Although recent vaccine approvals have raised hopes of a turnaround in the pandemic later this year, the IMF believes that renewed waves and new variants of the virus pose concerns for the outlook.
According to the recent report released by the most influential financial institution, amid exceptional uncertainty, the global economy is projected to grow 5.5% percent in 2021 and 4.2% in 2022. The 2021 forecast is revised up 0.3 percentage point relative to the previous forecast, reflecting expectations of a vaccine-powered strengthening of activity later in the year and additional policy support in a few large economies.
It seems for 2021, those with diversified vaccine providers and production have more favorable or broadly unchanged forecasts, while the outlook for those with more limited access to vaccines and those harder hit by the second wave looks weaker. Countries that have put in place stronger fiscal responses to COVID-19 are also expected to have a stronger recovery in 2021, aided by a shallower trough in 2020.
Mr. Jihad Azour, the Director of the Middle East and Central Asia Department at the International Monetary Fund, where he oversees the Fund’s work in the Middle East, North Africa, Central Asia, and the Caucasus, sat down with BM.GE for a better focus on the region.
Thank you, Mr. Azour, for being with us and talking to The Checkpoints. What does this current outlook show us – does it tell anything when the post-Covid period comes – something that all of us are waiting for so impatiently?
Well, first of all, thank you for having me. We are still in a race between the virus and the vaccine, and this race has been exacerbating by the second wave of the coronavirus that has affected many countries in the world. We expect that 2021 will witness a recovery – the recovery though, it’s going to be different for different countries – those who have the capacity to withstand the policy response and to provide additional support to their economies will be able to recover faster.
In terms of 2021, also the uncertainty will remain high because we don’t know to which extent risk of the third wave is real or not. In terms of policy recommendations, we recommend countries to still on saving lives and livelihoods and dedicate the maximum resources to provide the vaccine to their population because this is something that will also allow them to accelerate recovery.
In addition this crisis has shown some weaknesses and also showed some silver linings – technology and environment are two important directions going forward in order to accelerate the recovery worldwide as well as in the region.
What has changed from the last outlook to this one – do we see some certainties along the way?
I would say since the last outlook update two things have emerged: One is the reality of the vaccine – I think this is a very positive development and the diversity of the vaccine sources. But also we had the second wave that was even deeper than the first one – however, countries have developed new methods of dealing with the second wave.
I think 2021 is the year of transition – several countries will see their economies bouncing back – some of them will not recoup and recover the level of the economic development that they had pre-COVI. This crisis has also highlighted some weaknesses – and I would like to highlight three: One is social – certain countries had challenges dealing with the level of informality, providing access to social protection to those who are not included in the economic activities – this is one.
The second important development is that policies matter, and we saw countries who have developed policy responses were able to recover faster. And three – institutions are also very important, and the trust of citizens in the institutions was one important factor to provide the level of assurance to citizen to accelerate the level of vaccination and to respect the rules.
Let me go quote by quote to some of what is seemed to be an important emphasis to me. One you say that countries who have put in place the stronger fiscal responses to COVID-19 are also expected to have a stronger recovery in 2021 – What does the stronger fiscal response mean in this context – is it just spending debt or taxpayers’ money or is there more to how the governments manage the process?
Well, I would say here three things were important. One is to provide targeted and timely support to people and their livelihood and the certain activities that were more affected than others, and certain countries that were for example Georgia, Armenia and other countries tourism is an important sector and therefore providing support to those sectors heavily affected by the crisis was important.
In addition to that Central Banks played an important role in addressing the crisis by providing liquidity, adjusting interest rates and also making sure that the financial system is sound. I would say also what was important is recognizing that this crisis is an opportunity, too. That’s an opportunity to address long lasting issues – for example, in certain countries productivity was low and therefore investing in accelerating the recovery in sectors where growth is potential is bigger was also important, addressing some of the shortages in terms of infrastructure in other countries was important to embrace what this crisis has showed as acceleration – technology was clearly an area that countries need to address further to accelerate; environment too is an avenue for accelerating and creating a new job of opportunities.
Therefore, I think we are now in the situation where it’s very important to keep the focus on protecting lives but also it’s as important to think what the economy will look like after this crisis.
When and how should the economies open up – Don’t you think that this policy of virus containment with lockdowns won’t be sustainable?
Well, of course, the vaccine will be the solution and all our member countries – especially in the region should accelerate the vaccination.
Because the vaccination will protect lives but also will allow the economy to recover faster. Our analysis is showing that it can even increase the level of economy by accelerating the vaccination. Therefore, vaccine is very important, providing vaccine and also making sure that you have the diversity of the sources of vaccination. This is the, I would say, starting point. The second important point is to make sure that you don’t withdraw the policy support fast. By doing so it may abruptly reduce the recovery.
And three I think it’s by also investing in some of the important enablers – education has proven to be very much dependent on the technology going forward as well as also logistics – therefore investing in technology, improving the quality of education, increasing productivity is going to be very important for the various countries in the region, too.
Balancing to support the recovery and debt sustainability will be challenging for the region given that the fiscal space is limited and consolidation will need to resume in 2021 for numerous countries – Is Georgia among these countries?
Well, first of all Georgia has implemented over the past years certain number of important reforms that allowed the economy to withstand an important shock and to be able to respond quickly. The government introduced fiscal measures, as well as also the Central Bank did the same.
The reforms that were introduced in the last 5 years proved to be the right ones because they helped the economy to withstand a very important shock. Let’s not forget that Georgia is an open economy where tourism and certain number of activities are important and those activities were affected by the crisis. Going forward and although Georgia suffered a strong negative growth in 2020, we expect that the recovery could be accelerated.
The issue here is the magnitude of the second wave, the capacity to accelerate the vaccination and use this crisis to accelerate certain number of reforms – investing in education, it’s an important dimension in Georgia and this is something that Georgia has put as high priority; accelerating the role of Georgia to play the role of platform for logistics to be a bridge between East and Europe; accelerate also certain number of structural reforms that will allow the economy to attract more investment and to be more productive. Those are the priorities for Georgia and the coming years and also those are the priorities that the Georgian government has put forward.
I’m stressing this process of consolidation because right now we’re seeing that this might not be as easy as it might’ve looked at the first sight. For example, government has attempted to step away from subsidizing new mortgage loans but now we hear and we see this pressure on the government to resume those – so is there some kind of a magic recipe from the IMF that would make this process of phasing out easier for the governments?
While there is no magic recipe, there are certain basic rules. One – support has to be targeted and timely. It has to be targeted to address sectors that are the most affected and the categories of the population that are most vulnerable, and it has to be temporary because you don’t want to create dependencies. And also you want to make sure that you find the right balance between macroeconomic stability and support to the recovery. And I would say that Georgia did relatively well.
At the time when the shock was bigger on the economy that is an open economy and economy where the services are important. I think what is important going forward is to use the strengths of Georgia and reduce the weaknesses. The strengths are very dynamic – economy that is very productive in terms of ability to attract investment; allow also the private sector to lead the recovery and at the same time use this opportunity to address some of the structural issues – education as I said is one of them, and it’s an important one; repositioning Georgia to benefit from the way the new global economy will be shaped is another one, and three is very quickly to allow the economy to reposition to benefit from the relationship that it has with Europe – especially now that Europe is planning to invest more than 700 billion in euro in the recovery, and make sure that Georgia as enabling country could benefit from that. Those are among the priorities that one could see for Georgia going forward.
You mentioned reforms that Georgia undertook during the past 5 years and I just remembered Fitch Ratings that downgraded government support ratings for Georgia’s three systemic banks – TBC Bank, Bank of Georgia and Liberty Bank – citing the new resolution framework that the NBG has reformed based on the IMF’s recommendations. So what is the logic behind the reforming process of Georgia that any analysis needs to consider?
Well, first we need to recognize that this is crisis like no other, and Georgia is not the only country who has been affected by this shock. I would say what this crisis has revealed that there are certain number of issues that need to be addressed structurally going forward. One – it’s very important to accelerate the transformation in education sector, as well as to develop the infrastructure allow Georgia to regain and play an important role in being more and more integrated in the global value chain. This is one.
Second – technology. Technology proved to be very important ranging from digital money to the utilization of technology to accelerate certain number of public services; using technology in providing social services – medical and education – is important; allow economy to be more competitive by deploying some of the reforms that were planned in terms of increasing the level of competitiveness, attractiveness of FDI, and this is the role where the private sector is going to be critical in increasing productivity but also leading the recovery and making the Georgian economy more competitive.
Of course, the economy that relies on tourism and certain number of services will need to adjust and this adjustment will take time. But I would say if you put those three pillars in place – saving lives, protecting the economy during this difficult moment, make sure that you accelerate the recovery and maintain the macroeconomic stability by making sure that both fiscal situation and the monetary stability are in place – are three priorities and these are the directions that the Central Bank is taking as well as also the Ministry of Finance and the government taking too.
Another quote from this outlook is that in countries with flexible currencies the exchange rate should continue to act as a buffer when needed – please, elaborate a little bit on that – what that means for the Central Bank selling reserves to stabilize currency since it then has a pressure on prices?
The strengths of the policies matter and that is one of the lessons of this crisis, and countries that have the capacity to use the multiple policy instruments should do this. And therefore, fiscal monetary exchange rate are to be used in order (a) to preserve stability and absorb and amortize part of the shock but also to respond providing fiscal support, providing liquidity to the system, adjusting the interest rates are all steps in the right direction.
And of course when you have a flexible exchange rate – flexibility of the exchange rate will allow you or allows you to reduce the impact of the external shock on your economy. Of course this crisis is evolving and with time you adjust those instruments and you make sure that you preserve inflation at the low level, you allow the economy to get access to the liquidity that is needed to finance the recovery and you make sure that certain sectors that are more affected than others are more supported.
Of course, nothing better in this case than regain in demand and the recovery in the global economy, and this is something that the vaccination will help accelerate as well as also making sure that the economy is ready to attract investment.
And this is the direction of policies that we are recommending to Georgia and those are the policies that we need to develop – especially that we are in an uncertain moment: Of course, the economy is recovering but the level of uncertainty remains high and this is why it is very important to remain vigilant.
President of the National Bank of Georgia told me in our interview that at this point the outlook is that the monetary policy will be remaining on the more tightened territory rather than considering easing the monetary policy to support the economy in that way – I would like to hear your thoughts on that…
Again, I think the mix of policy makes a big difference. And in the case of Georgia we saw both central bank and government acting in synchronized way to address the crisis and also to accompany the economy throughout. Where we stand today is at the turning point. We need to accelerate vaccination, and therefore fiscal resources need be dedicated to that. We need to maintain the support to certain sectors and groups of the population that were affected by the crisis until we see there is no need for that going forward.
Three – we need to maintain the liquidity in the system and keep inflation under control, and this is what the Central Bank is doing and last but not the least, we need to accelerate the recovery and invest in the future – technology is going to be an important wave of getting out of the crisis and accelerate the recovery; banks and the financial sector will play an important role in financing the recovery and the most important is the talent of the Georgians who are well educated hard workers and this also will help in accelerating the recovery that hopefully will be based on technology, on green sectors and will allow Georgia to reposition itself to benefit from the new global economy will be.
What should be done with tourism? We mentioned dependency of Georgia’s tourism sector on Georgia’s service economy – UNWTO is talking about some kind of one pass for the travelers, some kind of an app maybe that would try to help trace travelers’ medical history to contain the virus while allowing for travel – what is your take on that – what is the solution there?
There is an immediate need to provide support to kind of flowing those kind of activities – especially to the companies in this sector. But what will help is with the acceleration of the vaccination you will be able to resume normal economic activity including in tourism – therefore, investing in the vaccination, investing in making sure that this second wave of the pandemic is under control will help to accelerate the process of the recovery and will help to bring again this sector back on the level where it was pre-COVID.
Those are some steps. But we need also to recognize that this sector not in Georgia but worldwide has been severely affected and therefore it will take the sector some time to recover and regain full potential that it had before the pandemic.
And my last question to you what can you tell us more specifically about Georgia and the outlook for Georgia’s economic growth?
As you know Georgia has suffered in 2020 and economy contracted by 6.1% and we expect the economy to recover at 4.3% next year, and this recovery will be sustained over the medium term: In 2022 we expect economy to grow at 5.8%. Of course this will allow Georgia to regain the level of growth and the economic activity pre-crisis, and hopefully with the next wave of the reforms with the economy will recoup the ground loss because of the crisis and regain it full potential in the medium term.
Thank you, Mr. Azour for your very interesting insights.
Thank you for having me.