GCC urged to adopt 'three-pronged' fiscal policy

Gulf oil producers need to adopt a three-pronged fiscal policy to sustain growth and tackle inflation, unemployment and other economic problems that are looming despite high oil prices, an official study said yesterday.

The policy should take into consideration reforms, macroeconomic fundamentals and downside risks to growth resulting from high inflation rates, lower capital flow and over-exposure of financial services, said the study by the Dammam-based Arab Petroleum Investment Corporation (Apicorp), an affiliate of the 10-nation OAPEC. The study about the global credit crisis and its impact on the Middle East and North Africa (Mena) countries, said regional nations face both downside and upside growth risk, adding the upside trend is backed by expectations of continued rise in oil prices.

The study, sent to Emirates Business yesterday, said that despite having relatively been insulated from worsening credit and liquidity strains, the GCC and other Mena countries have been experiencing diverse constraints and dilemmas.

While a number of countries still face over-heating pressures and rising domestic prices, others struggle with reform and external sector problems.

"Amid looming financial and energy crises, the GCC and other countries in the region need to adopt sounder monetary policy measures and more prudent fiscal stances. Furthermore, at the present juncture of uncertainties, it is paramount to closely monitor the causes and consequences of broader macro-risks," Apicorp said.

"A pragmatic three-pronged analysis, which combines macroeconomic fundamentals, structural reforms and country risks, can help better identify the appropriate mix of policies and measures to mitigate such risks and foresee potential challenges."

The study noted that six-nation GCC has been the main victim of inflation in the region because of the peg between the national currencies of most member states and the ailing US dollar. It referred to a spate of cuts in GCC interest rates over the past few months in line with the US Fed rate reductions.

"Along a solid dollar peg system in some major economies within Mena, monetary easing in tandem with the US federal funds rate remains a threatening factor to the entire region, aggravating further an already high inflationary pressure and project cost," said Apicorp, the main oil investment establishment of the Kuwaiti-based Organisation of Arab Petroleum Exporting Countries.

"A concern of risks is now prominent. Apicorp's perception on the balance of risk defined broadly as the sum of regional upside risk to growth and regional downside risk to growth has been tilting to the downside."

From the economic analysis point of view, the upside risks to growth remain a solid macroeconomic health backed by the high oil price and accumulated savings.