High oil prices and a benign global environment provided the impetus for strong growth in the Middle East and Central Asia over the past year. The region averaged more than 6 percent growth in 2005 and is projected to turn in a similar performance in 2006, according to the IMF’s Regional Economic Outlook: Middle East and Central Asia. Macroeconomic performance was strong more generally: inflation was muted, fiscal and external balances improved in most countries, and official reserves rose sharply despite hefty external debt repayments.
Sharply higher oil revenues in exporting countries have thus far not translated into correspondingly higher expenditures, and the resulting high rate of saving (see top chart) is showing up, the report notes, in wider global imbalances.
Capital inflows in some instances have helped the region’s oil-importing countries finance higher energy bills and postpone adjustment. Indeed, countries in the region, on average, passed through only 50 percent of the higher oil prices to consumers between 2002 and 2005. In oil-exporting countries the pass-through was only 20 percent of the increase; in low-income countries, the pass-through was 80 percent of the increase. Although these actions have helped contain inflation and aid non-oil sectors, the fiscal costs for some oil importers have been high.
High oil prices have also swelled regional liquidity and fueled stock market and real estate booms. The report cautions, in particular, about possible overvaluation of some stock markets—several of which suffered reversals in late 2005 (see bottom chart).
On the horizon
While the report sees good prospects for 2006, it cautions that countries will need to adjust to higher energy costs and be mindful of attendant risks. It urges oil producers to reduce oil price subsidies and seize the opportunity afforded by increased revenues to invest in infrastructure and human development. With pressures on exchange rates rising, nominal appreciation, the report says, is certainly preferable to increased inflation. The report also cautions that those countries with pegged exchange rates, open trade regimes, and flexible labor markets may see asset rather than consumer price inflation—making tightened bank supervision and adequate investor protection a priority.
Middle East and Central Asia
The Middle East and Central Asia Regional Economic Outlook covers countries included in the IMF’s Middle East and Central Asia Department. The countries are grouped as oil exporters (Algeria, Azerbaijan, Bahrain, Iran, Iraq, Kazakhstan, Kuwait, Libya, Oman, Qatar, Saudi Arabia, Syria, Turkmenistan, and the United Arab Emirates’ low-income (Afghanistan, Armenia, Djibouti, Georgia, Kyrgyz Republic, Mauritania, Sudan, Tajikistan, Uzbekistan, and Yemen), and emerging markets (Egypt, Jordan, Lebanon, Morocco, Pakistan, and Tunisia).
The full text of the Regional Economic Outlook is available on the IMF’s website (www.imf.org).
Oil exporters’ rising surpluses
Between 2002 and 2005, the average current account balance—a broad measure of saving—has increased more than fourfold.
Data: Country authorities and IMF staff estimates.
Fundamentals or bubble?
The size of the increase in the Shua’a before the recent correction is daunting compared with the lead-up to the Nasdaq and Nikkei bubbles.
Note: Market peaks—Nasdaq (March 2000), Nikkei (December 1989), and Shua’a (February 2006). Shua’a is a market-weighted index of the most active stocks in 12 Arab stock markets.
Oil-importing countries will need to adjust, passing through the full increase in the price of oil and taking steps to protect the poor—measures that will entail substantial fiscal tightening in some countries. It will also be important to tighten monetary policy to limit credit growth and prevent higher inflation from becoming entrenched.