The IMF’s view on the pace of reform in the MENA region

Jihad Azour was appointed director of the Middle East and Central Asia department of the International Monetary Fund (IMF) in 2017. He served as Lebanon’s finance minister from 2005-08 after working in the private sector at consulting and investment firms.

Prior to US President Donald Trump’s withdrawal from the Iran nuclear deal, Azour spoke to The Arab Weekly about the need to promote jobs and growth in the region.

The Arab Weekly (TAW): How worried are you by the economic effects of the US withdrawal from the 2015 Iran deal? [Tehran had agreed to curb its nuclear programme in return for relief from US sanctions that will now be reimposed.]

Jihad Azour (JA): “The increase in tension will clearly increase uncertainty, which will be a negative development for any economy. It is important that certain measures were taken [in Iran] to preserve stability on the economic and financial side. The reunification of exchange rates that happened recently was in the right direction. [In April, Iran unified official and free-market exchange rates but the Iranian rial plunged to a record low against the US dollar in the free market after Trump announced his withdrawal from the Iran accord on May 8.] “The level of trade between Iran and the [Gulf Cooperation Council] GCC countries is fairly limited and in certain countries non-existent but any increase in regional tension and uncertainty could have an effect on investor sentiment.”

TAW: The IMF’s latest report, released in early May, forecasted economic recovery in both oil-exporting and oil-importing economies this year and next. It also warned that deeper reforms were necessary to create jobs. What are your biggest worries?

JA: “Clearly the outlook is improving. It offers an opportunity to maintain the reform drive. It doesn’t give [governments] the time to relax and to delay reforms. The current recovery that we are seeing in the region, and the global improvement in the outlook, provide the background and the right environment for countries in the region to accelerate their reform agenda.

“We recognise that there will be some challenges or risks for the outlook for this year. For example, interest rates may go up… and this needs to be taken into consideration, especially for [oil-importing] countries with high levels of debt.

“The evolution of the oil price [which has risen to around $75 a barrel from less than $30 in early 2016] can allow importers to accelerate reform of subsidies. The same is true of geopolitical clouds that could have an impact on investor sentiment and should be an incentive for governments to enact reforms to keep their attractiveness.”

TAW: Can reforms such as slashing energy subsidies and shrinking public sector jobs lead to rising frustration and short-term pain?

JA: “This year the context is better than last year or the years before because of the improvement in economic activities and outlook. Therefore, it’s easier to pursue those reforms than two years ago when the level of growth was slower.

“The second important element is when you do a comprehensive reform programme, the tendency is to have a faster payback. Take the examples of Egypt or Morocco, which enacted more than one reform at a time and their economies have jump-started again.

“I think it is important to recognise there will be short-term pain but the commitment to reform can shorten the period of adjustment while the current outlook that is turning positive gives a better background for countries to pursue their reform agenda.”

TAW: What do you think about Saudi Arabia’s ambitious reforms?

JA: “The reform programme that [the Saudis] have come up with is the right mix of reforms. The key is implementation and commitment to deliver on it. I think what is important now is not to be complacent because the oil price went up. There is always a challenge whenever you have a rise in the oil price to go back to the old cycle of boom and bust.”

TAW: How is the region faring in terms of improving transparency and governance?

JA: “There is progression. Some countries are already making initiatives on that but there is a long way to go. If you look at education, the region is not performing well compared to benchmarks and, if the region wants to attract more investment, it has to accelerate the reforms on that front.

“There is still some way to go in terms of fighting corruption, in terms of improving government services as well as increasing transparency. I think there is a recognition of the importance of those elements but still there are certain steps to be made and important ones.”

TAW: Are there any other areas of progress?

JA: “Some countries have introduced measures to improve the business environment, access to finance, institutions and bankruptcy laws and to reduce the number of steps to open a company but, as I said, it’s not enough.”

TAW: You have said the region needs to create at least 25 million jobs over the next five years. How can it do this?

JA: “By enabling the private sector is the best fit currently to create jobs. In the past, the public sector tried to compensate for the lack of job creation in the private sector and this didn’t lead to a reduction in unemployment or improvement in public services. Therefore, what is needed today is to enable small and medium-sized enterprises to have the potential to grow and by allow the private sector to play a greater role in terms of infrastructure.

“I think it’s very important to accelerate the pace on that because technology offers an opportunity but also it creates some challenges because some jobs could be destroyed. This is why the emphasis today is to do whatever is required to improve the business environment and accelerate some of the key reforms that provide better access to finance for the private sector.”

This article was originally published in The Arab Weekly.