Covid-19 underpins need for economic diversification and structural reforms in Mena, IMF says

The Covid-19 crisis is a defining moment for the Middle East and North Africa, underpinning the need for economic diversification and structural reforms to lay the foundation for a post-pandemic recovery, according to the IMF.

“I think we are in a defining moment and changing the way how [a] state [is] used to function – especially in the GCC – is a critical piece in any problem solving going forward,” Jihad Azour, director of the IMF’s Middle East and Central Asia Department, said on Tuesday.

“You need to anchor your policies … in the medium term framework. This is how you manage the short-term response to the crisis but also maintain [its] sustainability in the medium and long term,” he said during an online IMF panel discussion.

Gita Gopinath, the IMF’s chief economist, Reza Moghadam, vice chairman of global capital markets at Morgan Stanley and Nasser Saidi, former Lebanon economy minister also took part in the panel debating Covid-19 challenges and policy priorities for the Mena region.

Countries in the region, Mr Azour said, will gradually move to a “balance sheet approach” looking at their assets and liabilities at the same time, a structural change needed to prepare for a post-Covid-19 recovery.

“We will see a gradual wave of diversification of revenue outside oil,” he said. “We will also see a gradual change in the role of sovereign wealth funds and how they contribute [in] generating income but also how they contribute in the economic recovery.”

The coronavirus pandemic has tipped the global economy into its deepest recession since the 1930s. The IMF expects global output to shrink 4.4 per cent this year with only a moderate recovery next year. The Washington-based lender forecasts Mena economies will contract by an average of 5 per cent this year and expand by 3.2 per cent next year.

Governments in the region, especially those in the hydrocarbon-rich six-member economic bloc of the GCC, had been diversifying their economies before the virus outbreak. However, the focus on greener economies and a drop in oil demand in the face of lower consumption and climate change concerns is underlining the need to accelerate the reform process.

“This is a moment of opportunity of a lifetime that we got hit by Covid. We should go back to the drawing board and ask ourselves not only how we should diversify, [but also] what sort of fiscal policy rules we should be imposing, how we develop monetary policy … how we develop counter-cyclical policies,” Mr Saidi said.

“Most importantly, structural change, what do we do about labour markets,” he said, adding that these issues have come to the fore and will become increasingly important for the region's economies.

For more effective policy responses, especially in terms of job creation, regional governments will have to promote the growth of the private sector to give it a greater share of the economy.

“There should much better employment opportunities for young people and women … which is an important concern in the Middle East,” Ms Gopinath said. “These kind of reforms have to done.”

She said the IMF has made a case in some countries for big, high-quality public infrastructure investments to boost jobs.

“[In] some cases green [projects] and in some cases digital infrastructure. All of that has a potential to create jobs and … hasten the recovery from this Covid crisis,” she said. “This is a transformation period … structural reforms will be needed.”

Comparing Covid headwinds with previous crises, Mr Azour said that previously the biggest mistakes that were made included being slow to respond.

"I think one message today is that the response has to be very fast. The response is not only about addressing [the immediate concerns] but also work on parallels," he said.

"Address the short-term [goals] of protecting lives, repairing the economy but also plan and provide a medium- to long-term horizon and this … will provide investors, [the] business community [and] citizens an anchor.”