View Full Version : IMF urges GCC to keep fiscal stimulus steps

04-25-2010, 03:06 PM
Emirates Business 24-7, 25 April 2010

Gulf countries 'should take advantage' of lower inflation.

Gulf oil producers and other countries in the Middle East should take advantage of lower inflation rates and maintain counter-crisis fiscal stimulus measures to boost growth in their economies, the International Monetary Fund (IMF) has said.

The Washington-based Fund said fiscal policy in the six-nation Gulf Co-operation Council (GCC) and other regional nations has played a critical role in cushioning the impact of the global economic crisis and in supporting domestic recovery.

"Government investment programmes, especially in infrastructure, will continue to boost domestic demand in the near term in many economies in the Middle East and North Africa. These measures should remain in place to help cement the recovery.

High debt levels, however, constrain the scope for fiscal stimulus in some oil-importing economies," the IMF said in its latest global economic outlook report released this week.

"Given the subdued inflation pressures, monetary policy should continue to be used as a countercyclical tool, if feasible. This pertains to Mena economies with non-pegged exchange rate regimes (Egypt). For other economies in the region that have hard pegs to the dollar, including the UAE and Saudi Arabia, monetary policy mirrors US policy and is appropriately stimulative."

The report said stimulus measures should also remain in place to offset a sharp slowdown in bank credit in the region because of debt default problems and a downturn in the real estate sector, mainly in the GCC.

It noted that massive cash injections and other types of financial support extended by governments to local banks in the GCC had contributed to containing vulnerabilities and spillovers from the crisis.

"In spite of such support, banks in the region have become more cautious, following recent episodes of financial sector distress that occurred amid sharp corrections in property markets. This will likely curb the availability of bank loans and, ultimately, credit growth," the IMF said.

The UAE and its partners in the GCC have been locked in counter-cyclical monetary and fiscal measures since the eruption of the global financial distress in September 2008 to safeguard their economies from sharp contractions.

The measures included support for the financial sector and a steep increase in public spending despite the crash of oil prices just after the crisis.

GCC central banks have also slashed interest rates to spur banks into lending, a reversal of their previous policy of hiking rates during the height of the oil boom in 2007 and 2008 to contain soaring inflation. But most banks in the region have remained reticent in credit provision because of default problems.

Analysts said GCC nations can maintain that counter-cyclical policy without having risking a resurgence of inflation on the grounds bank credit growth remains meager and global prices are far lower than in 2008.

The only major upward factor on inflation in the GCC is high rents, according to the experts.

IMF figures showed inflation in the GCC plunged to between one and 5.1 per cent in 2009 while Qatar recorded a deflation rate of around 4.9 per cent after reeling under the highest inflation rate of 15 per cent in the region in 2008.

In the UAE, the rate tumbled to only about one per cent last year from over 12 per cent in 2008 while it dipped to 5.1 per cent from 9.9 per cent in Saudi Arabia, to 4.7 from 10.5 per cent in Kuwait, to 2.8 from 3.5 per cent in Bahrain and around 3.5 from 12.6 per cent in Oman.

In 2010, the IMF projected inflation to rebound to around 2.2 per cent in the UAE, one per cent in Qatar, 5.2 per cent in Saudi Arabia, and 3.9 per cent in Oman. It forecast the rate to recede to 4.5 per cent in Kuwait and 2.8 per cent in Bahrain.

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