Cutting subsidies is a crucial reform that countries in the Southern Mediterranean region need to embark on to ensure increased investment in their economies, Suma Chakrabarti, the president of the European Bank for Reconstruction and Development, told Emerging Markets in an interview.
Egypt, Jordan, Morocco and Tunisia became EBRD countries of operations more than a year ago and so far the bank has invested more than E380 million in 13 projects in the region.
“Each of these countries is either in discussion with the IMF or going into an IMF programme,” Chakrabarti said. “Their budgets are stretched already, due to subsidies and so on. So reducing subsidies is a big issue.”
It usually takes a long time to “move away from a culture where everything is subsidized, or free, to a culture where everything is priced,” he added. But with a big communications drive, with governments making the case for what they would do with the public money that is saved because subsidies are cut, “it can be done, and it has been done,” he added.
“Here, Eastern Europe is a good example. In the last five or six years I think Eastern European governments have done quite a good job in trying to control their budgets. There are some good lessons here which can be transferred to North Africa as well.”
The EBRD plans to lend E2.5 billion to the four countries in the SEMED region by 2015, of which around E1.5 billion to Egypt, if the political situation stabilizes.
Egypt’s long-drawn discussions with the IMF about a potential agreement, as well as repeated violent clashes between supporters of the Muslim Brotherhood and security forces have made many investors lose hope that a loan is forthcoming, but Chakrabarti said he was optimistic.
“It’s good that they’re in discussion with the IMF; they’ve been in discussions for a long time, we’ll see where that goes. The key thing is to have a more macro economically stable environment in Egypt,” the EBRD president said.
“Many investors I talk to... say that Egypt has the potential of being the next Turkey as an investment destination and just needs some really difficult decisions to be taken, and of course political stability to be there for a period of time. But that is a country many investors wish to go to,” he added.
The SEMED have strong trade ties with the European Union but they also need to diversify their sources of investment, and emerging markets are a potential such source, according to Chakrabarti. “I am really pleased that more Turkish companies are taking an interest in our four countries. We’ve also encouraged our countries to talk to Asian investors, who know some of these countries reasonably well,” he said, adding that Brazil, which is “now quite big” in sub-Saharan Africa, could be another source of investment for SEMED.
In terms of sectors, he mentioned infrastructure, water, energy, agri-business and the development of capital markets as being in most need of investment.