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Gulf states facing capital challenge

MANAMA: The biggest challenge facing the Gulf is mobilising private sector capital to replace government spending as fiscal programmes are rolled back, according to the International Monetary Fund. Bank lending remains tight in the wake of the crisis, particularly in the region's financial centres of Bahrain and Dubai, the IMF semi-annual Regional Economic Outlook Middle East and Central Asia said yesterday. Government spending has succeeded in blunting the impact of the global financial crisis on the Gulf, the IMF said, but the region now needs to make the difficult shift from spending its oil savings to getting private money flowing through the economy again.

The fund lowered its projection of growth in the Gulf this year to 0.7pc, down from 1.3pc in its previous assessment six months ago, but predicted a stronger recovery next year, with growth reaching 5.2pc, higher than the 4.2 per cent growth for next year, it predicted back in May.

It reiterated its forecast of a mild recession this year in the UAE, with GDP contracting 0.2pc, but rebounding next year to expand by 2.4pc.

"Drawing on substantial reserves built up prior to the crisis, governments responded with strong countercyclical policies, which have helped contain the impact on the non-oil sectors of their economies," the fund said.

"Financial market development - including diversification beyond a bank-based system - will remain a priority, as will efforts improving the business climate to support economic diversification and generate employment."

After drawing down their oil surpluses to combat the global recession, Gulf nations will be able to rebuild their reserves next year as oil prices recover with demand, the fund said. It predicted that foreign currency reserves in the six nations comprising the GCC would rise by $100 billion in 2010.

The outlook is less rosy for oil importers in the Middle East and North Africa.

While insulated from the crisis somewhat by undeveloped capital markets and limited trade linkages with the rest of the world, these countries will face higher energy prices while getting few of the benefits of a global upturn.



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