Monorail in Dubai: With oil prices remaining lower, oil-exporting countries will have to moderate their pace of spending, the IMF says (photo: Ingram Publishing/Newscom)

2015 IMF-World Bank Spring Meetings

Creating Jobs Remains Key Priority for Middle East, North Africa

IMF Survey

April 19, 2015

After years of political transition, some countries in the Middle East and North Africa are seeing a pickup in economic activity, but the region still needs to foster the kind of growth that generates jobs and raises standards of living over the medium term, the IMF says.

And spillovers from deepening regional conflicts pose a risk to this recovery.

Countries that have succeeded in stabilizing their economies should press ahead with their economic reform agendas, IMF Middle East and Central Asia Department Director Masood Ahmed told reporters at the IMF-World Bank Spring Meetings in Washington.

“The big issue is how to create jobs, particularly for young people, since that has been a driver of not just economic but also social unrest in these countries,” Ahmed said.

The meetings brought together ministers and top government officials as well as journalists, academics, private sector participants, and representatives of civil society from all over the world to debate the key issues facing the global economy.

In addition to official meetings with country delegations, a number of seminars and briefings focused on topics of relevance to the region. In a gathering that has become a regular feature of these meetings, IMF Managing Director Christine Lagarde met with the region’s ministers of finance and central bank governors to gain insight into the pressing economic issues they face, including on how the recent slump in oil prices is affecting the region.

Regional outlook

The region’s oil-importing countries are seeing higher growth, owing to prudent economic management combined with a more favorable international environment, Ahmed told reporters during a briefing on economic developments in the region. In particular, lower oil prices are boosting growth, although some countries have chosen to save the gains from lower oil prices, strengthening their budgets and increasing international reserves.

As a group, the oil importers will likely see their growth rate increase to about 4 percent this year from about 3 percent in 2014, Ahmed said. But there are significant risks to this outlook, he cautioned.

Security problems and spillovers from regional conflicts such as those in Syria and Yemen present risks to the region. A deepening of these conflicts could compound this negative effect, he said. Another risk is the movements of international exchange rates—in particular, the strengthening of the U.S. dollar—which could hurt the region’s competitiveness.

As for the region’s oil-exporting countries, Ahmed said he expected growth this year to reach 2½ percent, on average. “Despite the big fall in oil prices, these countries have managed to limit the impact on growth by using the financial buffers that they have accumulated over many years,” he said.

But the drop in the price of oil has had other consequences, Ahmed said. “Export earnings this year for the oil-exporting countries in the region are expected to be $380 billion lower than we had expected before the price of oil fell,” he said. “Similarly, these countries’ fiscal balances are projected to deteriorate by an average deficit of 8½ percent of GDP,” with only Kuwait and Qatar expected to avoid a budget deficit this year.

Since oil prices are expected to remain lower (relative to where they were) for some time, these countries will inevitably have to moderate the pace of their spending, Ahmed said. He also noted that oil price developments highlight the urgency of the economic diversification of these economies.

Islamic finance’s potential

The IMF-World Bank meetings also featured a seminar “Islamic Finance: Unlocking its Potential and Supporting Stability” in which a panel of prominent officials discussed the rapid growth and benefits of Islamic finance and its considerable potential for further growth.

Panelists noted that Islamic financial institutions sustained little damage in the global financial crisis, in contrast to conventional financial institutions. Because of the risk-sharing feature of Islamic finance, it is a less risky type of investment. And since Islam bans speculation, there must be a tangible asset underlying every transaction.

“Islamic finance is a form of financial intermediation that is highly attractive in an environment where investors are averse to risk,” said panelist Zeti Akhtar Aziz, Malaysia’s central bank governor.

While Islamic finance is growing rapidly in Muslim countries, it is also attracting attention in other places, the audience heard. Pierre Gramegna, Luxembourg’s Minister of Finance, noted that his country recently issued the first sovereign sukuk (Islamic bond) denominated in Euros. “We wanted to diversify our activities and to innovate,” he said. He noted, however, that Islamic finance is more complex—and its transactions more costly—than conventional finance.

Islamic finance has the potential to help meet the demand for infrastructure financing, particularly in debt-strapped countries where public financing for this type of development is not always available and sukuk, with its public-private partnership type features, is well-suited, observed panelist Ali Babacan, Deputy Prime Minister of Turkey. It also has the potential to narrow the financial inclusion gap in regions like the Middle East and North Africa, where large percentages of the population lack bank accounts.

Though it shows promise, Islamic finance is still evolving, panelists pointed out.

Issues with liquidity management and the lack of product standardization across countries pose problems for the industry. And regulation and supervision of Islamic financial products are not as well developed as they could be, IMF Deputy Managing Director Min Zhu said. Nonetheless, he said, “We see Islamic finance as a potential engine for financial stability and growth.”

The IMF recently released a paper on Islamic finance and plans to deepen its work in this area over the coming months.

Enhanced cooperation with the Arab Monetary Fund

On the final day of the meetings, the IMF and the Arab Monetary Fund signed a pledge to enhance their cooperation.

Under the agreement, the two institutions will continue to provide training opportunities to Arab officials, support the development of domestic capital markets in the Arab countries, and strengthen their collaboration on the Arabstat initiative, which aims to develop efficient statistical systems in the region.

The two institutions also plan to carry out joint analytical work and organize events on high-priority topics of mutual interest.