Christine Lagarde: We have reset region’s growth forecast because of volatility

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Christine Lagarde, managing director of the International Monetary Fund (IMF), spoke to Al Arabiya’s Lara Habib on the sidelines of the World Government Summit in Dubai on Monday. Here is the entire transcript:

Lara Habib: Ms Lagarde thank you for being with us. You are discussing corruption and corruption costs for the region. What message is the IMF trying to convey in that matter?

Lagarde: We have determined about six months ago that it was important for the IMF to actually identify what we called the vulnerability points. Because we have really convinced ourselves and convinced the board of the IMF that corruption matters macro-economically. The more corruption you have the less growth you have. This is evidence that we have identified in our research. It seems to us that it is not only the issue of growth it is also the issue of trust. We have also found out that the more corruption there is the less trust there is, the less revenue generation there is and the less young people actually believe in the institutions that run their countries. So we believe that it’s really a worthy cause to pursue, for the macroeconomic consequences of it, but more generally from a good stability point of view. So the board last year actually adopted this resolution that we the IMF should be looking in our economic audit of our membership at those vulnerability points that I talked about.

What are they? Well procurement generally is a vulnerability point, revenue generation, custom authorities are generally areas were possibly if it is poorly structured. If there are too many bottlenecks, too many procedures where you can actually identify a source for corruption. So we will be having that dialog with all countries and certainly we will do that in the region as well, which is not worse not better than other countries around the world.

Lara Habib: Any estimates for the cost of corruption in the region?

Lagarde: No, we don’t have the estimate of the overall cost of corruption. What I can give you is the estimate we have for the cost of bribery around the world and we are anywhere between USD 1.5 trillion and USD 2 trillion. So you are really talking about something which is significant.

Lara: When it comes to the region, the price of oil is essential in predicting economic growth. What is the outlook on the price of oil? Do you believe that volatility will continue and are the risks skewed to the downside for the region?

Lagarde: Well first of all we have seen volatility since 2014 when it was way up then went down and then back up again and in the last few months down by 30 percent. So that volatility in itself is a source of instability. When governments at the moment do their budgeting it’s hard actually for them to say whether it’s going to be around 60, closer to 70. What we try to take into account ourselves is future prices so that we can assess more or less what markets are forecasting in terms of price per barrel depending on the quality of oil so that’s what we are using.

Are we right? Are markets right? Future will tell really. It depends on geopolitical developments, you know Venezuela comes to mind, geopolitical difficulties in the region could come to mind as well the demand addressed by China to the oil-producing countries is also going to make a difference. But you know in the region have both oil exporting and oil importing region so in a way when you look at the entire region there is a balancing effect where what benefits some will actually disadvantage others. So we are we looking at the region as a whole and generally distinguish between the oil-exporting and the oil-importing [countries]. We have reset the growth forecast for the oil-exporting countries by 1 percentage point because of recent volatility and the fact that prices since last October have gone down. For the oil-importing countries, we have maintained roughly our forecast for this year and next.

Lara: The region you are predicting a pickup in growth next year for the region. But are these growth rates enough to tackle the problem of unemployment, for instance?

Lagarde: It is never enough! I am yet to see leader of a country or a finance minister who is happy with enough growth. So everybody wants a bit more growth and clearly for the region and for the number of young people coming to the market whom want and expect jobs though it’s not enough.

Lara: What kind of growth rates are needed like above 5 percent?

Lagarde: You know it is not so much the growth rate but it is the job-creating growth that is important. At this point in time, you look at the number of young people coming to the markets in the next five years as you we talk about 25 million young people coming to markets and those jobs have to be identified.

Lara: Madame Lagarde, let us discuss a bit of Lebanon. Lebanon a problem and now they have a government and we all know that they are facing some issues in the sustainability of debt. My question to you, Lebanon did not come to the IMF to seek assistance. If you would give advice to this country, what would you tell them to do now with a new government?

Lagarde: We have a very steady relationship with Lebanon. While we do not have a program so to speak we are in constant dialog about what they should do in terms of policies. What I have heard Prime Minister Hariri say earlier today is that he is determined to actually implement very radically all the measures that he has put in his government statement, which includes fiscal consolidation, which includes structural reforms, which includes tackling at last the issue of electricity prices and all those things we would love to celebrate as success for Lebanon in a few months.

Lara: If we want to talk about global risks now we know that things are not looking very well in Europe we might face a recession now in Germany and the UK is facing the risk of Brexit. You are saying that we are not going to see a global recession in 2019. Is it possible that we will see that in 2020 if Brexit happened without a deal or if the trade talks between China and the United States fail?

Lagarde: What we are certain of is that we have big risks on the horizon and the horizon is getting a bit closer to us. So you have the trade tensions which are still unresolved, the outcome of those discussions between China and the United States is uncertain, the time is short and the problems that they are trying to deal with are monumental in my view.

You have financial tightening you know cost of financing is going to go higher and that will apply to sovereign and corporates in particular that are heavily indebted in foreign-denominated currencies. I wouldn’t call these sort of recession in Europe. I would certainly wouldn’t go for that. But I would say that there is uncertainty as to what the Brexit outcome will be and whether it’s very good or very bad outcome it will be less favorable and more friction than what the UK has had with the rested of the European Union. So it will have an impact and it will reduce the growth forecast for that region.

Lara: Thank you so much.

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