Middle East, Central Asia Outlook Remains Bright

• Pages: 89

Page 89

Despite slowing world growth, the outlook for the Middle East and Central Asia remains favorable in 2008, with commodity prices, including oil, expected to remain high, says the IMF's latest forecast.

The surge in investment and strong productivity gains from broad-based structural reforms are expected to sustain growth above the 6 percent level (see table). However, against the background of persistently high fuel and food prices, strong domestic demand, and supply bottlenecks, inflationary pressures are unlikely to abate. Inflation is forecast to climb to 10.7 percent in 2008, up from 9.2 percent last year.

The IMF's Regional Economic Outlook for the Middle East and Central Asia said that with high oil prices boosting oil revenues, fiscal and current account surpluses in oil-producing countries are projected to remain large despite stronger imports and further fiscal expansion.

In most non-oil-producing countries, the policy stance will likely aim to rein in fiscal and external deficits, thereby reducing further vulnerabilities.

Risks to the outlook are broadly neutral, with some upside risks from domestic demand likely to be balanced by downside risks from the external sector. High oil prices and further cuts in U.S. interest rates could lead to a stronger-than-expected increase in domestic demand in the Gulf Cooperation Council (GCC) countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates).

Furthermore, the growing surplus in oil producers, combined with concerns about asset quality in advanced economies, may well lead to increased inflows to the other countries in the region, fueling stronger credit and domestic demand.

However, a protracted slowdown in advanced economies would hurt growth in most countries, depressing exports and commodity prices. Tighter credit in advanced economies and lower risk appetite, as evidenced by widening sovereign spreads, could also curtail the capital inflows that have supported growth in many countries.

Strong performance

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"All countries in the region have been largely unscathed by the recent financial turmoil in developed countries, except Kazakhstan, where the banking sector relied heavily on foreign borrowing," said Mohsin Khan, Director of the IMF's Middle East and Central Asia Department.

Despite continued strength in import growth (20 percent in U.S. dollar terms), high oil prices will keep the region's current account...