Regional Economic Outlook, September 2006, Middle East and Central Asia

International Monetary Fund. Middle East and Central Asia Dept.

• Publisher: INTERNATIONAL MONETARY FUND
• eBook ISBN:
  9781589065963
• Year: 2006

NONE

Recent Macroeconomic Developments and Prospects

Photos on previous page

Gold bars in Dubai, United Arab Emirates by STR/Reuters Photo Archive.

Pyramids of Giza at sunset in Cairo, Egypt by Philip Coblentz/PictureArts.

Iraqi petroleum workers turn a valve to release gas at the Anzalla oil fields in the Ninewa province of northern Iraq, by Joe Raedle/Getty.

Highlights

• Economic performance in the Middle East and Central Asia region remains strong, despite security problems in some countries and recent asset price reversals. Growth in the region continues to outpace global growth and should average 6–7 percent in 2006 and 2007—similar to the rates of the past three years. Strong external inflows resulting from high oil and non-oil commodity prices, foreign investments, and remittances are fueling credit growth, and inflation continues to edge up, though it remains moderate in most countries. The region’s fiscal and external surpluses are still rising, but at a slower pace than in recent years. Progress in reducing debt and building official reserves has put the region in a better position to absorb shocks and address development needs.
• High oil prices, a favorable global environment, and generally good economic policies underpin this strong performance, but there are risks. Most importantly, further conflict and a worsening security situation would eventually have a broader impact on the regional economy than we have seen so far. Global developments, including a sharper-than-expected tightening of international financial market conditions, or a slowdown resulting from a disorderly unwinding of global imbalances, could also hit regional growth. Policies should continue to aim at strengthening the region’s resilience to such developments.
• Policies are on the right track. With the growing realization that the increase in oil prices— and hence in oil revenue—will endure, many oil-exporting countries have started to pick up the pace of spending and are putting in place major programs to upgrade their social and physical infrastructure. As a case in point, the Gulf Cooperation Council (GCC) countries’ investment plans for 2006–10 amount to over $700 billion—covering investments in the oil and gas sector, infrastructure, and real estate. Once under way, these projects should enhance growth and employment, and help narrow the region’s large external surplus. In addition, the oil projects will boost production and petroleum refining capacity, and so help to promote global oil market stability. Oil importers are continuing to make progress with fiscal consolidation and financial sector oversight.
• Large external inflows are creating difficult challenges for monetary policy. Real exchange rate appreciation will eventually be needed in response to permanently higher inflows. For countries with flexible exchange rate regimes, a combination of monetary tightening and nominal appreciation would be the best way to limit inflationary pressures. For countries with pegged exchange rates, open trade regimes and flexible labor markets will help to constrain increases in consumer prices.
• Continued structural and institutional reforms will help to ensure that higher spending translates into increased productivity and potential output, and boost the region’s resilience to shocks. In the financial sector, strengthening prudential measures and improving risk management practices will reduce the impact of future asset price volatility and lessen the risk of financial sector instability. Increased regional cooperation—especially in Central Asia, the GCC, and the Maghreb countries—will promote trade and investment, and improve the prospects for sustainable long-term growth.

The Fall 2006 Regional Economic Outlook (REO), covering countries in the Middle East and Central Asia Department (MCD) of the International Monetary Fund (IMF), provides a broad overview of recent economic developments, and prospects and policy issues for 2006 and 2007. MCD countries are divided into three groups: oil exporters, low-income countries (LICs), and emerging markets.¹ Countries are grouped based on the share of oil in total exports, per capita income, and access to international capital markets.

Recent Economic Developments

The MCD region has continued to grow strongly in 2006, for the fourth year in a row. Real GDP expanded by 6½ percent in the first half of 2006—a little better than the performance of the previous three years and well above the average growth rate of 3¾ percent registered during 1998–2002 (Figure 1). Continued high oil and non-oil commodity prices, robust global growth, a favorable international financial environment, and appropriate fiscal and monetary policies in many MCD countries underpinned this performance. With the boost to growth in recent years, real per capita income growth jumped from an average of 1¾ percent in 1998–2002 to 4 percent in 2003–05, and average per capita income reached $5,500 in 2005.

Figure 1. Global real GDP growth

MCD growth continues to outpace global growth.

(average annual change; in percent)

Sources: Data provided by authorities; and IMF staff estimates and projections.

Growth in the region continues to outpace global growth. For the sixth year in a row, MCD growth exceeded global growth (of about 5 percent). Despite this strong performance, unemployment rates remain in double digits throughout much of the region, largely reflecting a rapidly growing labor force.

Among MCD countries, growth in 2005 and early 2006 accelerated in LICs and oil-exporting countries and remained at about the previous year’s level in emerging market economies (Figure 2).

• LICs registered the highest growth in the MCD region, with an average of 7¼ percent in 2005 and over 9 percent in the first half of 2006, which compares favorably with the average of all developing countries. Growth picked up and was well above the average in Afghanistan, Armenia, Georgia, and Sudan, with all of them benefiting from a recovery in agriculture. Armenia, Georgia, and Sudan also benefited from expanding construction activity.
• Oil-exporting countries grew by 6½ percent in 2005 and early 2006, with particularly strong growth in Azerbaijan, Kazakhstan, Kuwait, Turkmenistan, and the UAE. Non-oil GDP growth, chiefly from construction activity, was the main engine of growth in Kazakhstan and the UAE, while expansion in the oil sector was the driving force in Azerbaijan and Kuwait. Oil GDP continued to contract in Bahrain and Syria.
• Emerging market countries continue to grow, on average at about 5¾ percent. Growth has remained strong in Jordan and Pakistan, and picked up in Egypt in early 2006. In Lebanon, after a weak performance in 2005, GDP was recovering strongly in the months before the conflict with Israel, while in Morocco, activity is rebounding from the effects of bad weather on agriculture in 2005.

Figure 2. Real GDP growth in MCD

Low-income countries are growing fastest.

(average annual change; in percent)

Sources: Data provided by authorities; and IMF staff estimates and projections.

The MCD region as a whole continues to have high savings as reflected in large current account surpluses. On average, the current account surplus of MCD countries was about 14 percent of GDP in 2005 ($200 billion) compared with an average of 2½ percent of GDP ($25 billion) during 1998–2002 (Figure 3). The surplus was reflected in a sharp increase in gross official reserves, a trend that has continued in the first half of 2006. Both the high level of the surplus and its increase were due to developments in oil-exporting countries. Elsewhere, external balances generally deteriorated, although the adverse impact of higher oil prices on the current account of oil importers was partly offset by increases in non-oil commodity prices, especially metals (Figure 4), and in remittances. Remittances were particularly important in the Commonwealth of Independent States (CIS, Box 1), in Egypt, Jordan, Morocco, and Pakistan among emerging market countries, and in Sudan.

• Oil-exporting countries’ current account surplus exceeded 20 percent of GDP ($206 billion) in 2005. The value of exports rose by at least 30 percent in all countries except Qatar, Syria, and Turkmenistan. On the other hand, import growth moderated relative to 2004, reflecting higher saving from oil receipts. Among oil-exporting countries, Iraq, Kazakhstan, Qatar, Saudi Arabia, and the UAE had above-average growth in imports, including for foreign direct investments (FDI) projects.
• Emerging market count...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Recent Macroeconomic Developments and Prospects
• Statistical Appendix
• Footnotes