IMF update

 

Saudi Arabia Saudi Arabia to Grow at Fastest Pace in a Decade (Photo: Mlenny/iStock by Getty Images) By Amine Mati and Sidra Rehman Saudi Arabia is likely to be one of the world’s fastest-growing economies this year as sweeping pro-business reforms and a sharp rise in oil prices and production power recovery from a­ pandemic-induced recession in 2020. Gross domestic product is expected to expand by 7.6 percent, the fastest growth in almost a decade, according to our recent Article IV consultation report. Despite higher prices for imported commodities, inflation will remain contained at 2.8 percent in 2022 as the central bank tightens policy in line with the US Federal Reserve. Public finances and the external position will strengthen substantially thanks to increased non-oil revenue and higher proceeds from oil exports. Reserve buffers will remain ample. Maintaining control of public spending despite higher oil proceeds will be important, but there is scope for more targeted social spending. Improvements in tax policy and revenue administration to raise more taxes from non-oil activities would help support fiscal consolidation. Managing oil revenues in a sustainable manner, so that spending does not rise and fall in line with the price of oil, would promote fiscal sustainability and prevent a return to previous oil-driven cycles of boom and bust. So too would far-sighted budget planning and policies to diversify the economy. Reforms to energy prices so that domestic fuel prices converge with international prices would generate fiscal savings as well as support the authorities’ climate objectives, set out in the Saudi Green Initiative. Ongoing efforts to strengthen social safety nets through targeted schemes would protect the vulnerable from higher energy bills. With strong central bank supervision, the financial sector remains resilient and systemic risks are low. Increases in interest rates are expected to have only a limited impact on the Saudi economy in an environment of high oil prices and strong liquidity. Continued improvements to the framework for financial sector regulation and sustained monitoring of rising mortgage lending are important to prevent risks from materializing. Saudi Arabia’s sovereign wealth fund, the Public Investment Fund, should continue to focus on high returns and greater private sector involvement, including as it continues to implement “Giga projects”. Reform momentum The authorities’ continued implementation of Vision 2030 policies will help diversify and liberalize the economy and thus pave the way to more stable growth. Saudi Arabia is taking impressive steps to improve the business environment, attract foreign investment and create private-sector employment. These initiatives, combined with governance and labor market reform, have made it easier to do business (a business can be registered in just three minutes), increased the number of industrial facilities, and raised female participation in the labor force. In addition to the removal of formal restrictions and legislation ensuring equality of employment, female labor force participation has benefited from transport subsidies of up to 80 percent for the cost of a taxi fare, employer incentives for hiring Saudi women, and childcare support. As a result, the proportion of Saudi women in work has doubled in the past four years to 33 percent, exceeding the 30 percent target set under the 2030 plan and the 27 percent average for the Middle East and North Africa. Growing digitalization has the potential to boost productivity given a young population that is adept at using technology. Digitalization accelerated during the pandemic including through and online health services, virtual courts, distance learning, and an online finance platform for public procurement known as Etimad. Saudi Arabia’s economic outlook is strong. Maintaining the Kingdom’s long-term prosperity depends crucially on sustaining the reform momentum. **** Amine Mati is an Assistant Director and Sidra Rehman is an Economist. Both are in the IMF’s Middle East and Central Asia Department.   RELATED LINKS Saudi Arabia and the IMF Country Report

For this episode of our special series, Women in Economics, Sabina Alkire talks about tackling poverty beyond just the numbers.

Women in Economics: Sabina Alkire on Tackling Poverty Beyond the Idea of Material Wealth August 17, 2022 (Photo: Oxford University) Mahatma Gandhi once said, "Live simply so that others may simply live.” In this podcast, we hear from an economist who believes there is more to poverty reduction than just money. Sabina Alkire began her long career helping the poor doing volunteer work alongside the likes of Mother Teresa- then studying theology before turning to economics. Today, Alkire heads the Oxford Poverty and Human Development Initiative (OPHI) and is one of the creators of the Multidimensional Poverty Index (MPI), which the United Nations uses to identify and help the most vulnerable people in the world. Journalist, Rhoda Metcalfe spoke with Sabina Alkire to discuss her work for our special series on extraordinary Women in Economics. Read the F&D profile Sabina Alkire is Director of the Oxford Poverty and Human Development Initiative at the University of Oxford. Listen to the podcast Read the transcript   ***** Thanks for listening to the podcast. We're always looking to improve your experience so let us know if you have any suggestions! Send your comments to me at bedwards2@imf.org.   Bruce Edwards Producer, IMF Podcasts

Sharing the risks between public and private sectors would direct a greater share of the world’s financial assets to climate projects.

Dear maria, We just published a new blog—please find the full text below.  Public Sector Must Play Major Role in Catalyzing Private Climate Finance (PHOTO: TEBNAD/ISTOCK BY GETTY IMAGES) By Kristalina Georgieva and Tobias Adrian Climate change is one of the most critical macroeconomic and financial policy challenges that IMF members face in coming decades. The recent spikes in the cost of fuel and food—and the resulting risks of social unrest—underline the importance of investing in green energy and boosting resilience to shocks. It will require massive global investments to address the climate challenge and vulnerabilities to shocks. Estimates range from $3 trillion to $6 trillion per year until 2050. The current level at about $630 billion is just a fraction of what’s really needed—and very little goes to developing countries. That’s why we need a major shift to harness public and, especially, private financing. With $210 trillion in financial assets across firms, or roughly twice the gross domestic product of the entire world, the challenge for policymakers and investors is how to direct a big share of these holdings to climate mitigation and adaptation projects. This is the focus of a new IMF Staff Climate Note on mobilizing private climate financing in emerging market and developing economies. It explores the factors that limit climate finance and what policymakers can do to address them. Constraints What prevents money from flowing in greater volumes to climate projects outside of advanced economies? Incentives are at the heart of the problem. Investors have plenty of alternative options to generate returns—including fossil fuels in the absence of robust carbon pricing. And currently, green projects in emerging markets and developing economies simply do not justify the risks. For example, both mitigation and adaptation investments often come with high upfront costs, multiple technical challenges, a long time horizon, and unproven business models. Add to that poor data, risks associated with currency fluctuations, macroeconomic conditions, an unpredictable business environment, and the perceived potential for political upheaval. As a result, many climate opportunities are unable to secure sufficient financing. Those that do are most likely to attract a small pool of specialized investors demanding high returns in a developing and relatively illiquid asset class, with debt being the main instrument. This is particularly the case for renewable energy companies, which operate in illiquid markets and have long-term financing needs. For instance, there is evidence that large investors screen out companies with a market capitalization of below $200 million, a threshold that relatively few renewable energy companies clear. And the compensation that the market expects in exchange for owning the asset and bearing the risk of ownership, termed as cost of equity, for climate investments for impact investors is in the 12-15 percent range in frontier emerging market and developing economies. This suggests it could be even higher for commercial investors. Unleashing private sector financing These obstacles are not insurmountable. But addressing them—to change the incentives for domestic and foreign investors—will require coordinated and determined action across the public and private sector. The role of the public and the private sector financing varies across countries depending on country-specific characteristics and the local economic and institutional context. Blending public and private sector finance is useful to de-risk these investments for private sector capital in general, through for example first loss investments or performance guarantees. For example, the public sector could invest equity—which brings higher risks, if the underlying asset loses value—or provide credit enhancements to improve creditworthiness of the projects. Both would lower the cost of investment by reducing risk to the private sector. By taking an equity position in climate investments, the public sector would bear much of the investment risk, but it would also see upside benefits when investments succeed. Multilateral development banks will have an important role in this type of arrangement. They are already major providers of climate finance, especially debt which makes up more than two-thirds of the $32 billion disbursed in 2020. More innovative approaches—such as equity—would help to leverage more private capital and would be particularly helpful to the many emerging markets and developing economies already carrying heavy debt burdens. Other financing instruments will also have a role to play. Think of public-private partnerships or multi-sovereign guarantees that help achieve higher leverage ratios. And underwriting the risks from specific factors such as project completion or political instability can be particularly helpful in easing high-risk premia that serve to impede private capital. A forthcoming analytical chapter of the October Global Financial Stability Report will take a more in-depth look at financial markets and instruments in scaling up of private climate finance in emerging market and developing economies. Of course, all these tools must be deployed carefully. Prominent among the pitfalls is the potentially large public debt increases through the crystallization of contingent liabilities—so hard limits on the state’s exposure should be appropriately judged. In Uruguay, for instance, a law caps the state’s total public-private-partnership liabilities and fiscal transfers to private operators to 7 percent and 0.5 percent, respectively, of the preceding year’s GDP. The role of policy Beyond financing, governments can use several policy tools to help attract private sector capital toward climate opportunities. A first priority is robust and predictable carbon pricing. This would help generate incentives for private investment in low-carbon projects, promote a more transparent market and allow investors to make informed decisions in different markets. The public sector can also provide leadership in establishing a strong climate information architecture to further improve decision-making and risk pricing, as well as preventing “greenwashing.” Ideally, this would comprise high-quality, reliable, and comparable data and statistics; a globally harmonized and consistent set of climate disclosure standards; and globally agreed principles for climate finance taxonomies. Here, the IMF had rich discussions on how to close climate finance data gaps with other international organizations and stakeholders at a statistical forum in November, and recently co-authored a report for the Network for Greening the Financial System setting out the urgent steps that are needed to bridge the data gaps. What the IMF is doing The IMF is also contributing elsewhere, including through surveillance, capacity development, financial sector risk assessments, and climate data and diagnostic tools. Of particular importance are programs to promote climate-friendly management of public finances and public investments. As well as promoting accountability, transparency and more effective spending, these measures can also increase domestic revenues and mobilize external funding from donors and the private sector. Where emerging markets and developing economies have limited fiscal space, the new IMF Resilience and Sustainability Trust could help. With its focus on longer-term structural changes, such as climate change, we expect it to play a catalytic role and thus create a conducive investment environment. Again, the goal is to attract additional financing particularly from the private sector. After all, climate change is a global challenge that requires financing on a global level Jeff Kearns Managing Editor IMF Blog jkearns@IMF.org   Thank you again for your interest in IMF Blog. Read more of our latest content here. Take good care!