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Mideast-Central Asia: Strong Growth Outlook Tempered by Rising Inflation

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
December 2007
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The Middle East and Central Asian region is growing at 6½ percent in 2007; growth is expected to be about the same in 2008. The overall outlook is favorable, but the downside risks from the global economy have increased, and the region must tackle important policy challenges to sustain strong growth and further reduce poverty and unemployment.

Growth in the region, which is divided into oil exporters, low-income countries, and emerging markets, will outstrip global growth in 2007 for the eighth year in a row and is outpacing population growth.

In the oil exporters, growth is expected to be about 6½ percent this year and next, underpinned by non-oil activity. The low-income countries are growing the fastest at 9 percent, although growth should dip next year. The emerging market countries are estimated to grow by slightly less than 6 percent in 2007 but should reach 6½-7 percent next year.

Inflation has picked up to about 8½ percent and will likely ease only slightly in 2008. In the oil exporters, inflation will jump to 10 percent from 7 percent last year. Inflation has been low in Bahrain, Kuwait, and Saudi Arabia, which have open trade systems, flexible labor markets, less binding capacity constraints, and limited domestic pass-through of higher fuel costs. Inflation will likely be highest in Azerbaijan, Iran, Libya, and Qatar because of pressures from increased domestic demand, including from hikes in public sector wages, and supply constraints. In most countries, the recent increases in food prices are beginning to exert additional inflationary pressures.

Regional changes

The region has seen increases in per capita incomes, enhanced economic integration, and changes in countries’ economic systems. It is becoming more diversified, and, in the Gulf Cooperation Council countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates), the non-oil sector is growing in importance. Moreover, the role of market forces and the private sector in the region is expanding.

Development indicators are improving. Extreme poverty (those living on less than $1 a day) has fallen, life expectancy has increased, and fertility has declined. The region’s population, swelled by immigrants, now numbers 650 million. The populations of Qatar and the United Arab Emirates have increased fourfold, fueling these countries’ strong growth but straining infrastructure. Despite the region’s recent strong growth record, unemployment has declined only slightly and exceeds 10 percent in many countries.

Solid growth

Low-income oil importers are at the forefront.

(annual change, percent)
2006Est.

2007
Proj.

2008
Middle East and Central Asia6.66.66.7
Oil exporters6.26.66.4
Low-income countries9.39.38.8
Emerging markets6.85.96.6
Sources: Country authorities; and IMF staff estimates and projections.
Sources: Country authorities; and IMF staff estimates and projections.

Spending versus saving

Higher spending by oil exporters has lowered the region’s savings this year. With oil and gas export receipts rising, spending on infrastructure and social investment projects has accelerated. The oil exporters can expect external current account surpluses to drop to about 17 percent of GDP ($264 billion) this year from 21 percent ($275 billion) last year, contributing to a narrowing of global current account imbalances. The low-income countries have also spent more in 2007; in contrast, the emerging market countries’ spending as a percentage of GDP has declined on average.

Most emerging market and low-income countries have generally recorded current account deficits. In the former group, the deficit has widened to 2½ percent and will remain at that level in 2008. In the latter group, the deficit is projected to widen to about 3½ percent of GDP, largely because of strong import growth driven by domestic demand. In some oil importers, however, the effect of higher oil prices on the current account has been partly offset by remittance inflows and higher export prices.

Flows of foreign direct investment to the region have quadrupled since 2002 and should top $80 billion this year. These flows, combined with the large current account surpluses, have substantially increased the region’s official international reserves, which are set to reach almost $790 billion by the end of this year. Oil exporters have the largest reserves, which should reach $675 billion by the end of the year.

Policy issues

The outlook for the Middle East and Central Asia is positive but could be marred by, for example, conflicts and worsening security. If global growth slowed significantly, the region could also suffer, particularly in light of its increasing integration with the global economy and dependence on commodity exports. Another potential risk is that of worsening international financial market conditions, which could reduce capital flows to the region.

Key challenges will be to manage exceptionally strong foreign exchange inflows, which have provided opportunities for long-term growth in some countries but sparked inflationary pressures in others; ensure fiscal and external sustainability in some countries; continue to develop the financial sector; maintain progress toward diversification; and promote private sector-led economic expansion.

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