Regional Highlights

International Monetary Fund
Published Date:
October 2017
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Sub-Saharan Africa: China’s Economic Shifts Hit Sub-Saharan African Exporters

China and Africa have developed close economic ties over the past 20 years. China’s rapid growth has boosted its demand for raw materials, many of which come from Africa. Trade between the two regions has risen more than 40-fold during that period. China’s share of African exports jumped from 1.6 percent in 1995 to 16.5 percent in 2015, and its share of African imports increased from 2.5 percent to 23.2 percent (Figure 1.9).

Figure 1.9Sub-Saharan Africa, exports and imports by partner, 1995–2015

(Billions of US dollars)

Source: IMF, Direction of Trade Statistics.

But now China’s growth is slowing, and the drivers of its growth are shifting from investment and exports to domestic consumption, a process referred to as “rebalancing.” A recent analysis prepared by the IMF shows that this shift had a particularly big impact on commodity exporters, many of which are in Africa: in 2015, the value of African exports to China fell to $48 billion from $105 billion in 2014, putting pressure on exchange rates and foreign exchange reserves. Sharply lower government revenue in commodity-intensive countries has forced them to cut public spending, including on badly needed infrastructure and social services. The short-term pain is acute.

Not all the news is bad, though. Looking for more opportunities abroad, Chinese enterprises and financial institutions have expanded their direct investment and lending in Africa, notably in non-resource-intensive countries, which continue to enjoy high growth. Over the medium term, this investment offers opportunities to sub-Saharan Africa to become part of global value chains, boosting much-needed structural transformation on the continent.

“Every cloud has a silver lining,” said Roger Nord, coauthor of the IMF analysis. “While falling commodity prices hurt Africa in the short term, China’s shift to more consumption is an opportunity for Africa to accelerate its much-needed structural transformation.”

Roger Nord, coauthor of “A Rebalancing Act for China and Africa: The Effects of China’s Rebalancing on Sub-Saharan Africa’s Trade and Growth”

Sub-Saharan Africa: Delayed Adjustment to Commodity Price Decline Constrains Growth in Sub-Saharan Africa

Starting in 2011 and more acutely since mid-2014, the decline in commodity prices has put severe strains on the 23 sub-Saharan African economies that rely significantly on commodities for their exports. In these countries, the ensuing decline in export proceeds and budgetary revenues has led to a rapid deterioration in the external and fiscal balances, particularly in oil exporters.

As a result, pressures on exchange rates emerged, international reserves declined, and both public debt and arrears increased. Growth in resource-intensive countries has slowed markedly since 2014, compared with the previous period of buoyant growth. This picture contrasts sharply with the rest of the countries in the region, which have continued to enjoy strong momentum, as they also enjoyed tailwinds from a lower energy import bill (Figure 1.10). Growth for sub-Saharan Africa as a whole reached just 1.4 percent in 2016—its worst performance in more than two decades.

Figure 1.10Sub-Saharan Africa, GDP growth, 2010–16

(Average; percent)

Source: IMF, World Economic Outlook database.

“The authorities in the sub-Saharan African countries most affected have started to adjust policies, but the adjustments have been slow and insufficient, creating uncertainty, holding back investment, and running the risk of generating even deeper difficulties in the future,” said African Department Division Chief Céline Allard, who oversaw preparation of the April 2017 Regional Economic Outlook: Sub-Saharan Africa—Restarting the Growth Engine.

Thus, as commodity prices are expected to remain low, the hardest-hit countries urgently need to adjust if they want to restore macroeconomic stability and revive growth. They need to combine fiscal consolidation with exchange rate flexibility where feasible. And this rebalancing will be durable only if these countries at the same time boost domestic revenue mobilization, foster diversification, and address long-standing weaknesses in the business climate to attract investment in new sectors.

Regional Economic Outlook: Sub-Saharan Africa team members (from left): Jackie Zhang, Nkunde Mwase, Haris Tsangarides, Jarek Wieczorek, Natasha Minges, Romain Bouis, Mustafa Yenice, Torsten Wezel, Maxwell Opoku-Afari, Monique Newiak, Céline Allard (not pictured: Francisco Arizala, Paolo Cavallino, Jesus Gonzales-Garcia, Cleary Haines, Charlotte Vazquez)

Middle East and North Africa: The Economic Impact of Conflicts and the Refugee Crisis

The conflicts in the Middle East and North Africa region have had a dramatic humanitarian impact. An IMF paper on their economic impact, published in September 2016, looked at the role that economic policies play in this context. The study found that in the short term, such policies can help mitigate some of the immediate impact of conflicts, and in the long term, they play a significant role in promoting a healthy, sustainable recovery and in reducing the likelihood of a relapse into conflict.

In the midst of a conflict, policymaking is beset by multiple challenges, conflicting demands, and urgent needs (Figure 1.11). Under these extreme conditions, the longer-term goals of economic development may seem irrelevant. However, failing to maintain good policy practices or to offset the negative impact of conflicts can have deeper, lasting adverse consequences for the economies of conflict countries.

Figure 1.11Middle East and North Africa, change in GDP associated with conflicts, 1970–2014

(Percent; cumulative)

Sources: Center for Systemic Peace; and IMF staff estimates.

Thinking through economic policy, even if difficult given the urgency of dealing with conflict, can help maintain some economic stability. In addition to addressing immediate humanitarian needs, there are three priorities: protecting the effectiveness of economic institutions, prioritizing budget space to serve the basic needs of the public, and using monetary and exchange rate policies to ensure macroeconomic stability.

Recovering from the impact of a conflict takes time, depending on several factors, including the intensity, duration, and type of conflict and the extent of damages to institutions. For example, during the period 1970–2014, a broad range of postconflict countries that maintained peace for at least 10 years after the end of conflict averaged a relatively high annual growth rate of 4.5 percent. However, if the conflict in Syria had ended in 2015 and the country grew at that rate, it would still take at least 20 years just for it to rebound to its 2010 preconflict GDP level.

As countries transition out of wartime-economy policies, successful rebuilding requires well-functioning institutions and robust yet flexible macroeconomic frameworks to guide reconstruction and recovery, especially managing donor support, absorbing capital inflows, and maintaining debt sustainability. A major challenge in the Middle East and North Africa region will be to take care of the large refugee populations and design policies that can accommodate the return of refugees to their home countries or create opportunities in the host countries to accommodate refugees and bring them into productive activity. This means designing policies not only for the refugees but also for the host communities, which are often already struggling.

Gaëlle Pierre, coauthor of “The Economic Impact of Conflicts and the Refugee Crisis in the Middle East and North Africa”

The lessons from the Arab Spring and subsequent conflicts show that countries across the region should accelerate inclusive growth reforms aimed at reducing inequality in opportunities. Though some progress has been made, more remains to be done to ensure that the returns on economic growth are more equally shared—a challenge for many other regions in the world as well.

To help mitigate the economic implications of conflicts and their spillovers, the IMF provides tailored policy advice in the following areas:

▪ building reliable macroeconomic frameworks

▪ setting monetary and exchange rate policies

▪ prioritizing spending, including to protect critical social spending, and securing debt sustainability

▪ fostering inclusive growth

The IMF also shares its expertise, including through the Middle East Regional Technical Assistance Center and country-specific trust funds. This assistance focuses mainly on rebuilding and strengthening economic institutions, improving economic policymaking, strengthening public financial management and developing equitable tax systems, strengthening financial supervision and intermediation, and preparing statistics.

The IMF has provided financial support to Afghanistan, Iraq, and Jordan, taking into account the impact of refugees and the internally displaced. In addition, the IMF helps mobilize additional resources from donors and other international financial institutions (Iraq, Jordan, Lebanon). It plays a key role in supporting the dialogue of the international community by providing assessments of economic developments and participating in donor meetings (Libya, Somalia, West Bank and Gaza), as well as high-level conferences on Supporting Syria and the Region in London in 2016 and in Brussels in early April 2017.

The sign above says: “Current training offers.”

Middle East and North Africa: Energy-Pricing Reform in the Arab World

The fall in oil prices in late 2014 had a profound impact on countries in the Arab world: the region’s oil exporters saw billions of dollars wiped from their revenues, while the oil importers saw substantial decreases in remittances and investment. Although oil prices had recovered slightly to about $45–$50 a barrel as of July 2017, they were expected by the futures markets to remain low, at about $55 a barrel, in the medium term.

Countries across the Arab world are acknowledging this new reality. Many have taken significant steps to reform their generous energy-pricing policies to help them consolidate their fiscal positions. However, an IMF paper released in early FY2018 suggests that there is room to go further. In 2015, Arab countries accounted for more than one-quarter of pretax global energy subsidies—$117 billion, or more than the 2015 revenues of Amazon, Microsoft, or Google (Figure 1.12). This figure includes the implicit or opportunity cost of low energy prices—the revenue forgone by selling below world prices.

Figure 1.12Energy subsidies by region, 2015

Sources: International Energy Agency; and IMF staff calculations.

Note: MCD: Middle East and Central Asia.

Low energy prices typically favor the rich, who consume larger amounts of energy, while generating relatively few economic benefits. The money spent on subsidies would be better invested in sectors that produce higher returns, such as infrastructure, health, and education. Subsidies also lead to industrial distortions and wasteful domestic consumption of energy, which has an environmental cost. And they exacerbate budget deficits, leading to higher debt levels and eating into savings.

There are many political and social challenges to reforming energy prices. But reform experience in numerous countries shows that it can be done. To be successful, reforms should be broad, comprehensive, implemented gradually, and depoliticized. The public must be kept informed. And compensation should be provided to the poor and vulnerable, for whom higher energy costs will be a burden.

With lower global oil prices implying smaller gaps between domestic energy prices in Arab countries and international benchmarks (Figure 1.13), now is an ideal time for energy-pricing reform. On average, Arab countries spent 3 percent of their GDP on energy subsidies in 2016. Were they to redirect those subsidies into more productive investments in physical or human capital, they could add 6 percentage points of additional growth over six years and lower public debt by up to 20 percentage points of GDP over that period.

Figure 1.13Average gas prices by region, 2004–16

(US dollars per liter)

Sources: International Energy Agency; and IMF staff calculations.

Note: LAC: Latin America and the Caribbean.

To soften the impact of reforms, countries could choose a mix of investment, debt reduction, and using savings for compensatory measures. With the Arab world looking to boost inclusive growth and raise living standards, the potential benefits of energy-pricing reforms are substantial. “Now is a really good time to go ahead with reforms,” said Olivier Basdevant, coauthor of the IMF paper, “either because you have to or because it is easier now while the gap between domestic and world prices is lower.”

Olivier Basdevant, Coauthor of “If Not Now, When? Energy Price Reform in Arab Countries”

Asia and the Pacific: Brunei Darussalam: Technology for Customized IMF Support

The IMF consults with its 189 member countries primarily through its annual economic health checks. During these Article IV consultations, country authorities often request support from the Fund to help build institutions through expert advice called technical assistance, along with training. This is precisely what happened when past IMF missions traveled to Brunei Darussalam: the authorities in this small oil producer on the island of Borneo in southeastern Asia asked the IMF for such support to help them grow their economy.

But the IMF team faced a couple of hurdles: information on technical assistance options was dispersed across several IMF departments, and Brunei Darussalam is so far away from IMF headquarters that, along with limited course space and staffing, frequent travel is not feasible for IMF or Bruneian officials. “The solution,” said Mission Chief Seng Guan Toh, “was for the team to put together a cohesive package of information on our technical assistance offerings and make use of the technological tools developed by the IMF, such as its free online training and Data Portal.”

The team developed a tailored list of technical assistance options from across the IMF, based on offerings for other oil-producing countries: on the fiscal side, enhancing public financial management and on the financial side, developing the financial sector. The team identified specific courses for each of the government agencies it would meet with and compiled customized menus of technical assistance options for each one. For example, given that Brunei Darussalam is an oil-exporting economy, for its meeting with finance ministry officials, the team selected the IMF course “Macroeconomic Management in Resource-Rich Countries.”

On its mission to Brunei Darussalam in February 2017, at the end of each key meeting with officials, team members presented brief sample lectures on the courses related to the country’s economic issues, screened a video on how to use the online training portal, and walked the officials through the available online data. In addition to meeting with the finance ministry, the team met with officials from the prime minister’s office, monetary authority, Ministry of Foreign Affairs and Trade, and Labor Department, plus a leading think tank, the Centre of Strategic and Policy Studies.

“The ‘three T’ approach —technology, technical assistance, and training—enables Bruneian government agencies to draw on the IMF’s offerings to help them address economic issues,” said Toh. He and the team expect the country to take greater advantage of those offerings and hope to expand the approach to other countries as a way to better deliver on the Fund’s mandate to assist its membership.

The ‘three T’ approach —technology, technical assistance, and training—enables Bruneian government agencies to draw on the IMF’s offerings to help address economic issues.”

— Seng Guan Toh, IMF Mission Chief

Asia and the Pacific: IMF Partners with India to Open New Learning Center

Less than a year after a memorandum of understanding was signed between the government of India and the IMF in March 2016, the South Asia Regional Training and Technical Assistance Center (SARTTAC) was inaugurated February 13, 2017, in New Delhi. Choosing a suitable site for the center, creating a functional design, and tackling its construction involved close partnership between the Indian authorities, IMF staff, and local vendors. The result is a world-class facility for learning.

This is the newest of the IMF’s global network of 14 regional technical assistance and training centers. It is designed as the model for the IMF’s future capacity development, with both training and technical assistance under one roof. The member countries in the region provided most of the funding for the center themselves, and it was generously supplemented with resources from Australia, the European Union, Korea, and the United Kingdom.

SARTTAC responds to strong demand from its member countries (Bangladesh, Bhutan, India, Maldives, Nepal, Sri Lanka) for the Fund’s capacity development work. South Asia is a rapidly growing region that is home to one-fifth of the world’s population. The region’s economies are grappling with the challenges of improving the efficiency of public spending, strengthening tax administration, enhancing regulation and supervision of the financial system, modernizing monetary policy and operations, and improving macroeconomic statistics. Through training courses and resident technical assistance experts, SARTTAC will allow the IMF to meet more of these high demands. Its regional location will enable it to be flexible and responsive to country needs and to tailor its support to members’ circumstances.

SARTTAC has been very active from the outset. Consistent with the demand-driven approach, considerable time has been spent learning about member country needs. This has resulted in an initial program of some 30 courses that will be delivered in calendar year 2017, spanning fiscal, monetary, financial, and statistical topics. The first course, on macroeconomic diagnostics, for officials from the Indian Economic Service, was followed by regional courses on fiscal analysis and on monetary policy. Some training will also be delivered in other member countries and at the subnational level in India, where there is strong demand at the state level.

Over the coming year, in addition to its tailored training and hands-on technical assistance projects, SARTTAC will bring together countries for peer learning, reassign officials between countries, and work in partnership with local institutions across south Asia.

Secretary Shaktikanta das of India’s Ministry of Finance and IMF deputy Managing director Carla grasso open the South asia regional training and technical assistance Center.

Asia and the Pacific: Myanmar Parliamentarians Strengthen Management and Oversight

After historic elections in November 2015, a new democratic government in Myanmar (formerly known as Burma) took office in April 2016. Following decades of isolation, the administration prioritized much-needed financial sector reform, improving the infrastructure, and ending the country’s internal armed conflicts to gradually reintegrate Myanmar with the global economy.

Developing capacity in Myanmar is an enormous task as the country continues its economic transition. The need was even more pressing for the newly elected parliament, since most of the parliamentarians had no previous experience in government. To address this need, IMF staff members from several departments crafted a high-level capacity development seminar for the Union Parliament of Myanmar, in consultation with parliamentary leaders.

The seminar, held in December 2016, focused on Myanmar’s efforts to strengthen macroeconomic management and financial stability. Over 60 parliamentarians from three key parliamentary economic committees participated in the interactive sessions, which were coordinated with the IMF’s annual health check mission. The IMF team had staff from the Asia and Pacific Department (including the Resident Representative Office, Technical Assistance Office for Lao P.D.R. and the Republic of the Union of Myanmar, and Regional Office in Japan); the departments of communications, fiscal affairs, monetary and capital markets, and statistics; and the Singapore Regional Training Institute, with financial support from the government of Japan.

The interactions between the parliamentarians and the IMF team provided a unique opportunity for the parliamentarians to discuss policy and technical issues together. The parliamentarians particularly liked the approach of integrating capacity development with economic surveillance. This helped them better apply the technical issues discussed to policy matters they face on a regular basis in the course of their oversight responsibilities. A follow-up seminar on public financial management for the Parliamentary Joint Public Accounts Committee was scheduled for mid-2017.

Yongzheng Yang, the IMF Mission Chief for Myanmar, summarized the Fund’s strategy with the country: “Knowledge-sharing plays a key role in helping the authorities implement policies to achieve their objective of sustainable and inclusive growth. We will continue our capacity development activities in Myanmar, already the most extensive among the IMF’s membership. And integrating those activities with our economic health checks is essential to our effective engagement with the country.”

Yongzheng Yang, IMF Mission Chief for Myanmar

“We will continue our capacity development activities in Myanmar, already the most extensive among the IMF’s membership.”

Western Hemisphere: Mexico: Flexible Credit Line Serves as a Backstop in a Volatile World

Over the past decade, Mexico has deepened its integration into the global economy through both trade and financial channels. This has helped boost productivity, improve competitiveness, lower financing costs, and diversify the investor base. In 2016, total foreign portfolio investment flows in Mexico reached $26.7 billion (2.6 percent of GDP), and nonresidents held 35 percent of local-currency-denominated sovereign bonds (Figure 1.14). The strong presence of foreign investors in Mexico reflects their confidence in the strength of the economic policy framework and the depth and liquidity of the country’s foreign exchange and bond markets.

Figure 1.14Mexico, foreign direct investment and portfolio investment liabilities, 2007 and 2016

(Percent of GDP)

Sources: National authorities; and IMF staff estimates.

Note: FDI: foreign direct investment.

The Mexican peso is the second most actively traded emerging market currency in the world, with a daily global trading volume of $97 billion. Mexico’s very strong macroeconomic policies and policy frameworks have helped it navigate a complex external environment characterized by financial market volatility. Monetary policy is guided by an inflation-targeting framework in the context of a flexible exchange rate. Fiscal policy is underpinned by the fiscal responsibility law, and the authorities are committed to bringing the public-debt-to-GDP ratio down over the medium term. The financial regulatory and supervisory framework is strong.

To support the Mexican authorities’ overall macroeconomic strategy and provide insurance against risks, in May 2016 the IMF’s Executive Board approved a two-year arrangement for Mexico under the Flexible Credit Line (FCL) in the amount of about $85 billion. The FCL proved effective during FY2017 when the peso came under temporary pressure. This is the sixth such arrangement with Mexico, and the authorities again intend to treat it as precautionary. Previous arrangements provided valuable insurance against tail risks in the immediate aftermath of the 2008 global financial crisis, during the euro area crisis, and during the turbulent period in the run-up to the start of US monetary policy normalization.

The FCL was designed to meet the demand for crisis prevention and crisis mitigation lending for countries with very strong policy frameworks and track records in economic performance that find themselves in a cash crunch. Two other countries, Colombia and Poland, have also used FCLs. While none of the three countries have so far drawn on them, the lines have provided a valuable backstop for the countries and helped boost market confidence during a period of heightened risks.

“…clearly, the FCL, which Mexico has benefited from for now a few years, is a testimony to the good macroeconomic policies that have been in place, thanks to the leadership of the country, both at the central bank and at the finance ministry level.”

Christine Lagarde, IMF Managing Director, International Monetary and Financial Committee press briefing, April 22, 2017

Western Hemisphere: Argentina’s Bold Steps to Avert a Crisis

When Argentina’s new government took office in December 2015, it faced pervasive macroeconomic imbalances, microeconomic distortions, and a weakened institutional framework. Consumption levels were unsustainably high, investment had reached historically low levels, and large fiscal deficits were being financed by money creation and inflation. Distortions at the micro level included an extensive network of administrative controls—such as trade barriers, foreign exchange restrictions, and price controls—and a business environment that eroded competitiveness and undermined medium-term growth. A serious financial crisis was imminent.

The government “is now looking its problems in the eye and tackling them decisively,” said IMF Mission Chief Roberto Cardarelli in November 2016, upon publication of the first IMF review of the country’s economy (known as an Article IV consultation) since 2006. The authorities took bold steps to address the imbalances and avert a crisis, explained Cardarelli, dismantling exchange controls, allowing the exchange rate to float, removing restrictions on access to foreign currencies, eliminating export taxes (except those on soybeans, which were reduced), and settling litigation with creditors that stood in the way of Argentina’s debt restructuring, restoring access to credit markets.

The authorities set fiscal and inflation targets, and began phasing out ineffective energy subsidies. The national statistics agency is being rebuilt and in mid-2016 started publishing new official statistics in line with international standards.

While necessary to lay the foundation for robust future growth, these measures to reverse the serious imbalances and distortions unavoidably had an adverse short-term impact on the Argentine economy. When the IMF mission met with senior officials, along with representatives from the private sector and civil society, the central focus of the discussions was thus on how to sustain the economic recovery and protect the poor from the costs of restoring macroeconomic stability. The consultation included the country’s ambitious agenda of reforms designed to produce an environment more conducive to private investment and lay the groundwork for strong, sustained, and equitable growth.

With about one-third of the population living below the poverty line, reducing poverty is the administration’s absolute priority. The authorities know that a vibrant economy is the best way to create jobs and pull people out of poverty. After contracting in 2016, economic activity in Argentina was set to expand by 2.2 percent in 2017, thanks to stronger consumption and public investment, and 2.3 percent in 2018, reflecting the gradual rebound in private investment and exports (Table 1.1).

Table 1.1Argentina, growth in real GDP, consumer prices, current account balance, and unemployment, 2016 and projected 2017–18
20162017 (projected)2018 (projected)
Real GDP−
Consumer prices (year to year)21.617.2
Current account balance−2.6−2.9−3.4
Source: IMF, World Economic Outlook, April 2017.
Source: IMF, World Economic Outlook, April 2017.

Roberto Cardarelli, IMF Mission Chief for Argentina

Europe: Albania’s Reforms Get Results

In 2013, Albania’s economic growth almost ground to a halt as the 2008 economic crisis cut demand from Greece and Italy, its main trading partners. At the same time, public debt surged and arrears accumulated due to election-time splurges, an unsustainable pension system, and an unviable electricity sector. The banking system, on which the government relied heavily for borrowing, had weakened due to a high ratio of overdue loans, increasing financing pressures.

To help address these fiscal and financial challenges and restore economic growth, the country requested an IMF loan, which the Executive Board approved in February 2014. The 36-month arrangement under the Extended Financing Facility aimed to restore economic growth and control the rapidly rising public debt that threatened economic stability, by strengthening public finances, maintaining financial stability, and implementing structural reforms focused on improving the energy sector and the business climate.

In February 2017, the program was successfully concluded and Albania entered into postprogram monitoring. Upon completion of the final mission, former Albanian Minister of Finance Arben Ahmetaj reported at a press conference that economic growth had recovered and was expected to reach 3.7–3.8 percent in 2017 from 3.4 percent the preceding year(Table 1.2). He credited the strong economic outcomes to the macroeconomic and fiscal reforms undertaken, which, he said, “are also closely linked to all other reforms the government has conducted during the last three years, like the pension reform, the energy sector reform, the reform in the public finance management, the reform in the tax administration,” and others.

Table 1.2Albania, main economic indicators, 2013 and 2016
GDP growth (percent)1.03.4
Primary balance (percent of GDP)−2.00.2
Overall balance (percent of GDP)−5.2−2.2
Tax revenues (percent of GDP)22.024.9
Nonperforming loans (percent)23.518.3
Sources: National Albanian authorities; and IMF staff calculations.
Sources: National Albanian authorities; and IMF staff calculations.

The reforms have also led to increases in wages and pensions, employment, the number of enterprises, and foreign direct investment, said Ahmetaj. IMF Team Leader Anita Tuladhar agreed that the program has successfully put Albania on a recovery path with sound public finances: “Thanks to the commitment of the Albanian authorities, we could support reforms that are critical to growth. The program strengthened the institutional framework, reduced vulnerabilities of the economy, and helped maintain economic stability despite difficult external conditions,” she said.

Albania is continuing reforms to support growth and strengthen the financial sector while maintaining fiscal consolidation with the goal of bringing the debt down to below 60 percent of GDP. It has launched a European Union–supported justice reform initiative to address governance concerns and an inefficient justice system. Conditional on making tangible progress on the judicial reforms, the European Commission has recommended opening negotiations for Albania’s accession to the European Union.

Anita Tuladhar, IMF Team Leader for Albania

Europe: Spain: Maintaining an Impressive Recovery

One of the countries in the euro area hardest hit by the global financial crisis, Spain has made a remarkable recovery. The economy grew by more than 3 percent in both 2015 and 2016 and is expected to reach its precrisis GDP growth level in 2017 (Figure 1.15). Since the peak of the crisis, more than 1.5 million previously unemployed people have found jobs. Decisive reforms in 2011–13, such as measures to ensure greater labor market flexibility, have helped the Spanish economy regain competitiveness and have contributed to strong job creation, while banking reforms have made the sector more resilient. Low oil prices and interest rates, together with fiscal stimulus measures in 2015–16, have also spurred growth.

Figure 1.15Spain, Italy, France, and Germany, real GDP growth, 2007–21

(Index, 2007 = 100)

Sources: IMF, World Economic Outlook; and IMF staff estimates.

Thanks to a boom in exports, Spain has posted four years of current account surpluses. Many companies have made good progress in cleaning up their balance sheets, while household debt has come down to the euro area median, though it is still high in absolute terms. Spanish banks have raised capital ratios and lowered nonperforming loan ratios, despite shrinking credit.

Nevertheless, unemployment remains very high at about 18 percent, and youth unemployment is even higher, at 42 percent, almost double the euro area average. Many of these individuals have been without a job for years. A two-tiered labor market—with a large percentage of workers in lower-paying jobs with temporary contracts—is still widespread, and productivity growth is low.

Public debt has more than doubled since the start of the crisis, to 100 percent of GDP, limiting the government’s room to maneuver. The debt, along with pockets of overindebtedness in the private sector and the still-large negative net international investment position, leaves the economy vulnerable to shocks.

The IMF country team, led by Andrea Schaechter, recommended that Spain build on its reform-based achievements by doing the following:

  • Continuing its fiscal adjustment to bring down the deficit and public debt

  • Enhancing its labor market policies by more effectively targeting the young and the long-term unemployed and by reducing the two-tiered system, in order to promote job creation and fairness

  • Fostering research and development, and competition in the product and service markets, to boost productivity and incomes

  • Strengthening bank balance sheets and enhancing oversight and management of systemic risks

The IMF’s 2017 Financial Sector Assessment of Spain will provide policy options for preserving financial stability in Spain.

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