The International Monetary Fund (IMF) expects Egypt’s economy to grow at a slower rate during the next fiscal year compared to 2012-2013, while inflation is predicted to increase, according to a report on the economic outlook of the Middle East and North Africa region.
In the report, entitled Regional Economic Outlook, the IMF predicted Egypt’s GDP will decrease to 2% in the coming fiscal year, compared to 2.2% in the previous fiscal year.
The report predicted that annual inflation rates would increase by the end of this year to 10.8%, compared to 8.4% in the previous fiscal year, with the potential for such numbers to increase to 11.6% in 2014.
Statistics also showed that Egypt’s budget deficit is set to increase to 11.3% over the coming year, compared to 10.7% during the previous year, with this number set to decrease to 8.7% in 2014.
Meanwhile Egypt’s current account deficit as a percentage of the country’s balance of payments is set to decrease this year to 2.1% compared to 3.1% in 2012.
Inflation is expected to increase in Egypt, Jordan, Morocco and Tunisia, a result of recent cuts made in subsidy spending, rising pressure being put on the country’s financial budget deficit, and a general decrease in the supply of goods and services.
In other countries in the Arab world, it is expected that decreases in local demand and the drop in prices of local food products will help lead to the curbing of regional inflation.
Even in countries where economic recovery is expected to occur due to high levels of government revenues, high rates of spending on wages and subsidies are expected to lead to budget deficit increases. Budget deficits are expected to stabilise in countries that have directed recent savings acquired from cuts made in subsidy payments to the strengthening of social safety nets, and increasing capital spending on growth and job creation.
The report further stated that regional foreign reserves are not expected to increase as long as world food and energy prices do not decrease. The failure to increase the export of foreign direct investments (FDI) in many countries, or convert the monies of citizens working abroad, is also expected to help prevent the increase of regional foreign reserves.
The weakening of investor confidence in Middle East nations may also lead to the leaking of such reserves. These factors are expected to reach particularly critical levels in Pakistan, as a result of high debt payments made to international lending institutions, which will lead to critical decreases in the country’s foreign currency reserves.
With the regional depletion of foreign reserves, many countries will be forced to take tangible steps to institute financial controls and increase the flexibility of local exchange rates in order to promote economic stability and investor confidence, increase competition and mobilise foreign funding.
Such policies will include decreasing subsidies and restructuring social safety nets in a way that ensures that aid goes only to those who need it most, in addition to reigning in the cost of government wages.
Governments in the region will be forced to make tough political decisions in order to achieve economic stability, decisions which may not produce high levels of popular support. This will be difficult considering that elections are soon set to take place in a number of oil importing countries, along with political change and constitutional reforms which will further increase the difficulty of such decisions.
The IMF report on the Middle East stated that despite these challenges, many of these countries posses a high potential for growth and job creation; however in order to utilise such potential, structural reforms that eliminate red tape in addition to strengthening and improving commercial integration will also need to be put in place. The report stated that regulations will need to be amended and simplified in order to encourage job creation and growth.
With increases in regional budget deficits and the lowering of protective barriers for foreign currency reserves, oil importing countries no longer have much time left to decide upon and set such policies. These would include severe financial austerity measures that support growth in addition to striking a fair social balance, as well as increasing the flexibility of local and international exchange rates.
According to the report, such measures will help achieve economic stability, improve business and investor confidence, preserve the spirit of competition, and mobilise foreign funding.
Massoud Ahmed, representative of the Middle East and North Africa division within the IMF, recently told reporters that subsidy spending reforms taking place throughout the region have often times come along with protective measures being taken to redirect funds to those who need them most. Such policies, he said, have already begun to decrease the pressure on the region’s public finances and foreign currency reserves.
He added that countries needed to further decrease levels of spending on subsidies while at the same time putting in place measures to increase the efficiency in which funds are distributed and redirected to the region’s poorest citizens.
The report also stated that in order to address the challenges set to be faced in the short term, it would be necessary for countries in the region to actively seek to implement structural reforms that achieve comprehensive growth in addition to sustainable job growth.
Ahmed further stated that despite the importance of focusing on the preservation of economic stability in the short term, it was important not to overlook serious challenges facing countries in the region during the medium term. These challenges included modernising regional economies and diversifying their activities, increasing rates of job creation and improving social mobility. He identified three steps that could be taken during the medium term as follows.
First, increasing commercial integration be it locally, regionally or internationally, is not only for the purpose of achieving growth, but also to provide incentives for the passage of new legal reforms. Secondly, making sure that such reforms would ensure that businesses operate with an improved level of transparency is also a crucial step.
Finally, undergoing workforce and educational reforms that would guarantee that those entering the job market would have the necessary and appropriate skills needed to successfully find employment proves to be a crucial step to achieve job creation. This would include facilitating the ease with which businesses and entrepreneurs could seek out and establish lines of credit.
Translated from AlBorsa Newspaper