Christine Lagarde, Managing Director, IMF: Viewpoint

Viewpoint: Christine Lagarde

Fiscal policy plays a vital role in creating and nurturing sustainable and inclusive growth. This is because we need fiscal space for spending on health, education, social protection and public investment, which are all key priorities in the Arab world. Unfortunately, this region has yet to fully recover from the global financial crisis and other big economic dislocations over the past decade. Fiscal deficits are still high, and public debt has risen sharply. This is despite significant reforms on both the spending and revenue sides in many countries, including the introduction of both value-added and excise taxes.

At this juncture, expansion is weakening and risks are rising. The global economy is expected to grow by 3.5% in 2019 – 0.2 percentage points below what we expected in October 2018 – against a backdrop of escalating trade tensions and tightening financial conditions. Unsurprisingly, a weaker global environment has knock-on effects on the region through a variety of channels, including trade, remittances, capital flows, commodity prices and financing conditions. The economic path ahead for the region will be challenging, reinforcing the need to build strong foundations to anchor fiscal policy.

The two key pillars of good fiscal management are strong frameworks, and good governance and transparency. A good fiscal framework outlines a set of laws, institutional arrangements and procedures needed to achieve a country’s fiscal policy objectives. Such a framework allows governments to map out budgets over the medium term in a way that reflects clear, consistent and credible goals.

There is scope to improve fiscal frameworks in this region. Some of the weaknesses are short-termism and insufficient credibility. Focusing on the immediate horizon makes it harder to implement critical, longer-term reforms in such areas as: high public wage bills; effective social protection systems; and harmful fuel subsidies. 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 from outside of their respective budgets. Addressing these fiscal risks would have the effect not only of enhancing budget credibility and transparency, but also of helping keep a lid on corruption. Numerous countries, however, are strengthening their fiscal frameworks, many with IMF assistance. Saudi Arabia, Kuwait, the UAE, Sudan, Qatar and Lebanon have all set up macro-fiscal units, and Egypt now publishes a fiscal risk statement with its budget, along with an internal in-year budget risk assessment. 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. The second pillar of good fiscal management is good governance and transparency within the institutional frameworks and practices of the public sector. This is crucial for legitimacy, fostering a clearer understanding of policy objectives among citizens to enhance their voices and generating buy-in for fiscal policy.

Weak institutions imply weak policy foundations, largely because there is inadequate legitimacy, public accountability and even corruption. The latter is social poison that feeds discord, disengagement and disillusionment, especially among young people. The word corruption, after all, comes from the Latin root for rotting and breaking apart. The word in Arabic, fasad, also connotes this idea of rotting or coming undone. With better governance, we can replace the “disintegration” of corruption with the “integration” of all into a productive economy. We can replace fasad with islah, or reforms, to set things right and to reconcile people with one another.

The above is adapted from a speech given at the World Government Summit in Dubai on February 9, 2019.