GCC may have to withdraw stimulus

The GCC countries will have to withdraw stimulus next year if inflation continues its upward trajectory, according to a senior official of International Monetary Fund.

John Lipsky, First Deputy Managing Director of the IMF, said: “The outlook for the GCC countries has improved considerably thanks to the ongoing global recovery and the stabilization in oil prices. Comfortable fiscal and external positions permit most GCC countries to maintain fiscal stimulus in 2010, and into 2011 if necessary. However, in some countries we are seeing early signs of a pickup in inflation. If sustained, this may call for a withdrawal of stimulus as early as 2011.”

Lipsky said this in a statement after meeting the financial ministers and central bank governors of Gulf states in Kuwait.

Inflation has been on the rise in most of the Gulf countries over the last couple of quarters particularly in the UAE, Kuwait and Saudi Arabia mainly due to the rising food prices.

“The short term challenge for the GCC countries will be to support a revival in credit growth, which similar to many other countries had decreased sharply as a result of the crisis. The fundamentals to address this challenge have improved as considerable progress has been made in financial and corporate restructuring in 2010, helping shore up market confidence. Additionally, GCC banks’ capital adequacy ratios remain strong,” he added.

“Turning to the long-term challenges, although GCC financial systems were less affected by the crisis, some areas for further strengthening need to be addressed. In particular, it would be important to enhance supervision, macro-prudential policy tools, liquidity management, and resolution frameworks for banks and nonbanks, and to reduce dependence on name lending. Development of local financial markets will be key in deepening financial intermediation. To meet the rising demand for Sukuk in the region, creditor rights and court enforceability should be clarified and disclosure standards strengthened.

“The global crisis has also highlighted the need to preserve fiscal space to enable an effective policy response to contain damage in times of economic slowdown. For the GCC, given the system of pegged exchange rates, this implies continuing to implement countercyclical fiscal policy and establishing strong fiscal frameworks, with a medium-term anchor, which include monitoring of contingent liabilities linked to quasi-sovereign entities,” Lipsky said.

“Regarding macroeconomic statistics, timeliness, quality, and periodicity should be improved at the country level, while, simultaneously, efforts should be accelerated to harmonize statistics across the region. Tackling these challenges would bring with it large benefits to the GCC in terms of economic stability, and stronger and sustainable non-oil growth and job creation. The IMF has been closely cooperating with the GCC countries and stands ready to further this collaboration in the future.”

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