Financial inclusion could accelerate economic growth in the Arab world

The International Monetary Fund (IMF) has called for the development of small and medium sized enterprises (SMEs) and financial inclusion in the Arab world.

Christine Lagarde, MD, IMF spoke at the World Government Summit in Dubai, UAE about doing more in Arab countries to increase growth and job opportunities for all. She noted that SMEs help create jobs, diversify economies, and support growth.

"In the Arab region, SMEs represent 96% of registered companies. They also employ half of the labour force. Yet their access to finance is the lowest in the world: lending to SMEs in the region is only 7% of total bank lending.

"We found that closing this financial inclusion gap – with respect to the average of emerging and developing countries – would yield multiple economic benefits:

"- It could boost annual economic growth by up to 1%o, potentially leading to about 15 million new jobs by 2025 in the Arab region.

"- It could also increase the effectiveness of fiscal and monetary policies, by improving domestic revenue mobilisation and monetary policy transmission.

It is clear then, that supporting and enabling SMEs is a key component of any inclusive growth agenda," she said.

IMF research has found that promoting SME financial inclusion requires a holistic approach. "To achieve meaningful, safe and sustainable SME access to finance, there is no magic bullet. And partial approaches are unlikely to suffice," she said.

Three success factors, Lagarde said, are sound economic fundamentals and financial sectors, institutional factors, and alternative channels for SME finance.

This translates into levelling the playing field for SMEs, maintaining a competitive economy and a banking sector that facilitates market entry for SMEs; good governance and financial supervisory capacity, availability of credit information, as well as strong legal frameworks; tapping capital markets and supporting the development of SME capital market segments.

"Fintech is also a potential game changer for SMEs: it can increase competition among credit providers and expand credit information," she said.

A departmental paper on how SME financial inclusion is at the core of the economic diversification, growth, and addressing job creation challenges many countries are facing was launched on February 12.

Source: IMF website. Infographic on boosting economic growth and job creation in the Middle East and Central Asia.

In other announcements the IMF said:

Jordan

Exports in Jordan increased in 2018, supported by the re-opening of the border with Iraq. Tourism has grown strongly, and credit to the private sector has grown at solid rates for the third consecutive year, according to an IMF team who visited Amman from January 27-February 7, to discuss the country’s recent economic developments; economic policies and reforms under Jordan’s reform programme supported by a three-year IMF extended fund facility (EFF) arrangement.

Team leader Martin Cerisola said economic growth remained at about 2% and inflation remained relatively steady, falling below 4% by year-end. "Weak growth and investment remain insufficient to generate more jobs, with unemployment at around 18%, presenting difficult conditions for the population," he said.

“The outlook for the Jordanian economy brings renewed momentum. The re-opening of the border with Iraq and associated trade and investment agreements; the extension and broadening of the trade agreement with the European Union; as well as other efforts to lower the cost of generating energy, all bode well for a steady recovery in investment, exports, competitiveness, and growth. However, challenges still remain, particularly from tighter and more volatile global financing conditions and elevated vulnerabilities."

UAE

The UAE economy is starting to recover from the 2015–16 slowdown caused by a decline in oil prices, the IMF said. Growth momentum is expected to strengthen in the next few years with increased investment and private sector credit, improved prospects in trading partners, and a boost to tourism from Expo 2020.

Non-oil growth is projected to rise to 3.9% in 2019 and 4.2% in 2020. The oil sector’s prospects have also improved with higher oil prices and output. Overall real GDP growth is projected at around 3.7% for 2019–20. Inflation is expected to remain low, notwithstanding the introduction of the value-added tax (VAT) earlier in 2018.

IMF directors agreed that creating a vibrant, diversified, and knowledge-based economy will require continued reforms to boost the role of the private sector and promote talent and inclusiveness. They welcomed recent reforms, including the liberalisation of foreign investment, and encouraged the authorities to swiftly implement them, while broadening and deepening policy initiatives to improve productivity and competitiveness.

Timor-Leste

Government spending is expected to regain momentum in 2019, with non-oil GDP growth projected at 5%. "Inflation rose in 2018 and is expected to reach around 3% by end-2019, below the government’s target of 4%," said Niklas Westelius of the IMF, who visited Timor-Leste from January 14-25 to conduct the 2019 Article IV Consultation discussions.

Westelius added, “Political uncertainty constitutes the main downside risk to the near-term outlook, with the potential to reduce public spending and slow reform efforts. Over the medium-term, insufficient progress to diversify the economy and create private-sector jobs could worsen labour market outcomes.

"Moreover, with oil revenue from active fields expected to end in 2022, continued drawdowns of the Petroleum Fund could pose risks to long-run fiscal sustainability. Beyond the medium-term, the development of the Greater Sunrise fields represents an upside risk, provided that the project is technically and economically viable and that proper safeguards are taken to minimise funding risks.'

Hong Kong

The Hong Kong SAR’s economy is expected to grow 3.5% in 2018 and 2.9% in 2019 according to IMF projections. The organisation said private consumption aided by a tight labour market and investment are expected to continue to support growth, with headwinds coming from the increased trade tensions, tighter global financial conditions, and slower growth in mainland China.

Risks to the outlook include the further escalation of global trade tensions, possible disorderly tightening of global financial conditions, slower-than-expected growth in mainland China, and a sharp housing market correction.

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Armenia's economy is picking up: IMF

On June 23, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation* with Armenia, noting that growth has been satisfactory with inflation under control, the fiscal situation broadly well managed, and foreign exchange reserves enhanced. 

In 2016, the IMF notes that GDP growth was at 0.2%, deflationary pressures persisted, and the fiscal deficit rose to 5.6% of GDP. Economic activity in 2017 has shown signs of recovery, accompanied by a pickup in inflation and private sector credit growth, supported by monetary policy easing.

Real GDP is projected to grow by around 3% in 2017, while inflation is estimated at 2% by end-2017. The risks are that a recent recovery in remittances and copper prices may not endure, and growth in key trading partners could be weaker than expected, the IMF said.

Executive Directors agreed** with the thrust of the staff appraisal, commending the Armenian authorities for their sustained efforts to enhance macroeconomic stability and satisfactory programme implementation despite significant external challenges. Directors noted that the economy is expected to gradually recover in 2017, but significant risks and challenges remain, including those from a narrow growth base and a sharp increase in public debt. They called for continued commitment to sound policies and structural reforms to ensure macroeconomic stability, and foster sustainable inclusive growth.

Directors called for continued efforts to advance structural reforms to foster sustainable and inclusive growth. They underscored the need to promote private sector development and diversify the economy by attracting FDI. In this context, they welcomed the authorities’ growth-promoting initiatives to improve the business environment, encourage competition, and strengthen governance.

It is expected that the next Article IV consultation with Armenia will be held on the standard 12-month cycle.

*Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

**At the conclusion of the discussion, the MD, as Chairman of the Board, summarises the views of Executive Directors, and this summary is transmitted to the country's authorities. Read an explanation of any qualifiers used in the summings-up. 

IMF completes 2017 Article IV consultation with Vietnam

The Executive Board of the International Monetary Fund (IMF) has concluded the Article IV consultation with Vietnam*. According to the IMF Vietnam’s economy continues to perform well, aided by sound economic fundamentals. Growth moderated to 6.2% in 2016, reflecting the impact of a drought and land salinisation on agriculture and lower oil production. 

Weakness in the oil sector continued in Q117, but the underlying growth momentum remains robust underpinned by strong manufacturing activity and foreign direct investment (FDI), robust domestic demand, and a rebound in agricultural production. Inflation rose to around 5% in early 2017 due to increases in administered prices for health care and education. 

The authorities are developing a broad reform agenda, keenly aware of the limited fiscal space, the need to upgrade the growth model at home, and rising risks of economic fragmentation abroad. Bank reforms have progressed, the IMF notes, but nonperforming loan (NPL) resolution, bank recapitalisation, and legal reforms to strengthen market discipline have been sluggish. Good progress has been made on the legal framework for state owned enterprise (SOE) reforms, but implementation has been slow. The authorities are planning to limit the role of the state in the economy, reduce state ownership in enterprises and encourage private sector-led sustainable growth.

2017 growth is projected at 6.3% and headline inflation is projected to stabilise at around 5% as administered prices continue to be adjusted. The current account surplus is expected to decline somewhat, reflecting stronger imports. While the near-term outlook is positive, there are downside risks including from high public debt, slow NPL resolution, tighter global financial conditions, shocks to external demand, and rising protectionism as well as the failure of the Trans Pacific Partnership. On the upside, successful implementation of the authorities’ ambitious reform agenda could raise growth potential and increase resilience to shocks. Fast implementation of the Vietnam-EU and other bilateral trade agreements would fuel exports and FDI.

Executive Directors commended the Vietnamese authorities for achieving robust growth with low inflation, pushing ahead with important reforms to promote private sector-led growth, strengthening the public finances and tackling legacy issues in the financial sector while making progress on poverty alleviation. Directors noted that risks remain from the slow pace of banking sector reform, continued rapid credit growth and limited fiscal and external buffers. They encouraged the authorities to expand the scope of reforms to safeguard macroeconomic stability, raise growth potential and upgrade the growth model to enhance sustainability and productivity.

Directors welcomed ongoing structural reforms and underscored that Vietnam will need to build a sustainable, modern economy. For this, more extensive policy action is needed to reform institutions and raise potential growth. Reforms of the state-owned enterprise sector and improved outcomes from vocational and tertiary education will also be critical. Directors commended the authorities for ratifying the Paris Agreement and for putting climate change and implementation of the Sustainable Development Goals at the core of their policy agenda.

*Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

At the conclusion of the discussion, the MD, as Chairman of the Board, summarises the views of Executive Directors, and this summary is transmitted to the country's authorities. View explanations of qualifiers used in summings up.

IMF sees favourable outcome for Pakistan's economic growth

The Executive Board of the International Monetary Fund (IMF) concluded its Article IV consultation* with Pakistan on June 14, 2017.

Pakistan’s outlook for economic growth is favourable, the IMF said, with real GDP estimated at 5.3% in FY2016/17 and strengthening to 6% over the medium term on the back of stepped-up China Pakistan Economic Corridor (CPEC) investments, improved availability of energy, and growth-supporting structural reforms. Inflation has been gradually increasing but remains contained, the IMF team said, and the financial sector has remained sound.

However, macroeconomic stability gains made under the 2013-16 IMF Extended Fund Facility (EFF)-supported programme have begun to erode and could pose risks to the economic outlook, the IMF warned. Fiscal consolidation has slowed, with the 2016/17 budget deficit target of 4.2% of GDP (authorities’ latest projection) is likely to be exceeded, the IMF said.

The current account deficit has widened and is expected at 3% of GDP in 2016/17, driven by quickly rising imports of capital goods and energy. Foreign exchange reserves have declined in the context of a stable rupee/dollar exchange rate. On the structural front, while the successful implementation of business climate and financial inclusion reforms has continued, some renewed accumulation of arrears in the power sector has been observed, and financial losses of ailing public sector enterprises continue to weigh on scarce fiscal resources.

IMF Directors agreed** that the growth outlook remains favourable, but noted that policy implementation weakened recently and macroeconomic vulnerabilities are reemerging. They  emphasised that sustained fiscal consolidation over the medium term, in line with the Fiscal Responsibility and Debt Limitation (FRDL) Act, is critical to strengthen economic resilience, safeguard fiscal sustainability, and limit pressures on the current account and international reserves.

To this end, Directors recommended mobilising additional tax revenues by broadening the tax base and strengthening tax administration; and enhancing the composition of public spending by containing the wage bill’s growth, further reducing electricity subsidies, and increasing priority social spending. They suggested strengthening the national fiscal federalism framework and public debt management.

Directors stressed the importance of maintaining a prudent monetary policy stance to preserve low inflation, and of further advancing financial sector reforms to continue strengthening resilience and support financial deepening. They welcomed the progress in fostering financial inclusion and implementing the business climate reform strategy, and encouraged the authorities to press ahead with these efforts. Directors also recommended further strengthening social safety nets.

*Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

**At the conclusion of the discussion, the MD, as Chairman of the Board, summarises the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here.

IMF says AML/CFT crucial for financial sector stability in Kyrgyz Republic

• Growth accelerated towards the end of 2016, reaching 3.8% with 0.5% deflation due in part to exchange rate appreciation of about 9% percent.
• Consolidation efforts should continue to meet the 2017 fiscal deficit target of 3% of GDP.
• The passage of the anti-money laundering and counter finance of terrorism law is vital for the stability of the financial sector.

An IMF mission led by Edward Gemayel visited Bishkek from February 9 to 15 to take stock of the latest economic developments, discuss progress on economic reforms, and prepare for the upcoming combined Article IV consultation and fourth review under the ECF programme planned for April. At the conclusion of the visit, Gemayel issued the following statement:

“With external pressures subsiding, economic indicators have improved, but the recovery remains modest. Growth accelerated towards the end of 2016, reaching 3.8% with 0.5% deflation due in part to exchange rate appreciation of about 9%. Despite a shortfall in tax revenue, the 2016 deficit was contained to 4.5% of GDP due to restrained spending on non-priority items and the rephasing of some investment projects.

“Consolidation efforts should continue to meet the 2017 fiscal deficit target of 3% of GDP. It is important to continue to implement revenue and expenditure measures announced last year, including the elimination of the value added tax (VAT) exemption on flour, rationalising the public sector wage bill, and streamlining spending on goods and services. Resisting spending pressures will be critical in the run up to the presidential election. Developing a credible and transparent fiscal rule will help maintain fiscal discipline."

Gemayel added, “The passage of the anti-money laundering and counter finance of terrorism (AML/CFT) law is vital for the stability of the financial sector. The law is necessary to keep the Kyrgyz Republic on the white list of the Eurasian Group on AMl/CFT. Failure to pass the law could lead to loss of correspondent banking relations and cut the financial sector off from the outside world.”

IMF comments on Lao economy

The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation* with the Lao People's Democratic Republic in late January.

Real GDP growth is expected to moderate from 7.5% in 2015 to 7% in 2016. Domestic activity has slowed following a less favorable external environment, and credit growth has also moderated from a high level, the IMF said. While the overall banking system is well capitalised, state-owned bank balance sheets show signs of weakness, with rising non-performing loans (NPLs) and weak capital and profitability.

Inflation is expected to remain low and stable at around 2% at end-2016, aided by a strengthening kip exchange rate. As growth continues to moderate in the near-term, inflation is projected to remain in low single digits.

A failure to consolidate the fiscal position and bring down public debt could undermine confidence in the government’s macro policy framework, raise public debt further and worsen the external position. The economy is also exposed to external shocks, notably a further regional growth slowdown and a deterioration in terms-of-trade and capital inflows.

Executive Directors commended the authorities for their strong macroeconomic performance and progress on poverty reduction despite economic challenges. Directors noted, however, that there are significant vulnerabilities in the external, fiscal, and financial sectors, and that risks to the outlook could materialise from a regional growth slowdown, tightening in global monetary conditions, and capital flow volatility. Against this background, Directors emphasised the need to resume fiscal consolidation, tighten monetary conditions with gradually increased exchange rate flexibility over the medium-term, strengthen financial sector supervision, and introduce reforms to support economic diversification and private sector development. 

Directors noted the rise in NPLs and the under-capitalisation of state-owned banks. To safeguard macro-financial stability, they recommended promptly addressing NPLs, phasing out regulatory forbearance, strengthening sound lending practices and supervision, and recapitalising the state-owned banks. Directors emphasised the importance of addressing supervisory weaknesses and developing a crisis management framework. They also welcomed the Anti Money Laundering/Countering Financing of Terrorism (AML/CFT) law, and encouraged full implementation of the action plan as agreed with the Financial Action Task Force.

Directors welcomed progress on product and labour market openness and gains in poverty reduction. To support more inclusive and broad-based growth, they encouraged further reforms aimed at diversifying the economy, boosting private sector activity, and improving the business climate. In this context, trade integration and improvements in education and health infrastructure were encouraged. Enhancing financial deepening and financial access by small and medium-sized enterprises (SMEs) would also support macro stability and growth.

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*Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

IMF mission says Pakistani economic reform needs to continue beyond EFF

An International Monetary Fund (IMF) staff mission led by Harald Finger, visited Dubai from July 26 – August 4, 2016 to conduct discussions on the 12th and final review of Pakistan’s economic programme, which is supported by a three-year IMF Extended Fund Facility (EFF) arrangement. The staff team met with Finance Minister Ishaq Dar, State Bank of Pakistan (SBP) Governor Ashraf Wathra, and other senior officials.

At the conclusion of the mission, Finger issued the following statement: “After productive discussions, the mission and the Pakistani authorities have reached staff-level agreement on the completion of the twelfth and final review under the EFF arrangement. The agreement is subject to approval by the IMF Management and the Executive Board. Upon completion of this review, SDR73 million (about US$102 million) will be made available to Pakistan.

“Growth is expected to reach 5% in FY16/17, supported by buoyant construction activity, strengthened private sector credit growth, and an investment upturn related to the China Pakistan Economic Corridor (CPEC). Nevertheless, a challenging global environment and declining exports are weighing on growth prospects. Average inflation is expected at around 5.2% in FY2016/17, remaining well-anchored by continued prudent monetary policy. Gross international reserves reached US$18.1 billion at end-June 2016, covering over four months of prospective imports.

“Programme performance in Q4FY15/16 has been solid. Most end-June 2016 quantitative performance criteria (PCs) were met, although the ceilings on the budget deficit and net domestic assets (NDA) of the State Bank of Pakistan (SBP) were exceeded by small margins. We welcome the authorities’ commitment to take remedial actions in these areas. All indicative targets and structural benchmarks (SB) were met, except for the delayed notification of multi-year tariffs for three power distribution companies.

“In the course of the IMF-supported programme, Pakistan’s economy has made significant progress toward strengthening macroeconomic and financial stability and resilience, and laying foundations for higher, more sustainable, and inclusive growth. Growth gradually accelerated, international reserve buffers have been rebuilt, and the budget deficit narrowed significantly, helped by sizeable growth in tax revenue. Inflation declined, helped by lower oil prices and improved monetary and fiscal policies. Regulatory reforms and improved energy sector performance have slowed the accumulation of arrears and begun to reduce outages. Coverage under the Benazir Income Support Program (BISP) has expanded, and stipends increased by over 60%. Regulations to fight money-laundering and financing of terrorism have been strengthened. Despite some delays, the authorities continue to advance in their work toward restructuring and divesting ailing public sector enterprises (PSEs).

“To consolidate and reinforce the gains achieved in the last three years, the economic reform agenda needs to continue after the programme ends. In this context, it will be important to further strengthen public finances and external buffers, broaden the tax net, improve public financial management, strengthen the monetary policy framework, address losses in PSEs, complete the energy sector reforms, and accelerate competitiveness-enhancing improvements of the business climate, including the trade regime. Continued progress with these reforms will be critical to reinforce the authorities’ achievements under this IMF-supported programme."

End-of-Mission statements of IMF staff teams convey preliminary findings after a visit to a country. The views expressed do not necessarily represent the views of the IMF’s Executive Board.

IMF gives Singapore economy thumbs up

The Executive Board of the International Monetary Fund (IMF) has concluded its Article IV consultation* with Singapore for 2016, noting that the Singapore economy continues to perform well despite being impacted by a combination of cyclical and structural factors, originating both at home and abroad.

Growth moderated from 3.3% in 2014 to 2% in 2015. It was 2.2% in the first half of 2016. Unemployment has remained low, but net employment generation slowed rapidly in 2015 and headline inflation has stayed below zero since late 2014. In response, macroeconomic policies have become more accommodative, spearheaded by monetary policy easing and an expansionary budget. Financial sector and macroprudential policies have ensured financial stability. On the external front, lower global energy prices contributed to a higher current account surplus in 2015, though the surplus declined in the first quarter of 2016.

Growth is projected to moderate slightly to 1.7% in 2016, as the full impact of the global shocks experienced in 2015 is felt, and is expected to recover to 2.2% in 2017. Economic activity will be supported by accommodative policies, along with low energy prices and the ongoing global recovery. However, near-term risks are skewed to the downside, including from slow global and regional growth and spillovers from renewed global financial volatility. Headline and core inflation are benign, expected to be -0.3% and 0.8% in 2016, respectively, before rising to 1.1% and 1.4% in 2017 on gradually recovering energy and commodity prices. The current account surplus is expected to moderate over the medium term amid rapid population ageing and reforms to boost domestic demand, including through better health care, pensions, and other social insurance arrangements.

Structural policies continue to focus on moving toward an innovation-based economy that relies less on labor and more on productivity growth, especially in the non-traded sector. Policies focus on targeted support to businesses to promote automation, innovation, and internationalisation. The government is also raising investment in infrastructure and other long-term capital projects and rolling out policies to improve access to education and health care, particularly for the elderly.

Executive Directors observed** that Singapore’s highly open economy enjoys strong fundamentals and continues to perform well, and commended the authorities for their skillful management. Directors noted that Singapore’s strong external position and ample fiscal space allows the authorities to adjust policy settings in response to slower growth and external risks stemming from protracted lower growth in advanced and emerging economies and global financial market volatility. Directors considered the authorities’ expansionary fiscal policy stance and further easing of monetary policy in April as appropriate, in view of the weaker‑than‑expected inflation and growth developments. They agreed that the current accommodative fiscal stance is providing welcome support to activity and applauded the authorities’ willingness to act quickly in response to evolving conditions.

However, a number of Directors saw scope for additional fiscal stimulus to boost domestic demand, close the output gap, and provide insurance against elevated downside risks to growth. In this context, a number of Directors underscored that the current fiscal rule has served the country well for many years, while a number of others saw merit in considering aligning it to the business cycle. Turning to monetary policy, Directors considered that current policy settings are appropriate. They agreed that clear monetary communications are desirable, particularly to avoid short‑run instability. While some Directors considered that more frequent elaboration of inflation prospects would be beneficial, a number of other Directors recognised merits in the authorities’ current approach, which has served the country well and should be retained.

Directors observed that Singapore is at the mid‑point of a decade long restructuring to a knowledge‑based economy. They welcomed the authorities’ more targeted approach to supporting automation, innovation and productivity, while expanding social insurance and safety nets. Directors urged the authorities to increase spending on research and development (R&D), promote private sector R&D, and support new, creative firms. They looked forward to the unveiling of initiatives by the Committee on the Future Economy, which was set up to position Singapore for the future and identify areas of growth.

Directors observed that Singapore’s financial cycle has turned and that credit growth to residents has moderated. They noted that macro prudential policies in place made a decisive contribution to containing household indebtedness and should be retained. Directors considered that high levels of corporate debt warrant caution and close monitoring, although risks are mitigated by companies’ high debt‑servicing capacity.

Directors recognised Singapore’s high regulatory and supervisory standards in the financial sector. They noted that banks have remained profitable with low non‑performing loans and large capital and liquidity cushions as they adjust to changes in the direction of capital flows and lower oil prices. Directors welcomed that the regulation and supervision of banks is being further enhanced, and emphasised the need for banks to remain vigilant. They noted the authorities’ continued efforts to align the anti-money laundering and countering financing of terrorism (AML/CFT) framework with international standards, and welcomed recent steps to strengthen its enforcement.

Directors noted the finding that Singapore’s external position is substantially stronger than is consistent with macroeconomic fundamentals and desirable policies, while acknowledging that considerable uncertainty surrounds the assessment. The current account surplus increased further in 2015, as buoyant consumption only partly offset the narrowing of the oil trade deficit. Fiscal expansion should help reduce the external imbalance in the near term. Rapid population ageing and policies to boost domestic demand and enhance inclusion, including better health care, pensions, and other social insurance arrangements, should over time lead to a significant reduction in Singapore’s external imbalance.

*Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

**At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. Read the qualifiers used in summaries.

Real GDP growth in KSA to bounce back in 2017

Real GDP growth in KSA is expected to slow to 1.2% in 2016, but recover to 2% in 2017 as the pace of fiscal consolidation eases and to settle around 2.25 to 2.5% over the medium-term. Inflation has risen in recent months to over 4% as energy and water prices have been increased, and is expected to ease to 2% in 2017.

The observations were made by the Executive Board of the International Monetary Fund (IMF), which concluded an Article IV Consultation* with KSA on July 18, 2016. The board noted that bank deposits have declined, but growth of credit to the private sector remains strong. Capital buffers are high, non-performing loans (NPLs) low, and banks are well provisioned against loan losses.

Based on current policies, the IMF says that the fiscal deficit is projected to narrow to 13% of GDP in 2016. Non-oil revenues are expected to increase, while spending restraint, particularly on the capital side, will result in a substantial reduction in expenditure.

KSA has begun a fundamental policy shift to respond to low oil prices. The government has introduced a series of reforms over the past year and has recently set out plans for a bold and ambitious transformation of the Saudi Arabian economy in Vision 2030 and the National Transformation Program. Diversifying the economy, creating jobs for nationals in the private sector, and implementing a gradual, but sizable and sustained fiscal consolidation to reach budget balance in five years are key policy priorities.

Executive Directors** noted that KSA faces important challenges stemming from the decline in oil prices. They welcomed the authorities’ timely response, which, supported by sizeable fiscal buffers and a strong and resilient financial system, has maintained macroeconomic growth and stability. Nonetheless, the fiscal and current account balances have moved into deficit and growth is starting to slow. Directors highlighted the need for continued fiscal adjustment and reforms to strengthen and transform the Saudi Arabian economy. In this regard, they commended the authorities’ bold reform plans.

Directors welcomed the ambitious reform goals announced by the authorities in Vision 2030 and the National Transformation Program, and underscored the importance of clear prioritisation and sequencing of the planned reforms to reduce implementation risks and give the economy time to adjust. They supported the authorities’ plan to increase the role of the private sector in the economy by focusing on privatisation and public-private partnerships, improve the business environment, develop local capital markets, encourage foreign direct investment (FDI), and support small and medium enterprises. Directors noted that continued labor market and education reforms are needed to encourage private sector employment of Saudi nationals and increase labour force participation of women.

Directors agreed that a gradual but sizable and sustained fiscal consolidation is needed, and welcomed the adjustment under way. They generally agreed that balancing the budget over the medium term is an appropriate goal and encouraged the authorities to develop a credible medium-term plan to achieve this objective. They supported expenditure and revenue reforms, including continued gradual adjustment of energy prices with compensation for lower-income households, introduction of a VAT and excise taxes, containment of the government wage bill, and improved public investment management and spending efficiency. They recommended accompanying these measures with growth-enhancing structural reforms.

Directors emphasised the importance of developing a medium-term fiscal framework and strengthening the annual budget process, with better integration of the Public Investment Fund and Aramco into the budget. They encouraged the authorities to take an integrated asset-liability management approach to financing the fiscal deficit. They noted that government debt issuance would help establish a risk-free yield curve and support the development of domestic debt markets.

Directors noted that reforms have helped strengthen the financial system, and the banking sector is well positioned to weather lower oil prices and slower growth. They encouraged the authorities to continue to closely monitor credit quality, strengthen the macro-prudential framework, and finalise the framework for bank resolution and liquidity provision. They also recommended strengthening the liquidity forecasting and management frameworks of the central bank.

Directors agreed that the exchange rate peg to the US dollar is the best option for Saudi Arabia given the current structure of its economy, and emphasised that a continued fiscal adjustment is needed to support the peg. They saw merit in reviewing the peg periodically to ensure it remains appropriate, given the desired evolution of the economy away from its current reliance on oil.

Directors welcomed the improvements in economic statistics, but noted that further work is needed to fill remaining data gaps. Publication of more detailed budget data and updates would enhance transparency. Directors encouraged the authorities to subscribe to the Fund’s Special Data Dissemination Standard.

*Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

**At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarises the views of Executive Directors, and this summary is transmitted to the country's authorities. Read an explanation of qualifiers used in summings up.

IMF lists policy priorities for Cambodia

An International Monetary Fund (IMF) mission headed by Sonali Jain-Chandra has visited Cambodia from July 6 to July 20, 2016 to conduct the annual Article IV staff discussions*. During the visit, the mission assessed macroeconomic developments and held policy discussions with ministers and senior officials of the Royal Government of Cambodia, and met a wide range of stakeholders, including representatives of business community, NGOs, and development partners. At the conclusion of the visit, the mission issued the following statement:

“Cambodia is a fast-growing, highly open economy, and just attained lower-middle-income status. In 2015, economic activity remained strong, while inflation rose moderately. Growth is projected to remain robust around 7% for 2016 to 2017, supported by strong garments exports, real estate and construction activity as well as the reduction in oil prices. Over the medium term, growth is projected to slow to around 6¼%  (by 2021) due to a gradual reduction in foreign direct investment (FDI), challenges in export diversification, and a moderation in the credit cycle. Inflation is projected to rise to 3.2% by end-2016 due to a pickup in food prices.

"The current account deficit (CAD) is projected to narrow in 2016 to 9.7% of GDP, from 10.7% in 2015, due to robust garments exports and reduced imports following the completion of major hydro projects. FDI and official sector flows are expected to continue financing most of the CAD over the medium-term.

“The main downside risk to the outlook arises from rapid credit growth, increasingly concentrated in real estate, which threatens to undermine economic and financial stability. External risks include a significant slowdown in China, an appreciating US dollar, weaker growth in Europe and increased uncertainty from the Brexit referendum result, and a sharper-than-anticipated tightening in global financial conditions...The key policy challenges are to secure sustained growth and mitigate growing financial sector vulnerabilities, along with continuing efforts to meet the sustainable development goals and promote inclusion."

The mission also noted that Cambodia is still vulnerable to shocks, and made several recommendations:

“Over the last two decades, Cambodia grew rapidly, its integration with the global economy increased sharply and poverty has fallen significantly. Going forward, Cambodia’s strategic location, China’s changing trade patterns, and ongoing regional integration provide further opportunities to build on this success. Important steps have been taken by the government that will help Cambodia capitalize on these opportunities. Nonetheless, further measures are needed to boost productivity, increase competitiveness, and ensure that the benefits of growth are widely shared. Our discussions covered a range of policies to overcome structural growth barriers and vulnerabilities, including a narrow economic base, weak business climate, high dollarisation, and underdeveloped financial markets. These structural features constrain Cambodia’s growth potential and render the economy and financial system vulnerable to shocks.

"Priorities include reducing energy costs and improving reliability, enhancing transportation links, addressing skills gaps via improving the quality of education and promoting technical and vocational training, as envisioned in the Industrial Development Policy launched by the government in 2015. Efforts should also be expedited further to develop and deepen financial markets, to boost investment efficiency and facilitate macro-economic management."

*Under the Article IV consultation, IMF staff undertakes annual surveillance and analysis of economic developments and policies of member countries for discussion by the Executive Board. The last Article IV consultation discussion with Cambodia took place in July 2015.

Markus Rodlauer, Deputy Director of the Asia Pacific Department of the IMF, joined the mission during the second week.

UAE dealing well with lower oil prices: IMF

On July 20, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation* with the UAE.

According to the IMF persistently lower oil prices continue to weigh on economic sentiment and fiscal and external positions, but large buffers built over time have provided ample policy space, limited negative inward spillovers and contained the weakening of investor appetite.

Non-oil economic activity has slowed to 3.7% in 2015, driven by a contraction of public investment in the context of fiscal consolidation, and lower contribution from domestic private demand. Negative effects on overall growth were partially offset by the increase in oil production. Despite the strong fiscal policy response to adjust to lower oil prices, the fiscal balance turned to a deficit of 2.1% of GDP, while the current account surplus declined to 3.3% of GDP. Banks remained well-capitalised and liquid, though pressures on profitability are emerging as asset quality weakens due to the economic slowdown and rising funding costs.

The IMF expects economic activity to moderate further in 2016, before improving over the medium term. Non-hydrocarbon growth is projected to slow to 2.4 % in 2016 due to fiscal consolidation, the stronger dollar, and tighter monetary and financial conditions. Over the medium-term, non-hydrocarbon growth is forecast to increase to above 4% as the dampening effect of fiscal consolidation is offset by improvements in economic sentiment and financial conditions due to oil price rises, a pickup in private investment in the run-up to the Expo 2020, and stronger external demand.

Executive Board Assessment**

Executive Directors welcomed the United Arab Emirates’ resilience to the oil price shock. Directors commended the authorities for their prudent policies, which helped build large fiscal and external buffers and strengthened the economy. Nevertheless, persistent lower oil prices continue to pose challenges. Directors underscored the need for sustained sound macroeconomic policies to reduce fiscal vulnerabilities, safeguard financial stability, and promote long-term growth.

Directors welcomed the authorities’ commitment to pursue fiscal consolidation. For the near term, in light of the ample buffers, they generally considered a gradual adjustment effort to be appropriate in order to minimise the negative impact on growth. However, stronger fiscal consolidation will be needed over the medium term to ensure inter-generational equity.

Directors encouraged the authorities to diversify revenues and rationalise current spending, while further strengthening public financial management. They welcomed the plans to introduce a VAT and increase excise taxes, which could be followed by a corporate income tax. Directors also recommended phasing out remaining energy subsidies, while protecting the vulnerable. Priority should also be given to curb other current spending, while preserving public investment and enhancing its efficiency. Directors noted that developing a consolidated forward-looking medium-term fiscal framework would assist the authorities in setting direction for fiscal policy, and in aligning resource allocation with the UAE 2021 vision. They encouraged the authorities to strengthen the debt management framework to better account for contingent liabilities from government-related entities and public-private partnerships.

Directors noted that the dirham peg to the US dollar remains an appropriate anchor for price and financial stability. They supported continued efforts to enhance the monetary framework, particularly by improving liquidity management. Directors encouraged further steps to develop domestic debt markets and reduce private sector foreign exchange exposure. They also encouraged the authorities to tap into sovereign wealth funds and international capital markets to finance the deficit.

Directors welcomed the ongoing revision of the central bank and banking law and plans to strengthen banking regulation and supervision. They emphasised that the new law should further enhance central bank independence and governance, align the macroprudential institutional framework with best practices, upgrade banking sector regulation and supervision in line with global standards, strengthen safety nets, and improve the resolution framework. Directors encouraged the authorities to implement their plans to phase in the Basel III capital framework, enforce loan concentration limits, strengthen corporate governance, and move toward risk-based supervision. They supported ongoing efforts to strengthen the anti-money laundering and countering financing of terrorism (AML/CFT) framework and address de-risking.

Directors commended the efforts to further diversify the economy away from oil. They encouraged continued action to increase productivity and foster competitiveness. Efforts should continue to improve the business environment, ease restrictions on foreign direct investment (FDI) in the new investment law, and spur competition. In addition, priority should be given to upgrading the quality of education, promoting innovation and entrepreneurship, and facilitating SMEs’ and startups’ access to finance, notably through an approval of the bankruptcy law and further broadening the credit bureau’s coverage.

*Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

**At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. Read the qualifiers used in summaries.

IMF expects economic growth in the Kyrgyz Republic to reach 2.2% in 2016

An International Monetary Fund (IMF) mission led by Edward Gemayel visited Bishkek in the Kyrgyz Republic from July 8 to 14 to take stock of the latest economic developments and prepare the ground for the third review mission under the Extended Credit Facility (ECF), tentatively scheduled for the second half of September.

At the conclusion of the visit, Gemayel issued the following statement, which conveys preliminary findings after the visit, and do not necessarily represent the views of the IMF’s Executive Board:

“After a difficult start of the year, the pressures on the economy are beginning to moderate, helped by a stabilising regional context. In the first half of 2016, overall and non-gold growth reached -2.3% and 1.2% year-on-year, respectively. Inflation is subdued at 1.3% year-on-year, at the end of June, whereas the som (Editor's note: the som is the currency of the Kyrgyz Republic) has appreciated by 11.3% by early July. For 2016 as a whole, growth is expected to reach 2.2%, while inflation will remain below 3.5%.

“The government should make every effort to keep the fiscal deficit in 2016 within the budgeted 4.5% of gross domestic product (GDP). Meeting this target will require significant efforts aimed at increasing revenues and controlling expenditures. In this context, the recent introduction of a new VAT exemption on imported grain is counterproductive and should be reversed.

“From 2017 onwards, the budget should continue the path of fiscal consolidation, thereby helping to maintain public debt at a sustainable level. Revenues should benefit from the full effect of measures implemented in 2016 to improve tax policies and administration, in addition to rationalising non-priority expenditures. Refraining from spending pressures will be critical in the run-up to next year’s presidential election.

“The National Bank of Kyrgyz Republic (NBKR) should continue to limit interventions only to smooth excessive volatility and allow the som to move in line with fundamentals. The recent appreciation of the exchange rate calls for a careful foreign exchange intervention policy that strikes a balance between financial sector stability and external competitiveness.

“High banking sector vulnerabilities call for the immediate passage of the Banking Law, given its importance to preserving financial sector stability. The Law is essential to reduce the duplication and contradictions prevalent under the existing regulatory framework and strengthen the independence, governance, and transparency of the central bank. Unfortunately, key provisions aimed at establishing a modern and efficient bank resolution framework and protecting depositors’ rights have been removed from the Law during the second reading. The NBKR should exert every effort to preserve the key features of the Law and bring it in line with international best practice.

“The recent completion of the audits of the Debt Resolution Agency (DEBRA) and the banks under its management, as well as the liquidation of the first two banks are important steps forward. Additional efforts are needed to complete the liquidation of all banks under DEBRA by the middle of next year."

IMF analyses Philippine economy

An International Monetary Fund (IMF) mission led by Chikahisa Sumi has rated the performance of the Philippine economy as good, but said that there is scope to do better.

The mission visited Davao and Manila from June 28 to July 12, meeting with the Governor of the Bangko Sentral ng Pilipinas (BSP), the Secretaries of the economic cluster, senior national and local government officials, private sector representatives, and the financial community. A post-mission statement by Sumi noted:

“Real GDP regained strength from a slowdown in mid-2015 to record a robust 6.9% in the first quarter of 2016, in line with our 6% (year-on-year) growth forecast for 2016 as a whole. Both consumption and investment have grown rapidly, while net exports have been held back by weak external demand. Amid strong economic activity, inflation fell below the government’s target band (3±1%) in 2015 and the first half of 2016 due to lower food and fuel prices, but is expected to return to within the target range later this year and in 2017 as commodity prices stabilise. The external current account remains in surplus driven by robust remittances and business process outsourcing receipts, while international reserves are stable and comfortable.

"The strong macro fundamentals provide a solid foundation to meet the remaining challenges. Notwithstanding strong economic growth and improved governance, there is a need to ensure that the benefits reach the broader population. Infrastructure quality and social indicators are still below those of peers. The unemployment rate has fallen to a decade’s low of 5.3%, but significant under-employment and poverty remains.

"The continued solid growth in 2016, despite the external headwinds, is due in part to fiscal stimulus and supportive monetary conditions. The national government budget deficit reached 1.4% of GDP in 2015, and has been below the 2% target over the last few years because of slow budget execution and public financial management weaknesses. Nevertheless, budget execution has improved since mid-2015 reflecting enhanced public finance and procurement management, making the 2% deficit target attainable in 2016. Monetary policy remains supportive of growth and the introduction of the interest rate corridor (IRC) system will help improve monetary policy transmission.

"The current monetary stance is appropriate and should remain vigilant to the impact of additional fiscal stimulus on inflation. The flexible exchange rate regime and strong external position should help cushion the economy from external shocks. The risks to the short-term 2016 outlook are balanced, with upside risks related to a better-than-anticipated execution of the 2016 budget and downside risks emanating from the external environment including Brexit.

"President Duterte’s 10-point reform agenda will anchor policy formulation and structural transformation over the medium term. Given the large infrastructure and social needs and ample fiscal space, we support raising the national government budget deficit to 3% of GDP over the medium term, consistent with a broadly stable debt-to-GDP ratio. We would moreover encourage a comprehensive and equitable tax reform package that raises substantial additional revenue to finance higher productive spending that would crowd in private investment. A higher revenue and productive spending scenario of about 3% of GDP with the expeditious implementation of the 10-point reform agenda would raise the IMF staff’s baseline growth outlook of about 6-7% to a 7-8% range over the medium term. This additional effort scenario would make the Philippines one of the fastest-growing (if not the fastest) economies in the world and help reduce poverty towards the government’s ambitious target."

The IMF suggests that this medium term strategy could include:

A tax reform package that simplifies the personal income tax (PIT) rate structure, indexes tax brackets for inflation, and eliminates the exemptions; the IMF suggests that such a package could be progressive while raising the relatively low revenue ratio through offsetting higher excises on fuel, rationalisation of VAT exemptions, and excises on sweetened beverages. The package could also include simplifying and reducing the corporate income tax (CIT) rate structure while at the same time rationalising tax incentives;

Enhanced infrastructure investment, including in areas that have not benefited from such investment in the past, should help create jobs and make growth more inclusive.
Structural reforms such as liberalising foreign investment and land use will help catalyse the effects of higher government spending; and
Enhanced competition in the crucial transport, logistics, and telecoms sectors should be achieved through steadfast implementation of the competition law and avoiding regulation that unduly discourages new entrants.

"The authorities’ initiatives to strengthen systemic risk monitoring in the financial sector are welcome," the statement added. "The BSP’s micro and macro prudential policies as well as enhanced monitoring of real estate and credit conditions including the introduction of the residential real estate price index (RREPI) have helped maintain financial stability in a challenging global financial environment. We also welcome the regulatory agencies’ concerted efforts to maintain financial stability through the Financial Stability Coordination Council (FSCC), including addressing data and regulatory gaps related to real estate developers and concentration risks posed by conglomerate structures and rising corporate leverage. Capital market development is crucial for growth and infrastructure investment including PPPs while mitigating concentration risks in the banking system. The recent incident involving the unauthorised transfer of US$81 million from Bangladesh’s international reserves to entities in the Philippines highlights the need to tighten anti-money laundering legislation and procedures as well as easing bank secrecy in line with international practice, including making tax evasion a predicate crime."

The mission recommends resubmitting amendments to the BSP charter to support the BSP’s efforts to maintain monetary and financial stability.

"The Philippines favourable medium-term outlook is subject to downside risks mainly emanating from the global environment," the statement added. "On the downside, lower growth in China and the region, tighter global financial conditions, and a surge in global financial volatility could lead to capital outflows and tightening of domestic financial conditions. Should risks materialise, the authorities are well equipped to respond, particularly given the Philippines’ strong fundamentals and ample policy space.”