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Jon Alterman: Jihad Azour is the director of the Middle East and Central Asia Department at the International Monetary Fund. Jihad, thank you very much for joining us on Babel.
Jihad Azour: Thank you for having me.
Jon Alterman: You just came back from the Middle East. What was the mood, and what did you see?
Jihad Azour: This is the beginning of the year, so everybody is looking back at what happened in 2022 and thinking about the main issues for this year. If I go a year back to the beginning of 2022, the region was enjoying strong growth and recovery after Covid. The situation has changed, and now we have some divergence—a tale of two cities. You have the oil-exporting countries who keep enjoying strong tailwinds. The price of oil is still high. The reforms they introduced over the last five years are paying off, and the way that they managed the Covid crisis and their ability to recover fast has strengthened their capacity to generate growth. On the other hand, middle-income and emerging economies are facing headwinds. One challenge is the increase in the price of commodities—food and oil—amid the war in Ukraine. For the third year in a row, they are facing double-digit inflation. And middle-income countries that rely on the financial market for their financing are being hurt by high interest rates, given the tightening of global monetary policy. When we look at 2023, we know the global economy will slow down. The three major engines of the global economy—the United States, China, and Europe—are slowing down, for various reasons. That will affect the rest of the world. Second, the uncertainty brought on by the second year of conflict in Ukraine will also be an issue on the minds of many people—especially in a region that is very affected by geopolitical developments there. Third, in addition to these new challenges, longstanding issues remain. Unemployment levels are on the rise, especially among youth, and the average level of growth in the region is not enough to maintain the current level of income per capita. So, this year is going to be an important one, and it’s going to be a challenging one for some countries in the region.
Jon Alterman: Let me go back. You mentioned the impacts of Covid overall. Do you think that Covid had a larger or smaller effect than you had anticipated on regional economies?
Jihad Azour: I think countries were able to react very quickly, by and large. They were able to protect lives and livelihoods , despite some challenges in the beginning in terms of access to vaccines and medical resources. Most of the countries in the region were able to set certain practices and introduce certain policies that brought confidence back very quickly, allowing them to address the challenge of maintaining a balance between reducing the spread of the virus and maintaining their economic functions. Therefore, the exit from the Covid shutdowns was also strong and fast. In 2021 and 2022, the level of recovery covered for the loss of output that resulted from Covid, and the recovery helped several countries address the issues that came up immediately afterward. However, there are scars, especially for certain sectors that were more affected, like the informal sector and more contact-intensive sectors of the economy. Certain numbers of social groups were also more affected because of weak telecom and communications infrastructure that led to them having less access to certain basic services than the rest of the population. The second important post-Covid effect was in unemployment. Unemployment went up across the board, especially for youth and women. Women’s participation in the economy went in decline across the region. For me, those are the priorities for the next decade. Any policy should aim to ultimately achieve higher levels of growth and economic inclusion—increasing the capacity to provide jobs and increase the participation of women in the economy.
Jon Alterman: One of the manifestations of frustration, especially with IMF policies, has been people who come out into the streets periodically over the last 20 or 30 years in the Middle East to protest the government, cutting back on subsidies—cutting back on those sorts of price supports that they've come to expect. How does the IMF think about how much political space and leeway governments have to implement reforms? Do you measure that? How do your experts think about when you have to take the foot off the gas because governments just want to keep people from going into the streets?
Jihad Azour: This is a very important issue. You are asking a few questions at once, so let me take them one-by-one. Subsidies are not uniform, and we tend to differentiate more and more between fuel and food subsidies. Our research shows that a fuel subsidy is more regressive than a food subsidy. The lower 40 percent of the population doesn’t benefit, on average, from more than 15 to 20 percent of the fuel subsidy. That means that you are providing very rare and precious resources to those who don't need it. Therefore, it's very important to make sure that you expand your social safety net and that when you need to provide a subsidy, you provide it in a targeted way. The IMF is very much in favor of expanding social protection, and the level of spending on social protection is relatively low in the region. It needs to be increased, but benefits need to go to those who are in need of benefit—not the opposite.
Jon Alterman: But on political terms, often it's not the poor that go into the streets. It's the middle class that goes into the street, right?
Jihad Azour: That is the second dimension of your question. So, a subsidy, alone, is proven not to be the best way to use public resources. It’s regressive and it transfers resources from those who need it to those who don’t need it. I think it's about time that we look at the overall social framework, the social compact, whereby we can address the root cause of the issues. You need to strengthen social protection by providing income support to those who economically cannot afford to go without it. And this is the importance of social transfers, and they need to be targeted. But the social contract, especially for the middle-income population that can live without subsidies is to promote economic activity that creates jobs, and that starts from investment infrastructure and enabling of the economy. The government’s role is to promote investment in sectors that create jobs that export and that allow your population to thrive. You need to have an infrastructure that helps increase productivity in telecom, transportation, logistics, education, and access to talent and finance. When you compare the region to other parts of the world, you can see that access to finance is low—especially for a region that has financial resources. Access to finance in the Middle East is between 3 and 5 percent, but on a compatible basis, it is more like 15 to 18 percent in other areas. Women’s participation in the economy is low for a region that is investing in education. So, you need to enable the economy by unlocking some of the legal impediments to women’s participation and by developing social infrastructure like childcare and public transportation. Lastly, you need transparency and to fight corruption. Those are important elements that not only bring trust back but also increase the capacity for those in the middle class who do not have access to "wasta”—or informal networks of opportunities. I think it’s a good time for the region to go back to basic things to use this moment, this challenge, as an opportunity for major transformation. On your last question, we have invested a lot into understanding the political economy of reforms. We’ve developed indices about social unrest. But the experience here is telling. Delaying decisions puts you in a situation where you need to do more with less impact. If you delay decisions and policies, you end up doing more, spending more effort, or making more adjustments, and you increase the level of resentment. So, I think it’s important to understand from other cases that you need to be as transparent as possible. You need to explain the tradeoffs and move fast to break some of the bottlenecks on your economy and unleash its potential. This is also a moment where part of the region is going to enjoy huge levels of additional revenues—somewhere north of $1 trillion over the next four or five years. This is something that can be channeled to different countries—we especially now see that Gulf Cooperation Council (GCC) countries are wanting to invest in the region. They are interested in more direct investment in those economies. It’s an important moment that should be used wisely.
Jon Alterman: I want to come back to that, but I also want to drill down a little bit on the specifics. You talked about the importance of moving quickly, and there were more than nine months of serious negotiations with Egypt over a loan that initially was speculated to be in the 10 to $15 billion range. It took nine months. President Sisi was in Europe and said, “You have to understand and give us political space.” The result came in as a $3 billion loan in December—very much on the low end of expectations. Why were expectations off? What did people miss about Egypt's need for an IMF loan? And what do you think is going to come from the IMF loan?
Jihad Azour: First, the partnership between Egypt and the IMF is a strong one, and Egypt has undertaken important reforms over the last five years. Those reforms helped the Egyptian economy to grow at rates exceeding 5 percent on average. This was despite Covid. In the last fiscal year, Egypt had a 6.5 percent growth rate. Egypt was also able to address some of the major challenges that the Egyptian economy faced and to attract additional investments and create jobs. But one also has to recognize that the Egyptian economy was subject to external shocks—the war in Ukraine with its impact on the price of food, specifically the price of wheat for a country that is heavily dependent on those imports from Russia and Ukraine. There has been an impact on tourism from two years of Covid. But clearly, Egypt has an economy that has strong potential; it has a large set of resources. Egypt needs to stabilize the macro-economy, and the most important issue to address is inflation. This is why monetary policy should be geared toward reducing the impact of inflation—not only to stabilize its economy but also to reduce its social impacts. Egypt needs to use the exchange rate to protect its economy from external shocks at a time where we are in a shock-prone global economy. Lastly, Egypt needs to accelerate its economic transformation through structural reforms. I think we all agree—starting with Egyptians—that jobs can be created and that the private sector should be in the lead. This would require a certain number of measures and reforms to be introduced. This would also require providing the private sector with needed support. Those are the basic foundations of the program that we negotiated with Egyptian authorities, and the last dimension was social protection. We believe that what Egypt achieved over the last five years through better targeting of subsidies should be expanded. The size of the program should not reflect the IMF’s commitment. Over the last five years, the IMF provided Egypt with more than $18 billion. The role of this current program is to play a connective role, connecting Egypt with other sources of financing.
Jon Alterman: This brings us to some of the Gulf sources that you were talking about.
Jihad Azour: Yes, and some of the bilateral partners are showing great interest in providing support to Egypt—be it in the form of deposits, loans, or investments. This is something we really welcome because this is what would help Egypt create job opportunities and to attract a stable source of financing through foreign direct investments (FDIs).
Jon Alterman: Have you been in touch with Gulf Finance ministers about supplementing the IMF loan with their own deposits in the Egyptian Central Bank?
Jihad Azour: Yes, and this was part of the whole discussion when we were preparing for the program. We were in regular and constant dialogue with GCC authorities. This is something that we did hand in hand with the Egyptian authorities. I think it's very important to highlight that Egypt’s strategy in attracting FDIs as a stable source of funding will lead to investment in the economy and job creation. I think this is the right strategy.
Jon Alterman: Egypt, I think, comes across as the easy challenge. You were just in Lebanon, where 80 percent or more of the population is now in poverty. Most people argue that Lebanon's economic crisis is really a reflection of an underlying political crisis that the country's been in for many years. You're the former finance minister of Lebanon. How do you think the political log jam blocking economic reform can be broken? What's everybody's role breaking that, and how do you catalyze that in Lebanon's political system?
Jihad Azour: An extraordinary effort needs to be made to help Lebanon exit this crisis. It has to start with a package of reforms that will bring confidence back. You need to bring trust—both of the Lebanese community and the international community—so that people can work, invest, and promote a new economic recovery. This requires addressing some issues. An economy cannot grow without a healthy financial system and a state that is efficient and operational. Therefore, you need to address the legacy of the past. You need to provide certain safeguards for people to trust the future, and the IMF program is an important piece in that. You need to use this moment to accelerate reforms and transform the Lebanese economy—on one hand to catch up on lost ground but on the other to create a sustainable recovery, a recovery that will not be stopped by political bickering or tension. It needs to be a phased approach. Phase one is to stabilize and bring confidence back to the system. This requires restarting the economy by addressing finance sector issues and restoring some of the core functions of the state. Phase two is to reform and restructure some of the key public entities—especially those in some of the leading sectors, like telecom and electricity, the key enablers of the economy. The third phase is to unlock the potential of the economy. This economy has huge potential because of the widespread of the Lebanese diaspora internationally. The capacity for this economy to reconnect to the global economic world will come in the form of partnerships. Part of this has to be done through internal reforms, but this, too, requires the international community to provide financial support and more strategic support for opening Lebanon up to opportunities in the regional and global economies. This will take time, but I think the magnitude and extent of the crisis should be a call for action for the Lebanese to say, “never again.” Even if the political situation remains complex, it shouldn't hijack the life and the livelihood of the Lebanese people.
Jon Alterman: Let me ask a very forward-looking question. The energy transition will happen. We don't know just how quickly. We don't know what it'll look like. As you think forward in the region, when do you think the energy transition is likely to start taking a bite out of regional revenues? How will the phases proceed as the energy transition affects both labor-exporting states and oil-exporting states in the region over the next 50 years?
Jihad Azour: Climate issues are already affecting the region. I see many countries developing long term energy transition strategies—starting with the oil-exporting ones, but others are as well. COP27 in Egypt was an opportunity to highlight the importance of that. Of course, when you talk about the energy transition in a region with a large portion of oil and gas exports, it has a different meaning. I think we see more of a kind of reconciliation between energy security—providing a stable supply of energy to the world economy—and a transition out of the façade of fuel energy. Here, there are three important steps. One is adaptation. We see a lot of investment and effort put into adaptation. Second, is mitigation, which is more complex and challenging. Third, we need to develop financial mechanisms to finance this transition. We are working with other institutions—other multilaterals and others—to promote an understanding that this is a long-term transformation that will require huge amounts of investment, which is something countries need to embrace.
Jon Alterman: From an economic perspective, how should we think in the foreseeable future about what the economic stages of the transition look like?
Jihad Azour: Recently, we’ve seen an acceleration in the economic transformation of oil-exporting countries, where the strategy to diversify economies and the state’s income away from oil revenues has succeeded. Another avenue for the future is to change the pattern of regional coordination and integration—moving from the old top-down political framework of regional integration toward something that is more fit and driven by the private sector. Both human capital resources and markets need to converge to create opportunities. We’ve seen this recently with moves from several sovereign wealth funds in the region. Saudi Arabia, the UAE, Qatar—and I expect Kuwait will soon join—are looking for investment opportunities in Jordan, Egypt, Lebanon, Morocco, and Tunisia. They are looking to create additional regional integration through enlarging the size of the market. Global trends are helping move things in that direction because we see trends of onshoring—or “friendly shoring” or “regional shoring”—and I see that as something that could provide the region with the chance to channel additional resources to a larger market, removing some barriers to economic opportunities. We have done a lot of work on that. We did research on that for North African countries, where we demonstrated that just by removing economic barriers, you can create an additional percentage point of growth on average over the next five to ten years. By improving women’s access to the labor market, you can capture $1 trillion dollars of additional output over the next decade. By addressing issues related to the inclusion of youth—through training and education—you can increase output for the region and for induvial countries. So, I think this is a moment where three things are going to make a difference. First, the world economy is not going to be a driving force for cheap capital or a high level of growth in the next couple of years. So, you must recognize that and adjust for it. Second, macroeconomic stability is still important, and it matters. Third, many countries in the region have already developed strategies and plans to accelerate their economic transformation away from oil. Maybe this is the right time to put those pieces into implementation.
Jon Alterman: Let me ask one final question. There was a perception in the 1970s and 1980s that the Gulf money brought with it a certain cultural price—that there was an attempt to spread conservative religion. There was a sense that attitudes toward women's dress were somehow connected to Gulf support. Clearly, the Gulf is moving away from the religious conservatism it had in the 1970s and 1980s. What do you think the Gulf would look for as a trade for the investment of more capital in the region? Are there cultural or political things the Gulf would want in exchange for helping the economies of the Levant and North Africa?
Jihad Azour: It's a difficult question. Let's try to dissect it into pieces. First, the trend that Gulf societies are taking is more toward liberalization and openness. We see this in Saudi Arabia and the UAE, and in Qatar with the World Cup. There is a trend of social transformation in the Gulf that I would say is happening even faster than what we see, on average, in the rest of the region. Second, the nature of capital is much more investment and private sector-led than in the past. There is less funding going through the traditional channel of deposits or loans, and there is more interest in investment—and investment that is managed by professionals usually seeks to create value for investors before anything else. So, I see that connection as less important going forward. I also see the tendency to export ideology happening less. What’s important at this stage is to recognize that fundamental issues in the region still need to be addressed. You need to create more growth because you have a population that is growing—and growing fast. If economic policies do not create opportunities, they will not satisfy that population. You have to reconcile between the short and longer term. The short term needs you to provide both economic stability and mitigate external shocks—especially now with the shock of inflation, and in the medium term with shock from transformative reforms and the trends that have accelerated because of Covid-19. Last, but not least, I think the more you connect this region to the rest of the world, the better off it is. This is where the role of the private sector comes in. Investment and engagement in education and healthcare are fundamental elements for the future. Still, this year is going to be a challenging one for the region, and the world economy. It’s very important for countries to preserve their stability when the winds are changing, and the tides are high.
Jon Alterman: Jihad Azour, thank you very much for joining us on Babel.
Jihad Azour: Thank you, Jon. Thank you for having me.
