April 26, 2024

I.H.T. Special Report: Global Agenda: Western Finance Bodies Face Challenges in Funding Arab Spring Countries

Governments and institutions like the International Monetary Fund and the European Investment Bank have been quick to offer financial help to Egypt, Tunisia and the other Middle Eastern countries making tentative steps toward democracy.

But whatever the motive behind the offers — benevolence, wanting to bolster Western-style governance or help Western businesses expand — the traditional model used by multilateral lenders looks increasingly unsuitable for the region and difficult to implement, analysts say.

“There is a potential contradiction in that the economic model that these countries need, and that is on offer, has been discredited,” said Mark Malloch Brown, former deputy United Nations secretary general. “The liberal economic programs that these countries tended to adopt in recent years were compromised by the regimes, which enriched themselves and their friends.”

Finding an economic model to replace crony capitalism is critical to addressing the region’s other pressing problems, which include high unemployment, budget shortfalls, high inflation, and a lack of investment.

The I.M.F. estimates that Egypt, Jordan, Lebanon, Morocco, Syria and Tunisia all have unemployment rates of about 11 percent, barely changed over the past two decades. Youth unemployment on average exceeds 40 percent.

Egypt, Yemen, Tunisia and Syria are likely to experience recession this year as economic activity contracts following the uprisings, the Institute of International Finance said recently.

An I.M.F report in May said the external financing needs of oil-importing Middle East and North African countries would exceed $160 billion over the next three years.

This month leaders of the Group of 8 industrialized nations pledged $38 billion in new aid to help underpin the transition to democracy amid complaints that little of a $20 billion aid package promised in May had materialized. Cash-rich Arab states like Qatar, Kuwait and Saudi Arabia have also offered billions, as well as increasing their own spending to try to head off domestic unrest.

In a research report this month, Jean-Michel Saliba of Bank of America Merrill Lynch estimated that the oil-rich Gulf nations would spend $150 billion to accommodate domestic social pressures and in intra-regional fiscal transfers.

The I.M.F. has said it could provide $35 billion in loans to the region, and the World Bank in May announced plans to lend $6 billion over two years to Egypt and Tunisia.

Alongside the Gulf States, Europe may have a central role: It accounts for more than three-quarters of Tunisia’s exports of goods, tourism receipts, workers’ remittances and investment.

One tool of support would be the European Investment Bank, which has a mission to support stability and nation-building in the Union’s partner countries. At the start of the summer, Union members agreed that the E.I.B. could increase lending to the Middle East in a process expected to be ratified soon. That would give the bank nearly €6 billion in financing available for the region until 2013.

Over the summer, the E.I.B signed a €163 million loan to support road upgrades in Tunisia and a €140 million loan to help the Tunisian Chemicals Group, a major phosphates producer, build a fertilizer plant.

Egypt is to receive about half of its funds for the region, followed by Morocco, Tunisia and Jordan. The European Union is also offering Libya access to E.I.B. loans, should a new government seek assistance.

Another vehicle will be the European Bank for Reconstruction and Development, established in 1991 to help countries in Eastern Europe and the former Soviet Union make the transition to market economies and multi-party rule following the collapse of communism.

Article source: http://feeds.nytimes.com/click.phdo?i=7bc9a5fc5bd9be81a3330959ba39d043

I.M.F. Warns of New Austerity Measures Ahead

PARIS — The International Monetary Fund sent a simple message Monday to the Greek people as they struggle to cope with the austerity measures being imposed on them in exchange for a bailout: Prepare for more of the same.

“Consolidation will have to continue,” the I.M.F. said of countries like Greece, Portugal and Ireland that are struggling to close their gaping budget shortfalls. “Continuing fiscal consolidation broadly as planned will support confidence.”

The comments, made in a report after a regular I.M.F. staff mission to the euro zone, come at a sensitive time. Greeks, in particular, are growing increasingly angry about the austerity measures their government has put in place in return for a €110 billion bailout it received a year ago from the fund and European Union countries.

In its report, the I.M.F. also took a broader look at the euro zone and its troubles. It said that if the monetary union is to function, its 17 member states would have to either move toward political union or implement rules that result in tighter cooperation of national budget policies.

Without political union, stronger governance will be “indispensable,” the I.M.F. said. To make a difference, the various policies which are being planned to better coordinate the monitoring of national budgets by other euro zone governments and Brussels “will need to be made more binding and relevant for national decision making,” the report said.

The I.M.F. also said that the debate within Europe about the degree of involvement of the private sector in a second Greek bailout now being discussed was “unproductive.” It said the issue should be settled quickly to avoid the impression that future financial support would be conditional on a voluntary restructuring of debt held by banks and other private-sector investors. The fund has opposed suggestions that the bailout should coincide with private investors being forced to take losses on their Greek debt.

At a news conference in Luxembourg, where he was meeting European ministers, the acting managing director of the fund, John Lipsky, said the I.M.F. would have to be sure that reforms the Greek government has committed to were proceeding before Athens could receive the next slice of aid in the original bailout.

“For a successful review of the existing program with Greece, which means approval of a new disbursement, it requires the I.M.F.’s executive board to conclude that the program is on track and that it is financed,” he was quoted as saying by Reuters.

Greek lawmakers are expected to vote June 28 on a new package of austerity measures designed to increase government revenue after Athens missed fiscal goals it agreed to as part of the bailout it received in 2010.

While the uproar over budget cuts is threatening to topple the Greek government, austerity measures have also brought disquiet in Spain and Portugal. Even in Britain, which is struggling to close a budget gap but which has the highest possible credit rating, plans to raise the retirement age for civil servants have brought the threat of a general strike.

The fund also said that continued financial support for the so-called periphery of the euro zone would still be needed from the core members like Germany and France.

One of the tools created for this — the European Financial Stability Facility — will have to “scale up,” the report said, and there must be a “further extension of its potential uses,” for example, as an instrument to intervene in markets and to guarantee more funding for governments like Greece.

It also suggested ways that the euro zone could move away from its dependence on the banking systems for finance.

“European regulators should welcome and actively support the development of market-based alternatives for corporate finance to reduce the dependency of the euro area economy on the banking system,” it said.

One option might be a new lending facility, operated by the European Central Bank but with the explicit backing of euro zone governments, to help refinance illiquid assets, it said. In general, unconventional monetary measures — a reference to the E.C.B.’s huge program of providing liquidity to banks — should remain in place “until financial market tensions have been addressed,” the I.M.F. said. The results of bank stress tests, expected to be released in July, will provide an important opportunity to begin recapitalizing banks, it said.

The fund also urged the central bank to move “cautiously” as it raises interest rates to counter inflation. It said the E.C.B. should “help limit stress from higher interest rates that could be felt in the periphery.”

A “broadly sound” economic recovery is underway in the region, the fund said, but it also warned that the sovereign debt crisis “threatens to overwhelm this favorable outlook, and much remains to be done to secure a dynamic and resilient monetary union.”

The reforms proposed by the fund are classic free market policies of the kind advocated for years from Brussels, Frankfurt and Washington. These include an “ambitious drive to open up the economy to foreign competition and foreign ownership along program commitments” and privatization.

Article source: http://feeds.nytimes.com/click.phdo?i=89f37567e5ffd82a78c7aadbf1bd4a8d