Despite slowing world growth, the outlook for the Middle East and Central Asia remains favorable in 2008, with commodity prices, including oil, expected to remain high, says the IMF’s latest forecast.
The surge in investment and strong productivity gains from broad-based structural reforms are expected to sustain growth above the 6 percent level (see table). However, against the background of persistently high fuel and food prices, strong domestic demand, and supply bottlenecks, inflationary pressures are unlikely to abate. Inflation is forecast to climb to 10.7 percent in 2008, up from 9.2 percent last year.
The IMF’s Regional Economic Outlook for the Middle East and Central Asiasaid that with high oil prices boosting oil revenues, fiscal and current account surpluses in oil-producing countries are projected to remain large despite stronger imports and further fiscal expansion.
In most non-oil-producing countries, the policy stance will likely aim to rein in fiscal and external deficits, thereby reducing further vulnerabilities.
Risks to the outlook are broadly neutral, with some upside risks from domestic demand likely to be balanced by downside risks from the external sector. High oil prices and further cuts in U.S. interest rates could lead to a stronger-than-expected increase in domestic demand in the Gulf Cooperation Council (GCC) countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates).
Furthermore, the growing surplus in oil producers, combined with concerns about asset quality in advanced economies, may well lead to increased inflows to the other countries in the region, fueling stronger credit and domestic demand.
However, a protracted slowdown in advanced economies would hurt growth in most countries, depressing exports and commodity prices. Tighter credit in advanced economies and lower risk appetite, as evidenced by widening sovereign spreads, could also curtail the capital inflows that have supported growth in many countries.
GDP growth is expected to remain strong throughout most of the region.
(annual change; percent)
|Middle East and Central Asia||6.6||6.4||6.3|
|Caucasus and Central Asia||13.1||11.9||8.8|
|Middle East and North Africa||5.8||5.7||6.0|
|Gulf Cooperation Council||6.0||5.6||6.1|
“All countries in the region have been largely unscathed by the recent financial turmoil in developed countries, except Kazakhstan, where the banking sector relied heavily on foreign borrowing,” said Mohsin Khan, Director of the IMF’s Middle East and Central Asia Department.
Despite continued strength in import growth (20 percent in U.S. dollar terms), high oil prices will keep the region’s current account surplus above 18 percent of GDP in 2008, leading to a further accumulation of international reserves, now close to the $1 trillion mark, the report said.
The key challenge in the short run for most countries is to contain rising inflationary pressures, and for countries with large external debts and current account deficits to protect their external stability in the context of high oil prices and slowing world growth.
The appropriate policy mix will depend on each country’s circumstances but would most likely call for fiscal and monetary tightening, and greater exchange rate flexibility when feasible. In oil-exporting countries with currencies pegged to the U.S. dollar, demand management policies will face challenges in controlling inflation, given the continuing bias toward monetary easing in the United States. The burden of the adjustment may well have to fall on fiscal policy, particularly in the GCC countries, where a change in the exchange rate regime would be disruptive in the runup to the planned monetary union.
The report said that policymakers need to remain focused on strengthening policy frameworks, promoting sound financial deepening, and supporting the growth potential of the private sector.
In particular, countries need to continue strengthening their fiscal policy frameworks tailored to address specific issues in their fiscal outlook, notably the efficient and sustainable use of oil revenues in oil-exporting countries and high public debt in some low-income and emerging market economies. Phasing out fuel and food subsidies while establishing a more targeted safety net would help some countries preserve long-term fiscal sustainability, enhance efficiency of spending, and improve equity.
For countries where greater exchange rate flexibility is desirable over the medium term, it is important to continue to lay the foundation of an independent monetary policy. Despite the challenges ahead, GCC countries are encouraged to keep the agenda of the proposed monetary union on track, including reaching consensus on the appropriate exchange rate regime.
Continued development of banking systems will be critical for achieving high growth and for successful integration into the world economy. Dealing with the large stock of nonperforming loans and restructuring state banks in some countries will be crucial for enhancing the banking sector’s efficiency and lowering the cost of borrowing. Strong supervisory vigilance is also important.
The report noted that the private sector is essential for the expansion and diversification of the production and export base of the region’s economies, and for the creation of jobs for the rapidly growing labor force—a pressing problem for many countries.