The World Bank’s (WB) latest report on the Middle East and North Africa (MENA) region’s economy amid the COVID-19 crisis, released on 19 October, estimated Egypt’s real GDP growth at 3.5 percent in the fiscal year 2020 (a slight downgrade from its previous forecast of 3.7 percent in April,) down from the 5.6 percent growth attained in fiscal year 2019.
In an exclusive interview, Vice President of the World Bank Ferid Belhaj spoke to Ahram Online about the reasons behind these improved projections and how Egypt can face the second wave of the pandemic and its associated impacts, especially on the economy.
He also talked about how the dual shock of COVID-19 and the collapse of global oil prices has affected MENA’s economy, and how this will contribute to the economic outlook over the coming years.
Ahram Online: What are the impacts of the COVID-19 crisis on the MENA countries’ economies according to the World Bank’s latest report?
Ferid Belhaj: The dual economic shock of the COVID-19 pandemic and the decline in oil prices has affected all aspects of MENA’s economies, with the most devastating impact being on the poor and most vulnerable.
Our latest Regional Economic Update projects that MENA’s economy will contract by 5.2 percent in 2020—that is 4.1 percentage points below our projections published in April 2020, and 7.8 percentage points worse than the outlook one year ago. Public debt is projected to rise significantly in the next few years, from about 45 percent of GDP in 2019 to 58 percent in 2022. And we expect that MENA’s economies will only partially recover in 2021.
AO: How can the region cope with the notable drop in revenue due to the ongoing crisis?
FB: Some of the drop in revenue is because of mitigation measures such as deferrals, moratoria, and extended grace periods on some taxes and fees. Countries can recoup some of the lost revenue by letting these measures expire, but no one knows for sure when this crisis will be over. It will be important for countries to unwind these kinds of measures as their economies recover.
What the crisis has shown is the need for countries to enact a long-term agenda to mobilise revenue. That means reforming the tax system (including wealth taxes) and enlarging the tax base. Right now, too many informal workers and businesses are not part of the tax system. It means reducing corporate subsidies and increasing transparency. All of this will require building societal trust in the government, which must start with greater transparency and accountability.
AO: COVID-19, the Lebanon crisis, and conflicts have all contributed to increasing the number of people who are expected to fall into extreme poverty in the region over the medium and long term. How can the region’s countries address such an issue, especially with 3 million additional people in the region expected to fall into extreme poverty?
FB: As the COVID-19 pandemic swept across the region, it increased the suffering of everyone, particularly the poor and vulnerable. Economies shut down, and massive job and income losses particularly affected informal workers in urban areas.
It is difficult to offer precise estimates of the income losses and consequent increases in the number of poor people. In MENA, unfortunately, we face a challenge of a lack of access to reliable household survey data. Nonetheless, given the information that we do have, we estimate that poverty has increased by roughly 12 million to 15 million people in 2020 alone at the middle-income poverty line of $5.5 per day. And we estimate that the number could rise to upwards of 23 million by the end of 2021.
In terms of recovery, the urgent priorities are to stop the spread of the virus and protect and care for MENA’s citizens. The World Bank is helping with both. We have provided almost $700 million in emergency support across MENA to help with the most urgent public health needs. And we are supporting individuals and helping countries expand social safety nets, including cash transfers for the most vulnerable, and supporting small businesses.
In the medium run, it is important for countries in the region to enact reforms that restore growth and facilitate structural transformation by promoting competition, adopting digital technologies, pursuing trade integration, and increasing transparency. This should be complemented by policies to increase the productivity of those ‘at the bottom of the pyramid’ in order to improve the welfare of those engaged in the informal sector, which is a majority of the work force in many countries. Micro-finance, a more positive engagement with the state, and again, investing in the digital economy are important is this regard.
AO: How has international trade flow to the region been affected by the pandemic?
FB: We estimate that trade in MENA has fallen sharply. The downturn is expected to accelerate in sectors such as electronics and automotive products. Trade in services like tourism is also severely affected because of transportation and travel restrictions.
Our latest regional economic update report shows the extent to which MENA’s integration—both within the region and with the rest of the world—was underperforming before the pandemic. And it proposes a new trade integration framework that goes beyond reducing tariffs.
A coordinated MENA trade and integration strategy starts with regional trade in sectors such as food, health systems, renewable energy, and the knowledge economy. Creating a common digital market would improve trade and digital connectivity with broader markets in Africa and the Mediterranean. That would help increase productivity; help with the response to COVID-19 and future disasters; and promote inclusive, resilient, sustainable jobs in the region.
We are ready to help MENA countries strike the right balance between political and economic objectives to build a new framework and ensure that trade agreements do not fail.
AO: Egypt has maintained its positive economic growth expectations since the onset of the crisis. What are the reasons behind this?
FB:Egypt was the only country in the region with positive growth during the COVID-19 crisis. That’s because of a number of factors, but some of the most important are the deep reforms the country went through in the last few years—macroeconomic reforms and reforms of energy subsidies that freed up resources for social spending and public investment.
But like all other countries, Egypt’s growth has been severely affected by the pandemic. Instead of heading toward 6 percent growth from the momentum of those reforms, we estimate that Egypt’s growth slowed to 3.5 percent in the last fiscal year. And we project that growth will drop to 2.3 percent in this fiscal year.
To continue fighting the pandemic and promote a strong economic recovery, the second wave of reforms should focus on enabling the private sector to compete, creating more and better jobs, and reforming state-owned enterprises. The World Bank will continue working closely with Egypt to stop the spread of the disease and protect and care for the country’s people. At the same time, we are committed to supporting Egypt’s second wave of reforms that will ignite sustainable, equitable economic growth.
AO: In light of the unprecedent increase in the region’s countries’ debt levels, which procedures should these countries, including Egypt, take to deal with such a serious situation?
FB: Many countries can expect their debt to rise, given increased deficits and slower growth. But the decline in global interest rates buys some time in terms of debt sustainability, since interest drives growth of the stock of debt.
We are encouraging countries to get out of the crisis first, then work on debt sustainability. But there are reforms that are good for the short and medium terms, such as public financial management, access to finance and digital financial services, improving the business environment, and of course public sector transparency. As the recovery takes hold, countries can pursue deeper reforms to social safety nets and tax policy, along with regional trade integration.
AO: What do you think about Egypt issuing a first of its kind sovereign green bond in domestic market and the LSE with the support of the World Bank?
FB: Egypt’s sovereign green bonds are an innovative, sustainable financing solution that will support the country’s environmental, social, and economic development. The World Bank congratulates the government on piloting this new bond, and we look forward to working with Egypt to use those resources to benefit all Egyptians.