Transcript

Transcript of Press Briefing: Regional Economic Outlook Update for Middle East and Central Asia

January 31, 2024

PARTICIPANTS:

JIHAD AZOUR

Director, IMF Middle East and Central Asia Department

ANGHAM AL SHAMI

Communications Department

* * * * *

T R A N S C R I P T

MS. ALSHAMI: Good afternoon. Thank you for joining us today on the Regional Economic Outlook Update for the Middle East and North Africa. I'm Angham Al Shami from the Communications Department. If you're joining us online, we do have French and Arabic interpretations that you can access on the IMF Regional Economic Outlook webpage.

I'm joined today here by Jihad Azour, IMF Director of the Middle East and Central Asia Department, who will give us an overview of the report and then we will open it up for your questions. Jihad, over to you.

MR. AZOUR: Thank you. Thank you very much, Angham. Good morning. Good afternoon, everyone. The conflict in Gaza and Israel has sent shockwaves across the Middle East and North Africa. We are saddened by the loss of lives. In addition to its devastating impact, the conflict is having adverse economic consequences on the broader MENA region. It erupted at a time when growth was already slowing, and the region was facing existing challenges. In particular, debt levels remain high, and inflation has not yet been sufficiently brought down in many economies.

Today, we are releasing a special update on the Regional Economic Outlook to reflect these and other developments in the Middle East and North Africa. The 2024 growth projections for the MENA region were revised downward by 0.5 percentage point from our latest October forecast. We now project GDP to grow by 2.9 percent in 2024 from already weak growth of 2 percent in 2023.

Various factors are weighing on activities. First, the conflict in Gaza and Israel. The IMF estimates that growth in West Bank - Gaza contracted by about 6 percent in 2023, a downgrade of 9 percentage points from October's projections. Neighboring countries - Egypt, Lebanon, and Jordan - also face a challenging outlook. In addition, the heightened security situation in the Red Sea has raised new concerns about the conflict's impact on trade and on shipping costs. Second, oil production cuts by several oil exporters. These are weighing on overall GDP growth, while non-oil sector activity remains robust. And third, tight policy settings. Restrictive macro policies remain essential to bring down high debt and elevated inflation in certain countries.

An encouraging development is that inflation has continued to decline in most MENA economies in line with global trends except in some parts of the region due to country specific challenges. Since last October, uncertainty and downside risks for the region's economy have increased sharply, with the duration of the conflict and scope of escalation still uncertain. The heightened security situation in the Red Sea highlights the ongoing unpredictability and could entail a significant hit to shipping, regional trade, and possibly to Internet connections. Should the conflict escalate, a more severe or persistent negative impact on tourism could materialize. Higher energy bills and borrowing costs from an unexpected tightening of regional financing conditions could also hold back growth. And fiscal spending could rise to support vulnerable households and displaced families, as well as to bolster security, particularly for economies close to the conflict.

In terms of policy response, the appropriate policy response will depend on country's exposure to the conflict, existing vulnerabilities, and policy space. Where the impact of the conflict is acute or risks are elevated, crisis management and precautionary policies will be critical. Elsewhere, countries will need to continue to fortify safeguards. Monetary policy will need to remain focused on price stability, and fiscal policy should be tailored to country specific needs and available fiscal space.

Structural reforms to boosting growth and strengthening resilience in both the near- and long- terms remain critical. The Fund is ready and committed to supporting the region. We are already providing policy advice, technical assistance, and financing to MENA countries to help buffer against shocks and ease any necessary adjustment. We have approved $26 billion in financing to the MENA region since early 2020. In Jordan, for example, a new four-year extended fund facility was recently approved, unlocking $1.2 billion.

More broadly, since the start of 2023, the IMF approved programs for Egypt, Mauritania, and Morocco. And Somalia's completion point under the HIPC Initiative was also approved. The IMF has also increased its local presence in the region by reopening its Middle East Regional Technical Assistance Center in Beirut and setting up a new regional office in Riyadh, Saudi Arabia. This office will further strengthen the IMF engagement and partnership with the region.

I would like to thank you very much and now open the floor for questions.

MS. ALSHAMI: Thank you very much, Jihad. We will now open the floor for your questions. If you are on Webex, please turn on your camera, and raise your hand if you want to ask a question and we will call on you. Or you can post your question on Webex and in the chat box or through the IMF Press Center. And we would be grateful if you could introduce yourself and your news outlet. So let's take the first question, and we have Hashim from AFP. Hashim, please go ahead.

QUESTIONER: Hi. Thank you, Jihad, and thanks everyone. Hashim Osseiran from AFP here. So my first question is, do we have an estimate of the percentage drop in Red Sea traffic because of the Red Sea attacks? And do we have any projections on how the Red Sea attacks could affect prices in the Middle East? Thank you.

MR. AZOUR: Thank you very much, Hashim. As you know, the large traffic in the Red Sea is on the container shipping, which has declined by almost 30 percent. The decline in volume of shipping, as well as also the increase in shipping costs, is affecting both the value chains. We saw a certain number of sectors affected, affecting certain number of economies. For example, Egypt, in terms of revenues coming from the Suez Canal, and also creating additional delays in providing goods and services from China.

This impact, I would say, is differentiated between countries depending on their reliance on this China or Asia-Med lines, and also depending on the size of those economies in terms of imports. If this trade issue will escalate, this could have an increased impact on economies in the region, both in terms of increasing their cost of import, cost of production. As well as also declining a certain level of revenues for a certain number of MENA countries.

MS. ALSHAMI: Thank you, Jihad. Let's take the second round of questions and we will take Duaa first. Please go ahead, Duaa.

QUESTIONER: Hello, Angham. Hello, Jihad.

MS. ALSHAMI: Yes, we can hear you, Duaa. Go ahead.

QUESTIONER: Pleased to meet you today. Thank you so much, Angham, for taking my questions. I have two quick questions, Jihad. Could you please update us on the latest updates regarding the IMF discussions with the Egyptian authorities, regarding pushing forward the first and second reviews under the EFF Loan Program and securing an additional financing package. The second one is, the report showed that the threats in the Red Sea region and the escalation in Gaza has a severe impact on the Egyptian economy. Could you please preface on the projections for inflation, debt, budget deficit, and debt levels? Thank you so much, Jihad.

MS. ALSHAMI: Thank you, Duaa. So maybe we could take more questions on Egypt, Jihad? Let's take more questions on Egypt. Ahmed, please go ahead.

QUESTIONER: Good evening, Jihad and Angham. The IMF mission concluded its work, and we haven't heard any results about the mission from the Egyptian authorities or the IMF leadership. Can you tell us what happened in the negotiations with Egypt to increase the IMF loan to Egypt and the expected date for awarding the second batch of finance? The discussion focused on a free exchange rate and inflation. What was the outcome of these discussions between the IMF and Egypt? Thank you.

MS. ALSHAMI: Thank you, Ahmed. We'll take one more question on Egypt. Yassin, please go ahead.

QUESTIONER: Hi, Angham. Hi, Jihad. My question is on the negotiations between Egypt and the IMF. How far have the discussions gone on the exchange rate? How does the IMF look at the two parallel exchange rates? Are we talking about a fully free exchange rate or sort of an adjusted exchange rate?

MR. AZOUR: Thank you very much. Many questions were raised on Egypt. The first was about forecast for growth this year. Egypt, as a neighboring country to Palestine, was heavily impacted by the events and the conflict. This necessitated a revision of the growth in 2024. This year it will be 3 percent, compared to 3.8 percent last year. If we compare this to our projections in October, these forecasts were downgraded by 0.6, from 3.6 percent to 3 percent this year.

The second question, or the second batch of questions, on the negotiations that are underway between the IMF and the Egyptian authorities on the first and second revision. This program, as you know, was approved last year and is based on four main goals. First, protecting the economy against external shocks. A flexible exchange rate is one of the tools that would help secure the highest level of protection for the Egyptian economy against external shocks. Address the inflation rate, which is high, 33 percent now in Egypt. Addressing the issue of inflation is essential for economic stability and decreasing the suffering of the people and those with limited income and the vulnerable. Second, elevate the economy to 5, 6 percent growth as we've seen in previous years. This requires giving the private sector a greater role to play by reconsidering the role of the public sector and the role of the private sector.

The second and the last thing, is to broaden social protection through social programs. The first and second revisions are being looked into. The goals of the program approved in October ’22 remained the same. And that's the basis of the discussion now there are negotiations between the IMF team and the Egyptian authorities now. They are making progress on these issues, and the mission is still negotiating with the Egyptian authorities.

MS. ALSHAMI: Thank you. Thank you, Jihad. I think we have covered Egypt, so let's move on. We have some questions that we received, Jihad. Does the IMF have an estimate on how much it will cost and its role in post-war Gaza? And another question, does the IMF have any economic projections regarding Gaza that we can share?

MR. AZOUR: Well, I think -- two questions. The first one is the impact of the conflict. Let me say first, the situation today is still very uncertain because our projections were based on the assumption that the high intensity in the conflict will last for the first quarter of this year and then escalations will gradually decline. And therefore, based on those assumptions, the level of damage on the West Bank and in Gaza are immense. We project that growth will be negative in 2023, -6 percent compared to an earlier projection of positive 3 percent, which means the drop is of 9 percent pre- and post- the war. And also, we project that the economy will keep contracting in 2024, if there is no fast and quick cessation of hostilities and the reconstruction.

As for the assessment or the estimate for the reconstructions, I think it's too early. And usually those are other institutions who are more involved, the UN Agencies, as well as also the World Bank, who assess the level of damages. But it's very important to have a comprehensive package to allow both economies to recover and to address immediate humanitarian social needs, but also to have the necessary resources for the reconstruction. In the short term, providing greater access to people, greater access to goods, increasing the level of transfers of resources to the Palestinian authorities, as well as also allowing additional assistance to be channeled to both Gaza as well as also the West Bank.

MS. ALSHAMI: Thank you, Jihad. So let's turn to more questions on Webex. Mohammed from Jordan, please come in.

QUESTIONER: Thank you, Angham, and thank you Jihad. I will ask my question in Arabic. What is the impact of the current war in Gaza on the Jordanian economy at the moment and in the future, and how can Jordan avoid the implications? And if I may ask another question about the characteristics of the program that was approved with Jordan recently?

MS. ALSHAMI: And any other questions on Jordan? Or maybe I have one more question on Jordan. Jihad, what are your expectations for the Jordanian economy in light of the geopolitical developments and high public debt rates?

MR. AZOUR: Thank you, Mohammed, for your question about the implications of the Gaza war on Jordan. Of course, this war is impacting directly the neighboring countries, Lebanon, Jordan, Syria, Egypt, and these are the countries that have been impacted to a great extent because of this war. And of course, any improvement and the resilience of the Jordanian economy through the reforms that were conducted in the past allowed Jordan to overcome these difficult times or to reduce the burden of these difficult times on the Jordanian economy. And of course, this crisis is impacting the Jordanian economy and the economies of the neighboring countries.

And this is why we have reconsidered the growth levels for 2024 and downgraded them by 0.4 percent. And it is expected that growth rates for this year to be at about 3 percent for Jordan. The policies that were adopted in the past years allowed the reinforcing of the Jordanian economy and it has improved its performance and reinforced the Central Bank reserves.

And of course, these are the aims of the program, the program that was approved with the Jordanian government at the beginning of this year, and this program was being prepared for before the war on Gaza. And this program aims to strengthen the Jordanian government’s actions in order to create job opportunities and strengthen the economy. And this plan was developed post Covid in order to reinforce Jordanian’s abilities, growth in economy, and to improve living standards. This program was based on the strategic objectives that the Jordanian government laid and it expresses the confidence of the IMF in these reforms, and it sees how it aims to improve the economic situation and manage some of the structural problems in the Jordanian economy. It also contributes to reinforcing the Jordanian economy’s ability to create job opportunities, because job opportunities are fundamental to reducing unemployment and especially youth unemployment.

And of course, without a doubt in Jordan, as is the case in other countries, the 2024 projections are determined by two points. The risks are still high and that are the risks of the spillover of the crisis and the deepening of this crisis and the anticipation that is prevailing because of this crisis. So this is why it is important to take precautionary measures through financial and economic policies that would strengthen preparedness. And two, we have to continue economic transformation in order to have the economies of the region move away from the implications of the crisis in the region.

MS. ALSHAMI: One question we have. What are the Funds expectations for the growth of the UAE's economy for 2024, 2025? Do you have any numbers setting out the scale of the potential impact that prolonged conflict or the more extreme risk scenarios could have on GDP of the countries in the region, the price of oil, shipping, global inflation and potential migration flows?

MR. AZOUR: Well, several questions have been asked, starting with the UAE economy. The UAE economy has been able to recover fast since the Covid crisis, as well as also was able to adjust to the various crises that took place, from the war in Ukraine to the increase in inflation. And we expect that the economy will grow by 3.8 percent in 2024. This growth is mainly driven by the non-oil sector and therefore, despite the extension of the cuts in oil production and oil export, with the extension of the OPEC+ agreement in its 2024 format, we expect that growth will be at 3.8 percent this year. Inflation will ease at 2.3 percent. Over the last few years, UAE was able to keep inflation under control, which means that this will help address issues related to price increase as well as also improve the overall macroeconomic situation in the UAE.

Broadly speaking, again, I think it's very important to highlight the issue that the recent developments were or erupted on a backdrop of weak recovery in 2023 that was expected to strengthen in 2024. And here the crisis affected countries who have, on one hand, direct contact or immediate impact because of being adjacent to the conflict area and also to some country specific issues and weaknesses. The high level of debt in certain number of countries where the decline in capital inflows has affected their overall fiscal situation. And therefore, it's very important for those countries to maintain fiscal discipline and the consolidation of their fiscal situation. And two is also on the monetary side. The improvement in the monetary situation where the gradual decline in inflation should be pursued in 2024 and onward, in order to curb and address the risk of inflation.

MS. ALSHAMI: Thank you, Jihad. Now let's turn to our colleagues on Webex. Mohammed Saeed. Mohammed Saeed, would you like to come in?

QUESTIONER: Yes. Good evening, everyone. I will be asking in Arabic. I am Mohammed Saeed from El Sharq in Egypt. My question is about the press releases or what was discussed in the media about doubling the funding to Egypt from 3 billion to about 6 billion or more. To what extent is this information true?

MR. AZOUR: In fact, Mohammed, as you have just said recently, the negotiations for the first review and the second review are currently being conducted with the IMF team and the Egyptian authorities or the Egyptian government. And currently they are discussing the implications of the Gaza war on Egypt's economy, and the policies that should be adopted, at the time being, for facing the challenges of inflation, reduction in foreign currency, and to relaunch the economic activity in Egypt. Of course, this matter is being worked upon and it is still early to provide additional information about it. And perhaps if the funding needs require increasing the amount of funding of the program, then this will be up for discussion. However, it is also tied to the priorities and the measures that should be undertaken and the reforms and what is the funding gap and how we can close the funding gap. And this could lead to increasing the IMF's loan to Egypt.

MS. ALSHAMI: I have one more question on Webex. Raef from Jordan. Raef, can you hear us? Okay. Actually, we received some questions on Tunisia, Jihad. Has the Tunisian government provided a plan for economic reforms, a new plan to the Fund? And are you following up on the reforms that the Tunisian government is undertaking, which includes the reforms for the policy of the central bank?

MR. AZOUR: There is a cooperation between the IMF and the Tunisian government, and it goes back to over ten years ago. And it comes in different forms, such as the provision of technical assistance from the Fund to Tunisia, an addition to the consultations and the continuous communication with Tunisia regarding the economic policies. The economy of Tunisia in 2023 was able to benefit from the economic improvement through the improvement of the tourism sector, which has raised the reserves of the Central Bank. And this has led to an improvement in the public finances.

The IMF is following up with the Tunisian authorities periodically.

MS. ALSHAMI: Thank you, Jihad. We have a question on Jordan, Jordan has presented its budget for an amount of over $3 billion. To what extent can the new program with the Fund get credit for the Jordanian government with low interest rates? Another question for Qatar, what are the expectations for the economic growth in Qatar?

MR. AZOUR: Regarding the first question for Jordan, the program is contributing in addition to the economic and financial measures that were undertaken by the Jordanian government. They are contributing to the reinforcement and the solvency of the Jordanian government and improving the public finances. And this has a positive impact on Jordan's ability to receive funding from the financial markets, because as we know, the level of credit rating for Jordan has been upgraded. In fact, the program and the measures and the reforms that Jordan is undertaking should improve the economic situation in general and should contribute to the gradual reduction of the cost of funding on the Jordanian economy.

As for the growth projections for the Qatari economy, we have not upgraded or revised the projections for Qatar. As for the rest of the GCC countries, Qatar's economy is a non-oil economy and we have seen how the steps that were taken in the past few years, how they have contributed to the diversification of the revenues for the economy and to develop new sectors. And Qatar has benefited the last year and in the previous years from investments that were done to prepare for the World Cup event, and this contributed to raising the level of growth and the economic performance for the past years in Qatar.

MS. ALSHAMI: We have maybe two more questions. What are the biggest risks from the conflict in the Middle East? What are the biggest risks facing the global economy from the conflict in the Middle East? Then one more question. What are the forecasts around commodity prices impacting growth in MENA?

MR. AZOUR: Well, this crisis has increased the level of risks and especially on certain number of key sectors, trade, tourism, investment, and capital flow, oil and gas are the main area where this conflict has created additional set of risks. Of course, the most affected one was tourism. Several countries in the region, in the last quarter of 2023, suffered from that. Trade with increased tension in the increased tension in the Red Sea has reflected in the increase in cost of transportation, and the drop in the volume of trade that is being channeled through the Red Sea and through Suez Canal. Therefore, the second most affected sector, and the second highest risk in 2024, will be on the trade sector.

Capital flows or financial sector and oil and gas. We saw in the beginning, in the first few weeks after the outbreak of the crisis, an increase in oil price, but it was short lived and limited in time as well as also we saw some tightening on the spreads and drop in the level of capital flows that recovered by the end of the year by end of 2023. Still, those are two dimensions that we need to watch for 2024.

In addition to that, there are certain specific issues for certain number of countries. Emerging markets and middle-income countries, especially those who have high level of debt, the increased level of uncertainty could affect their inflows, both in terms of FDIs that are very needed for those economies to grow, but also could increase the cost of borrowing. And therefore, we encourage countries to maintain fiscal stability, as well as also for those who are in a mode of fiscal consolidations, to accelerate that.

The last aspect is oil and gas market. Of course, the oil and gas market has been subjected to various shocks over the last few years, from Covid to the war in Ukraine, and the increase in inflation, and now recently the war in Gaza and Israel. And here also, what we have witnessed, is the capacity of the market to react. The level of spare capacity that exceeds 8 million barrel a day, the diversification of routes, in terms of exporting oil and gas, have reduced. All these developments have reduced the risk and the risk premium on the oil and gas market.

However, I think it's very important also to recognize that the oil and gas prices are subject also to demand and supply. And global market movements are currently more important in the definition and the projection of oil prices in 2024.

MS. ALSHAMI: Thank you very much, Jihad. We will take the final round of questions from Webex. Let's go to Hayat and then Hashim. Hayat? Okay, maybe we can turn to Hashim. Hashim, go ahead.

QUESTIONER: Can you hear me well?

MS. ALSHAMI: Yes, we can hear you.

QUESTIONER: Okay. So sorry, I just want to circle back to the figure of 30 percent drop in Red Sea container traffic. I was just hoping to ask if you can give me a time frame. So has it dropped by 30 percent since the attacks have started or are we talking about a different time frame here?

MR. AZOUR: Sorry, could you please repeat the questions? I was not able to hear exactly what was the question?

QUESTIONER: If you could just specify the time frame of the 30 percent drop in container traffic in the Red Sea. So, can we say that container traffic in the Red Sea has dropped by 30 percent since the skies and the 40 attacks or are we talking about a specific month that over the past month they've dropped by 30 percent?

MR. AZOUR: Hashim, of the drop is -- well, you recall that the situation on trade deteriorated mainly starting mid December and early January. Those are the trends that we are seeing this year, on year, on year, basis. We started seeing in December last year the first signals by seeing the cost of containers from China to Europe and to the Mediterranean Sea. The cost of shipping has went up as well as the cost of insurance. The drop in trade, in fact, accelerated in the beginning of this year, both in terms of diversion of trade through other routes as well as also using multi-modal type of trade.

Of course, again, I think it's very important to recognize here that the level of uncertainty is extremely high and the developments will determine the extent of change and shift in trade patterns. A, in terms of volume, but also in terms of sustainability. Are we at the verge of major change in trade routes or it's temporary because of the increase in the cost and also because of the deterioration of the security situation? Those are very important issues, the one that you're raising. But I think it's very important to recognize that this year, especially in the first half of the year, the level of uncertainty will be the main element in the outlook.

MS. ALSHAMI: Thank you, Jihad. Let's try Hayat one more time. Hayat? Okay, I think that concludes our press briefing for today. Thank you very much, Jihad.

MR. AZOUR: Thank you.

MS. ALSHAMI: Thank you all for joining us and for your interest. Hope to see you soon. If you have any follow up questions, please feel free to reach out to me directly or to media@imf.org. Thank you very much. Thanks, Jihad.

MR. AZOUR: Thank you very much.

* * * * *