IMF's Azour: Gulf economies must defend against global headwinds

Fund's regional director says high oil prices and business reforms have supported growth, but risks are on horizon

“Global headwinds are growing” and Gulf economies must defend against them, warned the IMF’s regional director.

Energy prices are rising, central banks are raising interest rates to tackle historically high inflation and a worldwide slowdown is forecast.

“The economic sky is now filled with a gloomy prospect, therefore it's very important to protect economies from the headwinds that we are currently facing,” said Jihad Azour, the IMF Director of the Middle East and Central Asia Department.

The IMF launched its latest regional economic outlook for the Middle East and North Africa at an event in the UAE on Monday.

While Gulf countries have benefited from the increase in oil and gas prices, the reforms introduced in the last five years, helping to further diversify their economies, have also supported an increase in growth, Mr Azour told the Business Extra podcast.

“Going forward, what is important is to maintain economic management anchored into a medium term approach,” he said.

“On the fiscal [side] maintain the medium term fiscal frameworks, keep accumulating additional buffers and reduce the risk of procyclicality.”

The Gulf can accelerate the economic transformation through increased participation of the private sector, stepping up reforms, such as to do with the labour market and ease of doing business, which increase productivity, he said.

“2022 is a year where the region is still recovering well, where the level of growth is reaching 5 per cent, 5.2 per cent for oil exporters, 4.9 per cent for the oil importers … Next year, we expect growth to slow down,” said Mr Azour, a former finance minister of Lebanon.

A deceleration is unavoidable given the need to tame inflation.

“There is no solution without a cost,” said Mr Azour.

Food security remains an issue for most countries in the region, “not only the price of food but also the price of fertilisers, which is an important component of agricultural activities”, he said.

“This inflation is very much driven by food and commodity prices, and therefore it hurts socially. This is why it's very important to address it in order to alleviate the pressure on the low income people,” he said.

“Addressing it would require … tightening the monetary policy, which means increasing interest rates, making the financing conditions more challenging. And this will have an impact on growth,” he said.

The key is “the right mix of policies” and to mitigate the cost of those policies on the most vulnerable.

However, reducing inflation may take time.

“There is a lag between the decisions and their impact. And this lag could be between six months and one year — depends on the transmission mechanisms,” he said.

There are three critical factors to watch this year, said Mr Azour.

“The level of inflation that keeps growing and reached double digits for the third year in the row for several countries … [also] the financial conditions and … the nature of policies that governments will put in place in order to address the very shocks that the global economy is facing.”

Also, the IMF has identified “vulnerabilities coming from the Covid [pandemic] era, the level of informality went up and the level of unemployment went up, too”.

Egypt and Lebanon

Egypt and the International Monetary Fund last week reached a deal for a $3 billion loan.

Mr Azour said the “Egyptian economy has huge potential”.

“It needs to grow and structural reforms and revisiting the role and the size of the state will help this direction,” he said.

In September, the IMF said Lebanon was moving too slowly on reforms required to secure $3bn of assistance.

“Those measures will help address both state and financial sector issues [and] will also address the public finance sustainability. That is very much needed in order to maintain the level of public services,” said Mr Azour.

“More importantly, I think it's very crucial to put Lebanon back on track and restore both economic confidence [and] the capacity to address some of the acute problems that the Lebanese economy and society are facing currently.”