By Jihad Azour
January 18, 2018
Rising social tensions and protests in several countries across the Middle East and North Africa are a clear indication that the aspirations of the people of the region—for opportunity, prosperity and equity—remain unfulfilled. Their frustration is understandable, and precisely because of that, it would be a mistake if the economic reform process currently underway were to be thrown into reverse.
Indeed, reforms are the key to address the fundamental problems that have plagued so many countries of the region for so long—low growth, high unemployment, and corruption. While implementing reforms, governments should ensure they are socially balanced and properly phased; above all, they need to deliver on the promise of a better life for everyone, but especially the poor and vulnerable.
That is the challenge facing the region today, and it is one that the IMF seeks to help our member countries to meet.
The broad context
For decades, many countries have been plagued by a model of state patronage where the public sector supports every fifth job . Not only has this failed to improve the quality of public services such as health and education, it has also dramatically reduced the scope for governments to fund social programs aimed at vulnerable populations and much-needed infrastructure investment. In a dynamic global economy, where the private sector plays an ever-increasing role in generating growth and employment, this system has become increasingly unaffordable—and incapable of creating the jobs and opportunities that people need.
In recent years, the situation has been made even worse by a series of shocks—protracted conflicts and terrorist attacks, the drop in commodity prices, and low growth in key trading partners. Perennially low productivity and endemic corruption have further held back the region’s economic performance. This has placed many countries in an extremely tight fiscal situation in which very difficult trade-offs must be made.
So, this is the broad economic context that frames today’s challenges. Addressing them requires progress on several fronts.
The primary objectives remain clear: create jobs (especially in the private sector), improve living standards, and promote sustainable growth. But countries can only achieve this if they keep their economic house in order. That means controlling debt and inflation to encourage investment and economic activity.
This, in turn, leads back to the need for reforms—well-designed, well-timed, and applied equitably across the population.
The reform priorities include the following:
- Reducing corruption, promoting fair competition through trade and better regulation, and improving access to finance to allow small and emerging firms to blossom.
- Investing in talent—particularly the young—for the new economy by modernizing education and training, and helping them find jobs.
- Ensuring opportunities for all through equitable and growth- promoting spending and fair taxation.
- Strengthening women’s legal rights, as well as meeting the needs of refugees for food, housing, education and work.
None of this is easy. Perhaps the most contentious issue of all is how the state collects taxes and spends revenue.
Many countries have no choice but to balance their budgets: accumulating public debts to finance what has been too often unproductive spending is not sustainable. Servicing these debts has come at the expense of vital spending on health and education, meaning the bill will fall on future generations.
Fiscal irresponsibility is not only unwise, it is also unfair. The challenge is to make the necessary adjustment in a balanced way, at an appropriate pace, and tailored to individual countries’ circumstances. This is where the IMF can help.
Adapting to each country’s circumstances
In those countries where the government has sizable buffers, in the Gulf and Algeria for example, the IMF has urged a measured pace of deficit reduction.
In those where public debt is already high and rising, such as Egypt and Tunisia, the IMF has provided financing to allow for a more gradual fiscal adjustment than would have otherwise been possible, and at a lower interest rate than would have otherwise been available. Other foreign creditors should provide further breathing space by providing financing at favorable conditions, preferably as grants.
We also seek to be sensitive to socio-political circumstances—for example, repeatedly relaxing the fiscal deficit target in Tunisia, even though this came at some cost in terms of debt and inflation.
Addressing fiscal sustainability, of course, is not just about cutting budget deficits but also about how governments choose to achieve the goal. The tax system is a crucial mechanism, both to raise revenues (including to finance social expenditures) and to ensure that the fiscal burden is shared fairly across the population.
This has been a problem for many countries of the region partly because domestic revenues—at around an average of 10 percent of GDP—are very low and generated by only a few taxpayers. In Jordan, for example, only 5% of households pay any personal income tax. Understandably, people do not to want to pay more if they think the system favors the better-off.
So, more efforts are needed to combat tax evasion, broaden the tax base, and make the tax system more progressive. IMF policy advice often includes such recommendations.
In the programs we support, the IMF has also been paying increasing attention to protecting the most vulnerable from tax increases and spending cuts. In Tunisia, for example, the government expanded the low-income cash transfer program, doubling the number of families and tripling the average transfer amount; overall social spending is monitored through a spending floor in the IMF-supported program.
Throughout the region, the IMF has advocated the reduction of costly energy subsidies. Why? Because these subsidies mainly benefit the better-off in society. At the same time—importantly—the IMF has strongly advised against cutting food subsidies, for example, for bread in Jordan and Tunisia.
Again, to be effective, reform programs need to be customized to a country’s circumstances and fully owned by the government. Consultation with key stakeholders—including civil society—is a key factor and this is a feature of the programs that the IMF supports around the world.
The way forward
While the challenges facing the region remain considerable, countries have made progress since the Arab Spring. The region has broadly maintained economic stability, despite the very difficult circumstances: growth is picking up; inflation is stabilizing; and in most countries, the build-up of public debt is slowing.
Perhaps most encouraging, the region’s young and talented population seems increasingly willing to take the future in its own hands. With proper education and employment opportunities, this new generation could fuel unprecedented economic growth. It is also encouraging that policymakers throughout the region are increasingly putting growth and jobs at the forefront of their policy agendas.
This is the backdrop for a regional conference that the IMF is organizing—jointly with the Arab Monetary Fund, the Arab Fund for Economic and Social Development, and the Government of Morocco—in Marrakech later this months. There, we will be discussing with policymakers, the private sector, and civil society how to do more to put an inclusive growth agenda into action.
The task is urgent. Indeed, the broad-based current global economic upswing offers an opportunity—in the region and elsewhere—to make headway on long overdue reforms. Reversing, or even delaying reforms would be the wrong option and continue to hurt future generations. So we need to ensure that reforms continue and are applied equitably, with due regard to their social implications, and phased in gradually to the extent that available resources and macroeconomic conditions permit.
The people of the region are rightly demanding economic growth and fairness. The IMF aims to help them in this effort.