After a period in which the amount of credit provided by banks in the GCC was rising by more than 30 per cent a year, the sudden halt of new loans being made has hit the region’s economies hard.

Credit growth fell from nearly 40 per cent in the UAE in 2008 to less than 2.5 per cent in 2009, while in Saudi Arabia it went into reverse in 2009. Unless banks start loosening up, the nascent economic recovery will take much longer to gain any real momentum.

But policymakers are finding their hands are tied. The lax credit conditions of recent years meant banks often made ill-advised loans, and the provisions they have since had to make for all these bad debts has left them wary of -making new loans.

The level of non-performing loans around the region will continue to rise throughout this year and banks must take measures to protect their balance sheets.

Banks still have plenty of money but, instead of lending it, they are generally depositing it in the safest place they can find: central banks. For now, any efforts by those central banks to dissuade banks from doing this are failing.

Banks will eventually start lending again, once there are signs that the worst of the -economic slowdown is over and large corporate defaults are behind them, but that may not be until late 2010.

At that point, policymakers will have to switch their focus to ensuring that credit growth does not get out of control again.

During the boom, the banks were allowed to flout loan-to-deposit ratios and much else besides.

The current problem may be persuading banks to lend at all but, in the medium term, the biggest challenge facing policymakers will be to find a way to avoid another cycle of boom and bust.