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Full Economic Recovery in the GCC will Take Time

Middle East : 07 February 2011

Arab Fund says the recent economic crisis emphasizes the need for strong fiscal coordination.

Although growth in oil producing states across the Gulf was supported by forceful government intervention during the worldwide financial crisis of 2008, the AMF (or Arab Monetary Fund) warns that a full economic recovery will take some time.

The fiscal support offered by the governments during and post-crisis were vital in containing the possible damage, but they also gave the local economies a jolt and resulted in almost $575 billion in projects being put on hold in 2009, according to a study by the AMF.

The group based in Abu Dhabi issued a study noting that relying too much on oil exports after the plummeting crude prices of the end of 2008 was shown to be a heavy risk. Also, the difficult times emphasized that there is an urgent need for more monetary and fiscal coordination within the GCC states.

When the various governments across the GCC intervened to control the negative impacts of the meltdown the weighty support given to the banking and financial industries effectively limited the consequences and the non-oil industries continued to grow in the midst of the economic slowdown. This leading organization within the Arab League also noted that a full economic recovery is expected to take some time as member nations get on track with sustainable growth after the volatile times post-global recession.

Even though the non-oil sectors within most member states have continued in strength due to increasing investments by the public, the nations have been shown their heavy reliance on oil sales that are unpredictable and dominating much of the regional economy, according to the AMF.

These realizations should cause the states to move forward with diversification plans that ease reliance on the oil industry, as well as encourage them to safeguard the savings acquired in the latest oil boom to be earmarked for expansions and investments during future recessions.

The AMF report also noted that there are risks associated with the sharply rising credit seen in domestic banking establishments during the boom period before the crisis, as well as in relying heavily on foreign financing.

Increased exposure by the banks to the unpredictable property market and stock market also carried a risk exposed in the recent crisis. The banks that were using short-term funds deposited and hot money to fund long-term loans and projects were also playing a risky game. This issue has raised the point that the local financial authority’s supervisory role is not effectively keeping up with rapidly developing changes within the domestic banking industry, due to an open structure and the interconnection with global financing.

The AMF is an Arab IMF-like fund that is urging banks in the region to resume lending, once they have successfully expanded the total capital and built sufficient reserves, in an effort to support the economies of local areas.

But the AMF also asked the monetary authority figures within the GCC to more intently supervise and intervene in the domestic financial sectors. This move is intended to help the authorities keep up with changes in the global financial and monetary fields and for the prevention of another crisis within the local economies.

The AMF noted that GCC member states should be advancing in monetary and financial cooperation utilizing tools that are macro-prudent to respond to any cyclical effects seen. These moves are a result of the limitations on monetary tools since the local currencies are pegged to the US dollar. The AMF also stated that if a debt market were created within GCC member nations it would assist investors in the diversification of assets and move their portfolios out of the traditional banking position and into greater financial depth.

Paul Holdsworth, Staff Writer, Gulf Jobs Market News
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