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Gulf Co-operation Council (GCC) nations have been advised to continue spending even if revenues from oil declined, because, only by stimulating their economies can nations pull out of recession.
GCC countries had ramped up public spending particularly on major infrastructure projects earlier this year in an attempt to battle the fallout from the world financial crisis, which sent the world's biggest industrial nations into recession.
Public spending and liquidity support to financial sectors in the oil-exporting states in the Middle East and North Africa have helped contain the impact of the world financial crisis on the broader economy but drew down current account reserves - built up in the oil boom years - to a projected $50 billion in 2009 from $380 billion in 2008, says IMF in a report.
Economies are stabilising and expected to experience higher growth next year, but are not yet 'out of the woods', the IMF says. The stimulus packages put in place have helped ease the effects of the downturn, although they have increased public debt, but the IMF expects economies in the MENA and Pakistan region to grow collectively by four per cent in 2010, up from 2.2 per cent this year.
The IMF expects to see growth this year of 1.7 per cent for emerging economies, down on predictions in its last Outlook report in May, but says 2010 will now see a return to healthier growth of 5.1 per cent, one per cent above previous expectations. Next year worldwide, growth is predicted to be three per cent, with half of that growth coming from emerging markets.
The report says that although the oil exporting countries within the region, such as Saudi Arabia, Kuwait and the UAE, were hit hard by the collapse in crude prices from their peaks, substantial reserves and countercyclical government spending softened the impact.
Output contracted 3.5 per cent among the oil exporters, with some countries, such as Saudi Arabia, contracting by 15 per cent. But action to boost revenues from non-oil sectors has resulted in a projected GDP growth in those areas of 3.2 per cent for 2009.
Broken down by country, the GDP health of GCC countries varies. While Qatar is expected to see real GDP growth of 11.5 per cent this year and 18.5 per cent in 2010, the picture in Saudi Arabia is somewhat different. It will have GDP growth of -0.9 per cent this year, before bouncing back next year and growing four per cent.
Among the other GCC nations, the UAE is expected to experience GDP contraction to -0.2 per cent in 2009, with growth of 2.4 per cent in 2010. Bahrain is projected to grow three per cent this year and 3.7 per cent in 2010, Kuwait -1.6 per cent in 2009 and 3.2 per cent in 2010, and Oman 4.1 per cent in 2009 and 3.8 per cent in 2010.
The IMF says oil exporters had surpluses of $380 billion last year, compared with a surplus of between $40 and $50 billion this year. In 2010, that surplus is expected to rise again, to between $100 billion and $125 billion.
So while oil exporters in the region were hit by the fall in prices, they continued with their government spending plans, which acted as a 'circuit breaker' in that it 'protected the main oil economies', says Ahmed.
The fiscal stimulus packages put in place around the world have helped reduce the impact of the global financial collapse. All GCC countries injected money into their banking systems, and the IMF said that so far banks have managed to remain profitable in the region.
A consequence of those packages is soaring government debt, but Ahmed said that it is much like if a fire breaks out in your home - your immediate concern is putting out the flames, not how long it will take to repair the water damage left behind. And there is the added danger that if governments switch off their stimulus packages too soon, economies could be plunged back into a recession. It's going to rise to levels not seen before. Bringing it down will be a big medium term challenge.
The outlook for 2010 is one of moderate growth in the region. Oil and non-oil GDP are predicted to grow by 4.4 per cent and 3.9 per cent respectively. The countercyclical policies of some of the GCC nations, which has seen continued, large-scale investment in public infrastructure projects, is expected to continue into next year.
Further into the future, the IMF says the GCC needs to diversify financial channels away from banks, in particular, developing local debt markets for large corporates.
