Interview: Dr. Youssef Boutros-Ghali on COVID-19, Debt Sustainability, and Macroeconomic Policy in Africa

COVID-19 Africa Watch talks to Dr. Youssef Boutros-Ghali, former Finance Minister of Egypt and former chairman of the IMF’s International Monetary and Financial Committee, about the economic impact of the pandemic, the policy response, SDRs, and more.

Interview

Key Takeaways

The following are a few of the main takeaways from COVID-19 Africa Watch’s conversation with Dr. Youssef Boutros-Ghali, the former Finance Minister of the Arab Republic of Egypt:

  • African countries unfortunately have little flexibility in terms of their macroeconomic policy responses to the pandemic. On the fiscal side, the effort made to date by African countries barely exceeds 3 percent of GDP because there is little fiscal space for additional spending. Monetary policy is not a very effective lever either, because the transmission mechanisms of monetary policy (mainly through the banking system) are fairly weak in most African countries.
  • The pandemic has weakened African countries’ negotiating power vis-à-vis the rest of the world, including China, in part because it has weakened their ability to access the international financial market. The collapse in commodity prices has further compounded these effects, leaving African countries in a precarious negotiating position on the international stage.
  • G20 countries have agreed to the debt service suspension initiative (DSSI) for 73 indebted countries, but more help is needed. In order to bolster sovereign debt sustainability, African countries should do what the European Union has been working on since the pandemic first hit: mutualize the problem. The African Union cannot do this on its own, because it is a political gathering, not a financial gathering. The African Development Bank, the European Investment Bank, the EBRD, the IMF, the World Bank, and other financial institutions need to step in.
  • IMF shareholders, including the United States, should agree to a reallocation of the IMF’s special drawing rights (SDRs) which could be provided to regional development organizations such as the African Development Bank. The African Development Bank should then take the lead in providing resources almost on a grant basis to African countries that are unable to address the economic fallout of the pandemic.

The interview was conducted by Carole Biau, Director of Global Market Development at the Milken Institute. A transcript is available below.

Transcript

Interviewer

Hello everyone, my name is Carole Biau, and I’m a Director for Global Market Development at the Milken Institute. It is my honor today to welcome Dr. Youssef Boutros-Ghali, to an interview with us here on COVID-19 Africa Watch.

Dr. Boutros-Ghali, you are a renowned Egyptian economist and former Minister of Finance, from 2004 to 2011. During that time you helped reinvigorate the Egyptian economy and deepen its global integration and led a very successful tax reform program. Previously you were also Minister of Foreign Trade and Minister of Economy and Foreign Trade, playing a major role in concluding several trade partnerships and agreements for Egypt. Finally, you were also Chairman of the IMF’s International Monetary and Financial Committee from 2008 until 2011.

Thanks for being with us today.

Dr. Youssef Boutros-Ghali

Thank you. My pleasure.

Interviewer

To start off with, let’s talk a bit about Egypt. Egypt had some of the highest case numbers earlier this year, and its tourism sector has been very hard hit. That said, this September the IMF predicted that Egypt’s growth would still be above 3.6 percent for this year. So growth has held up somewhat, although poverty has deepened. Egypt’s caseload curve is also relatively flat these days, compared to countries such as Morocco, Algeria, and others that have faced a severe second wave. What is your assessment of the current COVID-19 situation in Egypt, and what should be prioritized going forward?

Dr. Youssef Boutros-Ghali

As you know, the Egyptian government went to the IMF twice in the last 12 months, once to have exceptional emergency financing, which it is entitled to because of the pandemic, and the second time with a standby arrange to make sure that Egyptian policies are framed within a viable, sustainable fiscal and monetary system. And if we look at the report of the IMF that just came out a few days ago, they say that Egypt is on track to maintain fiscal viability. Of course, domestic debt has increased because spending had to increase to address healthcare requirements, support of the economy, etc. But the budget still had a primary surplus and the monetary policy was appropriately accommodating to the system.

So Egypt is weathering the pandemic relatively well. The effort that was undertaken from the very beginning in late February, March, April (both the lockdown and the measures they took) made it such that the first wave was a bit difficult, but then the second wave is under control.

Interviewer

That’s good to hear, and reassuring as well. Looking to the rest of the continent, on our COVID-19 Africa Watch platform, we’ve developed policy trackers for fiscal and monetary policy responses from different African countries. There’s been a wide range of different responses, and unfortunately, because the pandemic is far from over, a lot of countries are going to have to keep resorting to these tools. From your perspective, as a former minister of finance, how do you think these responses have gone so far? Have any country’s responses stood out to you in particular? Are there any lessons learnt you think people or countries that should be applied?

Dr. Youssef Boutros-Ghali

The situation in Africa, unfortunately, is very different from the rest of the world.

If you look at the fiscal effort that has been made by African countries, it barely exceeds 3 percent of GDP. They have tried to spend, but there’s not much fiscal space in Africa. They cannot spend, they don’t have the resources.

“As for monetary policy, the problem with the African countries is that the transmission mechanisms of monetary policy are fairly weak.”

As for monetary policy, the problem with the African countries is that the transmission mechanisms of monetary policy are fairly weak. So monetary policy does not really play a very important role. Most companies, enterprises and businesses in the African continent are not plugged into the banking system. And therefore monetary policy does not have as much of a bite as it would in more developed economies or in other emerging market economies, such as Brazil, India, Argentina, etc. In Africa, it’s mostly the fiscal tool.

And the fiscal tool, unfortunately, does not give them much reach because there’s not much fiscal space. The minute they push spending forward, they run into current account problems and foreign currency problems. And you can see immediately (Zambia is a clear example) that currency starts weakening and they run into currency problems, balance of payments problems, and it gets worse. So unfortunately, African countries do not have much room to be able to address the pandemic.

Interviewer

You mentioned Zambia and, of course, the fiscal space. There’s been a lot of debate regarding how the pandemic is affecting African countries’ sovereign debt. Of course, the G20 countries and multilaterals at the start of the pandemic agreed to the debt service suspension initiative (the DSSI), but there’s still a lot of questions around issuance of the IMF’s Special Drawing Rights (SDRs) and for the action needed by the multilaterals. And at the same time there are calls to address debt owed to private sector creditors, with the case in point being Zambia’s recent request to defer Eurobond payments, as you mentioned.

With your IMF hat on and your Minister of Finance and private sector hats on, what would you say the international community, African governments, but also the private sector and maybe even credit rating agencies could do to somehow help the situation?

Dr. Youssef Boutros-Ghali

I think we should do what the European Union has been trying to do for the past six, seven, eight months: mutualize the problem. The European Union decided to issue a Union-level debt of 750 billion euros, and to distribute that to the countries in the EU that do not have the resources to address the pandemic.

“We should mutualize the problem and make it such that it is addressed on a regional and on an international level.”

This is exactly what we should be doing for Africa. We should mutualize the problem and make it such that it is addressed on a regional and on an international level. The African Development Bank should take the lead in providing the resources almost on a grant basis to African countries that are unable to address the problems. There are problems in their economies. The health problem is not as dramatic as it is in the West, but the economic problem is just as dramatic. The best way is to internationalize the solution.

“The international community should come forward and decide on an allocation of SDRs, about $1 trillion of SDRs.”

And as you mentioned a minute ago, I was chairman of the IMF International Monetary and Financial Committee. I think the international community should come forward and decide on an allocation of SDRs, about $1 trillion of SDRs, allocated at the level of the IMF and provided to regional development organizations (the World Bank, the African Development Bank, and other banks) and these resources would be made available to African countries to address the problem.

Now, most countries have gone into quantitative easing. They have created money to be able to address the issue. Look at the trillions that have been issued in the U.S., the trillions that are being issued by the European Central Bank, by the Bank of England. We have this capacity in the IMF, the IMF can create a means of payment, namely SDRs, and can provide these means of payments to the countries that need it most.

It is an IMF decision, but the decision at the IMF is governed by the shareholders. And since every decision requires an 85 percent majority, the U.S., with a share of 16-something percent, can block any decision. And it has done that before. When the IMF tried and suggested that maybe an allocation of SDRs as could be very helpful at this stage, the U.S. said, “Forget it.” Now, if the U.S. could revise that decision in a more receptive and multilateral frame of mind. Then it and other developed countries (the European Union, etc.) could trigger an allocation of SDR rights that could be directed towards the countries that have the least means to address the problem.

Otherwise, we’re going to be left doing a little debt restructuring here, a little debt rescheduling here, a few defaults here and that, and again, partial solutions.

Interviewer

In your perspective, to what extent do you think the pandemic might have (for better or for worse) affected the negotiating power of African countries and of Africa as a region on the international stage, and also with respect to China?

Dr. Youssef Boutros-Ghali

Given the situation in international financial markets, when you look at the studies that have been done on the capacity of emerging market economies to access international financial markets, it depends on three things.

First, the situation of the market. If you look at the price of U.S. equities or the high yield corporate spreads in the U.S., in the early days of the pandemic all of this collapsed, the equity prices collapsed, and the spreads increased. It has normalized again, once there has been fiscal intervention in these countries. So the state of the market itself plays a role.

The second element that plays a role is the macroeconomic situation of the country accessing the market. And when you look at what proxy you could have for this, for each individual country, the credit default swaps (CDS) typically is the proper reference.

If the CDS has increased, that means the market thinks that the macroeconomic situation in the country is not good and is unstable, and it’s going to be very difficult for that country to access the market.

The third element to keep in mind is the impact of the pandemic on the country. And from all of the studies that have been done, that apparently doesn’t seem to affect very much the capacity of the country to access the markets. If they have a decent credit default swap index so that the market thinks that the macroeconomic situation is okay, they’re able to access the market.

Now, this is not the case for most African countries. If you exclude South Africa, and if you exclude West Africa where they have a monetary union with France (and therefore, where there is no basic balance of payments problem, and they don’t have a currency problem), nobody really can access the market, or if they do, they will be paying huge spreads over the rates that are offered in the market.

“Africa’s position in international markets has been weakened by the pandemic. And the same thing can be said for Africa’s negotiating position with the various interlocutors on the international financial market, China being the first.”

So of course, Africa’s position in international markets has been weakened by the pandemic. And the same thing can be said for Africa’s negotiating position with the various interlocutors on the international financial market, China being the first. If your commodity prices have collapsed, oil prices have collapsed, other commodities (copper, bauxite etc.) have collapsed, you are in desperate straits and you need whatever help is available at whatever cost. So that obviously weakens your situation vis-à-vis the rest of the world.

And this is why, again, the solution to Africa’s problems (and indeed to most of the countries that are in the African sphere economically) is a mutualization of the problem. Let the problem be solved multilaterally in multilateral and regional organizations. The African Union is one, but the African Union is a political gathering, it’s not a financial gathering. You need the African Development Bank, the European Investment Bank, the EBRD, the World Bank, these financial institutions to step in.

Interviewer

Thank you so much for these words of wisdom and for this advice in terms of the different institutions that should be lending a hand. Is there anything you’d like to share in closing in terms of what gives you hope?

Dr. Youssef Boutros-Ghali

It’s in times of stress that the most imaginative solutions come forward and the most imaginative leaders come forward. Hopefully this is going to bring about leaders that are able to address issues in a more systematic fashion, leaders who are able to get together and bring their efforts together to address a problem that affects the planet, not just a group of countries. So hopefully when we are facing this global catastrophe, we will find the talent and the leadership that will help us deal with it. That is the one hope we have.

Interviewer

Thank you for that high note. And we’ll keep that hope as well. We really appreciate your time, Dr. Boutros-Ghali, for joining us today. I know your insights will be very valuable to our viewers. Please stay safe and take care.

Dr. Youssef Boutros-Ghali

Thank you very much.

via COVID-19 Africa Watch
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