One-on-one with IMF Director of the Middle East and Central Asia Jihad Azour

Originally posted on Arab Finance

Since the onset of the pandemic, the International Monetary Fund (IMF) has provided $18 billion in financing to Middle Eastern (ME) and Central Asian countries, with emergency financing and program augmentations to 13 countries reaching $15 billion.

The Middle East and North Africa (MENA) region, specifically, is currently expected to suffer a 5% decline in growth during the current year, according to the IMF. While the economic slowdown is largely due to the pandemic, the crisis has brought to the forefront the region’s myriad other vulnerabilities including high dependence on only oil, remittances, and intangible services.

To get a deeper view of the region’s recovery, Arab Finance interviewed Jihad Azour, IMF director of the ME and Central Asia regions.

How has the pandemic shifted IMF’s priorities for the ME and Central Asia regions?

The COVID-19 crisis represents the fastest moving economic shock of its depth in recent history. Lockdowns to contain the virus led to a collapse in trade, tourism, and other domestic activities. Moreover, oil exporters also faced a double whammy of the pandemic and the resulting sharp decline in oil demand and prices.

The IMF, on its end, reacted swiftly to support countries in the region. The fund has extended $17 billion of new financing since the beginning of the year including $6 billion in emergency support to 10 countries spanning the whole region.

As a result, the IMF’s credit outstanding to the region increased by nearly 50%. Support has also been in the form of extending debt relief to several low-income members from the region and catalyzing funding from other bilateral and multilateral institutions.

This is in addition to providing policy advice on how to manage the pandemic’s impact and delivering remote capacity development.

Furthermore, our multifaceted support will continue as countries recover and pursue their goals of building more inclusive and resilient economies.

Zooming in on the MENA region, the IMF forecasts growth in 2020 to be -5%. How long do you think it will take the region to see positive growth levels?

Under the IMF’s baseline projections, the MENA region is expected to return to positive gross domestic product (GDP) growth rates starting next year, where we see an average growth of 3.2%.

However, the level of GDP inferred from such growth projections will remain below that implied by pre-crisis trends for some time to come.

That said, even such a tentative recovery is subject to considerable uncertainty. The crisis has amplified important vulnerabilities in the region including excessive debt, elevated financing needs, exposure to oil market volatility, and high unemployment and informality, all of which may hinder the recovery and leave scarring effects.

In your opinion, which country in the region will see the fastest recovery? Why?

Countries that entered the crisis with fewer vulnerabilities and more policy space, and reacted to the pandemic with bold, swift, and thought-through policies to save lives and livelihoods, are better positioned for a faster recovery. In other words, the countries that have fixed their roof while the sun was shining and thereby entered the crisis from a position of strength.

The task will be easier for countries that entered the pandemic with fiscal space. These will be able to support recovery through broader stimulus packages to lift demand and create jobs, while exiting targeted support gradually to avoid sudden income losses and bankruptcies.

But not all is lost for countries that entered the crisis with limited policy space. They can still forge a strong recovery, if decisive action is taken to reorient spending to protect and increase health, education, and social spending, while mitigating COVID-related fiscal risks.

What can governments do to ease economic scarring on their citizens and to speed up their recovery?

In the immediate future and for all countries, containing the health crisis and cushioning income losses, to the extent possible, remain the top priorities. As I said before, both types of countries, with and without fiscal space, will need to act swiftly to support their recovery. The former would need to use it and the latter create it.

For countries reliant on the hard-hit services sector, it will be important to reinforce temporary support to exposed vulnerable populations and sectors to minimize scarring to the economy. In countries with limited fiscal space, this could be achieved by reprioritizing spending. As the immediate crisis abates, authorities should incentivize efficient resource and labor reallocation.

On the financial front, policymakers should continue to carefully balance the sustained provision of credit and the preservation of financial stability during the crisis and its immediate aftermath. To entrench financial stability over the medium term, efforts should focus on removing regulatory easing, strengthening supervision, and rebuilding financial sector buffers.

The volatility of oil prices globally has compounded the impact of the pandemic on ME countries, what can governments do to protect their economies from further shakeups?

The pandemic brought to the forefront the region’s high dependence on not only oil, but also on remittances and services. Therefore, accelerating economic diversification will be vital to increase the region’s resilience. This will require fostering an institutional environment that is conducive to the private sector growth; facilitating the reallocation of resources towards promising sectors such as technology and green energy; widening support for small and medium-sized enterprises (SMEs) as well as startups.

This is in addition to ensuring adequate access to health care and social safety nets for all; enhancing financial inclusion; putting in place credible medium-term fiscal plans will boost resilience. As recovery takes hold, countries should begin tackling legacies of the crisis, including elevated debt levels and eroded external buffers.

The crisis offers an opportunity to recover stronger while expanding access to opportunities for all. This will mean implementing a new social contract with strong social protection, enhanced educational programs to make up for the loss in learning during the pandemic, improved governance, and zero tolerance for corruption. The recovery should enhance public investment in renewable energy and green projects, expand digital infrastructure, and ensure digital skills for all workers.

More than 100 countries have applied for emergency funding from the IMF, what are the conditions you look at when addressing emergency requests and how do you monitor such funding?

Since the onset of the pandemic, the IMF has provided $18 billion in financing to ME and Central Asian countries, with emergency financing and program augmentations totaling $15 billion to 13 countries. This is in addition to Morocco that drew all available funds under its Precautionary and Liquidity Line arrangement, equivalent to $3 billion.

The emergency financing using the Rapid Credit Facility and Rapid Financing Instrument (RFI) is disbursed very quickly and without conditionality after program approval, with amounts up to 100% of the country’s quota in the IMF. During the current crisis, the IMF was therefore able to quickly approve emergency finance to a large number of countries.

Other lending instruments, which have a longer duration and can provide larger total amounts, have also been used, especially in countries with pre-existing vulnerabilities and when the economic impact of the pandemic is likely to persist.

Egypt has been increasing its reliance on its debt market, how can it strike the right balance between utilizing debt as an instrument without burdening its economy?

Following Egypt’s May bond issuance, the IMF’s Executive Board approved in June a 12-month Stand-By Arrangement (SBA) worth $5.2 billion to help preserve macroeconomic stability amid the pandemic and continue to support key structural reforms. The agreement followed the May approval of the $2.8 billion under the RFI, which addressed the balance of payments’ urgent needs and provided a bridge to the SBA.

Going forth, policies under the SBA prioritize health and social spending, aim to reduce risks to debt sustainability, rebuild FX reserves, maintain financial stability, and support structural reforms to spur private-sector-led growth and improve fiscal governance. The program appears broadly on track.

At the same time, local authorities have developed a three-stage plan for the gradual return of normal life in the country, while continuing to manage risks posed by the virus and the possibility of a second wave. Furthermore, restrictions on retail activity and hotels have been eased and international flights have resumed.

Lebanon is in such economic turmoil, what are IMF’s plans to aid the Lebanese people?

As you know, following the Beirut port explosion, Prime Minister Hassan Diab’s government resigned. We have remained in contact with the caretaker government and central bank officials, as well as the World Bank and other partners in the international support group for Lebanon.

We are ready to engage with the new government when it is formed to formulate an appropriate reform program and provide technical assistance to build capacity both at the finance ministry and the central bank. It is important that the government has broad political support for the policies and reforms that Lebanon needs.

How can regional governments aid startups in this difficult time? Are there any strong support examples to highlight?

The COVID-19 recession will affect SMEs particularly hard. In response, many regional countries have implemented a wide range of policies to support SMEs, including moratoriums on debt repayments, direct lending through public institutions, and extension of guarantees.

A well-targeted approach is crucial for pandemic-related policies, including support to SMEs. For example, in Armenia, the government provides subsidized loans focusing on firms with strong credit history.

To support economic recovery, countries should continue to implement reforms aimed at expanding SME financial inclusion, which is a source of sustainable and inclusive growth over the medium term. In this regard, and building on the progress made so far, the authorities should further strengthen institutions and improve the business environment, while gradually reducing the size of the public sector in the economy.

Finally, what is the one piece of advice you would like to give to governments and private entities?

In the immediate future, containing the pandemic and limiting income losses remain top priorities. As the public health threat begins to wane, countries should shift their focus to strengthening inclusion and addressing vulnerabilities by supporting economic activity without incurring undue risk through well-calibrated approaches.

For those with space in their budgets, such as some oil exporters, broader stimulus packages can boost demand and productivity. These could include green investments in infrastructure and spending aimed at fostering digitalization. In countries with less space, which includes most oil importers, governments should reallocate expenditures to ensure that health, education, and social spending are protected.

As the recovery gains momentum, countries should rebuild buffers and explore ways to better ensure that the tax burden is distributed fairly and that every cent of public spending delivers the best outcomes.

By Nadine Abou el Atta