The Director-General and Chairman of the Board of Directors of the Arab Monetary Fund, Dr. Abdulrahman bin Abdullah Al Hamidy , expected that the inflation rate in Arab countries would reach nearly 7.6% in 2022, declining to 7.1% in 2023. He also projected (GDP) growth rates to hover around 5.4%, driven by many factors, topped by relative improvement in global demand, high oil and gas growth rates, and the continuation of Arab governments to adopt stimulus packages to support economic recovery.
He said the main challenge facing regulatory and supervisory authorities in the Arab region, similar to many countries around the world, is to find the optimal mix of economic, monetary, and financial policies that can meet challenges without sacrificing long-term sustainable growth.
Economy Middle East conducted a wide-ranging interview with Dr. Al Hamidy on the economic, financial and social developments taking place in the world and their repercussions on Arab countries. Below are answers to our comprehensive questions.
The world has entered a state of uncertainty spurred on by current regional and global developments. IMF head Kristalina Georgieva described the economic scene as bleak. What are your expectations for the remainder of this year, in particular for Arab countries?
Developments in the global economy and the ongoing challenges related to food security, the rapid rise in commodity prices, fluctuations in global supply chains, and consequently the emergence of an inflationary wave, in addition to the repercussions of expansionary policies adopted by global central banks to confront the recession that accompanied the Covid-19 pandemic, have all prompted international institutions to re-evaluate the condition of the global economy and reduce their expectations, which they released in January 2022 regarding global economic growth for 2022.
Their recent expectations reflect this new state of uncertainty and the potential repercussions it will have in the future, and the possibility of stagflation taking place as was the case in the seventies of the last century.
As for Arab countries, in line with these developments in global inflation rates during the first half of 2022, an increase in the general level of prices is expected, affected by the aforementioned international developments, in addition to the impact of the high levels of domestic demand and the increase in consumption taxes, as well as the pass-through effect resulting from currency devaluation in some Arab countries.
As such, according to the expectations of the Arab Monetary Fund, the inflation rate in Arab countries is expected to reach 7.6 percent in 2022, and decline to 7.1 percent in 2023. It is also expected that central banks will work to formulate tighter monetary policies to curb inflationary pressures that expansionary monetary policies left behind during the pandemic and which aimed at addressing the economic stagnation in that period, in addition to the rise in commodity prices as a result of the current global developments.
Therefore, the main challenge facing regulatory and supervisory authorities in Arab countries, as is the case in many countries of the world, is to find the optimal mix of economic, monetary, and financial policies to meet the challenges in the short and medium term without sacrificing long-term sustainable growth.
In light of the aforementioned conditions, what are the prospects for Arab countries’ economic growth during the current year and next?
The growth paths for Arab countries during 2022 and 2023 will be impacted by three main factors, including developments related to the continuation of work on financial arrangements and packages to contain the repercussions resulting from the pandemic, plus those resulting from the current global developments on Arab economies, in addition to the expected course of macroeconomic policies, especially monetary ones.
According to Arab Monetary Fund estimates, the growth rate of Arab economies is expected to rise in 2022 to about 5.4 percent, compared to the rate of 3.5 percent recorded in 2021, driven by many factors, foremost of which is the relative improvement in global demand levels, and high rates of global demand.
Add to that growth of the oil and gas sectors, the continuing adoption of stimulus packages, by Arab governments, to support economic recovery, in addition to the positive impact of implementing many economic reform programs and future visions and strategies aimed at enhancing levels of economic diversification, reforming business environments, encouraging the role of the private sector, supporting human capital, and increasing levels of economic resilience in the face of shocks.
The pace of economic growth is expected to decline in 2023 to record about 4 percent, in line with the decline in the global economic growth rate, the expected decline in commodity prices, and the impact of the gradual withdrawal from expansionary fiscal and monetary policies that support the aggregate demand side.
At the level of Arab oil-exporting countries, these countries will benefit in 2022 from the increase in oil production quantities within the framework of the “OPEC +” agreement, and the continued increase in oil and gas prices in international markets, which will support the levels of public spending that stimulate growth in these countries, helping raise the rate of growth in these countries with overall growth to 6% in 2022, compared to 3.2% for growth in 2021. Meanwhile, the growth rate is expected to decline to 3.7 percent in 2023 in light of expectations of a decline in global oil and gas prices, and the gradual fading of the effects of supporting fiscal and monetary policies.
As for the oil-importing Arab countries, they are expected to record a growth rate of 4.1 percent in 2022, compared to 2.7 percent in 2021, which reflects the challenges they face in terms of their internal and external balances.
A relative improvement in the economic growth rate of these countries is expected at 4.6 percent in 2023, due to expectations of improving aggregate demand levels, and a gradual easing of pressures facing public budgets and balances of payments as a result of the expected decline in commodity prices next year.
There are questions about the potential of a global economic recession, and others who rule out that. From your point of view, to what extent can the global economy fall into a recession?
In our reading of the current global economy coupled with developments at the global level and their repercussions, we find that the possibilities of the global economy entering into a state of stagnation in the future remain, especially if the decline in economic activities in most countries of the world is accompanied by the persistence of high levels of inflation that we are now witnessing.
Currently, in what is known as stagflation, it is difficult to exclude any of the economic blocs, especially advanced and emerging market economies, albeit to relatively varying degrees.
Even in countries that were able to maintain appropriate levels of production, despite current global conditions, the decline in real income as a result of relatively high levels of inflation will play an adverse role due to the decrease in consumer purchasing power.
In the foreseeable future, it is expected that the forecasted decline in the level of investment flows, the decline in government investments, the continuous rise in international energy prices, and the rise in interest rates, will together have a role in the upsurge in unemployment rates, which of course will exacerbate the pressures related to the decline in consumer spending and then the decline in economic activities that, in turn, may be reflected in the form of a recession wave in the global economy.
The rise in oil prices has benefited oil-exporting countries while putting some pressure on oil-importing countries. In your opinion, what are the ways that these latter countries should follow in order to reach safety with the least possible damage?
Oil and related products are considered a strategic commodity in the global market and are affected by regional and international developments that cast a shadow on the economies of countries. Of course, fluctuations in oil prices have different effects on the economies of many countries, whether they are oil exporters or importers.
In 2020, for example, oil prices witnessed a decline as a result of the repercussions of the Corona pandemic and the accompanying total and partial business closures, which led to a decline in demand for oil by importing countries, and consequently led to the accumulation of oil stocks in producers’ silos.
To remedy the matter, members of the group of Petroleum Exporting Countries (OPEC +) agreed to cut production by 10 million barrels per day, to help adjust the price back to normal levels.
Therefore, it is a fact that the rise or fall in oil prices represents a shock that affects the supply side of a country’s economy, whether it is positive or negative, according to the scenario.
In light of expectations of a rise in global oil prices during 2022 due to the impact of the current global developments, it is expected that Arab countries will be affected positively and negatively, depending on whether they are importers or exporters of oil.
For Arab oil-exporting countries, it is natural that the rise in prices will contribute to achieving fiscal growth to support the current account of the balance of payments, as well as the general budget, thus giving the state space to formulate its overall policies with more ability to manage economic pressures.
As for the oil-importing countries, the rise in oil prices is likely to negatively affect the current account balance and the state’s general budget as a result of high financial costs and narrow policy space. In this regard, oil-importing countries must adopt economic policies that will ease pressures on the current account and absorb the price shock on public finances. without compromising the targeted economic growth.
I might add that increasing the levels of crude oil production, as some demand, which is limited in nature, may not contribute to reducing prices in an expected manner. What is required is an increase in the production of oil derivatives, as there has been noticeable inaction or slowdown in global investments in this regard. Also, the oil sector cannot be dealt with in isolation from a comprehensive view of all energy sources, in general.
How do you evaluate the performance of Arab countries, in general, in addressing challenges from varying rates of inflation?
The pandemic has had different and varied repercussions on Arab countries, against the backdrop of different production structures, the degree of openness and exposure to the global market on the one hand, and the varying financial space available to finance stimulus packages and precautionary measures taken by central banks, on the other.
Therefore, what oil-exporting countries have done to address the challenges is different from what those net oil importers have done.
The rise in global oil prices contributed to an increase in revenues, which supported the public finances of the Arab oil-exporting countries. In addition, these countries were able to provide vaccines at an early stage, which helped them get a jump on the recovery stage.
As for Arab net oil-importing countries, they were able to face the challenges arising from the pandemic by redirecting part of government expenditures allocated to government investments to support social security systems and networks, provide unemployment benefits, and support wages, as well as subsidize public utility bills such as electricity and water, and stimulate productive activities, especially small enterprises, while ensuring the intensive provision of vaccinations and healthcare.
This in itself was necessary, and indeed helped to confront and limit the repercussions of the pandemic, but it affected economic activity, which in a large number of Arab countries depends on government investments as one of the main drivers of such economic activity, as these measures have exhausted a large part of the available financial space to the government, in addition to the impact on a number of Arab countries as a result of the decline in remittances of workers abroad, in light of the closures in the economies of labor-receiving countries.
The challenges arising from the pandemic also required, as we mentioned, the application of stimulus financial packages to support families and establishments, which had a positive impact in mitigating the negative repercussions of the pandemic, but it resulted in a rise in the levels of fiscal deficit and public debt.
With regard to the efforts of Arab countries in implementing structural reforms to confront the repercussions of the pandemic, it was clear how important public financial management was as an essential element in the response process to contain the challenges arising from the pandemic, in light of the financial pressures that resulted from the pandemic in terms of high expenses related to health and social services and a decline in tax revenues due to exemptions, deferment of installment payments and other measures to reduce the tax burden.
How do you evaluate the performance of the economies of the Gulf Cooperation Council countries at this stage? Do you think the bloc will succeed in diversifying its economies and benefit from its budget surpluses to implement development projects?
For the countries of the GCC, performance and economic recovery are enhanced by the fiscal and monetary stimulus policies that support the recovery from the pandemic and the efforts to vaccinate the population, which led to the GCC countries as a group achieving growth of about 3.1 percent in 2021. It is also expected that the economic growth gains will continue to be enhanced according to expectations of the Arab Monetary Fund at a relatively high rate in 2022 and estimated at 6.3 percent.
This is a result stemming from benefits related to the rise in oil and gas prices in international markets, in addition to recovery in non-oil sectors, in light of the expectation that the inflation rate in the GCC will stabilize at moderate levels around 2.2 percent in 2022.
With the recovery of the oil sector, the main driver of the GCC and other Arab oil countries, assuming the continuation of the aforementioned global economic conditions, the financial resources will continue to grow, which will enhance government revenues and increase the strength of the financial buffers, also make available and liberating more financial resources for investment projects in light of the development plans and strategic visions of these countries.
The continuation of this situation will provide an opportunity for these countries to implement the strategies and future visions that they launched in past years which are aimed at increasing economic diversification, i.e. reducing the contribution of the hydrocarbon sector to the composition of GDP and its percentage in exports, for the benefit of other sectors, while supporting the role of the private sector in stimulating work and investment environments.
In this regard, the GCC countries have made great achievements at the infrastructure level, such as the quality of such infrastructure in terms of transport, tourism facilities, advanced banking services, digitization, laws, and legislation, bringing these countries to an advanced position in the ease of doing business regionally and globally. This would contribute to attracting more foreign direct investment in sectors other than oil, such as renewable energies and knowledge economy projects, in addition to efforts to localize industries and raise competitiveness and attract large tourism projects, which supports economic diversification efforts, and thus raises the contribution of the non-oil sector to the total GDP.
I must also commend the accelerated and deep efforts and measures towards digital transformation in the GCC, to maximize opportunities and benefit from modern technologies in improving services and creating an environment conducive to attracting investments.
A number of GCC countries top the Index of Modern Financial Technologies (FinxAR), which is issued annually by the Arab Monetary Fund to measure the extent of progress in the manufacturing of modern technologies and their applications in Arab countries.
Do you believe Arab banks are affected by high-interest rates and the resulting decline in lending?
It is not expected that there will be a significant impact of higher interest rates on monetary policy tools, or on the ability of the banking sector to lend.
Financial safety indicators of Arab countries revealed that the levels of capital adequacy and liquidity are high in the Arab banking sector and above the minimum limits established by Basel (III) decisions, where the average capital adequacy ratio for the banking sector in Arab countries was about 17.8 percent by the end of 2021, and the ratio of liquid assets to total assets of this sector reached 32.7 percent at the end of the same period. The ratio of coverage of loan provisions to the total non-performing loans of Arab banks amounted to about 91.1 percent at the end of 2021. These excellent figures reflect the efforts undertaken and undertaken by Arab central banks to ensure the robustness and integrity of the banking sector performance indicators, and to develop legislation, policies, and precautionary measures.
In your opinion, what are the most important economic challenges facing Arab countries in general at the current stage?
Arab countries, like other countries at this stage, are facing economic challenges that require making a lot of efforts and moving towards adopting policies that help support attempts to achieve the desired economic growth and achieve levels of economic and social development that meet people’s aspirations.
Perhaps one of the most important of these challenges, in addition to expectations of rising inflation rates, as we have mentioned, is the high unemployment rates in the Arab region, which registered about 11.3 percent, almost double the global average, according to World Bank data.
The biggest challenge in this context is the concentration of unemployment rates among young people, as youth unemployment in the Arab region has risen to 33 percent, compared to 15.6 percent for the global average respectively.
On the other hand, the challenge of increasing indebtedness rates, in particular, is also considered among the most important challenges facing our Arab economies in light of the rise in public debt levels in the wake of the pandemic, reaching about $756.2 billion, representing about 107.3 percent of these countries’ gross domestic product. Here, the importance of containing public debt trajectories and promoting its movement at sustainable levels is worth highlighting.
This requires a vigorous effort by Arab ministries of finance to fine-tune the considerations of continuing to support economic recovery and considerations of the need to restore financial balances and move toward more sustainable paths for public debts.
In addition to the above, there is an urgent need to enhance the ability of Arab economies to increase levels of fiscal resilience to meet any potential economic challenges. Perhaps the Arab countries’ continuation of structural and institutional reforms is an urgent necessity dictated by the current economic developments, more so than ever before.
Institutional reforms also play an important role in the current phase with the aim of developing Arab business environments to enable the private sector to be an essential engine for growth and employment.
On the other hand, the importance of the Arab governments’ inclination towards accelerating digital transformation and the transition towards a knowledge economy is emerging. The lessons learned from the pandemic indicate that countries which were able to quickly recover from the repercussions of the crisis and deal with its repercussions effectively and efficiently were present in Arab countries that boasted higher levels of digital readiness. If we look at the contribution of the knowledge economy sectors to the GDP of Arab countries, which ranges between 4 to 12 percent, it shows a lower percentage compared to the similar level recorded in many pioneering countries in this field, including China, where this percentage is estimated at about 36 percent.
In addition, it’s important to intensify efforts and develop policies and programs to confront the repercussions of climate change and transition towards green and sustainable economies and finances, in line with the reality and needs of our Arab countries.
No less important than the above is the need to follow up efforts aimed at developing the financial sector in Arab countries to support access to finance and financial services, develop local financial markets, and enhance regional financial integration.
