(for Ahmed) Impacts of the conflict in Ukraine – Business – Al-Ahram Weekly
As the annual spring meetings of the World Bank and the International Monetary Fund (IMF) are due to begin on Monday, attention has turned to how the crisis in Ukraine could affect food prices and levels of consumption. debt in many parts of the world, including the Middle East and North Africa (MENA) region and Egypt.
IMF Fiscal Affairs Department Division Chief Paolo Medas explained the situation in an interview with Al-Ahram Weekly.
What are the IMF’s expectations for global food and commodity prices through the end of 2022?
There is great volatility and uncertainty around commodity prices, given the various shocks we have observed. Prices were already rising as economies recovered from the pandemic-related recession, but Russia’s invasion of Ukraine has caused major further disruptions in commodity trade flows. Futures markets suggest significant price increases in 2022. For example, global food prices rose 34% in March from a year earlier, according to the UN Food and Agriculture Organization. agriculture (FAO).
How could this affect the MENA region?
MENA countries are highly exposed to global food and commodity prices, especially the price of wheat. The heavy dependence of several countries on wheat imports from Russia and Ukraine in the MENA region, as well as disruptions in the supply of potassium fertilizers, exacerbate existing price pressures and problems of food insecurity. Average inflation in the MENA region is expected to remain high at around 14% in 2022, and the poorest households will be more affected, given the higher weight of food in their consumption basket.
But the situation differs considerably from country to country. Some governments have limited the pass-through of higher world prices to domestic consumers through tax cuts, subsidies and price freezes. This is particularly the case for energy prices, which remain well below international prices in several countries of the region. These measures aim to protect households and preserve social cohesion. However, they can have undesirable consequences and lead to even higher international prices and significant budgetary costs.
They will also worsen the situation for low-income countries that do not have the fiscal space to implement them. A better solution would be to provide targeted, temporary and direct support to low-income households, while allowing domestic prices to adjust at least gradually.
When do you expect inflationary pressures to subside?
This is a time when making projections is particularly difficult, as the full impact of the various shocks is not yet fully known. Markets expect commodity price pressures to ease somewhat in 2023, with oil prices falling from their highs as supply adjusts and food prices slightly lower due to the lagged impact of the 2022 harvest. Inflation in the MENA region is expected to decline to around 10% in 2023.
However, risks surrounding the outlook are high, including a protracted war in Ukraine and new sanctions against Russia. The war could lead to a bigger economic slowdown than currently expected, but it could also further disrupt international trade and commodity markets, putting further pressure on inflation. A longer period of high inflation could risk unanchoring inflation expectations (i.e. individuals and businesses could begin to expect inflation to be above target for longer), which will require a further tightening of monetary policy to bring down inflation.
What should MENA countries do in terms of debt management in the face of current challenges?
Public debt in the MENA region, after reaching almost 54% of GDP in 2020, is expected to decrease for the second consecutive year in 2022, and then stabilize at around 44% of GDP in the medium term. However, the outlook varies considerably within the region. Commodity importers are likely to face significant spending pressures and rising borrowing costs, which will make it more difficult to reduce budget deficits and debt, while commodity exporters enjoy a windfall of income.
Countries will need to strike a balance to meet urgent needs, including ensuring access to food for vulnerable households and reducing debt vulnerabilities. Putting in place credible medium-term fiscal strategies to ensure debt sustainability over time could help restore confidence in financial markets and limit the rise in borrowing costs. Marked differences between countries also call for different fiscal strategies. Commodity exporters can take advantage of this to rebuild fiscal buffers, while strengthening social safety nets and making productive investments.
Commodity importers will come under increased fiscal pressure to help vulnerable households, while many could also face tight financing conditions and high debt vulnerabilities. Governments will need to reprioritize spending and mobilize domestic revenue to create space for the most pressing priorities. Low-income countries and fragile and conflict-affected states face significant risks of food insecurity in addition to fiscal pressures. The support of the international community is essential to help in particular those who are very vulnerable to indebtedness, including in terms of debt relief.
How might the conflict in Ukraine affect Egypt’s fiscal balance and balance of payments?
Egypt is exposed to war in Ukraine due to disruptions in wheat imports and tourist flows, as well as rising commodity prices and financial market uncertainty. The recent rise in commodity prices is likely to worsen the current account deficit. It will also put pressure on the budget balance by increasing the cost of food and energy subsidies. The tightening of global financial conditions could have an impact on the balance of payments and the fiscal balance. The government announced a package of fiscal measures to cushion the impact of global shocks and the depreciation of the Egyptian pound on March 21, which includes extending coverage of direct cash transfers to the most vulnerable.
Immediate external pressures came from capital outflows, with the Central Bank of Egypt (CBE) initially drawing on its foreign exchange reserves before allowing the exchange rate to depreciate by around 15% at the end of March. Maintaining exchange rate flexibility will be essential to absorb future external shocks, reduce vulnerability to volatile capital flows, and preserve financial buffers.
What are your expectations for Egypt’s fiscal deficit until the end of the current fiscal year, 2021-2022, which ends in June?
In the current fiscal year, the primary surplus is expected to amount to 1.3% of GDP. Going forward, Egypt’s high public debt and gross financing needs underscore the importance of preserving fiscal discipline and preserving debt sustainability.
What are the IMF’s estimates of Egypt’s debt-to-GDP ratio in the context of the current crisis? How could the government best handle this situation?
Egypt’s debt-to-GDP ratio is expected to reach 94% in FY 2021-22. Going forward, it will be important to preserve fiscal discipline to maintain market confidence and put debt back on a downward path. In addition, the government could pursue its debt management strategy to lengthen debt maturity and reduce large gross financing needs.
*A version of this article appeared in the April 21, 2022 edition of Al-Ahram Weekly.