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Mr. Ali J Al-Sadiq and Ms. Inci Ötker
Declining commodity prices during mid-2014-2016 posed significant challenges to commodity-exporting economies. The severe terms of trade shock associated with a sharp fall in world commodity prices have raised anew questions about the viability of pegged exchange rate regimes. More recently, the COVID-19 pandemic and the measures needed to contain its spread have been associated with a significant disruption in several economic sectors, in particular, travel, tourism, and hospitality industry, adding to the downward pressure on commodity prices, a sharp fall in foreign exchange earnings, and depressed economic activity in most commodity exporters. This paper reviews country experiences with different exchange rate regimes in coping with commodity price shocks and explores the role of flexible exchange rates as a shock absorber, analyzing the macroeconomic impact of adverse term-of-trade shocks under different regimes using event study and panel vector autoregression techniques. It also analyzes, conceptually and empirically, policy and technical considerations in making exchange rate regime choices and discusses the supporting policies that should accompany a given regime choice to make that choice sustainable. It offers lessons that could be helpful to the Caribbean commodity-exporters.
International Monetary Fund. Middle East and Central Asia Dept.
The COVID-19 pandemic is having far-reaching consequences for the global economy. Measures to contain the spread of the virus have led to sharp declines in economic activity across the globe, particularly in 2020Q2. The hardest hit sectors have been those requiring intensive human contact, such as tourism, transportation, services, and construction, while, in general, IT-intensive activities have fared better. The economic contraction is most significant in advanced economies. The GCC countries face a double impact from the coronavirus and lower oil prices. GCC authorities have implemented a range of appropriate measures to mitigate the economic damage, including fiscal packages, relaxation of monetary and macroprudential rules, and the injection of liquidity into the banking system, and there are recent signs of improvement. Low oil prices have caused a sharp deterioration of external and fiscal balances, and fiscal strains are evident in countries with higher debt levels.
Mr. Olumuyiwa S Adedeji, Mr. Sohaib Shahid, and Ling Zhu
This paper examines real and financial linkages between Saudi Arabia and other GCC countries. Growth spillovers from Saudi Arabia to Bahrain are found to be sizeable and statistically significant, but those to other GCC countries are not found to be significant. Equity market movements in Saudi Arabia are found to have significant implications for other GCC countries, while there is no evidence of co-movements in bonds markets. These findings suggest some degree of interdependence among GCC countries.
International Monetary Fund
"Diversification of the GCC economies, supported by greater openness to trade and higher foreign investment, can have a large impact on growth. Such measures can support higher, sustained, and more inclusive growth by improving the allocation of resources across sectors and producers, creating jobs, triggering technology spillovers, promoting knowledge, creating a more competitive business environment, and enhancing productivity. The GCC countries are open to trade, but much less so to foreign direct investment (FDI). GCC foreign trade has been expanding robustly, but FDI inflows have stalled in recent years despite policy efforts taken to reduce administrative barriers and provide incentives to attract FDI. Tariffs are relatively low; however, a number of non-tariff barriers to trade persist and there are substantial restrictions on foreign ownership of businesses and real estate. The growth impact of closing export and FDI gaps could be significant. In most countries, the biggest boost to growth would come from closing the FDI gap—up to one percentage point increase in real non-oil per capita GDP growth. Closing export gaps could provide an additional growth dividend in the range of 0.2-0.5 percentage point. Boosting non-oil exports and attracting more FDI requires a supportive policy environment. Policy priorities are to upgrade human capital, increase productivity and competitiveness, improve the business climate, and reduce remaining barriers to foreign trade and investment. Specifically, continued reforms in the following areas will be important: • Human capital development: continue with investments made to raise educational quality to provide knowledge and skills upgrade. • Labor market reforms: aim to improve productivity and boost competitiveness of the non-oil economy. • Legal frameworks: ensure predictability and protection; efforts should include enhancing minority investor protection and dispute resolution; implementing anti-bribery and integrity measures. • Business climate reforms: focus on further liberalizing foreign ownership regulations and strengthening corporate governance; and on further reducing non-tariff trade barriers by streamlining and automating border procedures and streamlining administrative processes for issuing permits."