Business | Economy
Mideast needs to undertake deep structural reforms
Quality of spending requires greater attention
- By Babu Das Augustine, Deputy Business Editor
- Published: 00:00 April 28, 2011
Dubai: The political turmoil caused by economic disparities and youth unemployment in the Middle East must be addressed urgently, the International Monetary Fund said in its Regional Economic Outlook for Middle East and Central Asia.
"To be sustainable, growth strategies need to result in job creation and rising incomes for all segments of the population, and address unemployment and housing problems, especially for the youth," said Masoud Ahmad, Director of the IMF's Middle East and Central Asia Department.
The IMF report called on efforts to foster private-sector development in the region.
Credit plays a vital role in private sector-led growth that should create employment. Ensuring sustainable credit growth with improved access, particularly to small- and medium-sized enterprises, is, therefore, a priority," said Ahmad.
Commenting on the IMF report, Nasser Saidi, Chief economist of the Dubai International Financial Centre, said the success of efforts create inclusive growth through developing private sector will hinge on the effectiveness of reforms in education, stepped-up training for nationals, and enhanced productivity.
"The bottom-line in inclusive growth is competitiveness and to achieve this, the region requires to undertake structural reforms in education, training and job creation," said Saidi.
The huge public spending packages announced by governments in the region are expected to keep up the short-term growth momentum.
Strain on budget
"Fiscal packages in many countries in the region this year may strain budgets and require external assistance," said Ahmad.
Public spending has increased dramatically in recent years in many countries, often allocated toward growth-enhancing physical and social infrastructure.
The quality of spending needs greater attention, including the continued strengthening of public financial management.
The IMF called on regional governments to move away from reliance on untargeted subsidies to more efficient social safety nets. In particular, reforming universal fuel price subsidies would help contain rapidly rising domestic energy consumption.
Over the medium term, the Middle East oil exporters should continue their efforts to promote the development of the financial system, to improve its efficiency and further increase its resilience. The banking sector remains broadly sound in the Gulf countries because banks have high capital buffers, in some cases helped by large government capitalisation (Qatar and the UAE).
Potential vulnerabilities
Nevertheless, potential vulnerabilities could emerge through spillovers from the non-bank financial sector to the banking sector (Kuwait), the overhang of the real estate sector (Bahrain, the UAE), and the interconnectedness between the different segments of the banking system (wholesale and retail banks in Bahrain).
The IMF report observed that credit to the private sector began to pick up last year in several countries including the Gulf countries as well as Algeria and Yemen.
Continued efforts will be needed to support the development of the financial system and enhance its regulation and supervision, in order to improve its efficiency.
The report also called on governments to improve access to credit for small and medium-sized enterprises, the promotion of appropriate instruments for housing finance, and development of domestic debt markets to provide the basis for long-term financing.
In the more developed financial systems, existing macro-prudential tools should be further refined to manage the credit cycle without fuelling inflation, particularly in countries, such as those of the Gulf, where monetary policy is constrained by a currency peg.
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