Government spending has succeeded in blunting the impact of the global financial crisis on the Gulf, the International Monetary Fund said on Sunday, but the region now needs to make the difficult shift from spending its oil savings to getting private money flowing through the economy again. The recommendations were part of the fund's semi-annual outlook on the Middle East, North Africa and Central Asia. The fund lowered its projection of growth in the Gulf this year to 0.7 per cent, down from 1.3 per cent in its previous assessment six months ago, but predicted a stronger recovery next year, with growth reaching 5.2 per cent, higher than the 4.2 per cent growth for 2010 it predicted back in May. It reiterated its forecast of a mild recession this year in the UAE, with GDP contracting 0.2 per cent, but rebounding next year to expand by 2.4 per cent. "Drawing on substantial reserves built up prior to the crisis, governments responded with strong countercyclical policies, which have helped contain the impact on the non-oil sectors of their economies," the fund said. "Financial market development - including diversification beyond a bank-based system - will remain a priority, as will efforts to improve the business climate to support economic diversification and generate employment." The new regional outlook comes less than a week after the fund's joint annual meeting with the World Bank in Istanbul, where the fund sought to cement the new relevance it has gained in the crisis by winning new funding from its members by promising to be fairer about how it lends that money back out. Much of this new money will need to come from the faster-growing economies of Asia and the Gulf. The IMF, established in the waning days of the Second World War, is designed to serve as a global insurance policy against sudden economics shocks, where members can turn for assistance when financial tremors strike. Condemned for exacerbating the Asian financial crisis, then dismissed as irrelevant in the boom years that followed, the fund was given new life by the economic crisis. A total of 17 countries have turned to the IMF for help since last September when the crisis erupted, including $11.3 billion in loans to Pakistan. After drawing down their oil surpluses to combat the global recession, Gulf nations will be able to rebuild their reserves next year as oil prices recover with demand, the fund said. It predicted that foreign currency reserves in the six nations comprising the GCC would rise by $100 billion in 2010. The outlook is less rosy for oil importers in the Middle East and North Africa. While insulated from the crisis somewhat by undeveloped capital markets and limited trade linkages with the rest of the world, these countries will face higher energy prices while getting few of the benefits of a global upturn. Countries such as Syria will see growth rise to 4.2 per cent from 3 per cent, the fund said, but Afghanistan will see its economic growth cool to 8.6 per cent from 15.7 per cent this year. Perhaps the biggest challenge facing the Gulf is mobilising private-sector capital to replace government spending as fiscal programmes are rolled back, the fund said. Bank lending remains tight in the wake of the crisis, particularly in the region's financial centres of Bahrain and Dubai. Government efforts to revive liquidity have avoided the kind of bank failures and bailouts seen in the US and Europe, but bank lending has yet to recover. Banks remain reluctant thanks to increased scrutiny from regulators, highly publicised problems at Saudi family-run companies Saad and Algosaibi and a lingering slump in property markets. The fund urged Gulf countries to promote local bond markets to give companies an alternative to banks for funding. That, it said, was likely to foster small- and medium-sized enterprises, which many banks overlook as they grow larger and focus on their biggest, most profitable clients. And these smaller businesses would in turn help Gulf nations more rapidly diversify away from oil as a source of jobs and economic growth.
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