Arab region has yet to fully recover from 2008 global financial crisis: IMF
Managing Director of the International Monetary Fund (IMF), Christine Lagarde, said that Arab region has yet to fully recover from the global financial crisis and other big economic dislocations over the past decade.
“Among oil importers, growth has picked up, but it is still below pre-crisis levels. Fiscal deficits remain high, and public debt has risen rapidly from 64% of GDP in 2008 to 85% of GDP a decade later. Public debt now exceeds 90% of GDP in nearly half of these countries,” Lagarde added in a speech at the Fourth Annual Arab Fiscal Forum in Dubai on Saturday.
The oil exporters have not fully recovered from the dramatic oil price shock of 2014, she noted, adding that modest growth continues, but the outlook is highly uncertain partly reflecting the need for countries to shift rapidly toward renewable energy.
Fiscal deficits are only slowly declining, despite significant reforms on both the spending and revenue sides, including the introduction of Value Added Tax (VAT) and excise taxes, which led to a sharp increase in public debt from 13% of GDP in 2013 to 33% in 2018,Lagarde mentioned.
During a meeting with Egypt’s Minister of Finance Mohamed Moeit, Lagarde also praised the Egyptian citizens, and leadership in implementing the economic reform programme, stressing IMF’s continued support to ensure sustained economic growth, job creation, and living standard improvement, as well as social protection programs.
She expressed her understanding of the reforms’ impact on the different segments of Egyptians, especially the middle class, and the importance of focusing on diverting the economy in favour of those classes
Moeit explained that the government understands that there is a great deal of work to be done to translate the results of the economic reforms, into a permanent, and sustainable business strategy.
To achieve that, further economic restructuring ,increased investment in human development, and social protection programmes, are needed, he said.
“Additionally increasing expenditures on education and health in a way that translates reform into witnessed improvements in the standard of living and job creation,” he added.
Additionally, global risks are rising, and the IMF released its revised forecasts for the global economy which will grow by 3.5% in 2019, 0.2% below what we expected in October, given escalating trade tensions and tightening financial conditions, she said.
Unsurprisingly, a weaker global environment has knock-on effects on the region through a variety of channels, trade, remittances, capital flows, commodity prices, and financing conditions, she added.
“The economic path ahead for the region is challenging, which makes the task of fiscal policy that much harder, which in turn makes it even more important to build strong foundations to anchor fiscal policy,” she said.
Lagarde affirmed the importance of the foundations of fiscal policy and good fiscal management, adding, “Without a stable foundation, even the best policies can flounder. Without a stable foundation, fiscal policy will lack credibility.”
The first building block of fiscal policy foundation is a good fiscal framework, she confirmed, adding that setting of laws, institutional arrangements, and procedures are needed to achieve a country’s fiscal policy objectives.
“Such a framework allows governments to map out budgets over the medium term in a way that reflects clear, consistent, and credible goals,” she added.
Numerous Arab countries are already strengthening their fiscal frameworks with the IMF assistance, she said, noting that Saudi Arabia, Kuwait, UAE, Sudan, Qatar, and Lebanon have all set up macro-fiscal units which is a useful first step in strengthening the fiscal framework.
Mauritania, Morocco, Jordan, and Lebanon are making great progress with medium-term public investment planning and execution, she added, noting Egypt now publishes a fiscal risk statement with its budget and produces an internal in-year budget risk assessment.
With the IMF’s help, the UAE too is rolling out a fiscal risk management project and will produce its first fiscal stress test this year, Lagarde said.
Additionally, corruption is the great disruptor of fiscal policy, Lagarde said, noting that without trust in the fairness of the tax system, it becomes harder to raise the revenue needed for critical spending on health, education, and social protection.
Governments might be tempted to favour white elephant projects instead of investments in people and productive potential, she noted.