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Higher Expenditure Put Strain on Government Finances in Middle East

Middle East : 07 April 2011

Higher levels of spending by Middle East governments aimed at cushioning the negative impact of swelling fuel and food prices in the midst of political unrest will only strain the public finances over the long term, according to recent warnings from the IMF head.

IMF’s managing director Dominique Strauss-Kahn stated that one pressing challenge for the region is the preservation of social cohesion while maintaining stability in the macroeconomic climate.

Strauss-Kahn stated that global economic recovery remains fragile, bumpy and uncertain. As reported in the Khaleej Times, he warned that much uncertainty remains prevalent and “black swans are now swimming in the global economic lake.”

Referencing a black swan is in itself strange, since the very definition of the term is that of an unpredictable event that was not and could not be forecasted. When they are brought to light, blacks swans tend to mock the forecasters.

When addressing students at George Washington University Strauss-Kahn stated that an historic revolution is occurring in the Middle East region. The citizens of these nations are demanding more freedom and fair distribution of resources as well as opportunities within the economy. As governments respond to these demands the changes will affect the economy, the politics and the social structure. It will be a lengthy process, as transformation of this scale requires major effort and time.

He added that the governments have responded to increasing fuel and food prices by absorbing the effects into their budgets to cushion the blow in the midst of the turmoil.

Strauss-Kahn warned that the higher spending levels will put strain on the public finances for the future at the same time that the political situation dampens Foreign Direct Investment (or FDI) and tourism. Instability in the region is also resulting in higher borrowing costs. This could result in more setbacks as the region pushes for social inclusion in terms of growth and more job creation to absorb the swelling population. The global community needs to be ready to offer support, currently and into the future, said Strauss-Kahn.

The chief of the IMF stated that growth within the wealthy nations is too low and the levels of unemployment are too high. He said that the fractured approach Europe is taking against sovereign debt levels and crisis in economic growth is only making the issues worse and noted that low investments and revenues coupled with rising commodity prices spells an economic threat for restructuring in the Middle East.

These comments were made before the spring meetings were held, where finance ministers from the largest twenty developing and industrialized nations meet with the IMF and the World Bank in Washington.

Strauss-Kahn expressed concern that the cooperation seen during the peak of the financial trouble was vanishing, adding his worries that the level of political harmony necessary to meet the global issues head on is unsustainable. He also stated that the recent crisis showed that taxes are needed to prevent the finance industry from engaging in high risk behaviour.

There should be a tax levied on activities within the financial industry to push this sector into bearing a certain amount of the cost that results from high risk actions. Strauss-Kahn stated two broad conclusions in his address. While the new world’s macroeconomic structure is being designed the pendulum is likely to swing somewhat towards the state (from the market) and towards the complex (and away from the relatively simple).

The IMF chief added that this unequal situation may have contributed to the crisis. Inequality may have been included in the quiet causes of the crisis. Just before it hit there was inequality in the US that compared to the days before the Great Depression. Much like that time period past, the Great Recession followed an increase in the income levels of the rich and an expanding financial sector. Strauss-Kahn noted that under the circumstances borrowing may have been able to act as safety valve as ordinary families increased their standard of living, but only for a limited time. In the long term sustainable growth needs to go along with an equal distribution of income.

Rich countries are experiencing unemployment that is too high and growth that is not high enough.

Also, the economies of the emerging markets, notably those in Latin America and Asia, are moving ahead and handling the overheating conditions. These nations with low income levels have proven their resilience, only to be hit with high fuel and food prices, said Strauss-Kahn.

Paul Holdsworth, Staff Writer, Gulf Jobs Market News
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