The Middle East is projected to grow at five percent this year, up from 4.1 percent in 2021. However, it will slow next year to 3.6 percent due to the worsening global conditions, according to the director of the Middle East and Central Asia Department at the International Monetary Fund (IMF), Jihad Azour.
“The economic activity in the region has been resilient so far with a multispeed recovery continuing in 2022, and we project the region will grow five percent this year,” said Azour.
In a press conference, he added that inflation for the region was projected at 14.2 percent in 2022 and expected to remain elevated next year.
-Contradicting messages to Egypt and Lebanon
Azour said negotiations between Egypt and the Fund on a new support program are “progressing,” asserting the cooperation between the two is very strong.
He added that the role of the private sector in Egypt has proved to be very effective, both in terms of the competencies in the private sector and the ability to drive economic growth.
Contrary to the pro-Egypt message, the IMF Director-General, Kristalina Georgieva, urged Lebanese politicians to “work for the stability of Lebanon.”
Georgieva said: “I would appeal to everybody in the high corridors of power in Lebanon to put your country, your people first.”
She asserted the need to “have a clear commitment on a political level to work for the stability of Lebanon,” adding that nothing can be done unless reforms are carried out.
“It can only be resolved by the political leaders in Lebanon putting aside what divides them and getting to the point of serving the people of Lebanon who deserve no less.”
It is not the first time the IMF criticizes Lebanese authorities for not carrying out the necessary reforms. After a visit to Beirut, the Fund warned that this delay could be costly for the country.
In April, the Fund announced that it had reached a preliminary agreement with Lebanon on an aid plan worth $3 billion over four years.
However, its application is linked to the government’s commitment to implement prior reforms and Parliament’s approval of urgent bills, most notably the “Capital Control” law restricting withdrawals and foreign currency exchange from banks and the 2022 budget bill.
In September, the Lebanese Parliament approved the 2022 budget, which constitutes one of the main conditions for the Fund to release a tranche of financial aid to the country.
-Considering debt reduction
As part of the joint meetings of the Fund and the World Bank, David Malpass, World Bank President, said that with debt for a growing number of countries becoming unsustainable, policymakers meeting in Washington this week are discussing ways to reduce those debt burdens.
During an interview with Tom Keene on “Bloomberg TV,” Malpass said that arranging help for low-income nations in debt distress through institutions such as the IMF “means that you are under the gun.”
“A better way to do it is to find a way to get to actual debt reduction so that you can have light at the end of the tunnel, get out from under the debt,” he said, adding that this is “under discussion.”
-Resilience and Sustainability Trust
On the sidelines of the meetings, Georgieva announced the Resilience and Sustainability Trust (RST), the first-ever long-term financing instrument to support the transformation of economies. It allows wealthier IMF members to channel their Special Drawing Rights, or emergency reserves, to help vulnerable countries on the target issues.
The Fund, proposed by Georgieva last June, won the backing of the Group of 20 major economies last October and was approved by the IMF’s board in April.
Georgieva explained that members could start applying for the funds, which will offer 20-year maturities and a 10.5-year grace period, and the board would review applications in the coming months.
“I am delighted to announce that the new Resilience and Sustainability Trust has become operational,” she said in a statement.
She explained that RST resources are mobilized based on voluntary contributions from IMF members with solid external positions, including those wishing to channel SDRs to benefit low-income and more vulnerable middle-income members.
Generally, the IMF Financial Counselor and Director of the Monetary and Capital Markets Department, Tobias Adrian, stressed the need for central banks to adhere to their goal of slowing inflation to two percent.
“Amid the highest inflation in decades and extraordinary uncertainty, markets have been extremely volatile,” he said, adding that changing the target in the current environment would be unwise because it would feed into credibility problems of central banks, “so if you are above target and then you raise your target, that is undermining credibility.”
– Great risks
The International Monetary Fund said on Tuesday evening, in the latest version of the Global Financial Stability Report, that “markets have been extremely volatile,” while risks increase amid the highest inflation rate the world has witnessed in decades and unusual uncertainty about expectations.
The combination of high inflation with central bank policy uncertainty “creates this environment of really high risk and volatility,” he said.
“It is difficult to think of a time where uncertainty was so high,” said Adrian, adding that: “we have to go back decades to see so much conflict in the world, and at the same time, inflation is extremely high.”
Adrian told CNBC that US stocks could tumble another 20 percent was “certainly possible,” adding that central banks should work decisively to bring inflation back to the target rate and avoid fixing inflation expectations, damaging their credibility.
He noted that banks have a lot more capital and liquidity than during the 2008 crisis. However, he warned that an adverse scenario in emerging markets would see 30 percent of banking assets undercapitalized, and vulnerabilities in the non-bank financial system could spill into the banking system.