Sound Policies Soften Crisis Impact on Middle East

• Author: International Monetary Fund

IMF Middle East and Central Asia Department Director Masood Ahmed told an October 11 press conference in Dubai that lower oil production resulted in a 3.5 percent drop in oil GDP, but non-oil GDP continued to grow, although moderating to 3.2 percent. In 2010, both oil and non-oil GDP growth are projected to pick up to around 4 percent.

For the region's oil importers, the slowdown has been less severe, thanks to its low degree of integration with global capital markets, limited exposure of the banking system to structured financial products, and its small manufacturing base. But if the downturn for these countries has been mild, the rebound will be similarly modest, Ahmed said at the briefing, which focused on the outlook for the Middle East, North Africa, Afghanistan, and Pakistan (MENAP).

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Oil exporters withstand the shock

The Regional Economic Outlook: Middle East and Central Asia divides MENAP countries into two categories: oil exporters and oil importers.

The oil exporters comprise the six countries of the Gulf Cooperation Council (GCC)-Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates-and Algeria, Iran, Iraq, Libya, Sudan, and Yemen. Together, these countries account for 65 percent of global oil reserves and 45 percent of natural gas reserves.

With the large drop in oil prices-from a peak of more than $120 per barrel in the summer of 2008 to around $30 per barrel at the beginning of 2009-and subsequent cuts in oil production, oil exporters (particularly the GCC) were hard hit.

Drawing on substantial reserves built up prior to the crisis, governments responded with expansionary fiscal policies and liquidity support to their financial sectors, which has helped contain the impact on the broader economy. These policies are also helping maintain relatively high levels of imports during the crisis, which, in turn, contributed to mitigating the global downturn. As a consequence, the current account surplus of these countries dropped by nearly $350 billion (Chart 1).

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With higher oil prices and the anticipated reemergence of global demand, oil revenues will increase, allowing oil exporters to rebuild their international reserve positions-by more than $100 billion in 2010. This, in turn, provides the basis for maintaining public spending. With the GCC's share of world...