Worried about unrest, IMF gives pass to governments to boost subsidies
The economies of the Middle East face a daunting near-term challenge of containing the impact of rising food and energy prices without busting their budgets or setting off another round of unrest, the International Monetary Fund (IMF) warned in a report on the region.
With turmoil besetting so much of the region, the IMF conceded that the fiscal restraint it usually urges on governments might not be practical for now and gave its backing to the subsidies and make-work programs initiated in the face of mass protests. But it warned that policy would have to transition quickly to measures that spur economic growth and create productive employment.
“Many countries in the region have increased subsidies for food and fuel because increasing prices of food and fuel affect households, some of whom spend 50% of their incomes on these products,” Masood Ahmed, director of the Middle East and Central Asia Department, said in a podcast released Wednesday. “This is perfectly understandable in the short run to preserve social cohesion. But over the longer term the answer lies in moving away from generalized subsidies.”
Unrest has toppled the leaders of Tunisia and Egypt in the past three months and threatens strongmen in Libya, Syria and Yemen, spurring governments to look for palliatives for joblessness and inflation. But subsidies and job programs saddle them with extra costs they can’t afford and do little to address long-term problems of poverty and unemployment.
Economic growth across the Middle East and North Africa, including Afghanistan and Pakistan, will reach 3.9% this year, the IMF forecast – the same pace as in 2010 but among the lowest in more than a decade. Increasing oil prices have helped divide the region into winners and losers, with the price of benchmark Brent crude rising 22% since unrest broke out in Libya on February 15.
As a result, oil exporters will enjoy fairly strong growth of 4.9% on average, but among non-oil countries – the ones hit hardest by unrest – growth will slump to half its level of the last two years to just 2.3%, the IMF said.
The IMF said the sluggish growth will be accompanied by accelerating inflation, with consumer prices expected to rise 10.8% this year, compared with an average of 7.2% over the last decade. Both oil and non-oil economies will feel the impact of higher prices, but only the richer economies have the financial resources to cope with it, the IMF.
The Middle East is especially vulnerable to the global increase is food prices because the region imports so much of its food and because widespread poverty means that a big portion of a family’s income goes to purchasing food. On average, food accounts for about 36% of the basket of products and services used to calculate inflation, according to the IMF.
Subsidizing the cost of bread, cooking oil, gasoline and other basic items has been the preferred tool among Middle East governments for helping the poor. The International Energy Agency estimates that the Middle East and North Africa accounted for almost two-thirds of global petroleum price subsidies in 2009. Seventeen out of the region’s 22 countries subsidize food. The IMF estimated that this all comes at a cost of $200 billion annually, or almost 8% of the region’s GDP in 2010.
That is likely to go up with no program put into place this year in response to unrest. Egypt, for instance, has increased subsidies for wheat imports, Jordan has announced cuts to taxes on fuel and foodstuffs, and Lebanon slashed the excise tax on gasoline by about 55%.
“This increase in public spending can help to moderate the effect on growth, but it is going to strain their budgets,” Ahmed said about non-oil economies. “As a group their budget deficits are going to increase to over $40 billion this year.”
The increases will not only put a strain on state budgets but will encourage wastefulness, boosting countries’ import bills and fueling inflation, the IMF warned. The region’s non-oil economies, which lack the cushion of higher petroleum prices, are likely to see their current account deficit widen to 4.1% of GDP this year while the budget deficit widens to 6.8%, the IMF predicted.
The troubles don’t end there. The region’s high level of unemployment – which together with inflation is widely seen as a major factor behind the Arab Spring – remains a long-term problem demanding wide-ranging reforms in education and regulations designed to encourage private enterprise.
In 2008, unemployment rates in Egypt, Jordan, Lebanon, Morocco, Syria, and Tunisia averaged 11%, the highest regional rate worldwide. It blamed the joblessness on rapid population growth, which makes it hard for economies to generate enough jobs, as well as a mismatch between people’s skills and the needs of employers.