IMF’s Lagarde says market swings aren’t worrying, but wants reforms

DUBAI

Sharp swings in global financial markets in the past few days are not worrying since economic growth is strong but reforms are still needed to avert future crises, the managing director of the International Monetary Fund said on Feb. 11.

Christine Lagarde, speaking at a conference on global business and social trends in Dubai, said economies were also supported by plenty of financing available.

“I’m reasonably optimistic because of the landscape we have at the moment. But we cannot sit back and wait for growth to continue as normal,” she said in her first public comments on market movements since the latest round of turmoil at the end of last week, as quoted by Reuters. 

“I’m ringing not the alarm signal, but the strong encouragement and warning signal.”

Global stock markets were hit by wild fluctuations, with the U.S. benchmark S&P 500 tumbling 5.2 percent last week, its biggest weekly percentage drop since January 2016.

The volatility was fuelled by investor worries about rising interest rates and potential inflation.Lagarde repeated an IMF forecast, originally issued last month, which the global economy would growth 3.9 percent this year and at the same pace in 2019, which she said was a good backdrop for needed reforms.

She did not give details of the reforms she wanted to see beyond saying authorities needed to move to regulation of activities, not entities.

“We need to anticipate where the next crisis will be. Will it be shadow banking? Will it be cryptocurrencies?” she said. 

Warning on Arab countries

Lagarde also urged Arab countries to slash public wages and subsidies in order to rein in spending, achieve sustainable growth and create jobs.

Speaking at the one-day Arab Fiscal Forum in Dubai, Lagarde welcomed “promising” reforms adopted by some Arab countries, but insisted much more was needed to overcome daunting economic and social problems.

Low oil prices are weighing on the finances of Arab oil exporters, while importers are battling with rising debt, unemployment, conflicts, terrorism and refugee inflows, the International Monetary Fund’s managing director said.

Almost all Arab countries have posted budget deficits over the past few years and Arab economies grew at just 1.9 percent last year, half the global rate, according to the Arab Monetary Fund (AMF), which co-organized the event with the IMF.   

Yet Arab public spending remains very high, especially in oil-rich Gulf states, where government expenditures exceed 55 percent of gross domestic product, Lagarde said, as reported by AFP. 

She said many Arab governments had taken steps to contain spending, but the measures have often been temporary.

Public spending reforms should focus on cutting costly subsidies and public wage bills whilst boosting efficiency in areas like health, education and public investment, she said.

“There is really no excuse for the continued use of energy subsidies,” Lagarde said.     

“They are extremely costly -- averaging 4.5 percent of GDP among oil exporters and three percent of GDP among oil importers.”  

 All six members of the Gulf Cooperation Council and many other Arab countries have reduced energy subsidies in recent years, but their cost is still high.

Youth unemployment ‘highest in the world’

AMF chairman Abdulrahman al-Hamidy said the value of Arab energy subsidies dropped from $117 billion in 2015 to $98 billion last year, according to a study by his organization.

Lagarde warned that higher growth and stringent reforms were needed to create jobs for young Arabs.       

“Youth unemployment is the highest in the world -- averaging 25 percent, and exceeding 30 percent in nine countries,” she said.

“Moreover, over 27 million hopeful young people will join the workplace over the next five years.”    

Hamidy said Arab economies must grow at 5-6 percent annually to create the necessary jobs, adding that half of the Arab world’s estimated 400 million population is under 25 years old.