Arab states warned against complacency over debt

Jihad Azour, director of the IMF’s Middle East and Central Asia department, said higher oil prices should spur a change in the region’s fortunes. (AP)
Updated 02 May 2018

Arab states warned against complacency over debt

  • Oil prices have reached around $75 a barrel from under $30 a barrel in early 2016
  • After the GCC saw their economic growth shrink by 0.2 percent last year, their economy is expected to return to growth in 2018

DUBAI: The International Monetary Fund on Wednesday warned Arab states against complacency over a looming debt crisis, urging continued economic reforms despite a rise in oil prices.
Crude prices have rebounded in the region thanks to a deal by producers to trim production, but the IMF said such a change in fortunes should not get in the way of overhauling state spending.
“Required reforms include further steps toward full elimination of energy subsidies, and changes to pension and social security systems — including revisions to retirement age and benefits,” the IMF said in its Regional Economic Outlook for May.
Jihad Azour, director of the IMF’s Middle East and Central Asia department, said higher oil prices should spur change.
“We should not be complacent ... oil prices are going up. That definitely does not mean that we should not introduce the reforms. On the contrary, the current environment offers the opportunity to accelerate some of these reforms,” Azour said.
Oil prices have reached around $75 a barrel from under $30 a barrel in early 2016.
Overall growth in the Middle East and North Africa (MENA) region, which includes all Arab countries and Iran, was forecast by the IMF to reach 3.2 percent this year compared to just 2.2 percent in 2017.
The partial recovery in oil prices will be a boost for the Gulf Cooperation Council states — Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and UAE — which supply almost a fifth of global crude oil.
After the GCC saw their economic growth shrink by 0.2 percent last year, impacted by a 0.7 percent contraction by the Saudi economy, their economy is expected to return to growth in 2018.
The Council’s economy is forecast to grow by 2.2 percent this year and 2.6 percent in 2019, the IMF said.
Following the oil price slump in mid-2014, GCC members undertook fiscal measures and reforms to cut public spending and boost non-oil revenues.
Azour said that Saudi Arabia’s economic consolidation measures to cut a persistent budget deficit and diversify the economy away from oil remains the correct policy.
“The current strategy that is based on reaching a balanced budget by 2023 is the right one,” he said.
Despite the improved economic forecast, the IMF estimated cumulative overall fiscal deficits in the region to be $294 billion in 2018-22.
Around $71 billion of government debt is expected to mature during the same period.
“The rapid buildup of debt in many of them (MENA countries) is a cause for concern. Debt has increased by an average of 10 percentage points of GDP each year since 2013, with countries financing large fiscal deficits,” the IMF report said.
An impending increase in interest rates, making borrowing more expensive, will complicate the problem, it added.
According to the IMF, the economy of oil-importers should grow by 6.2 percent annually to maintain unemployment at the current rate of 10 percent.
MENA countries need to create 25 million new jobs over the next five years, Azour said, while warning of the negative consequences of unemployment coupled with rising debt levels.
“The average debt in the region for oil-importing countries exceeds 80 percent,” of gross domestic product (GDP), he said, stressing such a figure is “beyond what is acceptable.”


G7 backs extension of G20 debt freeze, calls for reforms 

Updated 25 September 2020

G7 backs extension of G20 debt freeze, calls for reforms 

  • Group of Seven ‘strongly regret’ moves by some countries to skip participation in debt relief for world’s poorest nations

WASHINGTON: G7 finance ministers on Friday backed an extension of a G20 bilateral debt relief initiative for the world’s poorest countries, but said it must be revised to address shortcomings hindering its implementation.

In a lengthy joint statement, the ministers from the Group of Seven advanced economies said that they “strongly regret” moves by some countries to skip participation by classifying their state-owned institutions as commercial lenders.

Two officials from G7 countries said the reference was clearly targeted at China, which has refused to include loans by the state-owned China Development Bank and other government-controlled entities in its official bilateral debt totals when dealing with countries seeking debt relief.

The ministers also acknowledged that some countries will need further debt relief going forward, and urged the Group of 20 major economies and Paris Club creditors to agree on terms by next month’s meeting of G20 finance ministers.

“Everyone was disappointed by China’s lack of transparency and commitment,” said one official, who asked not to be named.

At an online meeting hosted by US Treasury Secretary Steven Mnuchin, the ministers underscored their commitment to work together to support the poorest and most vulnerable countries, which have been hard hit by the coronavirus pandemic.

They asked the International Monetary Fund and World Bank to provide regular updates on the financing needs of low-income countries and propose solutions for expected financing gaps, including through instruments to leverage access to private finance.

They said the Debt Service Suspension Initiative (DSSI) approved in April by G20 countries, including China, had helped 43 countries defer $5 billion in official debt service payments to free up money to respond to the pandemic.

But the total is far short of the $12 billion in savings that were initially projected, and represents just over half of the 70-plus countries that were eligible.

The ministers said the initiative should be extended, “in the context of a request for IMF financing,” and called for a new term sheet and memorandum of understanding to improve its implementation.

The ministers said claims classified as commercial under DSSI would also be treated as such in future debt treatments and for implementation of IMF policies, delivering a stern reminder to China and others that have not been fully transparent about the scope and terms of government lending to poor countries.

The ministers also called again on private lenders to implement the debt relief initiative when requested, noting that the absence of private sector participation has limited the potential benefits for several countries.