IMF Chief: Corruption Is 'Key Threat' to Middle East Economies

Published February 10th, 2019 - 07:14 GMT
Christine Lagarde, International Monetary Fund chief. (AFP)
Christine Lagarde, International Monetary Fund chief. (AFP)

Corruption, poor governance and a lack of transparency are the key challenges facing Middle East economies, International Monetary Fund chief Christine Lagarde has warned in a hard-hitting analysis of the region’s economic prospects.

Speaking ahead of the opening day of the World Government Summit in Dubai, Lagarde also warned of the impact for regional economies if further measures to implement good governance practice and transparency were not put in place. 

The IMF is planning talks with regional policymakers to implement new frameworks to strengthen governance and tackle corruption, “the great disruptor of fiscal policy,” she added.

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Her hard-hitting analysis of the region’s economic prospects come against the background of a weakening outlook for global economies. The IMF recently downgraded its forecasts for global growth.

“Unfortunately, the region has yet to fully recover from the global financial crisis and other big economic dislocations over the past decade,” she told regional finance ministers.

“Among oil importers, growth has picked up, but it is still below pre-crisis levels. Fiscal deficits remain high, and public debt has risen rapidly—from 64 percent of GDP in 2008 to 85 percent of GDP a decade later. Public debt now exceeds 90 percent of GDP in nearly half of these countries,” Lagarde said.

She went on: “The oil exporters have not fully recovered from the dramatic oil price shock of 2014. Modest growth continues, but the outlook is highly uncertain—reflecting in part the need for countries to shift rapidly toward renewable energy over the new few decades, in line with the Paris Agreement.

“With revenues down, fiscal deficits are only slowly declining—despite significant reforms on both the spending and revenue sides, including the introduction of VAT and excise taxes. This has led to a sharp increase in public debt—from 13 percent of GDP in 2013 to 33 percent in 2018.”

The bottom line, the IMF boss said, is that "the economic path ahead for the region is challenging. This makes the task of fiscal policy that much harder, which in turn makes it even more important to build strong foundations to anchor fiscal policy.”

She said that there was scope to improve fiscal frameworks in the region, to offset the impact of short-termism and lack of fiscal credibility.

“I am referring to such factors as large amounts of spending kept off-budget and poor risk management. Across the region, it is common for sovereign wealth funds to directly finance projects, bypassing the normal budget process. And state-owned enterprises in some countries have high levels of borrowing—again, outside of the budget,” Lagarde said.

She commended Saudi Arabia and some other Middle East countries for setting up macro-fiscal units, but added: “Perhaps the oil exporters could follow the example of other resource-rich countries such as Chile and Norway in using fiscal rules to protect key priorities such as social spending from commodity price volatility,” she suggested.

Without such a framework, corruption - “a social poison” - becomes a greater risk. “Without trust in the fairness of the tax system, it becomes harder to raise the revenue needed for critical spending on health, education, and social protection. And governments might be tempted to favor white elephant projects instead of investments in people and productive potential. Add this up, and we have a recipe for unsustainable fiscal policy combined with social discord,” Lagarde added.

She was speaking at the Arab Fiscal Forum that traditionally precedes the World Government Summit, which formally opens Sunday for three days of high-level discussion and debate by world thought leaders from the worlds of public policy, business and entertainment.

Pakistan's Prime Minister Imran Khan, actor Harrison Ford and Lebanese Prime Minister Saad Hariri are among 4,000 delegates who will attend the three-day event, along with Estonia’s prime minister Jüri Ratas and President of Rwanda Paul Kagame.


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