INTERVIEW: Hedging for hard times

Doaa A. Moneim, Saturday 30 Apr 2022

Director of the Middle East and Central Asia Department at the International Monetary Fund Jihad Azour discusses the findings of the World Regional Economic Outlook report for the Middle East and North Africa (MENA) region.

Hedging for hard times


Without revealing details, the International Monetary Fund (IMF) announced in March that Egypt had officially requested its support through a new loan deal to mitigate the effects of the war in Ukraine.

“The IMF stands ready to support Egypt in the implementation of its comprehensive economic programme,” Jihad Azour, director of the Middle East and Central Asia Department at the IMF, told Al-Ahram Weekly. 

However, Egypt has some work to do, he added. “During this uncertain time, preserving macroeconomic stability, reducing external vulnerabilities, and safeguarding debt sustainability through continued exchange rate flexibility and prudent monetary and fiscal policies are priorities,” he said.

Moreover, the IMF sees that sustained progress on structural and governance reforms is essential to foster higher, more inclusive, and greener private sector-led growth, create durable jobs for Egypt’s young population, and improve external resilience.

The IMF’s World Economic Outlook Report issued last week during the Spring Meetings of the fund and the World Bank in Washington forecasts Egypt’s real GDP growth for the current fiscal year running until the end of June 2022 to reach 5.9 per cent, reflecting very strong growth in the first half of the fiscal year prior to the outbreak of the war.

This is compared to the 5.6 per cent expected in January.

However, the challenging external environment, with tighter financial conditions and trade spillovers from the war, is expected to lead to a considerable slowdown in growth momentum in the second half of the year and into the upcoming 2022-23 fiscal year to settle at five per cent, according to Azour.

As for inflation, which has been on the rise since the beginning of the year, the report expects it to reach 7.5 per cent on average in 2022 and to accelerate to 11 per cent in 2023.

“Most of the increase is accounted for by higher food price inflation. Elevated commodity prices, including for wheat and oil, and the passthrough of the recent exchange-rate depreciation are expected to exert further upward pressures in the months ahead,” Azour explained.

Inflation has picked up over the year, reaching 10.5 per cent in March and now lying outside of the Central Bank of Egypt (CBE)’s target band of seven per cent (±2 per cent).

Going forward, Azour said that a set of policy measures will be needed to mitigate the spillovers from the war, rebuild buffers, and protect the most vulnerable.

The government has already taken some steps in this direction. On 21 March, the CBE announced a one per cent increase in interest rates and devalued the pound by almost 15 per cent. Accompanying this was a package of fiscal measures that includes expanding the coverage of direct cash transfers to the most vulnerable.

“Continued exchange-rate flexibility will be essential to absorb external shocks and reduce vulnerability to volatile capital flows. Monetary policy will have to remain data dependent, and tightening would be appropriate if there are indications of sustained inflationary pressures,” Azour commented.

Given the high level of public debt and financing needs, returning to the pre-Covid primary surplus in 2022-23 would be an important signal of fiscal discipline and help safeguard debt sustainability, while structural reforms are equally important to build external resilience by providing the foundations for stronger private-sector exports and sustained foreign direct investment, according to Azour.

Prior to the pandemic, Egypt’s budget attained a primary surplus exceeding LE38 billion, accounting for over 0.5 per cent of GDP, up from LE28.5 billion in the previous fiscal year, according to the Ministry of Finance.

On a regional level, Azour noted that the war in Ukraine was already impacting the Middle East and North Africa (MENA) region’s economies via a multitude of global and direct channels and will be a key factor in shaping the outlook for this year.

He noted that the global channels include the rise in food and energy prices, supply chain disruptions, and financial-market tightening, and these are likely to weigh on the recovery for all countries. Several countries in the region are also exposed to direct channels through trade linkages, notably the reliance on basic food and energy imports from Russia and Ukraine.

The impacts differ from one country to another, with oil and food importers like Egypt expected to be more vulnerable than others.

“Those countries face worsening prospects for their inflation outlook and external accounts,” Azour said, adding that countries that choose to use food and energy subsidies to contain inflation will see their fiscal accounts worsen.

In contrast, the rise in oil and gas prices will benefit the region’s oil and gas exporters, supporting their economic activity and external and fiscal accounts. These positive spillovers are expected to offset the negative impacts of tighter global financial conditions and potentially lower tourism revenues, Azour said.

Secondary spillovers from slowing global growth and worsening prospects for Europe are likely to weigh on the recovery for all countries in the region, Azour added.

A key feature of the MENA outlook in 2022, mirroring the diversity of its economies, will be uneven recovery with a notable divergence in the outlook among oil-exporters and oil-importers. The MENA region in general is expected to grow at five per cent in 2022 and 3.6 per cent in 2023 after a strong 2021 growth of 5.8 per cent.

These numbers reflect an upgrade of 0.9 percentage points for 2022 and 0.1 percentage points for 2023, as compared to the October forecast. The upgrade is driven mainly by the improved outlook of the MENA oil-exporters, benefiting from higher oil prices and production and successful vaccination campaigns.

By contrast, the GDP growth for MENA oil-importers has been revised down by 0.2 percentage points to four per cent in 2022 and by 0.5 percentage points to 4.5 per cent in 2023, largely because of global spillovers from the war.

The downward revision is even stronger when excluding Egypt — by 1.5 percentage points to 1.2 per cent in 2022 and by 0.4 percentage points to 3.6 per cent in 2023, Azour said.

As the world is experiencing energy price hikes, Azour noted that global oil prices in 2022 are expected to be about 55 per cent higher than in 2021, reaching an annual average of $107 per barrel and putting significant pressure on external and fiscal balances for oil-importers, while improving these for oil-exporters.

“We estimate that for every $10 increase in oil prices, current account balances will deteriorate by around 0.4 per cent of GDP for oil-importers (on average and all else being equal). Whereas for oil-exporters, we expect external balances to improve by around 3.5 per cent of GDP and overall fiscal balances to improve by around 2.8 per cent of GDP, driven by higher revenue,” Azour added.

He said that inflation in the MENA region is expected to remain elevated at 13.9 per cent in 2022, following 14.8 per cent in 2021, mainly driven by oil-importers.

The inflation dynamics in the region reflect significant increases in food prices and, to a lesser extent, energy prices and in some cases exchange-rate depreciations and lax monetary and/or fiscal policies, he said.

“As global commodity prices are expected to decline in 2023, we expect that the main pressure will ease, thereby leading to a decline in inflation in 2023. There are, however, significant risks that inflation could stay higher for longer, if commodity prices continue to increase and/or inflation expectations start de-anchoring,” Azour concluded.

*A version of this article appears in print in the 28 April, 2022 edition of Al-Ahram Weekly.

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