add (albeit marginally) to the ongoing food inflation pressures in Egypt.

What are the key fiscal and financial risks for Egypt?

Egypt has achieved strides in fiscal consolidation, especially during the 2016-17 to 2019-20 fiscal years. However, government debt remains elevated at 88.3 per cent of GDP as of the end of the 2021-22 fiscal year. With high-interest rates and an elevated stock of government debt, servicing costs are substantial. Interest payments take up well above half of tax revenues. This limits the fiscal space for important spending on human development and social protection.

Domestic revenue mobilisation also remains below potential. The average time-to-maturity of total government debt has increased in recent years. However, debt remains subject to pressures and risks arising from interest-rate and exchange-rate fluctuations. To improve the management of fiscal risks the Egyptian Ministry of Finance has developed a fiscal risk report that is released with budget documents and that is being progressively improved.

The proposed reporting on SOE activities as part of the State Ownership Policy is another positive development. Key indicators point to the soundness of Egypt’s financial and banking sector, as captured by capital adequacy measures, low non-performing loan ratios, and ample liquidity conditions. The financial soundness indicators in part reflect the large holdings of treasury securities, which thus implies limited credit intermediation to the private sector.

Large holdings of government debt in the context of rising interest rates, higher government debt levels, increasing fiscal stress, and a lack of secondary market liquidity could make banks more vulnerable through unrealised losses in their debt portfolios.

What about forecasts for Egypt’s financial and fiscal performance during the 2023-24 fiscal year?

For the 2022/23-24 period, headline growth and fiscal and debt figures are expected to be undermined by concurrent global shocks and domestic supply bottlenecks, before starting to improve over the medium term as the country continues to push ahead with stabilisation and structural reforms.

Growth is expected to decline to four per cent in 2022/23-24, compared to 6.6 per cent in 2021-22. The budget deficit and government debt ratios to GDP are expected to rise as well. However, under the baseline scenario, Egypt is expected to continue pursuing fiscal consolidation and debt reduction, as well as key structural reforms — notably those that enhance the business environment and create a level playing field for the private sector to thrive. This will lay the foundations for enhanced economic resilience, a more sustainable growth trajectory, and bolstering confidence in the economy.

How could sound fiscal risk-management policies help Egypt to alleviate the pressures on its local currency and budget?

The current pressures on the exchange rate as well as on the budget result in part from adverse global shocks that have intersected with pre-existing challenges (the economy’s gradual shift towards non-tradables and the underperformance of non-oil exports and FDI). Mobilising foreign financing, in tandem with allowing for flexibility in the exchange rate in the face of global headwinds, in addition to streamlining inefficient and untargeted expenditures, can help maintain competitiveness and boost confidence.

This is especially the case if this is combined with the effective implementation of structural reforms that address the root causes of the problems, including measures to improve the business environment and foster competition, whilst deploying social-mitigation packages to shield the poor and vulnerable and support firms from the impacts of rising prices.

The government’s approach to reforming SOEs, as announced in the State Ownership Policy, is a positive development, but effective implementation is essential. This is not only through divestment to address the immediate foreign-exchange shortfall, but also through creating a level playing field with the private sector and improving SOE governance and performance to support the economy more generally.

* A version of this article appears in print in the 13 July, 2023 edition of Al-Ahram Weekly

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