INTERVIEW: Hedging for tough times – Business – Al-Ahram Weekly
Without revealing details, the International Monetary Fund (IMF) announced in March that Egypt had formally requested its support through a new loan agreement to mitigate the effects of the war in Ukraine.
“The IMF stands ready to support Egypt in the implementation of its comprehensive economic program,” Jihad Azour, director of the IMF’s Middle East and Central Asia department, told Al-Ahram Weekly.
However, Egypt has work to do, he added. “At this time of uncertainty, preserving macroeconomic stability, reducing external vulnerabilities, and safeguarding debt sustainability through continued exchange rate flexibility and prudent monetary and fiscal policies are priorities.” , did he declare.
In addition, the IMF believes that sustained progress on structural reforms and governance are essential to foster stronger, more inclusive and greener private sector-led growth, create sustainable jobs for Egypt’s young population and improve the external resilience.
The IMF’s World Economic Outlook report released last week at the fund’s and the World Bank’s spring meetings in Washington forecast Egypt’s real GDP growth for the current fiscal year of up to at the end of June 2022 will reach 5.9%, reflecting very strong growth in the first half of the fiscal year preceding the outbreak of the war.
This figure is to be compared with the 5.6% expected in January.
However, the challenging external environment, with tighter financial conditions and the trade fallout from the war, is expected to result in a considerable slowdown in growth momentum in the second half and the coming fiscal year 2022-23 to continue. set at five percent. hundred, according to Azour.
As for inflation, which has been on the rise since the start of the year, the report expects it to average 7.5% in 2022 and accelerate to 11% in 2023.
“Most of the increase is due to higher food price inflation. High commodity prices, including wheat and oil, and the pass-through of the recent exchange rate depreciation are expected to exert further upward pressure in the coming months,” Azour said.
Inflation rose over the year, reaching 10.5% in March and now outside the Central Bank of Egypt’s (CBE) target range of 7% (±2%).
Going forward, Azour said a set of policy measures will be needed to mitigate the fallout of war, rebuild buffers and protect the most vulnerable.
The government has already taken some steps in this direction. On March 21, the CBE announced a 1% increase in interest rates and devalued the pound by almost 15%. This was accompanied by a package of fiscal measures that included expanding the coverage of direct cash transfers to the most vulnerable.
“Continued exchange rate flexibility will be essential to absorb external shocks and reduce vulnerability to volatile capital flows. Monetary policy will need to remain data driven, and tightening would be appropriate if there are signs of sustained inflationary pressures,” Azour commented.
Given the high level of public debt and financing needs, a return to the pre-Covid primary surplus in 2022-23 would be an important signal of fiscal discipline and help preserve debt sustainability, while reforms Structural changes are equally important for building external resilience by providing the foundation for stronger private sector exports and sustained foreign direct investment, according to Azour.
Before the pandemic, Egypt’s budget had reached a primary surplus of more than LE 38 billion, more than 0.5 percent of GDP, compared to LE 28.5 billion in the previous fiscal year, according to the Ministry of Finance.
At the regional level, Azour noted that the war in Ukraine is already impacting economies in the Middle East and North Africa (MENA) region through a multitude of global and direct channels and will be a key factor in drawing up the outlook for this year.
He noted that global channels include rising food and energy prices, supply chain disruptions and tighter financial markets, and these are likely to weigh on the recovery for all. country. Several countries in the region are also exposed to direct channels through trade links, including reliance on imports of basic food and energy from Russia and Ukraine.
The impacts differ from country to country, with oil and food importers like Egypt expected to be more vulnerable than others.
“These countries face prospects of deterioration in their inflation outlook and external accounts,” Azour said, adding that countries that choose to use food and fuel subsidies to contain inflation will see their fiscal accounts deteriorate.
On the other hand, higher oil and gas prices will benefit oil and gas exporters in the region, supporting their economic activity and their external and fiscal accounts. These positive spillovers should offset the negative impacts of tighter global financial conditions and potentially lower tourism revenues, Azour said.
Secondary fallout from slowing global growth and deteriorating prospects for Europe are expected to weigh on the recovery of all countries in the region, Azour added.
A key feature of the MENA region’s outlook in 2022, reflecting the diversity of its economies, will be an uneven recovery with a noticeable divergence in outlook between oil exporters and importers. The MENA region in general is expected to grow by 5% in 2022 and 3.6% in 2023 after strong growth of 5.8% in 2021.
These figures reflect an upgrade of 0.9 percentage points for 2022 and 0.1 percentage points for 2023, compared to the October forecast. The upgrade is mainly due to improved prospects for MENA oil exporters, benefiting from higher oil prices and production and successful vaccination campaigns.
In contrast, GDP growth of MENA oil importers has been revised down by 0.2 percentage point to 4% in 2022 and by 0.5 percentage point to 4.5% in 2023, mainly due to the global fallout from the war.
The downward revision is even steeper if Egypt is excluded – by 1.5 percentage points to 1.2% in 2022 and by 0.4 percentage points to 3.6% in 2023, said Azure.
As the world experiences energy price increases, Azour noted that global oil prices in 2022 are expected to be around 55% higher than in 2021, reaching an annual average of $107 per barrel and exerting significant pressure on external and budgetary balances for oil. importers, while improving them for oil exporters.
“We estimate that for every $10 increase in oil prices, current account balances will deteriorate by about 0.4% of GDP for oil importers (on average and all other things being equal). While for oil exporters, we expect external balances to improve by around 3.5% of GDP and overall fiscal balances to improve by around 2.8% of GDP, thanks to higher incomes,” added Azour.
He said inflation in the MENA region is expected to remain high at 13.9% in 2022, after 14.8% in 2021, mainly driven by oil importers.
Inflation dynamics in the region reflect significant increases in food prices and, to a lesser extent, energy prices and, in some cases, exchange rate depreciations and monetary policies and/or lax taxes, he said.
“While global commodity prices are set to decline in 2023, we expect the main pressure to ease, leading to lower inflation in 2023. There are, however, significant risks that inflation could remain higher for longer. long if commodity prices continue to rise and/or inflation expectations begin to unanchor,” Azour concluded.
*A version of this article appeared in the April 28, 2022 edition of Al-Ahram Weekly.