IMF calls on Arab leaders to take action or risk new ‘lost decade’

The IMF has warned that the Arab world risks another “lost decade” if governments fail to invest in technology and implement reforms to accelerate the recovery of economies that have been battered by the pandemic.

Jihad Azour, the fund’s director for the Middle East, told the Financial Times that governments in the region, which are grappling with diminishing resources, rising debts and rampant youth unemployment, had to “learn from the past”.

“After the global financial crisis, it took the countries of the region much longer than the average emerging economy to regain their previous level of growth,” said Mr Azour, a former finance minister of Lebanon. “The risk now is that there are countries that will not be able to regain their 2019 level [of output] until 2022, and some who won’t reach it for five years.”

Even before the coronavirus outbreak, poorer oil-importing countries in the region had failed to tackle high poverty rates and joblessness in the decade since social and economic grievances fuelled the Arab uprisings. The pandemic has exacerbated the problem by shuttering the tourism industry vital for employment and foreign currency earnings, and damaging other sectors.

You need to increase [social investment] in the right ways by spending on education and health and by giving it to those who need it

Thousands of Tunisians took to the streets last month in protests that echoed the 2011 revolution, as they vented their frustrations at unemployment and a lack of prospects.

Mr Azour warned: “To accelerate the recovery and avoid a lost decade, work should start now on high-quality investment in green infrastructure and digitalisation.” 

The short-term priority for governments should be to vaccinate populations against coronavirus and support fragile health systems, he said. Beyond that, governments needed to address heavy debt burdens and to stimulate growth by shifting public expenditure away from wasteful spending — such as subsidies — to health, education, technology and sectors that led to job creation and inclusive growth.

“When we say fiscal consolidation, it doesn’t have to mean austerity,” he said. “It can be done by revising the tax system and sharing the burden differently. It is about focusing the support of the state where it should go.”

He continued: “With all the social spending [in the region] it’s still below the level of its competitors, which tells you something — that you need to increase it in the right ways by spending on education and health and by giving it to those who need it.’’

Government debt levels increased across the region by an average 5 per cent of gross domestic product for oil-importing countries and 10-12 per cent for oil exporters last year. That presents governments with the challenge of finding ways to balance between supporting economic recovery and debt sustainability given limited fiscal space in their budgets, said Mr Azour.

The impact of the pandemic has hit both oil-importing countries and the traditionally better off oil exporters who faced plunging crude prices. Middle East and North African economies contracted 3.8 per cent in 2020, according to the IMF.

Tunisia, the only Arab country considered to have had a successful democratic transition following the Arab uprisings, epitomises many of the challenges of economic reform in the shadow of the health crisis.

Its economy contracted 8.2 per cent in 2020, with both poverty and unemployment rising. Youth unemployment rose to 36.5 per cent according to an estimate by the International Labour Organization.

Tunisian officials have hinted that they are seeking an IMF loan but that would require difficult reforms to limit the public-sector wage bill, cut energy subsidies and tackle lossmaking state-owned enterprises seen as a drain on the budget.

Analysts have pointed out that successive governments have balked at implementing those reforms and that new pressures brought by the virus would make the task more difficult. 

Mr Azour said the IMF was “emphasising” the need for a “national dialogue in Tunisia around a social pact to define the country’s priorities”.

He accepted this was more difficult in a constrained environment but insisted “the best way is to talk to people to create a national pact then you share the responsibility and the decision”.