Oil Prices Underpin Strong Growth in the Mideast and Central Asia

International Monetary Fund. External Relations Dept.
Published Date:
October 2006
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Economic performance in the Middle East and Central Asia region remains strong, despite security problems in some countries and recent asset price reversals, the IMF said in its regional outlook published in October. Growth in the region continues to outpace global growth and should average 6–7 percent in 2006 and 2007—similar to the rates of the past three years, said Mohsin Khan, Director of the IMF’s Middle East and Central Asia Department.

Strong external inflows resulting from high oil and non-oil commodity prices, foreign investments, and remittances are fueling credit growth, and inflation continues to edge up, though it remains moderate in most countries, estimated at an average of 7.1 percent in 2006.

The region’s fiscal and external surpluses are still rising, but at a slower pace than in recent years. Progress in reducing debt and building official reserves has put the region in a better position to absorb shocks and address development needs.

Policies are on the right track. “With the growing realization that the increase in oil prices—and hence in oil revenue—will endure, many oil-exporting countries have started to pick up the pace of spending and are putting in place major programs to upgrade their social and physical infrastructure,” said Khan. As a case in point, the Gulf Cooperation Council countries’ investment plans for 2006-10 amount to over $700 billion, covering investments in the oil and gas sector, infrastructure, and real estate.

Large external inflows are creating difficult challenges for monetary policy. Real exchange rate appreciation will eventually be needed in response to permanently higher inflows. For countries with flexible exchange rate regimes, a combination of monetary tightening and nominal appreciation would be the best way to limit inflationary pressures, Khan said. For countries with pegged exchange rates, open trade regimes and flexible labor markets will help to constrain increases in consumer prices.

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