The International Monetary Fund (IMF) announced on Thursday its projections for the Middle East and Central Asia with a slight upgrade for the region’s real GDP growth outlook.
In an exclusive interview, Jihad Azour, director of the IMF’s Middle East and Central Asia department, unveiled to Ahram Online the IMF’s projections for the economic growth of the Middle East, including Egypt, revealing that the fund has upgraded Egypt’s projections for FY 2021/2022 (starting in July) and inflation is expected to hike to six percent.
He added that the medium-term public debt management strategy Egypt adopted to reduce elevated debt over four years will contribute to putting the country’s public debt on track to decline.
Ahram Online: What is the IMF’s outlook for the Middle East’s real GDP growth in 2021 and 2022 amid the coronavirus crisis?
Jihad Azour: For 2021, our projections relative to October are broadly unchanged for MENA, with a growth of 3.1 percent for the group.This is lower than the growth for emerging markets (excluding China), which is projected at over five percent.
As a result, MENA’s emerging markets are projected to lag that of their peers, with most countries not recouping 2019 GDP levels until 2022.
Fragile and conflict-affected states (FCS) will be especially battered, with 2021 GDP levels projected at six percent lower than in 2019.
Most countries in MENA, including FCS, are expected to recover their 2019 GDP levels in 2022, with growth projected at 4.2 percent for the group.
AO: How can disparities in vaccine distribution affect the region’s path to recovery?
JA: As of now, we see, indeed, that there is wide heterogeneity between countries in MENA on their vaccination plans. For instance, while Gulf Cooperation Council countries boast wide coverage, earliest inoculations, and diversified vaccine providers and larger countries boast production capacity, many, including fragile and conflict-affected states remain largely uncovered and reliant on COVAX.
Those with diversified vaccine providers and production have more favourable or broadly unchanged forecasts relative to October, while the outlook for those with more limited access to vaccines and those harder hit by the second wave looks weaker.
Beyond vaccines, however, another key element underpinning recovery in the MENA region is the availability of policy space to act swiftly and decisively. For instance, countries that put in place stronger fiscal support in response to COVID-19 are also expected to have a stronger recovery, aided by a shallower trough in 2020.
AO: What are the policies the region needs to adopt to accelerate their recovery and restore their pre-pandemic real GDP growth levels?
JA: While 2020 was the year of the shock, 2021 must be the year where countries lay the foundations for recovery. Markets will become more discerning as vaccines roll-out and recovery starts; financing conditions could tighten. Not much time left for action.
Most MENA countries lack fiscal space at this moment so it will be paramount to pursue a well-targeted approach, effective reorientation of spending, and further efforts to rebuild fiscal buffers.
Countries will need to rely on reorienting non-priority spending to the health, education, and social sectors and providing critical liquidity support measures rather than creating additional spending.
It’ll be especially important to adapt the type of fiscal support to different sectors’ recovery. Strong governance should also be put in place so that financing is used efficiently and COVID-19-related fiscal risks are mitigated.
As the recovery takes hold, countries should prioritise policies with the largest social impact while exploring ways to expand space (by improving tax equity and spending efficiency). If not feasible, debt operations may need to be considered.
Most importantly, however, for bringing real GDP back to pre-pandemic levels, the region needs to treat this crisis as an opportunity to build a better and greener future, accelerate digitalisation, and build a new social contract with stronger and less wasteful social safety nets, more equitable and inclusive policies, and enhanced governance and transparency. Countries should draw from lessons learned during the COVID-19 crisis.
AO: What is the IMF’s outlook for Egypt’s macroeconomic indices, including real GDP growth, inflation and unemployment in 2021?
JA: Egypt’s real GDP growth is projected at 2.8 percent in FY 2020/2021, with a modest pickup in employment expected in most sectors as domestic activity begins to recover from the disruption related to the pandemic. The recovery in tourism is expected to be more protracted as global travel remains constrained, however, and the downturn in tourism combined with a pickup in domestic demand is projected to widen the current account deficit to 4.6 percent of GDP in FY 2020/2021.
Twelve-month inflation is projected to remain close to six percent in June 2021, as inflation expectations remain well-anchored.
AO: How different is this outlook from the projections of the IMF’s October Regional Economic Outlook Report?
JA: Projections for FY 2020/2021 remain very close to those that were made at the time of the Regional Economic Outlook in October, but the growth outlook for FY 2021/2022 has been upgraded to reflect progress in development, the production of a vaccine, and the projected global rebound.
AO: Egypt’s finance minister announced on Monday that the government is currently adopting a medium-term strategy that targets decreasing public debt to GDP ratio to 79 percent by FY 2023/2024. How can the scheme contribute to accelerating the country’s recovery?
JA: The envisaged economic recovery is expected to allow a return to the pre-crisis primary surplus of two percent of GDP, helping put public debt on track to decline from FY 2021/2022. In parallel, the authorities will also need to accelerate structural and governance reforms to support a strong recovery.
Reducing public debt to GDP ratio and bringing down Egypt’s borrowing needs are essential to strengthen Egypt’s resilience to changes in external market sentiment that affect financial conditions for emerging markets. This would also help create more space over the medium term for priority spending, including on social sectors where needs remain large.
AO: What are the key procedures the government should adopt to narrow the budget deficit, knowing that Egypt targets to decrease it gradually over the next four years?
JA: The economic recovery should allow the temporary spending measures introduced in response to the crisis to be unwound and bring the primary surplus back to the pre-crisis level of two percent of GDP as growth picks up.
Over the medium term, interest expenditures are also expected to decline in line with the projected reduction in public debt. Continued progress on fiscal structural reforms to improve revenue mobilisation will also be important to create additional space for high priority spending on health, education, and social protection to support more inclusive private sector-led growth.
AO: How will remittances and foreign direct investment (FDI) inflows to the Egyptian market fare in 2021?
JA: FDI inflows declined in 2019/2020 and are expected to remain subdued in FY 2020/2021 as the pandemic continues to constrain investment flows. Moving forward, deepening structural and governance reforms is needed to further encourage foreign investment in productive sectors of the economy.
Remittances have proved to be much more resilient than originally projected, despite the global pandemic and the downturn across the region. The projection for FY 2020/2021 has been increased to reflect the strength of remittances in FY 2019/2020.