Region must spend to boost demand

The IMF has recommended the Gulf region governments maintain spending to offset the impact of the global economic crisis.

Gulf states need to maintain spending to offset the impact of the global economic crisis, the IMF said in its biannual outlook for the economies of the Middle East and Central Asia. The fund said the crisis was hurting the region through lower oil prices, weakened demand for tourism, tighter credit and falling international investment. But the impact had already been mitigated to some extent by sound policies and by the reserves Gulf nations had saved up during boom times, it said. "Like many parts of the world, the Middle East and North Africa (MENA) is also being affected by the fall in particular in oil prices and the slowdown in the world economy," said Masood Ahmed, the director of the IMF's Middle East and Central Asia department. But Mr Ahmed said the region was still likely to outperform much of the world. "They continue to do reasonably well because most of them are using reserves they accumulated in the boom years to maintain the level of public spending, and this public spending during the downturn is protecting their own economies and is also having positive spillover effects on to their neighbouring countries." The Abu Dhabi economy will grow in the second half of the year and next year, Ahmad Ghaida, the acting director of economic planning at the Abu Dhabi Department of Economic Development, told the IMF meeting in Dubai yesterday. The IMF projects growth in the MENA region will decline to 2.6 per cent this year, down from 5.7 per cent last year. GDP growth in the oil-exporting Gulf will slip to 2.3 per cent from 5.4 per cent. The IMF said last month in its World Economic Outlook that both Saudi Arabia and the UAE would slip into recession this year. It said oil-exporting nations were able to keep spending despite falling oil prices thanks to having amassed what it estimated was US$1.3 trillion (Dh4.77tn) in oil earnings between 2004 and 2008. That spending is being used to boost capacity and improve infrastructure, and would be needed more than ever to maintain aggregate demand during the economic slowdown, said the fund. By doing so, the IMF said, oil-exporting nations were not only helping to cushion their own economies but helping to support overall global demand. In the process, however, the region's massive $400 billion current account surpluses will disappear, to be replaced by what the IMF estimates will be a $10bn current account deficit. The fund predicts that while the Gulf's oil-related economy will slip into recession, shrinking by 3.5 per cent, non-oil GDP is likely to grow by 3.7 per cent. Offering a silver lining, the fund said that inflation was likely to slow this year to 10 per cent, down from 15.6 per cent last year. [e-mail]