Rising oil prices fuel liquidity, stoke reserves

• Pages: 133

Page 133

High oil prices and a benign global environment provided the impetus for strong growth in the Middle East and Central Asia over the past year. The region averaged more than 6 percent growth in 2005 and is projected to turn in a similar performance in 2006, according to the IMF's Regional Economic Outlook: Middle East and Central Asia. Macroeconomic performance was strong more generally: inflation was muted, fiscal and external balances improved in most countries, and official reserves rose sharply despite hefty external debt repayments.

Sharply higher oil revenues in exporting countries have thus far not translated into correspondingly higher expenditures, and the resulting high rate of saving (see top chart) is showing up, the report notes, in wider global imbalances.

Capital inflows in some instances have helped the region's oil-importing countries finance higher energy bills and postpone adjustment. Indeed, countries in the region, on average, passed through only 50 percent of the higher oil prices to consumers between 2002 and 2005. In oil-exporting countries the pass-through was only 20 percent of the increase; in low-income countries, the pass-through was 80 percent of the increase. Although these actions have helped contain inflation and aid non-oil sectors, the fiscal costs for some oil importers have been high.

High oil prices have also swelled regional liquidity and fueled stock market and real estate booms. The report cautions, in particular, about possible overvaluation of some stock markets-several of which suffered reversals in late 2005 (see bottom chart).

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On the horizon

While the...