New economic thinking for a region in transition

13 October 2006

IMF director Mohsin Khan said earlier in October that the Middle East and North Africa (MENA) region will record growth of more than 12 per cent in 2007. Aggregate gross domestic product (GDP) next year will be more than double the figure recorded in 2002. MENA governments will have a total fiscal surplus of almost 10 per cent of aggregate 2007 GDP. Government debts will fall. The forecast MENA current account surplus of more than $331,000 million will be a new record.

The GCC six, forecast to have combined GDP of more than $730,000 million in 2006, will also move into uncharted territory next year with growth of 11 per cent. Their combined current account surplus is projected to hit $260,000 million, equivalent to 32 per cent of GDP.Khan was positive about trends. ‘Policies are on the right track,’ he said. Plans to invest in infrastructure will lift growth and employment and reduce the external surplus. Even the recent inflation record is untroubling. The IMF says the UAE 2006 inflation rate is about 8 per cent and even higher in Qatar. But it is running at no more than 1 per cent in Saudi Arabia, the region’s largest economy. Khan said he believed strong growth will continue for five more years.But there are issues. Khan estimated that the Israel-Hezbollah war and blockade hit the Lebanese economy harder than initially thought. The country’s GDP could contract by up to 5 per cent in 2006 as a result. The IMF supports Iraq’s economic programme, but progress is below expectations. Inflation has accelerated and growth has been disappointing. Security and corruption in the oil sector are major challenges.The IMF avoided commenting on stock exchange developments. The macroeconomic impact of the 2006 GCC crash has been limited. But confidence has been hit. Capital markets are not contributing as much as they should.There was nothing in the fund’s IMF Middle East & Central Asia Middle regional outlook report about plans for full GCC monetary convergence in 2010. Khan said he sees no reason to think that this will not happen as planned. But he noted that the convergence conditions necessary for a smooth transition from six currency units to one have still not been announced. This was, perhaps, a hint that the fund would like to hear more about the transitional programme.Creating a single GCC currency is the most important Middle East economic initiative of modern times. If it goes wrong, prospects for the entire region will be blighted. The GCC is the locomotive of the Middle East. Its economy must stay on track. It plays a role equivalent to the US in the Americas and Germany in Europe.The IMF alluded to the need for real exchange rate appreciation where there are permanently higher capital inflows. There are no more prominent candidates for this treatment than the GCC six, but Khan was not specific. He simply argued that where there are pegged exchange rates, which the GCC has, open trade regimes and flexible labour markets will help constrain consumer price inflation. It is clear, however, that prescriptions appropriate for the long Gulf recession of the 1980s and 1990 are no longer relevant. A new era has begun. For the GCC, smoothly creating a currency union is just part of a larger challenge presented by unprecedented macroeconomic trends.Economic convergence is quickening due to intra-regional capital flows and growing trade among the GCC six. But a single Gulf currency, which convergence inevitably implies, raises other challenges. They include harmonising domestic tax systems, creating a unified system of financial regulation and developing a single labour market. New institutions and new laws will be needed, but doesn’t that imply a regional legislative body, GCC courts and a regional executive with real power? The list of possible action points is long. Some might regard it as impertinent.The prize of economic convergence, however, w

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