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Fri 28 Oct 2016 12:18 AM

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The money man: IMF's Masood Ahmed

As the International Monetary Fund director for the Middle East and Central Asia for eight years, Masood Ahmed has experienced just about every economic rollercoaster turn possible. Days before retiring, he discusses oil, conflict and jobs

The money man: IMF's Masood Ahmed

For Masood Ahmed, spearheading the International Monetary Fund’s (IMF) mission in the Middle East for eight years has not been easy.

The Pakistani has witnessed the fallout of the 2008 global financial crisis, the Arab Spring, ongoing conflicts in Syria and Yemen, and a dramatic collapse in oil prices. As Ahmed prepares to retire on October 31, he admits he has one regret.

“Looking back, one regret I have is that in the run-up to the Arab Spring in 2011, we were not able to appreciate the extent of popular discontent with economic policies that ultimately led to these uprisings,” Ahmed tells Arabian Business.

“I learned from this experience that it is not enough to look only at aggregate macroeconomic indicators; we must also examine the micro data and social trends that lie behind these indicators to get a better understanding of prospects and risks.”

But he quickly adds, “The Middle East has been going through some important changes during the past eight years. I am glad that, along with my colleagues at the IMF, I was able to contribute to helping the countries of the region in addressing these challenges.”

The IMF estimates growth across Gulf nations will be around 1.7 percent this year, with the six-nation bloc likely to amass a combined cumulative fiscal deficit of $500bn for 2016-2021.

In its latest report, issued on October 19, the IMF says “little” improvement is expected in 2017, with oil prices projected to remain low. It expects only Iraq, Kuwait and the UAE to see budget surpluses by 2021, while conflicts in Syria and Yemen will continue to affect confidence in the region.

“This reform movement on balancing the budgets will need to continue over a number of years despite the policies implemented,” Ahmed says.

He expects the various deficit-reduction measures, including increasing energy prices and reining in public wage bills, will progressively help GCC countries adjust to the new reality of low oil prices.

The GCC's planned value-added tax must be implemented simultaneously, Ahmed says.

“They have looked at cutting capital spending, halting some projects, raising energy prices and managing public sector wage bills - all of these are a good measure. As a result, you see an improvement regarding their spending profile this year compared to last year,” Ahmed says.

“Different countries will balance their budgets at different times. It depends partly on where they start from and on how much they have in terms of the buffer.

“In our view, all of them should proceed and get adjusted to the new reality of oil prices.”

Ahmed says Saudi Arabia’s plan to balance the budget over five years is a “reasonable” expectation. Its budget deficit is already narrowing following the release of Vision 2030, the implementation of austerity measures and the kingdom’s debut record bond sale earlier this month, worth $17.5bn.

“The spending in Saudi Arabia last year was 12 to 13 percent lower than it had been a year before. It is expected to be another 12 to 13 percent lower next year… so they are progressively cutting back spending.

“Also their budget deficit is beginning to come down, and this year the deficit will be around 13 percent… next year 10 percent. And this is part of a process to bring their deficits down over the time.”

The important thing, he asserts, is to accompany the budget-balancing measures with strategies that will create job opportunities and growth outside of the government sector, urging the need for labour and capital market reforms.

Saudi Arabia’s gross domestic product growth fell to 1.4 percent year-on-year in the second quarter of 2016 - the lowest in more than three years - while the non-oil sector expanded just 0.4 percent after shrinking 0.7 percent in the first quarter 2016. The country’s economic growth will bottom out at 1.2 percent this year, recovering to 2.0 percent in 2017, according to the IMF.

It warns the kingdom will face a “strong” dent in growth this year, despite higher oil exports due to higher production and lower domestic consumption.

Kuwait reported its first budget deficit in 16 years in the year to March 31, 2016.

Ahmed also warns unemployment must be a top priority for the region, with an estimated 1 million jobless young people in the GCC by 2021.

“It is urgent to begin addressing these issues because you will have about 2 million young people coming into the labour market in the GCC over the next five years,” Ahmed says. “And without more of them getting an opportunity in the private sector, you will have a million of them without jobs by 2021.

“So clearly you need to start acting on that now as it requires time to change the mindset, skillset and incentive structures for people to work in the private sector. I think that set of measures are important to be put in place as soon as you can.”

Part of the problem has been a disconnect between GCC school curriculums and the skills needed in the workplace.

“In many cases, people need to get the right skills to be able to participate in the private sector. When you look at what they are learning at schools and how they are learning, I think, historically many of the nationals in schools have learned things that made them more equipped for the public sector and now if you want them all to go to the private sector that will require different skills,” Ahmed says, echoing a view expressed by many businesses in the region.

“Remember, the skills that you need to work in the private sector are themselves changing, not just in the Gulf but all over the world. Maybe half of the jobs for which people are studying around the world won’t exist in 10 years’ time from now.”

GCC consumers are also facing a significant economic change, through the introduction of a value added tax (VAT) from early 2018.

Ahmed agrees with independent consultancies that suggest the VAT will be less distorting to the economy than other forms of tax, and will become a major source of revenue for the Gulf countries seeking to fill the gap made by lower oil prices.

“It is a tax that we encourage and many other countries have it in place,” Ahmed says. “It is important that the tax is done in a coordinated way, as the GCC is a single market, [so that] will help ensure it does not create any barriers to transport and disadvantages to firms operating in this region.”

Saudi Arabia's King Abdullah Economic City will host international financial firms.

While Ahmed says personal income tax in the GCC has so far been ruled out, the IMF believes there is room for other revenue-raising fees.

“[Personal income tax], at the moment, is not on the agenda. There are other taxes which can help [though], such as property taxes, taxes on assets and corporate income tax,” he says.

Such taxes have been flagged previously but were taken more seriously following the fall in oil prices from mid-2014. After sinking from historic highs above $100 a barrel to a 10-year low of less than $30 a barrel in January 2016, oil prices have partially recovered to about $40-$50 a barrel, supported by lower output from high-cost oil fields and supply disruptions in Canada and Nigeria that have outweighed production increases in Iran and Iraq.

Despite the rebound, the IMF says the oil market outlook has not fundamentally changed, predicting prices to rise gradually from an average of $43 a barrel this year to $51 a barrel in 2017.

In September, Fitch Ratings put its long-term expectations for both Brent and West Texas Intermediate (WTI) crude at $65 per barrel, while Goldman  Sachs, a global investment bank, forecast $43 per barrel for WTI by end-2016 and $53 per barrel for 2017.

Ahmed says there is a gradual recovery in oil prices as a result of supply disruptions in some countries and the more expensive-to-produce oil coming off the market.

“So by 2021, the central tendency is that prices will settle under $60 a barrel. They will not go much higher than that mainly because if they go above that level a lot of oil that has gone off the market [such as shale] will come back, bringing the prices down,” Ahmed says.

Coupled with the ongoing effects of the global economic crisis and regional conflicts, the Middle East is facing a significant shift in economic strategy, Ahmed says.

“The oil prices went up quite a lot in the first few years when I was working in the region, but then in the last two years, we have seen a dramatic fall. It has clearly changed the medium-term outlook for oil exporters, and they now have to adopt a new model of economic growth and play the role of the economic agent,” he says.

Managing the human fallout of conflict in the region is also taking a toll on economics, Ahmed says, adding that there are almost 85 million people directly impacted by conflicts and another 60 million indirectly affected as a result of spillovers into neighbouring countries.

Ahmed fears what will happen if 2 million young people entering the workforce do not get jobs.

“It is something that is hard for us to overlook, because fundamentally it has affected the lives of people today, and future generations,” Ahmed says. “Children are missing out on the opportunity to go to school as a result of it.

“The 2011 Arab Spring uprising was a process of change that will affect outcomes in those countries in the short term, but it will have an economic and social impact in the long run, as well.”

While the countries he analyses have juggled significant economic change, Ahmed, who joined the IMF in 2000 as deputy director of strategy, policy and review, says the IMF also has broadened its scope to include the changing nature of the societal impacts.

“We have broadened our scope in two ways,” he says. “We are starting to look at inclusive growth areas, such as energy subsidies, inequality and the gender gap, because we think these issues have an impact on the micro-economic outlook. This is, perhaps, different to what we were doing before, and it is important that going forward the IMF continues to do so.

“The second way in which we have changed our look is the result of the needs in the region. We have become much more active in providing financial support and today we have programmes of support in Iraq, Jordan, Morocco, Tunisia, Egypt, Sudan, Pakistan, and Afghanistan. We now offer technical assistance, policy advice to governments and work with conflict countries. Our engagement has become deeper.”

As Ahmed prepares to retire from the IMF this week, he is reluctant to leave advice for his successor, contrary to his eight years providing policy advice to states. But he does have a few words to say on his recipe for success and maintaining a good work-life balance: delegation.

“That is a primary challenge for anyone. If you have very able colleagues, then you can delegate to them the task that they do the best. You only do the work that only you should be doing, and that, I have found, is a good recipe over the years to make your workload manageable,” he says.

“Give them clear responsibilities, accountability, and let them get with it. And that frees you not only in terms of time, but more importantly gives you the mental space to address the issues of strategic importance that will help your institution to become relevant tomorrow.”

Sage advice from a man who IMF managing director Christine Lagarde described as a “visionary leader”.