Front Matter

Front Matter

Raphael Espinoza, Ghada Fayad, and Ananthakrishnan Prasad
Published Date:
November 2013
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    The Macroeconomics of the Arab States of the Gulf

    Raphael Espinoza, Ghada Fayad, and Ananthakrishnan Prasad





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    Library of Congress Control Number: 2013943976

    ISBN 978–0–19–968379–6

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    Raphael Espinoza is an Economist in the Research Department at the IMF and an External Research Associate at the Oxford Centre for the Analysis of Resource Rich Economies (OxCarre), University of Oxford. He has written on development macroeconomics, the economics of resource-rich countries, and asset pricing, and has worked on Qatar, Saudi Arabia, and the United Arab Emirates at the IMF. He is an Ingénieur des Ponts et Chaussées and holds a PhD in Economics from the University of Oxford.

    Ghada Fayad is an Economist in the Strategy, Policy and Review Department at the IMF and an External Research Associate at the Oxford Centre for the Analysis of Resource Rich Economies (OxCarre), University of Oxford. Her research focus is on development macro-economics, and she has worked on Qatar and Saudi Arabia in her country assignments at the IMF. She previously worked as a Research Fellow at OxCarre, and at the United Nations Economic and Social Commission for Western Asia. She holds a PhD in Economics from the University of Oxford.

    Ananthakrishnan Prasad is Deputy Division Chief in the Middle East and Central Asia Department at the IMF. He is currently the mission chief for Oman and Kuwait and has earlier led missions to Qatar. Prior to this, he was an Advisor to the Executive Director for India on the IMF Executive Board. Earlier, he was Director at the Department of Economic and Policy Research at the Reserve Bank of India. His research focus is on international macroeconomics and financial markets. He holds a PhD in International Banking and Finance from the University of Mumbai, a Masters in Commerce from the University of Mumbai, and an MBA in Finance from the University of Pittsburgh.


    The Gulf Cooperation Council (GCC) countries have made immense progress in developing their economies over the past ten years. While the prosperity of the region is undeniably linked to developments in the oil and gas sectors, it was prudent policymaking emphasizing domestic investments that led to the region’s rapid growth and increased economic diversity. The importance of the GCC has now expanded beyond oil and gas markets into other sectors: it is a major market for migrant workers, a source of remittances, a financial center, and a hub for international trade and business services. That is why this book not only examines the region’s management of macroeconomic cycles, but also analyzes issues around labor markets, immigration, diversification, and market efficiency.

    Some of the region’s challenges are clear. Commodity exporters such as the GCC often run the risk of overreliance on their natural resources, eventually resulting in a “resource curse”. This can originate in inefficiencies in government, or the mismanagement of volatile national income.

    Despite these challenges, the region has so far managed to use its oil wealth to provide services for its citizens and to attract the foreign workers and capital needed for the infrastructure developments that will lead to quality-of-life improvements.

    Indeed, the GCC countries entered the global crisis from a position of strength. GCC governments had the policy tools and options available to them when they were needed to support domestic demand, provide liquidity support, and recapitalize banks. While the economic impact of most of these measures was intuitively understood by GCC policymakers, by and large only a few such decisions were based on rigorous data analyses. Going forward, ensuring that these policies are implemented for maximum benefit will require the kind of deeper analytical inquiry this book provides.

    Fiscal and monetary policies are important aspects of that inquiry in the GCC. With pegged exchange rate regimes, monetary policy is constrained by financial integration, and fiscal instruments become the policymakers’ main method of adjustment. But because these countries now rely heavily on foreign workers and imports, fiscal multipliers may be weak. An important empirical question thus becomes determining the impact of fiscal and monetary policies on economic activity. It is questions such as these that this book attempts to answer. A fuller understanding of the interplay of these policy choices is vital to the work of the region’s policymakers who are shaping the economic futures of these countries’ citizens for years to come.

    The global crisis revealed the region’s strengths and weaknesses, making this a particularly appropriate time to analyze the GCC region’s macroeconomic situation. Such analysis relies on the expertise of this book’s authors but also on the spirit of trust and cooperation that has been cultivated between the International Monetary Fund and its member countries’ authorities. To date, this is the only book available on the macroeconomics of the GCC countries, providing original insights into the functioning of the GCC markets and the policy challenges ahead.

    This book, like other IMF work in the region, is part of an ongoing research agenda that recognizes the area’s important contributions to global economic and financial stability. Maintaining and building on that stability are important steps toward broadening equality and fostering prosperity.

    Christine Lagarde

    Managing Director

    International Monetary Fund


    This book is the product of several years of research undertaken at the International Monetary Fund, as well as research time spent at the Oxford Centre for the Analysis of Resource-Rich Economies. We are grateful to both these institutions and in particular to Messrs Masood Ahmed, Tim Callen, Sandy Donaldson, Alfred Kammer, David Robinson, Abdelhak Senhadji, Rick Van der Ploeg, and Anthony Venables for providing the supporting environment and resources that enabled us to complete this book.

    We also benefitted enormously from the comments from five anonymous referees, Christopher Adam, Zsofia Arvai, Alberto Behar, Samya Beidas-Strom, Kevin Carey, Reda Cherif, May Khamis, Prakash Loungani, Tobias Rasmussen, David Robinson, Abdelhak Senhadji, Niklas Westelius, Oral Williams, as well as colleagues and seminar participants at the Mediterranean Research Conferences, 2010 and 2011, the GCC Banking Conference, 2011, and the Qatar Capital Markets Conference, Qatar 2012, and at Oxford University and the IMF.

    We are also grateful to Chifundo Moya, Arthur Ribeiro, and Renas Sidahmed for their excellent research and editorial assistance. Special thanks go to Adam Swallow, the Economics and Finance Academic Editor at Oxford University Press, and the Assistant Editor Aimee Wright for supporting this project at a very early stage. Our book could not have seen the light without the continuing support of our families and loved ones, to whom our final thanks go.

    The views expressed in this book are those of the authors and do not necessarily represent those of the IMF or IMF policy.

    R. Espinoza

    G. Fayad

    A. Prasad


    List of Figures

    List of Tables

    List of Abbreviations


    Akaike Information Criterion


    Bayesian Information Criterion


    Bank Stability Index


    Conditional Value at Risk


    Consumer Price Index


    Country Policy and Institutional Assessment


    Error Correction Model


    Expected Default Frequency


    fixed effects


    Forecast Error Variance Decomposition


    Fed Funds Rate


    financial soundness indicator


    Gulf Cooperation Council


    Human Development Index


    International Country Risk Guide


    International Energy Agency


    impulse response function


    instrumental variable


    Joint Probability of Default


    likelihood ratio


    Left-hand side


    Middle East and North Africa


    nonperforming loan


    Public Investment Management Index


    pooled mean group


    pooled ordinary least squares


    Purchasing Power Parity


    Penn Word Tables


    random effects


    Real Estate Development Fund


    real effective exchange rate


    Right-hand side


    Schwarz Bayesian Criterion


    Total Factor Productivity


    Vector Auto-Regression


    Volatility Index

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