Boosting Demand and Investment Are Keys to Asian Rebalancing

Upturn in worldwide demand, oil prices spurs regional recovery

Addressing financial sector vulnerabilities remains a priority

Job growth, competitiveness are key to region’s development

The IMF’s Regional Economic Outlook for the Middle East and Central Asia, released October 24, says the MENAP region’s output is projected to expand by some 4.2 percent in 2010, up from 2.3 percent in 2009 (see table).

“We expect most countries in the region to grow faster in 2010 and 2011 than in 2009,” IMF Middle East and Central Asia Director Masood Ahmed told a press conference in Dubai. “With the economic recovery taking hold, the region needs to resume its focus on medium-term challenges: diversification and financial market development for the oil exporters, and tackling unemployment through faster, job-creating growth in the emerging markets.”

Oil exporters see visible improvement

For the MENAP oil exporters—Algeria, Bahrain, Iran, Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia, Sudan, the United Arab Emirates, and Yemen—economic activity is picking up considerably. With the rebound in worldwide demand, crude oil production is projected to grow to 25 million barrels per day (bpd) in 2010 and 26 million bpd in 2011. As a result, oil GDP will register growth rates of 3.5 percent in 2010 and 4.3 percent in 2011.

The rise in oil prices—by 23 percent in 2010 and more than 3 percent in 2011—is also leading to a marked turnaround in external balances. The combined current account surplus of these countries is projected to rise by about $80 billion on current oil price expectations; of this, close to $50 billion is accounted for by the countries of the Gulf Cooperation Council (GCC) (see Chart 1).

Non-oil activity is also projected to pick up, but more gradually by only 1 percentage point between 2009 and 2011, the IMF report said. In most countries, non-oil-sector growth continues to rely on supportive fiscal policy with private financing and credit still sluggish. Unlike some other regions, capital inflows have so far shown only a small resurgence in the MENAP oil exporters.

With the recovery in oil prices and non-oil activity, fiscal balances are expected to improve across the MENAP oil exporters. For the GCC countries, the improvement is almost 7 percentage points of GDP between 2009 and 2011.

Where fiscal space is available and signs of either self-sustaining private-sector activity or overheating are absent, fiscal policy should remain...