Arab Oil Importers Under Strain

A Commentary by Masood Ahmed, Director, Middle East and Central Asia Department, International Monetary Fund

Published in International Economic Bulletin, Carnegie Endowment for International Peace, May 24, 2012

The Middle East and North Africa region (MENA) is facing extraordinary challenges in the wake of the Arab Spring. The Arab countries in transition (mostly oil importers) are straining to manage political change, urgent social demands, and an adverse external environment—factors that have combined to increase the near-term risks to macroeconomic stability. These risks were also present in 2011, but now many governments have narrower margins for policy maneuver, having drawn down their foreign exchange and fiscal buffers over the past year. To manage the risks, countries in transition will need to rely on support from the international community.

Middle East oil exporters, meanwhile, are benefiting from high oil prices; it is estimated that they grew twice as fast as the region’s oil importers last year. Still, many of them face fiscal sustainability and structural challenges, including the need to create jobs for their growing working-age populations, further diversify their economies, and develop their financial markets to better support economic growth.

Oil Importers Burdened by Multiple Pressures

The region’s oil-importing countries had a difficult time in 2011.¹Unparalleled domestic pressures and a challenging external environment—notably, the slowdown in global growth and higher oil prices—weighed on economic performance. Growth faltered, unemployment—already chronically high across the region—continued to rise, and government budgets stretched further. Although remittances and exports helped hold up income in many countries, foreign investment and tourism declined sharply. In addition, adverse movements in fundamentals and investor sentiment contributed to a decline in stock market indices, wider sovereign spreads, credit rating downgrades, and capital outflows from some countries.

As a result, growth for the region’s oil importers, excluding Syria, fell by nearly half from 4.3 percent in 2010 to 2.2 percent in 2011. The forecast for 2012 is only a modest recovery to 2.7 percent (see Table 1).

Syria faces exceptional circumstances—the worsening political and military conflict, apart from its tragic human costs, is likely to result in a very large decline in economic activity in 2012. Outside of the Arab countries in transition, drought in Afghanistan and floods in Pakistan played a role in those countries’ downturns.

Table 1

The months ahead will be equally challenging. That is especially true because many countries now have smaller policy buffers than they did in 2011. Last year’s policy response increased spending, which pushed up fiscal deficits and diminished external inflows. Accompanied by large current account deficits, the policies led to reserve losses (see Chart 1). And as political transitions play out, private investors will likely remain in wait-and-see mode; it will take some time for investment, tourists, and capital to return.

Moreover, the international environment remains difficult. The European Union—an important economic partner for many MENA oil importers—is projected to post near-zero growth in 2012; oil prices are expected to remain high; and spillovers from Syria could affect a number of countries in the region.

Oil Exporters Fare Well

The economies of MENA oil exporters,² meanwhile, continue to post solid growth. While growth for the group as a whole fell from 5 percent in 2010 to about 4 percent last year (mainly due to the conflict in Libya), it reached 8 percent for the Gulf Cooperation Council (GCC).³ Oil production in GCC states increased, particularly in Saudi Arabia, to compensate for declines elsewhere (primarily in Libya). On the back of higher oil prices, the oil exporters’ combined current account surpluses approached 0 billion in 2011—almost double the amount in 2010—which helped lift their reserve position above the trillion mark, support a further increase in other foreign assets, and enable stepped-up government spending.

Oil exporters’ growth in 2012 is expected to strengthen to 4.8 percent and to be more evenly spread between the GCC countries and other oil exporters, as oil prices are expected to average about 5 per barrel. In the GCC, oil and gas production is expected to remain broadly flat: Qatar’s recent rapid hydrocarbon growth is likely to tail off, pending a moratorium on capacity expansion. Saudi Arabia’s role as a swing producer, moreover, will likely entail a smaller oil production increase than was required in 2011 to keep global energy demand and supply in balance. And government spending in the GCC will continue to support growth in the non-oil sector.

Despite an overall positive outlook for oil exporters, fiscal sustainability will be an issue—even with high oil prices—for those countries already running deficits, many of which are expected to increase this year. In non-GCC countries, government spending rose by one-third in dollar terms, leading to an average fiscal deficit of 1 percent of GDP, though average oil prices exceeded 0 a barrel in 2011. GCC fiscal expenditure also rose but only by about one-fifth in dollar terms, and the twin effects of higher oil prices and large export volumes allowed GCC fiscal balances to improve. Still, overall, oil exporters’ fiscal vulnerability has increased, as the fiscal breakeven price—that is, the oil price at which a country’s fiscal accounts are in balance for a given level of spending and revenues from oil—has generally been rising over time (see Chart 2).

In addition, a number of factors could pose risks to the oil exporters’ growth scenario. The most immediate risk would be a euro-area-induced global slowdown, which would reduce global oil demand and possibly lead to a sustained drop in oil prices. This would make countries with fiscal deficits especially vulnerable.

Policy Implications

For the region’s oil-importing countries, maintaining macroeconomic stability in the current environment will be challenging. Corrective measures are needed to lessen vulnerabilities, and some steps can be taken quickly. Governments must control spending on untargeted subsidies, which predominantly benefit the wealthy, and begin putting in place more effective social safety nets to protect the poor. Central banks need to maintain external stability, which may require greater exchange rate flexibility.

Ensuring adequate financing is also a key priority. The oil importers’ external financing need will be an estimated billion in 2012. Given that capital markets will not meet all of that demand, it will be important to scale up the international response.

The IMF is doing its part. It has upgraded its lending toolkit in part to address the needs of the region, approved a loan for Yemen in April, is in discussions with Egypt on a possible IMF-supported program, and is in early talks with a few other countries on financing needs and possible support. The IMF is also providing technical assistance to many countries in the region—in Egypt, for example, on tax reform to improve tax equity; in Jordan on fuel subsidy reform; in Tunisia and Morocco on measures to strengthen the financial sector; and in Yemen on improving customs administration.

But IMF support will not be enough. International and regional donors and institutions will need to provide additional funds and expertise. Improved international market access for MENA exports would also help counter the downturn in the region.

Looking further ahead, beyond macroeconomic stabilization, Arab countries in transition will need to build their own paths toward economic transformation to generate higher and more inclusive growth. Focusing on short-term macroeconomic challenges is vital. For the region’s oil-exporting countries, though there are no immediate inflationary pressures, a key short-term priority is to watch for signs of overheating in light of growing domestic demand. The quality of spending also needs to be monitored to ensure value for money in rapidly expanding public-spending programs. Reforming universal fuel price subsidies, in particular, would help contain growing domestic energy consumption. Even with high oil prices, fiscal sustainability is an issue that also needs immediate attention, especially for those countries already running deficits.

But it is equally important not to lose sight of the medium-term challenges of modernizing and diversifying the economies of the region, creating jobs outside the public sector, and providing fair and equitable opportunities for all.

Masood Ahmed is the director of the IMF’s Middle East and Central Asia Department.

This article is adapted from the IMF’s Middle East and Central Asia April 2012 Regional Economic Outlook Update and has been published with permission.

¹ Oil importers include Afghanistan, Djibouti, Egypt, Jordan, Lebanon, Mauritania, Morocco, Pakistan, Syria, and Tunisia. The IMF’s Middle East and Central Asia Department includes Afghanistan and Pakistan in its analysis.

² Oil exporters include Algeria, Bahrain, Iran, Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia, Sudan, the United Arab Emirates, and Yemen.

³ The GCC includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

Source | International Monetary Fund - Blog NEWS | http://imf-news.blogspot.com/2012/06/arab-oil-importers-under-strain.html

IMF Executive Board Completes Fourth Review Under the Policy Support Instrument for Uganda

The Executive Board of the International Monetary Fund (IMF) has completed the fourth review under a three-year Policy Support Instrument (PSI) for Uganda. The Executive Board’s decision was taken on a lapse of time basis and enters into effect today¹. The PSI for Uganda was approved by the IMF’s Executive Board on May 12, 2010 (see Press Release No. 10/195). The IMF’s framework for PSIs is designed for low-income countries that may not need IMF financial assistance, but still seek close cooperation with the IMF in preparation and endorsement of their policy frameworks. PSI-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners.

The PSI-supported program with Uganda remains on track. All end-December 2011 quantitative assessment criteria were met, as were most of the structural benchmarks.

The stance of macroeconomic policy remains appropriate. Monetary tightening, initiated in July 2011 in response to rising inflation, has been effective in reducing demand and price pressures in the economy. High interest rates supported by tighter fiscal policy have strengthened the currency and raised reserve levels, while private sector credit growth and overall demand pressures are now much reduced. Prices have been generally stable for the last few months and annual inflation is coming down. The disinflationary effort has had limited effect on financial sector stability. Nonetheless, the tighter policies combined with weaker global demand are projected to reduce economic growth this year.

Looking forward, economic growth should recover significantly next year, as the expected decline in inflation will allow a phased and gradual relaxation of the monetary policy stance and a recovery of credit growth. The FY2012/13 budget aims at further moderate fiscal consolidation while increasing spending on infrastructure and other development priorities. In addition, tax policy measures will be introduced and a comprehensive reform of tax exemptions linked to a new tax procedure code carried out, both aimed at improving revenue and budget performance over the medium term. While external borrowing for development is expected to increase in the years ahead, debt sustainability analysis carried out jointly by the IMF and the World Bank establishes that Uganda continues to face a low risk of debt distress.

Key risks to the outlook arise mainly from external factors. Slower than expected global growth would worsen the trade deficit and possibly reduce remittances and capital flows. Higher energy prices would dampen growth, as would deterioration in the regional security environment. However, absent these risks materializing, economic growth is expected to continue to improve, reaching 6 percent by 2013/14, and achieving its estimated potential of about 7 percent by 2014/15.

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¹ The Executive Board takes decisions under its lapse of time procedures when it is agreed by the Board that a proposal can be considered without convening formal discussions.

Source | International Monetary Fund - Blog NEWS | http://imf-news.blogspot.com/2012/06/imf-executive-board-completes-fourth_19.html

IMF Completes the Fifth Review Under the Extended Fund Facility (EFF) for Seychelles

The Executive Board of the International Monetary Fund (IMF) has completed the fifth review under the three-year Extended Arrangement (EFF) for the Seychelles. The completion of the review enables a disbursement of SDR 2.64 million (about US.6 million). The Board's decision was taken on a lapse of time basis.¹ The arrangement became effective on December 23, 2009, in the amount of SDR 19.8 million (see Press Release No. 09/472).

In 2011, the solid recovery that was set in motion by decisive policy changes after the 2008 crisis continued, supported by a vibrant tourism sector and continued high foreign direct investment. Consumer price inflation increased from near-zero levels at the beginning of 2011 to 5½ percent by year end, reflecting higher international food and fuel prices and, late in the year, a depreciating exchange rate. Fiscal performance was stronger than projected, despite higher losses from the national airline’s operations. Public debt remained on a downward trend, and the country continued to rebuild international reserves. The economic program supported by the EFF remains on track, and all quantitative performance criteria at end-December 2011 were met.

In 2012, economic growth is expected to moderate owing to less favorable external conditions. Inflation is projected to peak in mid-year, once recent adjustments of fuel prices and utility tariffs are fully reflected in the consumer price index. Monetary policy is appropriately being tightened, which should alleviate pressures on the exchange rate and bring down inflation during the second half of 2012. Public finances will need to absorb the one-off costs of restructuring Air Seychelles, but an improved fiscal revenues outlook will ensure that the primary balance target is met. The upcoming implementation of the value-added tax will improve the efficiency of the tax system. Public finances should be strengthened by enhanced oversight of public enterprises, the launch of the public sector investment program, and the implementation of further public utility tariff reforms. The financial infrastructure will be improved by the introduction of a new electronic clearing system.

Source | International Monetary Fund - Blog NEWS | http://imf-news.blogspot.com/2012/06/imf-completes-fifth-review-under.html

IMF Executive Board Completes Fourth Review Under the Policy Support Instrument for Rwanda

The Executive Board of the International Monetary Fund (IMF) has completed on June 7, 2012, the fourth review under a three-year Policy Support Instrument (PSI) for Rwanda.¹ The Executive Board’s decision was taken on a lapse of time basis.²

The Rwandan economy continued to grow strongly, and its economic program supported under the PSI remains on track. Real GDP growth is estimated at 8.6 percent for 2011, driven by agricultural output, exports, and domestic demand. Inflation rose sharply—mainly due to rising food and fuel prices but also an accommodative monetary policy—but stayed in single digits (8.3 percent in March 2012) and was the lowest in the region. All quantitative assessment criteria for end-December 2011 including fiscal and monetary targets were met. Most structural benchmarks were also met, albeit some with delays. In completing the review, the Executive Board approved the modification of the end-June 2012 assessment criteria. Rwanda continues to be assessed at moderate risk of external debt distress.

Growth is expected to remain high in 2012, but risks remain—a renewed global slowdown or sharply higher world fuel prices could threaten growth, revenue, and inflation objectives. The fiscal framework for 2012/13 is in line with the main objectives of the PSI, and the authorities committed to delay non-priority spending rather than resort to additional domestic financing if revenue collections fall short of target. Efforts are ongoing to further strengthen public financial management and enhance revenue administration. Monetary policy is aimed at maintaining inflation in single digits, and efforts are continuing to improve the liquidity management framework. To that end, it will be important to be proactive in monetary policy and improve the functioning of the money and foreign exchange markets. Improving access to financial services while safeguarding financial stability remains a key objective for Rwanda. Careful management of the consolidation of Savings and Credit Cooperatives will be very important in that regard.

The Executive Board approved a three-year PSI for Rwanda on June 16, 2010 (see Press Release No. 10/247).

Source | International Monetary Fund - Blog NEWS | http://imf-news.blogspot.com/2012/06/imf-executive-board-completes-fourth_1230.html

Rising oil prices have them Dancing Down Under

The Dollar has fallen to a year low against almost every major currency, given the problems that the US is facing, it is understandable - but the stock market gains are what is puzzling to me.

Forex Investors and traders are pumping up the markets because historically, when people have a sense of security they tend to abandon the the USD and the Yen and test their luck with stocks.
The US Economy is still in freefall. The fact that Tim Geithner, the US Treasury Secretary, has now began telling news outlets that the biggest challenges lay ahead with the enormous deficit is a big warning sign of that.

Broker trading companies investing and trading in the markets have begun to recognize this as the Dollar has matched the economy. The market seems to have reversed from a psychological one to a fundamental one and this is good.

I still believe that the real money to be made lies with Australia and New Zealand. The risk is less because of the low value of their currency in comparison with the big four, Yen, Euro, Pound and US Dollar, and the yields can be higher.

The Aussie and Kiwi have been doing very well as of late, and the Australian honesty we saw last week has seemingly driven much confidence in the competence of the leadership there.

Oil is rising and with it other commodities that rely on the slippery black stuff to help extract it - the per barrel that oil is now is very good for both down under dollars.
Keep an eye out this week for the unemployment numbers from the US and the British GDP figures. They will go a long way to showing us how to move in the coming days.

Source | Forex Update | http://adeel-forex-update.blogspot.com/2009/08/rising-oil-prices-have-them-dancing.html