Sunday, 28 April 2013

A two-speed region in a three-speed world

Oil is the difference between faster and slower-growing economies in 2013

The International Monetary Fund (IMF) is not just an international emergency lender, it is also an important research institution, home to 2400 employees, many of whom are economists. Its annual spring meetings (held jointly with the World Bank) present an opportunity to learn its views and outlook for the region and the world as a whole. In this year’s meetings, which took place last week, the Fund divided the world economies into three groups: countries that are doing well (mostly emerging markets), those on the mend (like the US, Switzerland and Sweden), and others still in trouble (the Euro Area and Japan). The Fund’s classification for the region was more one-dimensional: slower-growing oil-importing economies, and faster-growing oil-exporting ones.

Outlook for oil-importing economies

Growth in this group has been held back by four factors:
1.   Political uncertainty and social unrest: Egypt is a prime example of how this factor reduced investment inflows, increased capital outflows, deterred tourism and had an overall negative impact on growth.
2.   Regional spillovers especially from the conflict in Syria: most obviously seen in Jordan where regional problems disrupted both its gas supply from Egypt and trade routes through Syria.
3.   Economic problems in Europe: which had its biggest impact on the Maghreb countries affecting their exports, tourism, remittances and foreign direct investment.
4.   High commodity prices, especially food and fuel: this and the third factor were the main reasons Morocco turned to the IMF for help.

Looking ahead, the outlook for oil importers depends largely on the turnout of the four factors, but the IMF expects members of this group to grow faster in 2013 than last year. The notable exception is Egypt where the IMF expects growth to slow down to 2%, and unemployment rate to rise to 14% in 2014 from its current level of 12%.

In terms of policy recommendation, the IMF wants the usual mix: greater exchange rate flexibility, less energy subsidies and smaller government deficits. But since many of the countries in this group (Mauritania, Jordan, Morocco, Egypt and Tunisia) are either in a programme with the Fund or discussing the possibility of one, the implementation of these policies must have formed a central part of the negotiation process.

Outlook for oil-exporting economies

This group of countries is more homogeneous, and although they are expected to grow faster this year than oil importers, the IMF predicts that both groups will converge to the same average growth rate of 3.7% in 2014 (see the table below). The slowdown that exporters are likely to experience is a result of weaker global oil demand.

Unlike importers who face short-term problems, the economic challenges that this group faces are mostly medium term. To overcome them, oil exporters need to diversify their economies to develop non-oil economic activities and to create enough jobs to absorb their young populations.

However, a prolonged fall in oil price can turn medium-term challenges to short-term problems. If that happens, countries in this group may end up joining oil importers in seeking the IMF’s help.

The IMF role in the global economy

The international emergency lender is likely to have a big influence in shaping the region's policies

The International Monetary Fund (IMF) is very busy in the region these days. It has existing arrangements with Mauritania, Jordan and Morocco; provided Yemen with an emergency loan last year; has ongoing negotiations with Egypt; and is finalising an agreement with Tunisia. If we also counted the recently-expired programme with Iraq and the possibility that other countries could soon seek its help, the result would be one of the most active periods of the Fund’s involvement in the region.

What is the role of the IMF in the global economy? The Fund helps countries experiencing crises created by the mismatch between the payments they make to the outside world (for example debt service and imports) and the reverse payments from the world into the country (such as export of goods and tourism). Jordan experienced such imbalances when it was forced to buy expensive fuel from international markets following interruptions to the gas supply from Egypt in 2011. Similarly, Egypt’s balance of payments deteriorated as capital flowed out of the country and number of tourists declined after its 2011 revolution. When such imbalances persist, they can lead to crises manifesting themselves through currency crashes, runaway inflation or default on external debt.

To avoid such fate, the IMF provides loans to finance short-term payments. In return, it requires recipient countries to implement policies that should eliminate—or at least reduce—payment mismatch. Examples of such structural policies include asking Jordan to diversify its energy sources or—more controversially—asking Egypt to allow its currency to float hoping that the resulting depreciation would reduce imports by making them more expensive, and boost the competitiveness of Egyptian exports by making them cheaper.

In this sense, the IMF’s role is different from that of the World Bank. The former handles short-term financing crises while the latter focuses on long-term development projects. Yet despite the difference in the time-span of policies, both institutions aim to improve economic conditions by promoting changes in the structure of economies.

The IMF’s funding comes primarily through member countries subscriptions. Each country makes payments according to a quota system reflecting its size in the world economy. Linked to each country’s subscription is its voting power in the Executive Board—the body responsible for running the IMF. The quota system has left the Fund open to criticism of being dominated, both in thinking and decision making, by a few countries. Indeed, the five most powerful voting members of the Executive Board (the US, Japan, Germany, France and the UK) have 37% of total votes between them.

In response to criticism, the IMF has been undergoing a reform process to give more weight to emerging countries and to better reflect recent changes in the global economy. Irrespective of how these reforms pan out, one thing is for sure: for the next few years, the IMF is going to have a big influence on economic policy-making in the region.