Unrest in Arab States contributing to Slower Growth in MENA

Unrest in Arab States contributing to Slower Growth in MENA

Unemployment-fuelled unrest in Arab states contributing to slower growth in MENA: IMF as published on the 28th October 2019 New Indian Express.

The unrest is, in turn, contributing to slower growth in the Middle East and North Africa region, alongside global trade tensions, oil price volatility and a disorderly Brexit process.


DUBAI: Unemployment and sluggish economic growth are fuelling social tension and popular protests in several Arab countries, the International Monetary Fund said Monday.

The unrest is, in turn, contributing to slower growth in the Middle East and North Africa (MENA) region, alongside global trade tensions, oil price volatility and a disorderly Brexit process, the IMF said in a report on the regional economic outlook.

Earlier this month it lowered the 2019 forecast for the region — taking in the Arab nations and Iran — to a meagre 0.1 per cent from 1.1 per cent last year.

The IMF slashed its outlook for the region’s three largest economies — Saudi Arabia, Iran and the United Arab Emirates.

The risks around the forecast of earlier this month “are skewed to the downside and are highly dependent on global factors,” the IMF said in its report on Monday.

“The level of growth that countries in the region are having is below what is needed to address unemployment,” said Jihad Azour, the IMF’s director for the Middle East and Central Asia.

“We are in a region where the rate of unemployment at the youth level exceeds 25-30 per cent and this requires growth to be higher by 1-2 per cent” in order to make a dent in joblessness, Azour told AFP in an interview.

The IMF report said that high unemployment was worsening social tensions in Arab countries.

“Unemployment averages 11 per cent throughout the region versus seven per cent across other emerging market and developing economies,” it said.

“Women and young people are particularly likely to be out of work, with more than 18 per cent of women…without jobs in 2018.” Violent protests have broken out in several Arab countries since early 2010 and turned into bloody civil wars in Syria, Yemen and Libya.

A new wave of demonstrations erupted over the last year in Algeria, Sudan, Iraq and Lebanon, typically demanding economic reforms and action against corruption.

In Lebanon, where protesters have brought the country to a standstill with demands for a full overhaul of the political system, the economy grew at a very slow pace over the past few years, Azour noted.

“The government has to act firmly and swiftly in order to address those imbalances, bring confidence back by addressing the fiscal situation, and lower expenditure,” he said.

The IMF also said that public debt levels were very high in many Arab countries — exceeding 85 per cent of gross domestic product (GDP) on average, with rates of more than 150 per cent in Lebanon and Sudan.

“Having built over many years, the cost of public debt burdens has become sizeable, preventing investments critical to the region’s long-term economic future,” it said.

The IMF said that Iran, which is subject to crippling US sanctions, has entered a steep economic recession and faces a battle against spiralling inflationary pressures.

The Islamic republic’s economy is projected to contract by 9.5 per cent this year after posting negative growth of 4.8 per cent in 2018.

Iranian authorities must align “the exchange rate close to the market rate and also reform the financial sector…and try to address some of the implications of the high level of inflation,” Azour said.

As a result of the sanctions, Tehran is believed to be exporting only around 500,000 barrels per day of crude, down from over two million bpd before the sanctions.

The IMF said that oil-rich Gulf Cooperation Council (GCC) states, led by Saudi Arabia, are expected to grow by just 0.7 per cent this year from 2.0 per cent in 2018 due to lower oil prices and output.

“GCC economies need to diversify and grow out of oil and this requires them to accelerate the reforms that have been started in the last four to five years,” Azour said. Stay up to date on all the latest World news with The New Indian Express App. Download now (Get the news that matters from New Indian Express on WhatsApp. Click this link and hit ‘Click to Subscribe’. Follow the instructions after that.)

Growth in Emerging Market and Developing Economies

Growth in Emerging Market and Developing Economies

Romain Duval and Davide Furceri, authors of this article that obviously elaborates on the currently so-called developing countries. It does not ignore that there is some differentiation between oil and/or other scarce natural resources and the non-exporters of the same. It might as well be talking about these two categories of countries but perhaps along with the character traits described in the image below. Why you might wonder. Simply because How To Reignite Growth in Emerging Market and Developing Economies as developed here, could well apply to all countries in the MENA region, perhaps worldwide not for the same reasons.

Growth in Emerging Market and Developing Economies
NPR quotes the Associated Press, which says that the term ‘developing country’ is more appropriate than Third World when referring to the economically developing nations of Latin America, Africa, and Asia.

Let us, in the meantime, read what they say.

Growth in Emerging Market and Developing Economies
(photo: Kacper Pempel/Reuters/Newscom)

Emerging markets and developing economies have enjoyed good growth over the past two decades. But many countries are still not catching up with the living standards of advanced economies.

At current growth rates, it would take more than 50 years for a typical emerging market economy to close half of its current income gap in living standards, and 90 years for a typical developing economy.

Our research in Chapter 3 of the October 2019 World Economic Outlook finds that implementing major reforms in six key areas at the same time—domestic finance, external finance, trade, labor markets, product markets, and governance—can double the speed of income convergence of the average emerging market and developing economy to the living standards of advanced economies. This could raise output levels by more than 7 percent over a six-year period.

Structural reforms can yield sizable payoffs.

More room for reforms

Policies that change the way governments work—known as structural reforms—are difficult to measure. They often involve policies or issues that are not easy to quantify, such as job protection legislation or the quality of supervision of the domestic banking system.

To address this, the IMF recently developed a comprehensive dataset covering structural regulations in domestic and external finance, trade, and labor and product markets. The data cover a large sample of 90 advanced and developing economies during the past four decades. To the five indicators, we added the quality of governance (for example, how countries control corruption) from the World Gov­ernance Indicators.

The new indicators show that, after the major wave of reforms in the late 1980s and—most importantly—the 1990s, the pace slowed in emerging market and developing economies during the 2000s, especially in low-income developing countries.

While this slowdown reflects the prior generation of reforms, as in advanced economies, there remains ample room for a renewed reform push, particularly in developing economies—notably, across sub-Saharan Africa and, to a lesser extent, in the Middle East and North Africa and the Asia-Pacific region.

Reforms can boost growth and living standards

Based on our empirical research of reforms in 48 current and former emerging markets and 20 developing economies, we find that reforms can yield sizable payoffs. But these gains take time to materialize and vary across different types of regulations. For example, a domestic finance reform of the size that took place in Egypt in 1992 leads to an increase in output of about 2 percent, on average, six years after implementation. We get a similar result for anti-corruption measures, whose effects are sizable in the short run and stabilize at around 2 percent in the medium term. In the other four reforms areas—external finance, trade, product markets, and labor markets—the gains are about 1 percent six years after the reform.

For the average emerging market and developing economy, the results imply that major simultaneous reforms across all six areas considered in this chapter can raise output by more than 7 percent over a six-year period. This would increase annual per capita GDP growth by about 1 percentage point, doubling the average speed of income convergence to advanced-country levels. Model-based analysis—which captures the longer-term effect of reforms and provides insights on the channels through which they affect economic activity—points to output gains about twice as large as the empirical model over the longer term (beyond 6 years).

One channel through which reforms increase output is by reducing informality. For example, lowering barriers to businesses’ entry in the formal sector encourages some informal companies to become formal. In turn, formalization boosts output by increasing companies’ productivity and capital investment. For this reason, the payoff from reforms tends to be larger where informality is pervasive.

Getting the timing, packaging and sequencing right

Some reforms work best when the economy is strong. In good times, reducing layoff costs makes employers more willing to hire new workers, while in bad times it makes them more willing to dismiss existing ones, magnifying the effects of a downturn. Similarly, increasing compe­tition in the financial sector at a time of weak credit demand may push certain financial intermediaries out of business, further weakening the economy.

In countries where the economy is weak, governments may prioritize reforms—such as strengthening product market competition—that pay off regardless of economic conditions, design others to alleviate any short-term costs—such as enacting job protection reforms now with a provision that they will take effect later. These reforms can also be accompanied with monetary or fiscal policy support where possible. 

Reforms also work best if properly packaged and sequenced. Importantly, they typically deliver larger gains in countries where governance is stron­ger. This means that strengthening governance can support economic growth and income convergence not just directly by incentivizing more productive formal enterprises to invest and recruit, but also indirectly by magnifying the payoff from reforms in other areas.

Finally, to fulfill their promise of improving living standards, reforms must be supported by redistributive policies that spread the gains widely across the population—such as strong social safety nets and programs that help workers move across jobs. For reforms to be sustainable and therefore effective, they need to benefit not just some, but all.

About the IMF Blog

IMFBlog is a forum for the views of the International Monetary Fund (IMF) staff and officials on pressing economic and policy issues of the day. The views expressed are those of the author(s) and do not necessarily represent the views of the IMF and its Executive Board.

Financial and Monetary Policies in Climate Change Mitigation

Financial and Monetary Policies in Climate Change Mitigation

The IMFBlog, a forum for the views of the International Monetary Fund staff and officials on pressing economic and policy issues produced this article dated September 4, 2019, that suggests that financial and monetary policies in climate change mitigation have a role to play in order to achieve COP21, 22, 23, 24 and eventually the 25th one to be held on December 2 through 13, 2019.

Financial and Monetary Policies in Climate Change Mitigation

A Role for Financial and Monetary Policies in Climate Change Mitigation

By William Oman

July 2019 was the hottest month ever recorded on earth, with countries across the world experiencing record-breaking temperatures. A prolonged drought is affecting millions of people in East Africa, and in August 2019 Greenland lost 12.5 billion tons of ice in one day.

photo: Rattankun Thongbun/Getty Images by iStock

A review of the literature by IMF staff aims to spur discussion of what policies to mitigate climate change could or should include. The review suggests that, while fiscal tools are first in line, they need to be complemented by financial policy tools such as financial regulation, financial governance, and policies to enhance financial infrastructure and markets, and by monetary policy.

Financial and monetary policy tools can complement fiscal policies and help with mitigation efforts.

The stakes are high. There is a broad scientific consensus that achieving sufficient mitigation requires an unprecedented transition to a low-carbon economy. Limiting global warming to well below 2 degrees Celsius requires reductions of 45 per cent in CO2 emissions by 2030, and reaching net zero by 2050. Despite the 2015 Paris Agreement, greenhouse gas emissions are high and rising, fossil fuels continue to dominate the global energy mix, and the price of carbon, remains defiantly low, reinforcing the need for complementary policies.

The case for policy action beyond carbon pricing

Our review of academic and policy studies suggests that, currently, there are insufficient incentives to encourage investment in green private productive capacity, infrastructure, and R&D. At the same time, investments continue to pour into carbon-intensive activities. These undesirable economic outcomes prevent the needed decarbonization of the global economy. Decarbonization requires a transformation in the underlying structure of financial assets—a transformation that, studies suggest, is hindered by several deficiencies in the way markets function.

First, financial risks may not reflect climate risks or the long-term benefits of mitigation, given many investors’ shorter-term perspectives. Moreover, financial risks are often assessed in ways that do not capture climate risks, which are complex, opaque, and have no historical precedents.

Second, there is a wide gap between the private profitability and the social value of low-carbon investments. High uncertainty around their ability to reduce emissions, as well as the future value of avoided emissions, makes low-carbon investments unattractive to investors, at least in the short run.

Third, corporate governance that favors short-term financial performance may amplify financial “short-termism,” while constraints in capital markets can lead to credit rationing for low-carbon projects.

The above review of previous literature suggests that because they directly influence the behavior of financial institutions and the financial system, financial and monetary policies can play a key role in addressing these issues.

Possible policy tools suggested by studies

The table below summarizes financial and monetary policy options for climate change mitigation, based on the above review of previous studies.

Policies that have been proposed in the literature can be divided into two categories: climate risk-focused and climate finance-promoting.

Climate risk-focused tools aim to correct the lack of accounting for climate risks for individual financial institutions and support mitigation by changing the demand for green and carbon-intensive investments, as well as their relative prices.

On the monetary policy side, examples include developing central banks’ own climate risk assessments, and ensuring that climate risks are appropriately reflected in central banks’ collateral frameworks and asset portfolios. On the financial policy side, tools include reserve, liquidity and capital requirements, loan-to-value ratios, caps on credit growth, climate-related stress tests, disclosure requirements and financial data dissemination to enhance climate risk assessments, corporate governance reforms, and better categorization of green assets by developing a standardized taxonomy.

Climate finance-promoting policies seek to account for externalities and co-benefits of mitigation at the level of society—that is, to account for how economic activity harms the environment but could instead, in addition to mitigating climate change, generate social value through, for example, reduced air pollution or more rapid technological progress. These policies could help shift relative prices and increase investments. However, the fact that they add new goals to existing policies makes them more controversial.

Monetary instruments to promote climate finance include better access to central bank funding schemes for banks that invest in low-carbon projects, central bank purchases of low-carbon bonds issued by development banks, credit allocation operations, and adapting monetary policy frameworks.

Financial policy instruments to actively promote climate finance revolve around “green supporting” and “brown penalizing” factors in banks’ capital requirements, and international requirements of a minimum amount of green assets on banks’ balance sheets.

A Role for Financial and Monetary Policies in Climate Change Mitigation

What’s the bottom line?

More work is needed. The literature remains limited on the desirable package of measures to address climate mitigation. Nonetheless, financial and monetary policy tools can complement fiscal policies and help with mitigation efforts. All hands are needed on deck, for, as Mark Carney of the Bank of England has warned, “the task is large, the window of opportunity is short, and the stakes are existential.”

Costs of Corruption running deep in the MENA

Costs of Corruption running deep in the MENA

The IMFBlog on May 28, 2019, is about a world phenomenon that seems to still be present in all walk of life throughout the world. The Costs of Corruption running deep in the MENA, have been amplified by the hydrocarbon-related rentier economies to a point where only a defossilisation of the respective economies could somehow reduce their extent. In the meantime, costs of corruption running deep in the MENA seem to go unattended to. Anyway here is this IMFBlog article.

Corruption and Your Money

The costs of corruption run deep. Your taxpayer dollars are lost in different ways, siphoned off from schools, roads, and hospitals to line the pockets of people up to no good.

Equally damaging is the way it corrodes the government’s ability to help grow the economy in a way that benefits all citizens.

And no country is immune to corruption. Our Chart of the Week from the Fiscal Monitor analyzes more than 180 countries and finds that more corrupt countries collect fewer taxes, as people pay bribes to avoid them, including through tax loopholes designed in exchange for kickbacks. Also, when taxpayers believe their governments are corrupt, they are more likely to evade paying taxes.

The chart shows that overall, the least corrupt governments collect 4 percent of GDP more in tax revenues than countries at the same level of economic development with the highest levels of corruption.

A few countries’ reforms generated even higher revenues. Georgia, for example, reduced corruption significantly and tax revenues more than doubled, rising by 13 percentage points of GDP between 2003 and 2008. Rwanda’s reforms to fight corruption since the mid-1990s bore fruit, and tax revenues increased by 6 percentage points of GDP.

These are just two examples that demonstrate that political will to build strong and transparent institutions can turn the tide against corruption. The Fiscal Monitor shines a light on fiscal institutions and policies, like tax administration or procurement practices, and show how they can fight corruption.

The costs of corruption run deep.

Where there is political will, there is a way

Fighting corruption requires political will to create strong fiscal institutions that promote integrity and accountability throughout the public sector.

Based on the research, here are some lessons for countries to help them build effective institutions that curb vulnerabilities to corruption:

Invest in high levels of transparency and independent external scrutiny. This allows audit agencies and the public at large to provide effective oversight. For example, Colombia, Costa Rica, and Paraguay are using an online platform that allows citizens to monitor the physical and financial progress of investment projects. Norway has developed a high standard of transparency to manage its natural resources. Our analysis also shows that a free press enhances the benefits of fiscal transparency. In Brazil, the results of audits impacted the reelection prospects of officials suspected of misuse of public money, but the impact was greater in areas with local radio stations.

Reform institutions. The chances for success are greater when countries design reforms to tackle corruption from all angles. For example, reforms to tax administration will have a greater payoff if tax laws are simpler and they reduce officials’ scope for discretion. To help countries, the IMF has built comprehensive diagnostics on the quality of fiscal institutions, including public investment management, revenue administration, and fiscal transparency.

Build a professional civil service. Transparent, merit-based hiring and pay reduce the opportunities for corruption. The heads of agencies, ministries, and public enterprises must promote ethical behavior by setting a clear tone at the top.

Keep pace with new challenges as technology and opportunities for wrongdoing evolve. Focus on areas of higher risk—such as procurement, revenue administration, and management of natural resources—as well as effective internal controls. In Chile and Korea, for example, electronic procurement systems have been powerful tools to curtail corruption by promoting transparency and improving competition.

More cooperation to fight corruption. Countries can also join efforts to make it harder for corruption to cross borders. For example, more than 40 countries have already made it a crime for their companies to pay bribes to gain business abroad under the OECD anti-corruption convention. Countries can also aggressively pursue anti–money laundering activities and reduce transnational opportunities to hide corrupt money in opaque financial centers.

Curbing corruption is a challenge that requires persevering on many fronts, but one that pays huge dividends. It starts with political will, continuously strengthening institutions to promote integrity and accountability, and global cooperation.

Related Links:
Corruption Disruption

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Financing significant challenges in all Sustainable Development

Financing significant challenges in all Sustainable Development

Without adequate financing, the best intentions of the global community expressed in the Sustainable Development Goals (SDGs) will remain beyond reach.

Financing significant challenges in all Sustainable Development as elaborated on by the IMF in their blog’s article are real, tough but not insurmountable.

The image above is of Pacific Press/SipaUSA/Newscom)

Financing for Sustainable Development: Tackling Big Challenges

By Chris Lane

Recent setbacks in financing for development should therefore focus policymakers’ attention on the need for decisive national strategies so these best intentions might be realized. Harnessing the necessary resources could be achieved through a combination of revenue mobilization, attracting private finance, and supporting financial sector development. Policy makers will need to engage in collective action and practice a new multilateralism in support of global goals.

A new UN study, prepared with significant contributions by the IMF, the World Bank Group, the World Trade Organization, the United Nations Development Program and other UN agencies, takes a deep dive into how countries and the international community are faring in mobilizing the needed financing.

The financing needs are not small change—an IMF study earlier this year estimated additional annual spending needs by 2030 would be $2.6 trillion in low-income and emerging markets for the big-ticket SDGs delivering education, health, power, roads, water and sanitation to growing populations. The financing challenge is particularly large in low-income and fragile states given their low starting point, rapid population growth, and often weak growth trajectory accounting for one-fifth of the total financing needs.

While the financing challenges are large, they are not overwhelming for most countries.

The UN report also notes that some recent developments may make mobilizing financing more difficult. Global growth has likely peaked, trade restrictions are intensifying, some emerging markets are experiencing capital flow reversals, and debt risks are rising with about thirty low-income countries at a high risk of debt distress or in debt distress. We are indeed at a delicate moment  for the global economy as the IMF Managing Director remarked earlier this month.

Meeting the financing challenge

The Financing for Sustainable Development Report makes over 40 specific recommendations to UN member states to better align financing with investments in the sustainable development goals. Four proposals merit particular attention:

  • Develop a financing framework. Financing is often the weakest part of national SDG plans: a recent study showed that over three-quarters of 107 national plans do not contain costings or financing details. The report makes concrete recommendations on how to operationalize a financing framework and illustrates how some countries developed plans identifying both public and private flows.

  • Medium-term revenue strategies. The report recommends building a national consensus for medium-term revenue strategies that can support reforms through the political cycle by highlighting the link between additional revenues and effective and equitable public services. Indonesia provides a good example of an ambitious revenue strategy that aims to raise revenue from 10 to 15 percent of GDP over the medium term (explained in this IMF book ). Revenue strategies may be bolstered by global coordination on international corporate tax reform.

  • Actions to support debt sustainability. An in-depth discussion of debt risks provides a rich menu of actions to help countries spot vulnerabilities early on, and better manage their debt. The report highlights that all debt crisis situations are different and discusses ongoing efforts and challenges for debt-restructuring in the Gambia, Republic of Congo, and Mozambique.

  • Prepare for future crises. Even the best laid plans, strategies, and tools may not prepare developing countries adequately for future financial crises and spillovers from advanced economies. The report reiterates the importance of ensuring the adequacy and comprehensiveness of the global financial safety net, including through the ongoing review of IMF financing arrangements.

While the financing challenges are large, they are not overwhelming for most countries. Particularly strong efforts will be needed to move the needle in Africa and parts of the Middle East, with national policies to support SDG investments, and international cooperation to find solutions to new and emerging challenges. The Financing for Sustainable Development Report makes an important contribution to identifying necessary actions.

Related links:
Mind the Gap in SDG Financing
5 Things You Need to Know About the IMF and the Sustainable Development Goals
IMF staff commending Somalia to implement important reforms

IMF staff commending Somalia to implement important reforms

Somalia, as everyone knows, has gone through traumatic times and is now settling down to normality with the help of not only its neighbouring countries but most notably by the IMF. As a matter of fact, the IMF staff commending Somalia to implement important reforms was expected but confronting Somalia’s challenging conditions and implement the IMF’s counsel might not be inopportune at this conjecture.
These were commented by the Specimen-news on July 7, 2018, in this article that we reproduce here, courtesy of the Specimen-news team.

IMF staff has commended the Somali authorities for implementing important reforms in challenging conditions, stating recent developments are broadly favorable despite difficult political and security environment.

Famine in Somalia is affecting the economy

On June 20, the management of the IMF completed the second and final review under the second 12-month Staff-Monitored Program (SMP II) with Somalia, and the Managing Director of the IMF approved a third 12-month SMP (SMP III) covering the period May 2018–April 2019. The SMPs for Somalia are designed to help maintain macroeconomic stability, rebuild key economic institutions, and build track record on policy and reform implementation.

IMF staff encourages the Somali authorities to stay the course of reform implementation under the SMP, particularly on public financial management, revenue administration and policy, and monetary and financial sector.
The IMF supports the authorities’ ongoing efforts to launch a new national currency.

Economic activity is rebounding from the effects of the drought in 2017. Reflecting a strong rainy season, sustained remittances and grant inflows, growth in 2018 is projected to increase to 3.1 percent from an estimated 2.3 percent in 2017, and inflation is expected to ease to under 3 percent from about 5.1 in 2017.
Reflecting ongoing reforms, the fiscal position has improved since December 2017. The federal government of Somalia (FGS) recorded a small fiscal surplus in 2017 as a result of higher-than-programmed domestic revenue mobilization and budgetary grant disbursements. The strong fiscal performance continued through March 2018 due, in part, to
lower-than-projected expenditure and slightly higher domestic revenue.
Program implementation under SMP II has been satisfactory. For December 2017, all indicative targets (ITs) and all but one structural benchmark (SB) were met. Also, the two SBs and all ITs set for March 2018 were met. Considering the satisfactory performance under SMP II and the authorities’ strong commitment to accelerate and broaden the reform agenda, staff supports the completion of the second and final review under SMP II and the authorities’ request for SMP III.
Staff also supports the authorities’ ongoing efforts to launch a new national currency. After nearly two years of the IMF’s technical assistance support, the pre-conditions for the launch of the new Somali Shilling have been nearly completed. In March 2018, IMF staff prepared an assessment letter supporting the CBS’s initiative to issue a new national currency. Staff encourages the authorities to continue to reach out to donors to raise the needed funds for this operation, finalize the establishment of the accountability framework, and to fully staff the team that will manage the process.
SMP III will build on achievements under the previous two SMPs and will continue to lay the foundation so that Somalia will eventually have a SMP that meets the IMF Upper Credit Tranche (UCT) conditionality which is one of the key requirements for Somalia to reach the Decision Point under the Heavily Indebted Poor Countries (HIPC) initiative. SMP III will focus on broadening and deepening reform implementation to maintain macroeconomic stability and to continue rebuilding institutions and capacity to improve macroeconomic management and governance.
Risks to the program are elevated. Nonetheless, continued commitment to the reform measures under the SMP; and with sustained donors support, particularly on technical assistance, peace and state building, resilience and humanitarian aid, will help mitigate these risks.

via IMF staff commends Somalia for implementing important reforms in challenging conditions

Dark Corners of Weak Governance and Corruption

Dark Corners of Weak Governance and Corruption

Here is  Christine Lagarde, Managing Director of the International Monetary Fund with a fairly straightforward essay on how to fight off weak governance and the world. It goes without saying that the IMF in its role of facilitator of anything to do with the world economy and its good performance, finds it necessary to purvey free of charge that Bright Light into the Dark Corners of Weak Governance and Corruption. The MENA region does not escape such drawbacks and the IMF in its efforts to promoting good performance amongst other things, produces these periodical reports on country by country basis. These are definitely appreciated in as well as helpful in shedding some light with a view to help show the way to better economic performance.

Shining a Bright Light into the Dark Corners of Weak Governance and Corruption

April 22, 2018

The picture above is of “Anti-corruption strategies require broader regulatory and institutional reforms (Kritchanut/iStock)”

The IMF Executive Board has just endorsed a new framework for stepping up engagement on governance and corruption in our member countries. Let me talk about why this is important and what it means for our work.

Costs of corruption

We all know that entrenched corruption is economically pernicious, undermining the ability of countries to deliver inclusive and sustainable economic growth.

The paper we have just issued presents empirical results showing that high corruption is associated with significantly lower growth, investment, FDI, and tax revenues. Sliding down from the 50th to 25th percentile in an index of corruption or governance is associated with a fall in the annual rate of growth of GDP per capita by half a percentage point or more, and a decline in the investment-to-GDP ratio by 1½–2 percentage points. Our results also show that corruption and poor governance are associated with higher inequality and lower inclusive growth.

It is not hard to understand these findings. We know that corruption weakens government’s ability to tax, and distorts spending away from valuable investments in areas like health, education, and renewable energy, and toward wasteful projects with short-term payoffs. We know that it acts as a tax on investment—or worse, because of the uncertainty about demands for future bribes. We also know that corruption causes young people to underinvest in skills and education—because getting ahead depends on who you know not what you know. We know that corruption hurts the poor, hinders economic opportunity and social mobility, undermines trust in institutions, and causes social cohesion to unravel. Corruption is a major obstacle to attaining the Sustainable Development Goals.

Stepped-up engagement

Given all of this, the IMF’s stepped-up engagement against corruption is justified and timely. Importantly, this work on corruption will be embedded in our general work that promotes good governance in key areas such as public financial management, financial sector oversight, and anti-money laundering.

This broader focus is necessary. Governance weaknesses are harmful in their own right, but they also open the door to widespread corruption. To be truly effective, anti-corruption strategies must go beyond merely throwing people in jail. They require broader regulatory and institutional reforms. At the end of the day, the most durable “cure” for corruption is strong, transparent, and accountable institutions. In the famous words of Louis Brandeis, “sunlight is said to be the best of disinfectants; electric light the most efficient policeman.”

An added benefit of this broader approach: because corruption tends to be strongly correlated with more general lapses in governance and is often hard to measure, we can use governance weaknesses to help corroborate corruption assessments.

I should point out that this is not a new topic for us. We have had a governance policy in place since 1997, and it is a good policy—our review found that its principles are the right ones. This policy calls upon us to address governance and corruption issues when they have a significant macroeconomic impact. It calls upon us to work with partner institutions, especially the World Bank, in areas of their expertise and not to interfere in politics or in individual enforcement cases.

Yet while these principles are sensible, our review found that implementation was uneven. We did not always hold members to the same standard for similar actions. Our analysis too often lacked clarity.

This is going to change. We have now adopted a framework for enhanced engagement on governance and corruption that aims for a more systematic, evenhanded, effective, and candid engagement with member countries.

As a first step, we are developing a clear and transparent methodology for assessing the nature and severity of governance weaknesses. We will be looking at a broad array of indicators—the quality of the budgetary institutions that handle taxing and spending; the soundness of financial sector oversight; the integrity of central banks; the transparency and impartiality of market regulation; the predictability of those aspects of the rule of law that are vital for economic health, especially contract enforcement; and the adequacy of frameworks to fight money laundering and terrorism financing. We will also assess the severity of corruption directly, of course.

The next step will be to assess the economic impact of these identified governance and corruption fault lines and provide country-specific policy recommendations in response. Importantly, we will consider this over a longer time horizon, given that poor governance and corruption harm the economy not just through short-term disruption, but also through slow institutional decay. For our lending programs, we will be looking at whether problems hinder the ability of countries to implement their economic reforms.

Supply side of corruption

There is one additional element. It is a basic truism that—to adapt a phrase from Milton Friedman—corruption is always and everywhere a two-handed phenomenon. The flip side of every bribe taken is a bribe given. And funds received through corruption are often funds concealed outside the country—often in the financial sectors of major capitals. It is quite possible for countries to have “clean hands” at home but “dirty hands” abroad.

To truly fight corruption, therefore, we need to address the facilitation of corrupt practices by private actors. To do this, we will be encouraging our member countries to volunteer to have their legal and institutional frameworks assessed by the Fund—to see whether they criminalize and prosecute foreign bribery and have mechanisms to stop the laundering and concealment of dirty money. I am gratified that nine countries—the entire G7 plus Austria and the Czech Republic—have already volunteered for this assessment. This is a major vote of confidence in the new framework.

Now that we have the full support of our members, we must turn to implementation. In our surveillance and in our lending programs, expect to see more assessment and discussion of governance and corruption. We will also be stepping up our capacity development in these areas, to help countries strengthen their regulatory frameworks and institutions.

Our goal here is to be candid, rigorous, transparent, and evenhanded. In turn, that gives us more credibility and allows us to do our job even better.

To hark back to Brandeis, I am confident that this stepped-up engagement will do for governance and corruption what investment in solar technology does for the environment—harness the immense power of sunlight to put the global economy on a healthier and more sustainable path. If it works as planned, there should be progressively fewer dark corners left for corruption to hide. I look forward to working closely with our member countries to make this a reality.


Lebanon’s debt-to-GDP ratio could balloon to 180% by 2023

Lebanon’s debt-to-GDP ratio could balloon to 180% by 2023

The National of the UAE reported that Lebanon’s debt-to-GDP ratio could balloon to 180% by 2023 if the government does not undertake reforms to narrow its fiscal deficit, which may reach 10 per cent of GDP amid the current geopolitical tensions, the IMF said.

Lebanon needs to start implementing reforms that address its funding needs and tackle its debt, currently at 150 per cent of GDP, which is exacerbated by political uncertainty, internal disagreements and the burden of hosting about 1 million Syrian refugees, which represent about a quarter of the population. Prime Minister Saad Al Hariri’s sudden resignation in November, which he rescinded later, plunged the country into political uncertainty.

Out of the 26 points of the IMF’s Key messages, only 7 of them are reproduced below for their relevance, pertinence as well as their potential applicability to all countries of the MENA with however some country specific customisation.

Lebanon: Staff Concluding Statement of the 2018 Article IV Mission

February 12, 2018

The reform agenda needs to focus on three areas:

  • First, fiscal policy needs to be immediately anchored in a consolidation plan that stabilizes debt as a share of GDP and then places it on a clear downward path. Any scaling up of public investment will need to be grounded in such an adjustment plan and must be preceded by strengthening the public investment management framework.
  • Second, financial stability risks should be contained, including by incentivizing banks to gradually strengthen their buffers and by taking further actions designed to strengthen credit quality.
  • Third, to promote sustainable growth and improve equity and competitiveness, the electricity sector needs to be reformed and the anti-corruption regulatory framework should be enhanced and made effective.


  1. The underlying economic situation has not changed and remains challenging, with high public debt, current account deficit, and funding needs. Public debt is estimated above 150 percent of GDP at end-2017, and is expected to rise rapidly with a budget deficit above 10 percent over the forecast horizon. The current account deficit is expected to remain above 20 percent. The funding environment has been affected by the political crisis of November 2017. Without a significant reduction in the economy’s funding needs or an increase in deposit inflows (and given the global interest rate outlook), the Banque du Liban (BdL) will need to increase interest rates or use its sizable gross reserves to meet the funding needs of the economy. The budget of 2018 and preparation for the upcoming Paris conference could provide key platforms to initiate the much-needed economic reforms.

The Economic Backdrop

  1. Growth remains low. We estimate growth to be at about 1–1.5 percent for 2017 and 2018. The traditional drivers of growth in Lebanon—tourism, real estate, and construction—remain slow and a strong rebound is unlikely soon. According to the BdL, real estate prices declined by over 10 percent over 2017, while the purchasing managers’ index indicates that private sector confidence continues to be weighed down by political uncertainty. Inflation in 2017 reached 5 percent, likely due to a rise in the costs of imports, notably oil, and a weaker U.S. dollar.
  2. The fiscal situation remains very difficult and poses significant risks. In July 2017, the Lebanese parliament approved an across-the-board increase in the salary scale of public sector employees and pensions of retired civil servants. A range of tax and fee increases was approved during the second half of the year. While the net fiscal impact is expected to be broadly neutral in 2018, higher personnel and interest costs will be main contributors to further deteriorating fiscal position over the projection horizon. The overall budget deficit in 2017 is expected at 7.3 percent of GDP, with a primary balance of 2.4 percent—in part due to one-off revenues from taxing higher bank profits due to BdL financial operations. In addition, subsidies to Electricité du Liban (EdL) are increasing, in part due to rising oil prices.
  3. External imbalances are large and persistent. The nominal effective exchange rate appreciated sharply in recent years, while the real effective exchange rate (REER) also strengthened in 2017 by 2.8 percent. The current account deficit is projected to have remained above 20 percent in 2017. Goods exports as a share of GDP continue to decline, while imports remain strong, in part due to cheap credit made available by several BdL subsidy schemes and higher oil prices. The persistently large current account deficit and other imbalances are evidence of a significant REER overvaluation.
  4. In response, the BdL continues to expand its unconventional financial operations. The BdL has introduced several new financial operations since summer 2016 that offer large incentives to domestic commercial banks to invest in BdL’s dollar-denominated term deposits. Consequently, the increase in bank exposure to the BdL has accelerated since summer 2016. While these operations have boosted the gross reserves of the BdL and the capital of banks, they have come at a cost to the BdL’s balance sheet and net FX position, and have been regressive. In addition, the BdL introduced a new operation in December 2017 to incentivize banks to secure longer maturity local-currency deposits, by increasing the interest rate on existing BdL long‑term instruments held by banks by 2–3 percentage points.
  5. Lebanon’s outlook remains uncertain. Under our baseline scenario, growth will gradually rise close to 3 percent as external demand picks up due to a global recovery. Inflation is expected to remain around its trend of 2.5 percent. Overall fiscal balances are expected to reach well above 10 percent of GDP and public debt close to 180 percent of GDP by 2023. The current account deficit will remain large. Under the baseline assumption of no reforms or increase in interest rates, Lebanon’s reserve adequacy position is projected to deteriorate over the medium term. But the projection is subject to both upside and downside risks. On the upside, Lebanon’s outlook is linked closely to developments in Syria. In the event of an early resolution, Lebanon would be well placed to benefit from the reconstruction effort, as well as from the reestablishment of trade and an improvement in regional investor confidence. This would have significant and positive implications for local incomes and growth, though not enough to restore debt sustainability without adjustment. On the downside, tensions in the region could lead to escalation of conflicts or trigger security incidents, higher oil prices could increase Lebanon’s funding needs, or deposit inflows could decelerate putting pressure on foreign exchange reserves.

Policy Priorities

  1. Lebanon needs urgent action to preserve confidence in the system and take advantage of international support. Over the past several years, Lebanon has maintained a policy mix of loose fiscal policy, and high real rates on bank deposits combined with cheap private sector credit through various quasi-fiscal subsidy schemes. However, given rising vulnerabilities, the need to establish a policy framework that places the economy and public debt on a more sustainable path has only increased. The increased engagement by some donor countries also offers an opportunity to secure their support for a reform and investment plan. The reform agenda needs to focus on three areas.
A photograph of Algeria’s Economic and Financial situation

A photograph of Algeria’s Economic and Financial situation

This is a summary note relating to the last report of the Bank of Algeria on the economic and financial situation of the country at the end of 2017. It is a photograph of Algeria’s economic and financial situation as it stands today.

1.- According to the Governor of the Bank of Algeria in his business note dated February 12th, 2018, on economic and financial indicators, the growth rate was only 2.2% in 2017 (compared to 3.3% in 2016). This rate in our view barely covers the demographic growth rate. The Algerian population exceeded according to the Office of National Statistics to 41 million inhabitants in January 2017, the labour force being estimated at about 11 million and demand for employment in addition to the current overestimated unemployment stock including non-productive or very low productivity varies between 300,000 and 350,000 per year.

Employment is based on the rate of growth and the structures of productivity rates, with a significant change in the profile of the growth rate structure, that according to the IMF, could be extrapolated to an unemployment rate of 13.2% in 2018. Because employment is not created by decree or with overstaffing in the administration: public or private companies are not competitive in terms of cost/quality within the framework of international values.

2.- Out of a total of exports, the Bank of Algeria’s report notes an amount of US$32.9 billion in 2017 compared to $29.3 billion in 2016; non-hydrocarbon exports were only $1.3 billion (70% of hydrocarbon derivatives) against $1.4 billion in 2016. Exports of hydrocarbons declined in volume after an increase of 10.8% in 2016 while their value increased to $31.6 billion as at end of 2017 compared to $27.9 billion in 2016.

As for imports, legal transfers of capital and currency outflows of services not included, despite all restrictions they were $48.7 billion in 2017 compared to $49.7 billion in 2016, a decrease of $1 billion only compared to 2016. The prognosis is for an import of goods that could be $30 billion in 2018.

Could it be realistic when we know kthat the economic area is represented by 83% of small trade-services, and the industrial sector accounts for 6.3% of GDP; 97% of these enterprises are small SMEs and that most of public and private enterprises operate at more than 70/75% with imported raw materials?

3.- As a result, the trade balance deficit was $15 billion, and the overall balance of payments deficit closed at $23.3 billion in 2017 compared to $26.3 billion in 2016. This gives a hard currency outflow representing all services whose amount fluctuated in 2010 and 2016, between 9 to $11 billion, plus all legal capital transfer of foreign firms of $8.3 billion. On the budgetary level according to the central Bank, the actual budgetary revenues at the end of September 2017, were 4.74 trillion Dinars (DZD) versus DZD3606 billion in September 2016 and the budgetary expenditure remained quasi-stable at DZD5.535 trillion of dinars; or a deficit of DZD795 billion. It should be noted that for the IMF in its 2017 report, the public debt is estimated at 12% of GDP and the external debt would not exceed 3% of GDP.

4.- Foreign exchange reserves closed at $97.3 billion as at end of 2017 compared to $56 billion in 2005, $77.78 billion in 2006, $110 billion in 2007 to $138.35 in 2008, and $147.2 billion in 2009, to $157 billion in 2010, $188.8 billion million in 2011, $190, 66 in 2012, $194 billion in 2013, $179.9 billion in 2014, $144.1 billion in 2015, from $114.4 billion by end 2016, to $97.3 billion at end 2017. The Foreign Exchange Reserves amount by end of 2017 should have been lower since many foreign company invoices were not honoured, and this would affect year 2018.

Unconventional financing would also increase this dynamic with all new project financings accelerating the outflow of hard currencies by those companies strongly dependent for their operation on outside Algeria input. The country has a respite of three years to avoid a return to the IMF and thus to put in place a competitive productive economy and assume a real strategy off-hydrocarbon rente. These keep the Dinar rating at more than 70%. If the foreign exchange reserves tended towards $20 billion, the Bank of Algeria would be forced to rate the Dinar at about DZD200 an Euro, not to mention the on-going discrepancy with the informal sphere where the Dinar stood as at February 13th, 2018 between DZD206/208 an Euro.

5.- As for the official inflation rate, between 2016/2017, it approached the 6% with all subsidized goods whose amount increased under the Finance Act of 2018 by about 8% compared to 2017. This rate is biased for not considering that nowadays, the basket which must preside over the calculation of the index must be historically dated. In addition, there are approximately $17 billion for unconventional financing only for 2018: In cases where this amount or a significant fraction would go to unproductive or low-value-added expenditure, it will be expected to cause an inflationary surge, which will necessarily require an increase in the interest rates of primary banks, if they want to avoid bankruptcy, which will slow down productive investment and speed up speculative action.

6.- So, to avoid an uncontrolled inflationary process, arises the problem of subsidies. In the face of the previously reviewed budgetary tensions, the success of any targeted subsidy operation would involve three actions.

  • First, this operation is technically impossible without a reliable real-time information system, highlighting the distribution of national income by social strata and regional distribution and / or how to tell the rich from the poor.
  • Secondly, this operation is also impossible without quantifying the informal sphere which allows for the consolidation of income, existing different data or that one refers to the gross domestic product (between 40/50% according to the ONS), compared to employment (more than 33% of the labour force according to the Ministry of Labor) or the money supply. Per the governor of the Bank of Algeria dated February 12, 2018, who holds, I quote: “The money trust circulating in the economy until December 31, 2017 was DZD4.78 trillion and on these DZD4.78 trillion, about DZD2000 billion are hoarded amongst the private and / or economic operators, that is exactly 41.84%.

Therefore, to avoid confusion in the analysis of the money supply at the level of the informal sphere, the normal share held by personal-use households must be differentiated from the amount stored for speculative purposes.

  • Thirdly, there is need to define precisely an institution that would be responsible for all traceability and to establish a balance which must be positive, otherwise this operation would have no meaning, both in Dinars and in foreign currencies. In 2012, in an operational report which I forwarded to the Government following a dossier made under my leadership, which I personally presented to members of the National Assembly’s Economic Commission on Fuels in 2008, I had advocated a National Chamber for Compensation authority to be responsible for establishing all intra-socio-professional and inter- regional transfers. (1)

7.- In summary, faced with the current situation characterized by social tensions, economists and politicians, before developing a socio-economic policy must recognize their limits therefore needing to know the historical movements, the anthropological, political, economic and social forces, often influenced by external actors; thus, to know the functioning of the society always on the move.

Hence the strategic importance of the dialogue where the natural place would be the Economic and Social Council as enshrined by the new Constitution which should bring together the best competencies and all the components of the representative society, where a realistic policy of targeted subsidies would be discussed and developed. The 2018/2025/2030 strategic objective will be to overcome the current status-quo.


(1)-Audit under the direction of Professor Abderrahmane Mebtoul “For a new fuel policy in a competitive system” (Ministry of Energy 2007/2008) assisted by executives Leaders of SONATRACH, national experts and Ernst & Young   (8 volumes 780 pages) where a volume was devoted to subsidies, and a new pricing policy, another volume on the development of new fuels from the Gas whose GPLc and the Bupro.

Mauritania boosting its economy with help from the IMF

Mauritania boosting its economy with help from the IMF

An IMF blog  published on December 13, 2017 about Mauritania boosting its economy with help from the IMF. Mauritania is a country bordering the MENA western side of North Africa. It has just landed some cash from the IMF.  It has an economy that is dominated by the mining and fishing industries. It has seriously not been question of diversification of its economy even if as it is well known that it is a net importer of 70% of its domestic food requirements. Like for any other mono exporting country of the region, it does need some financial back up from time to time. The IMF obligingly reached out with some cash but are there any conditions attached?
Mauritania has obtained a three-year loan from the IMF to support the government program aimed at strengthening its recovery. The North African country is a traditional fish and metal exporter of iron ore, gold, and copper. Mauritania had to adjust in the wake of a 2014–15 plunge in metal prices, but the necessary budget cuts, currency depreciation, and borrowing resulted in low growth, higher external debt, and higher risks to financial stability.

Mauritania Gets Help To Strengthen Economic Stability, Speed Up Growth

The government program supported by the Extended Credit Facility (ECF), worth $163.9 million, follows the recommendations of the recently completed economic health check to strengthen the economy’s stability while also supporting the recovery. Here are the main issues the government will strive to achieve in collaboration with the IMF and other donors. 

·         Improve living standards through more diversified and inclusive growth. With low and volatile metal prices, the country needs to develop industries beyond traditional mining, agriculture, and fishing. It should also move beyond the export of raw materials towards the selling of processed goods. As part of its program for inclusive and diversified growth, the government also intends to further develop the private sector and improve the business environment to foster private sector-led job creation. The government also plans to keep supporting the most vulnerable. In partnership with the World Bank, it is piloting a cash transfer program which is about to be extended to the whole country. Such an expansion of social policies is instrumental to reduce endemic poverty and the measure should be accompanied by better education and health care. 

·         Collect more taxes: although public revenues are relatively high as compared to peers, tax collection and tax administration needs improvement to cover a larger share of corporations.

·         Reduce public debt, which rose to 72 percent of GDP due to sizable borrowing, and concentrate on concessional borrowing (zero interest rate).

·         At the same time, devote resources for infrastructure investment such as the extension of the electricity grid or water projects. These projects help extend growth to larger groups of the population.

·         Keep the financial system stable by strengthening bank supervision and lowering banks’ high stock of nonperforming loans, which can threaten the banking system if the banks are faced with a sudden need for liquidity.