IMF managing director Christine Lagarde warned of the fragile recovery of the global economy and the effects of the turmoil in the Middle East, especially the war against ISIS and the instability of Iraq and Syria, which could trigger higher global oil prices.
The annual Meetings of the International Monetary Fund (IMF) and the World Bank Group (WBG) is scheduled for October 10–12, 2014 in Washington.
Over 70 years these meetings have brought together central bankers, ministers of finance, private sector executives, and academics to discuss issues of global concern, including international development, and the world’s financial system.
This year’s meetings come as the world faces serious regional threats with potentially negative impacts on global economic growth.
In an exclusive interview with Asharq Al-Awsat, Lagarde highlighted the main issues that will be discussed at the meetings and outlined the IMF’s role in helping Syrian refugees in Syria, Yemen, Tunisia and Egypt.
Asharq Al-Awsat: What are the main topics at the upcoming IMF Annual Meetings, and what is the IMF’s expectation about global economic growth in 2015?
I am looking forward to our Meetings next week. They offer a unique opportunity for officials, as well as journalists, academics, bloggers, parliamentarians, representatives of civil society and the private sector from all over the world to take stock of global economic developments and look at the challenges ahead. While the global economy continues to recover, it remains too fragile and uneven— too weak to effectively address the predicament of the 200 million jobless worldwide. It is also uneven, with growth rates differing considerably across regions in the world and increases in inequality affecting 7 out of 10 people in the world today.
So, I expect that our 188 member countries will want to discuss how to improve our growth prospects, including how to make it more inclusive and job-friendly. We will also be discussing other challenges to growth, such as geopolitical risks, including those posed by the conflicts in the Middle East and in Ukraine. The scourge of Ebola constitutes a new risk, which we will need to help address collectively.
This year also marks the 70th anniversary of the IMF. This will offer an opportunity to discuss our past but, most importantly, to look to the future. I think the Fund is more relevant than ever, as economic cooperation remains essential to face all these critical challenges.
Q: Will there be a discussion inside the IMF about the military conflict in Iraq and Syria and its implications? Do you have fears that ISIS militants’ control of some oil fields could affect global oil prices?
The conflict in Iraq and the ongoing civil war in Syria are first and foremost tragic humanitarian crises, with staggering numbers of people killed and displaced. Of course, the expanding conflicts across the Middle East and North Africa will be very much in the mind of delegates during the Annual Meetings, as there are serious economic implications not just for the countries involved but for the whole region, and indeed for the world.
In Iraq, the conflict has brought the expansion of oil production to a standstill. In the non-oil sector, we are also seeing the adverse effects of the ongoing fighting on economic activity, as it undermines confidence and depresses investment. As a result, the economy is likely to contract this year. The government’s budget is also under pressure as a result of the increased security spending and the humanitarian crisis.
So far, the impact of the conflict on oil prices has been contained. But if the conflict were to intensify and lead to a further disruption in Iraq’s exports, it could trigger higher global oil prices and weakening confidence. We will discuss such a scenario in the upcoming World Economic Outlook that will be launched as part of the Annual Meetings.
Q: You visited the Al Za’atari camp for Syrian refugees in Jordan last May and expressed the IMF’s readiness to help Syria’s neighboring countries to deal with the refugee problem. What has been done to ease the pressure on Lebanon, Jordan, Iraq and Syria’s economies?
I started my visit to Jordan in May by visiting the Za’atari refugee camp, now home to over 100,000 Syrian refugees who fled the conflict in their country. I thought it was important to get a first-hand account of this human tragedy. I saw how the refugees cope under very difficult conditions, and I listened to their painful stories. I was also inspired by their courage. Hopefully, they will be able to return to their homes in Syria soon.
Za’atari has turned into Jordan’s fourth largest city, and I was very impressed by how Jordan and the international community have come together to help alleviate the refugees’ suffering and prevent a bad situation from becoming worse. Most of all, I was struck by the resilience and the ingenuity of the refugees, who are re-creating a community. We at the IMF aim to provide help by supporting Jordan with a 2.1 billion US dollars loan and through technical support. We also continue to urge the international community to do its part in lending a hand to help Jordan and Lebanon cope with the growing influx of refugees and the resulting economic strain. This can take multiple forms.
Q: The IMF made a comprehensive case for further cutting of subsidies and called for strengthening of social safety in MENA countries. In Egypt, Jordan and Lebanon spending on energy subsidies exceeded spending on capital, health or education. How should MENA countries deal with these problems?
Energy subsidies are widely used across the Middle East and North Africa, and as you point out, subsidies can be a drag on governments’ budgets at the expense of much-needed investment in health care, education, and infrastructure. The Fund has done extensive research on energy subsidies—not just in the Middle East, but across a number of countries, rich and poor. We know these subsidies provide some support to poor consumers, but their benefits go mainly to the better-off who consume more energy. When reforming subsidies, it is important to replace them with better-targeted social safety nets for the poor.
We have seen some progress in a few countries in the region where subsidies are being reduced—such as in Egypt, Jordan, Mauritania, Morocco, Sudan, and Tunisia. To varying degrees, these countries are also taking important steps to help mitigate the impact of these measures on the poor—for instance, through targeted cash transfer programs. Yet energy subsidy reform is complex, both technically and politically and there is no one-size-fits-all. Careful planning, including related to the pace of reforms, is crucial to ensure that cash transfers are well targeted to those who are hardest hit by the removal of subsidies and are available in time. It is important to explain these reforms to the public to create the broad political and social buy-in necessary to sustain them.
Q: Egyptian president Abdel Fattah El Sisi approved the cutting of subsidies for car fuel and natural gas, raising their prices by more than 70 per cent. The measures fall in line with the government’s effort to ease its budget deficit to 10 per cent of GDP. What is your evaluation of such measures?
As I have mentioned, we support reforms in this area in many countries, and welcome the recent moves in Egypt to reduce the budget deficit by lowering energy subsidies and raising revenues. This is a good start toward restoring fiscal sustainability. Looking ahead, a plan for continued subsidy reform with measures to protect the poor, as well as policies to accelerate growth and job creation will also be needed.
The energy subsidy cuts are important for many reasons: they will free public resources for investment in priority sectors such as infrastructure, education, and health, which will support growth and jobs. The lower deficit will free resources for private sector investment, also key to growth. By the same token, higher energy prices will encourage energy conservation and reduce blackouts and shortages.
Q: Discussions on an IMF program for Egypt have been going on for almost three years without reaching a deal. Recent press reports claim that both Saudi Arabia and the UAE have advised Egypt to negotiate a 2 billion US dollars arrangement with the IMF. What is the current situation with the Egyptian IMF loan? Is there any plan for the IMF to visit Egypt in the near future?
The Fund stands ready to help Egypt and its people. We have had a lot of discussions recently with the Egyptian government on the macroeconomic outlook, and we have been giving advice on tax policy and value-added tax reform. We hope to conduct an Article IV consultation with Egypt in the foreseeable future, but we are not in talks on a lending program.
What are your views on the huge public funding of a Suez Canal project. Will this kind of public funding for mega project, provide an alternative to getting loans and financing from an international institution like the IMF? How do you evaluate the revenues from this project, when completed?
The Suez Canal project shows that Egypt is focused on growth and economic success. If, as the government expects, the project increases revenues from the Canal, this will certainly help the budget and balance of payments position of the country over the medium-term. But all of this will take time, and in the interim, Egypt will likely need continued support from its partners abroad. The Gulf countries have already stepped up financial support to Egypt in a big way, and the IMF is ready to help, should the authorities be interested.
Q: Is the IMF willing to participate in a donor conference for Egypt in February to attract foreign companies, donors and international organizations? Will this conference enable the Egyptian government to push through reforms needed to reach agreement on a loan package with the International Monetary Fund?
The Egyptian authorities have not asked us for a loan, but they have indeed told us that they would like us to participate in the “Egypt Economic Summit”, and we are happy to do so. The authorities’ recent reform efforts are already encouraging. I hope that through our consultation process—and an Article IV staff report—we can add to the dialogue on the Egyptian reform process and provide conference participants with an assessment of how those reforms can help restore durable economic stability and sustainable growth to Egypt.
Q: Has the IMF taken any steps to follow up on the recommendation from the high-level conference that was held in Amman, Jordan last May, where Arab policy makers and the IMF discussed ways to achieve macroeconomic stability in the region, job creation, a better business climate, and more transparency?
The conference, which we co-hosted with the government of Jordan and the Arab Fund for Economic and Social Development, was an important milestone. It provided a great opportunity to take a hard look—in an open forum with all key stakeholders represented—at some of the main challenges facing the region: namely high and pervasive unemployment, especially for the youth, and inadequate infrastructure and poor living conditions. We had very candid discussions with all participants, including the official sector, non-governmental participants and young people on these issues.
The discussions highlighted the need for more inclusive and job-friendly growth policies—including creating opportunities for youth and women—enhancing governance and transparency, and improving the business climate.
The important question now is where do we go from here? The diagnostic phase is over, now comes the hard part—implementation. While each country has to shape its own path to address these challenges, several countries have already made some progress, in particular by reducing generalized energy subsidies and implementing targeted safety nets for the poorest. But more is needed and, of course, we at the IMF stand ready to help, with advice, technical assistance, and financing, as appropriate.
Q: Yemen is set to receive 553 million US dollars in financial assistance from the IMF over the next 3 years to address high unemployment and poverty. What updates do you have on this assistance given Yemen’s political instability?
Our Executive Board recently approved a loan of 553 million US dollars. It follows a 93 million dollar Fund arrangement that was agreed soon after the onset of Yemen’s political transition. The concessional loan will help the economy get back on a sustainable path and address long-standing challenges that have fueled instability: in particular the high levels of poverty and youth unemployment. A key element of Yemen’s program is increasing social transfers and reorienting public expenditure to pro-growth and pro-poor spending, financed by a reduction of un-targeted energy subsidies. The program also aims at reducing ghost workers in public employment and improving the business environment to reduce corruption and encourage private sector investment and job creation.
The economic content of the recent agreement between the government and the Houthis is broadly consistent with this program. Despite some reversal in fuel price increases, the net savings in the subsidy bill remain substantial and will allow to increase spending in infrastructure and the Social Welfare Fund. The national ownership of the reform process is key to success, as is continued strong support from the Friends of Yemen.
Q: The IMF has also supported Tunisia with a Stand-By Arrangement that expires soon. Is the IMF planning to extend the SBA?
I am very encouraged by the recent advancements in Tunisia’s transition and the resilience of its economy despite the deteriorating international economic environment. An IMF team was recently in Tunis for discussions with the government over the country’s economic performance under the current IMF-supported program that is due to expire in June 2015. Tunisia has not requested a new program. Of course, the IMF is ready to continue providing support through policy advice, technical assistance, and financial support as needed.
Q: The IMF approved a 17 billion Us dollar loan program to Ukraine. This was eight times as high as its quota; do you consider that as a bad loan? Some reports say that this loan demonstrates the degree to which the IMF is an arm of the US, what is your comment?
We provide financial support to member countries when they request it. We can lend amounts above normal limits on a case-by-case basis, and in recent years, given the global economic crisis, many countries facing acute financing needs have had exceptional access to Fund resources. So yes, Ukraine has received IMF support of about 17 billion US dollars, which is 8 times its quota—that is its share in the IMF’s capital. But other countries have had similar exceptional financing levels. For instance, Jordan’s 2.1 billion US dollar loan also represents 8 times its quota. At the end of the day, the IMF aims to be even-handed and tailor programs to effectively deal with the serious economic challenges that countries face.
Q: You have been put under formal investigation in France for negligence in a corruption probe relating to your time as French Finance Minister. What is your comment on these charges?
As I have said, the decision to put me under investigation for negligence is without merit, and my lawyers are appealing it. I am very encouraged that the IMF’s Executive Board expressed its confidence in my ability to effectively carry out my duties at the Fund.