Enterprise talks to Jihad Azour, IMF Director for ME and Central Asia: With the commodities supercycle in full swing across the globe, accompanied by rising inflation, the International Monetary Fund (IMF) revised its growth projection for Egypt’s economy in its latest global economic outlook to 5.2% in FY2021-2022 , down 0.5 percentage points from the 5.7% growth it had forecast for the same period in April. Overall MENA growth projections on the other hand were revised upwards by 0.4% to 4.1% in 2022.

We sat down with director of the Middle East and Central Asia Department at the IMF Jihad Azour to talk about the MENA’s upgrade and Egypt’s downgrade, the impact of rising commodity prices, inflation and vaccine supply on the region.

Edited excerpts from our conversation-

Covid has impacted Egypt’s growth because the country’s economy is highly dependent on tourism and social contact sectors. Egypt’s GDP growth held strong during 2020 due to the buffers it had built in the past, including monetary and fiscal measures. But the IMF’s downgrade of Egypt’s growth projections in FY2021-2022 comes in light of declining tourism numbers over the previous year. Accelerating vaccination, as well as reactivating the structural reform agenda, will be important factors in helping Egypt accelerate recovery,

We expect the increase in prices in light of the rise in commodity prices and inflation rates to remain this year, and then gradually start receding in 2022. The real issue for us this year is the fact that the increase is driven by food prices, and food is an important item in the basket of many families in the region, especially those who are in the low income vulnerable categories. It's very important to address the social dimension of that. We still think that with inflation being temporary, the measures that are introduced so far are sufficient, but we are asking central banks to remain vigilant and when needed, to take additional measures to avoid any de-anchoring of inflation expectations.

Covid-19 disruptions to supply chains had a milder effect on oil exporters thanks to the subsidy system in place. Measures introduced early on, as well as vaccinations, allowed them to have a smoother re-opening.

Current inflation risks should not necessarily be met with extreme measures. In the majority of cases, inflation is being driven by strong recovery and capacity shortages. Therefore, it's important not to introduce permanent measures if the inflation risk is not expected to be long-lasting.

But there are a few strategies that could reduce tensions on artificially inflated prices. These include improving supply chains, reducing any potential bottlenecks that exist in your economy, and allowing more market practices to prevail. There is also a need to recalibrate the support measures that were introduced during covid to make them more effective at serving those who are in need, while unwinding some of the measures that are no longer necessary.

The impact of rising oil prices on energy-importing countries will be seen in their current account first. This could lead to an increase in costs of production, especially in countries where the public transportation system is not efficient. It could increase the cost of transport, especially for low- and middle-income groups in countries with generous subsidy systems or inefficient utilities, like Lebanon, where this is already taking place.

Countries like Egypt, who had already reformed their subsidy system, will feel less of an impact on their balance of payments. Several countries have already started to reform their subsidy system, gradually moving from a commodity-based subsidy to an income-based subsidy, which lessens the impact of rising prices. In Egypt, for example, the development of the Takaful and Karama programs and the removal of gasoline subsidies helped the government address this issue and limit its impact.

Increased vaccination rates and the recovering oil sector are behind MENA’s improved growth forecast of 4.1% in 2022. Countries who have accelerated vaccination were able to recover faster. Since the beginning of the year, there has been improvement in economic activities, especially in GCC countries and Morocco, which have introduced efficient tracing and tracking measures, besides pushing for vaccinations. This can also gradually be seen in Egypt, Jordan and Tunisia. Saudi Arabia, for example, was able to reduce its daily infection count from 5k to 50, and the gradual improvement in oil and gas prices helped the recovery of all GCC economies. In 2021, the non-oil sector will gradually drive the recovery in the GCC as production increases, but the oil sector will contribute to growth in 2022.

But vaccine supply is not the only issue — logistics and acceptance of vaccination are equally important. Countries that have diversified their vaccination supply were able to preserve the capacity to vaccinate faster, but streamlining vaccination logistics and processes are equally important. There are certain countries who were able to accelerate the process because they had put a logistical chain in place, such as the UAE and Morocco. The third important aspect is the issue of the public accepting the need for vaccinations. Regulatory frameworks — such as requiring proof of jabs for social activities — can accelerate this process.

A lagging vaccine rollout is a huge risk for economic recovery. The UAE, Saudi Arabia, and Qatar were able to open up the economy given their high rates of vaccination. The IMF provided special drawing rights (SDRs) to move vaccinations forward and we hope that they will be used in several countries where financial issues limited the process. Our analysis shows that if a country accelerates vaccination, it could add additional growth of almost 0.5%.

Rising unemployment and weaknesses in the corporate sector are also risks. Countries who are lagging in terms of vaccines also face the risk of increased unemployment, and increased vulnerability and weaknesses in the corporate sector, which will delay their recovery.

But it all depends on the level of contact, and the digitization of each sector. Sectors where technology is very well entrenched have recovered faster, while sectors more reliant on human contact and informal sectors have lagged behind. The reformation of labor markets, providing better infrastructure for women to work, and investing heavily in technology and the digital climate will aid the recovery process.

The fund has been supportive to Egypt over the last few years. The IMF provided the country with an extensive program in 2016, which was successfully implemented and helped Egypt increase its access to donor funding. During the crisis, we provided the country with USD 8.5 bn, and a one-year stand-by agreement. Recently, we also offered USD 2.8 bn in SDRs.

But the form of coming partnerships depends on the government’s strategies. We are in regular dialogue with the authorities to provide technical assistance and policy support. Now it depends on the strategies that the authorities want to pursue.