With the recovery in oil prices, MENAP oil exporters will experience visible improvements in fiscal and external balances during 2010–11. Non-oil activity is set to pick up, although more gradually, with lackluster private demand offset by supportive policies. In many countries, accommodative fiscal and monetary policies will continue to be appropriate over the coming year, but with a closer eye on emerging inflationary pressures. Beyond 2011, fiscal consolidation should be under way in virtually all countries to enable them to confront the medium-term challenges of ensuring a sustainable use of hydrocarbon revenues and supporting private-sector development. Financial sector priorities should focus on reducing cyclicality in bank lending, strengthening liquidity standards, addressing systemically important institutions, and improving bank resolution frameworks, while creating conditions for more forceful and effective supervision. Specific strategies will depend on each country’s stage of banking development and the degree to which it has been affected by the global financial crisis.

At a Glance

With the recovery in oil prices, MENAP oil exporters will experience visible improvements in fiscal and external balances during 2010–11. Non-oil activity is set to pick up, although more gradually, with lackluster private demand offset by supportive policies. In many countries, accommodative fiscal and monetary policies will continue to be appropriate over the coming year, but with a closer eye on emerging inflationary pressures. Beyond 2011, fiscal consolidation should be under way in virtually all countries to enable them to confront the medium-term challenges of ensuring a sustainable use of hydrocarbon revenues and supporting private-sector development. Financial sector priorities should focus on reducing cyclicality in bank lending, strengthening liquidity standards, addressing systemically important institutions, and improving bank resolution frameworks, while creating conditions for more forceful and effective supervision. Specific strategies will depend on each country’s stage of banking development and the degree to which it has been affected by the global financial crisis.


Population, millions (2009)

GDP per capita, U.S. dollars (2009)

Sources: IMF, Regional Economic Outlook database; and Microsoft Map Land.Note: The country names and borders on this map do not necessarily reflect the IMF’s official position.

The Postcrisis Recovery Continues

For the MENAP oil exporters as a whole, the pace of economic activity is set to continue to recover. On the back of a rebound in worldwide demand, crude oil production is projected to grow to 25 million barrels per day (bpd) in 2010 and 26 million bpd in 2011. As a result, oil GDP will register growth rates of between 3½ percent and 4¼ percent in 2010 and 2011. However, these growth rates are still below precrisis levels, and crude production will still fall short of its 2008 level.

Non-oil activity, while significantly cushioned on the downside in 2009 by countercyclical fiscal policy in some countries, is projected to pick up only gradually, by 1 percentage point between 2009 and 2011 (Figure 1.1). In most countries, non-oil sector growth will continue to fall short of its long-term potential—given the uncertain outlook for private investment and financing conditions, both domestic and external—but will continue to be buoyed by supportive fiscal policy.

Figure 1.1
Figure 1.1

Oil Sector Leads the Way in Growth Recovery

(Real GDP growth; percent)

Sources: National authorities; and IMF staff estimates.

The increase in oil prices, by 23 percent in 2010 and more than 3 percent in 2011,2 will lead to a marked turnaround in external balances. There are signs of improvement as of the second quarter of 2010, with monthly exports having rebounded to levels almost 40 percent above their lows of February 2009, and greatly outpacing imports, which have remained essentially flat over the same period (Figure 1.2). For the full year, exports are projected to increase by 19 percent in 2010, followed by a more moderate 10 percent increase in 2011, by which time they will have surpassed the US$1 trillion mark. Consequently, the external current account surplus is expected to increase from US$70 billion in 2009 to US$120 billion in 2010 and US$150 billion in 2011. In the Gulf Cooperation Council (GCC), the rebound will be considerable as well, by about US$50 billion between 2009 and 2011 (Figure 1.3). Nonetheless, projected outturns in 2010 and 2011 remain highly sensitive to oil price developments (Box 1.1).

Figure 1.2
Figure 1.2

Exports Outpace Imports

(Billions of U.S. dollars)

Source: IMF, Direction of Trade Statistics.
Figure 1.3
Figure 1.3

Current Account Balances Improve Across the Board

(Percent of GDP and billions of U.S. dollars)

Sources: National authorities; and IMF staff estimates.

External financing conditions for borrowers in the region have improved noticeably, and have barely been affected by regional or global shocks so far. Since the summer of 2008, credit default swap (CDS) spreads for GCC sovereigns have generally fallen—by 50–180 basis points (Figure 1.4). The exception is Dubai, where spreads remain elevated following the November 2009 Dubai World standstill announcement, despite restructuring agreements with most creditors (Box 1.2). The financial market tensions of early 2010 that originated from the European sovereign debt crisis had little impact on the region. However, to the extent that they rely on international credit markets, regional banks and firms remain vulnerable to changes in global conditions.

Dependence on Oil: Cross-Country Comparison

Although MENAP oil exporters have largely overcome the most severe effects of the global financial crisis, they continue to face significant vulnerabilities, in large part as a consequence of their continued dependence on oil. The share of oil-related activity in total GDP varies widely among this group of countries, ranging from less than 10 percent in Iran and Yemen to about 30 percent for four out of six GCC countries—Kuwait, Oman, Saudi Arabia, and the United Arab Emirates—to more than 60 percent in Iraq. However, all countries derive at least half of their fiscal revenues from hydrocarbons (Figure 1).

Figure 1
Figure 1

Fiscal and Economic Activity: Dependence on Oil, 2010

Sources: National authorities; and IMF staff estimates.

As a result, these countries remain quite vulnerable to changes in the price of oil. It is estimated that a US$10 per barrel swing in the average price of oil over a year1 could affect their aggregate external current and fiscal accounts by US$88 billion and US$75 billion, respectively. For the GCC alone, the corresponding numbers are US$59 billion and US$48 billion. Measured as a percentage of GDP, these impacts can be quite substantial (Figure 2).

Figure 2
Figure 2

Impact of a US$10 per Barrel Increase in Oil Prices, 2010

Sources: National authorities; and IMF staff estimates.
1 Based on historical behavior over 1960–2009, a US$10 per barrel swing in the price has a 66 percent probability of occurring in any given year.

Regional stock markets have continued to recover from their lows reached during the first quarter of 2009 (Figure 1.5). However, the post-Lehman recovery remains incomplete: while the S&P 500 has climbed back to 88 percent of its level as of August 2008, recovery in GCC markets has ranged from 47 percent (Kuwait) to 72 percent (Qatar and Saudi Arabia). This incomplete recovery largely reflects the evolution of oil prices and capital inflows, both of which suffered sharp declines in 2009, and are expected to recover only partially by the end of 2010. A decoupling of other GCC markets from Dubai appears to have also taken place, indicating that market participants have become more discriminating, even within the GCC. Indeed, the correlations of CDS spreads and stock market indices between other GCC markets and Dubai have been lower since the Dubai World event.3

Figure 1.4
Figure 1.4

More Favorable Financing Conditions, for the Most Part

(Credit default swap spreads; basis points: 08/01/09–09/14/10)

Sources: Bloomberg; and Markit.
Figure 1.5
Figure 1.5

Recuperating Stock Markets

(Index; Aug 31, 2008 = 100; Aug 31, 2008–Sep 14, 2010)

Source: Bloomberg.

Update on Dubai World’s Debt Restructuring

On September 9, 2010, Dubai World Holding (DW) and its creditors agreed on the terms of restructuring of US$24.9 billion of liabilities. The agreement came nine months after DW’s request to stay its payments—as well as those of its property subsidiaries (such as Nakheel)—on bond and bank debt.

The agreement involves actions from both banks and the government of Dubai:

  • Banks accepted to take a haircut on their loans of US$14.4 billion to DW, by extending maturities to 2015 and 2018 at below market rates. Nakheel’s loans would be rolled over at market rates.

  • In exchange, the government of Dubai will inject US$9½ billion new cash (into DW and Nakheel) and convert this, and its preexisting loans of US$10 billion, into equity.

  • Bondholders are paid in full (US$1.8 billion) and on time.

  • Trade creditors will have their arrears progressively reimbursed by Nakheel.

The government of Dubai’s cash injection will allow Nakheel to complete ongoing projects. The orderly sale of these properties until 2018 is projected to generate enough cash to repay the restructured loans at maturity.

The author is Gabriel Sensenbrenner. See also IMF Middle East and Central Asia Department, 2010, Impact of the Global Financial Crisis on the Gulf Cooperation Council Countries and Challenges Ahead: An Update, www.imf.org/external/pubs/ft/dp/2010/dp1002.pdf.

Inflation has generally remained subdued among the MENAP oil exporters, with most countries registering low, single-digit rates. However, performance varies considerably across countries (Box 1.3), and conditions could easily change, as the recovery in international commodity prices4 or the lagged effect of nominal depreciations feed into domestic prices, or the recovery in domestic demand begins to fuel inflationary pressures. More recently, inflation has picked up in some countries (Figure 1.6). In Saudi Arabia, inflation has risen continuously since October 2009, moving from 3.5 percent to 6.1 percent in August 2010. In Yemen, inflation has accelerated from a low of 1 percent in early 2009, more recently nudging into double digits, while in Sudan it has increased steadily from just below 9 percent in August 2009 to more than 15 percent in June 2010. In Iran, inflation followed a strong downward trend throughout 2009, declining from 30 percent in late 2008 to 7 percent at end-2009, but has begun to inch up, reaching 10 percent during the first quarter of 2010.

Figure 1.6
Figure 1.6

Some Signs of Inflationary Pressures

(Consumer price index, average; year-on-year growth)

Sources: National authorities.1Algeria, Bahrain, Iraq, Kuwait, Libya, and Oman.

More recently, disruptions in the international wheat market have highlighted oil exporters’ vulnerability to variations in non-oil commodity prices. The resulting 85 percent spike in wheat prices from early June to early August 2010 is expected to have a direct impact of about US$1 billion on the import bill of MENAP oil exporters as a whole. Particularly large balance of payments effects, measured as a percentage of 2010 GDP, are foreseen for two countries: Yemen (0.5 percent) and Algeria (0.4 percent). There, the potential inflationary impact could be sizable, given the 11 percent weight of wheat in these countries’ consumer price index basket.

Less Pressure on Government Budgets

The fiscal stance for most MENAP oil exporters during 2010–11 is broadly appropriate. Where fiscal space is available (particularly in the GCC and Algeria), and signs of either self-sustaining private-sector activity or overheating are absent, fiscal policy should remain expansionary. Beyond 2011, most countries should turn to consolidation as they tackle critical medium-term challenges. Where fiscal space is lacking (particularly in Iran, Sudan, and Yemen), consolidation is already under way.

With the recovery in oil prices and non-oil activity, fiscal balances are expected to improve across the MENAP oil exporters (Figure 1.7). For the GCC, the improvement is particularly large, by almost 7 percentage points of GDP between 2009 and 2011. However, this overall trend conceals a significant degree of heterogeneity in fiscal stances as measured by the non-oil primary fiscal balance—that is, excluding oil revenue, net interest income, and nondiscretionary spending5 (Figure 1.8).

Figure 1.7
Figure 1.7

Better Fiscal Balances

(Percent of GDP)

Sources: National authorities; and IMF staff estimates.
Figure 1.8
Figure 1.8

Fiscal Stances Vary Widely

(Percent of non-oil GDP)

Sources: National authorities; and IMF staff calculations.

Recent Inflation Dynamics in GCC Countries

Inflation levels and inflation differentials across the GCC have been largely driven by the oil cycle, although other factors, such as international food prices and capital inflows, have also been at play.

Since 2003, two major trends have characterized inflation in the GCC. First, headline inflation crept up in the GCC from zero to a peak of more than 10 percent in 2008, then fell again—to 3.2 percent in 2009 (Figure 1). Second, inflation differentials increased—by about 50 percent on average—reaching more than 11 percentage points between Bahrain and Qatar, and Saudi Arabia and Qatar in 2005. This may be surprising, given the increasing integration of these economies, the peg to a common currency (the U.S. dollar), and flexible labor markets. Minimizing inflation differentials across the GCC is a key convergence criterion in the planned monetary union.

Figure 1
Figure 1

Inflation and Oil Price


Sources: National authorities; and IMF staff estimates.

Level of inflation. The increase in inflation in the GCC began with the 2003 upsurge in oil prices, which allowed governments to embark on large-scale infrastructure development and social programs (Figure 2). This, in turn, pushed up the price of housing and other nontradables, and contributed to an overheating of these economies. Large capital flows into some GCC countries, and their subsequent reversals during the initial stages of the global crisis, also contributed to inflation dynamics (Figure 3). Moreover, imports of food and other commodities contributed to inflationary pressures, given that food accounts for a large share in the consumer price index (CPI).

Figure 2
Figure 2

Expenditures and Oil Price

(Billions of U.S. dollars)

Sources: National authorities; and IMF staff estimates.
Figure 3
Figure 3

Credit Growth and Oil Price


Sources: National authorities; and IMF staff estimates.

Inflation differentials. Inflation in Qatar and the United Arab Emirates increased more rapidly during the oil boom than in other GCC countries before dropping more sharply during the global crisis. This largely reflects the more pronounced boom-bust cycle in these two countries. For example, growth of credit to the private sector decelerated from 93 percent in Qatar and 79 percent in the United Arab Emirates during 2007–08:H1 to 7.6 percent and 0.7 percent, respectively, in 2009. In contrast, Bahrain’s inflation remained the most stable during the recent oil boom, due in part to the country’s low share of oil in GDP, which—at 12 percent—is the lowest in the GCC. Structural factors have also contributed to inflation differentials within the GCC: different weights for food and rents, which are the most important components of the CPI; supply bottlenecks in the housing market that are more binding in some countries than in others; and differences in government subsidies.

The authors are Kamiar Mohaddes, Abdelhak Senhadji, and Oral Williams.

One group of countries—several GCC countries and Algeria—has had ample fiscal space owing to low debt levels and large buffers built up during the precrisis years. This has afforded them the opportunity to implement stimulus in 2009–11:

  • Several GCC countries—Kuwait, Oman, Qatar, and Saudi Arabia—are increasing their development and capital expenditures substantially. In Saudi Arabia, fiscal stimulus continues in 2010—total spending and capital outlays are projected to increase by 11 percent and more than 22 percent, respectively—but will begin to be unwound in 2011, with a 5 percentage point reduction in the non-oil primary deficit.

  • On top of a multi-year Public Investment Program that had already established high levels of capital spending, Algeria is introducing a large civil service wage increase in 2010, which is projected to raise the public wage bill by more than 30 percent. As a result, the non-oil primary fiscal deficit is projected to widen by close to 10 percentage points of non-oil GDP in 2010 and narrow only moderately in 2011.

At the other end of the spectrum, Iran, Sudan, and Yemen have little fiscal space and are narrowing their deficits in 2010–11, following a first round of tightening in 2009:

  • In Iran, successive years of fiscal consolidation—via a decline in capital spending and improvements in revenue administration—will leave the 2011 non-oil primary balance 7½ percentage points higher, in terms of non-oil GDP, than in 2008.

  • Sudan is tightening its fiscal stance by 1 percentage point of non-oil GDP in 2010, through an almost equal application of measures to enhance revenue administration and cut current expenditure.

  • In Yemen, under a new IMF-supported program, the implementation of a general sales tax, along with measures aimed at reducing oil subsidies and widening the base for trade and income taxes, will account for an adjustment of more than 2 percentage points of non-oil GDP in 2010, at the same time that social and capital spending will rise.

Short-term fiscal challenges are being confronted in two other cases:

  • With more limited financing options, Iraq continues to address its reconstruction needs within the framework of an IMF-supported program.

  • Dubai faces short-term challenges, while the government of Abu Dhabi has substantial fiscal buffers. For the United Arab Emirates as a whole, the significant stimulus in 2009 largely reflected transfers to Dubai government-related enterprises. In the absence of additional financing for Dubai from Abu Dhabi, the United Arab Emirates’ non-oil primary deficit is projected to decline by about 12 percentage points of non-oil GDP over 2010–11.

Accommodative Monetary Policy May Soon Have to Shift Gears

The accommodative monetary policy stance that has been in place since 2009 is largely justified to the extent that, in most countries, private-sector credit has not noticeably rebounded and inflation remains subdued. For the group of MENAP oil exporters, annual credit growth ticked upward to 6.7 percent as of May 2010, from a low of 4.1 at end-2009, but was still well below the 32 percent growth achieved in the fall of 2008 (Figure 1.9). Furthermore, for several countries (Qatar, Saudi Arabia, and the United Arab Emirates), credit growth has yet to pick up.

Figure 1.9
Figure 1.9

Credit and Deposits1

(PPPGDP weighted for aggregation; year-on-year growth, percent)

Sources: National authorities; IMF, International Financial Statistics.1Excludes Iran and Iraq due to data limitations.

The challenge for monetary policy is to balance the need to support a revival of credit growth while mitigating a potential resurgence of inflation arising from a lagged effect of rising international food prices and from the expansion of domestic demand. Although most oil-exporting countries in the region have limited options for conducting countercyclical monetary policy via domestic interest rates—given their pegged exchange rate regimes and open capital accounts (the GCC)—some have been able to cushion the slowdown in private-sector credit through quantitative easing, lowering reserve requirements, and providing liquidity and capital injections to the banking sector. As the recovery takes hold and banks become more willing and able to lend, these measures will need to be rolled back. Other countries, by virtue of having more flexible exchange rate regimes (Algeria and Sudan), have supplemented monetary easing with some nominal depreciation to prevent a sharper deterioration in external balances.

Partly in response to changing conditions, some countries have already begun shifting to a more neutral monetary stance:

  • In Oman, certain measures that had eased credit conditions—an increase in the loan-deposit ceiling and a reduction in the required reserve ratio—have been reversed.

  • Sudan has begun to phase out central bank lending to banks.

  • Saudi Arabia has unwound most of its extraordinary liquidity support.

  • In Iran, the central bank has allowed policy rates to climb in real terms since early 2009, thus dampening domestic demand. However, given the more recent uptick in inflation, an upward adjustment in nominal rates may be needed to maintain this stance.

Qatar, on the other hand, lowered its policy deposit rates—by 50 basis points—for the first time since April 2008, citing an improvement in the country’s sovereign risk premiums and high real interest rates. Indeed, for some time, Qatar had been able to maintain relatively high interest rates without inducing a surge of disruptive capital inflows.

Refocusing Medium-Term Fiscal Policy

Despite their varying fiscal policy stances, all MENAP oil exporters confront similar medium-term fiscal issues. Even for countries where fiscal space is available beyond 2011, consolidation will be needed thereafter to ensure a sustainable use of oil and natural gas revenues and to pursue intergenerational equity. Given the high dependence on oil revenues, fiscal balances continue to be vulnerable to downside risks (Box 1.1). With the exception of Kuwait, Libya, and Qatar, break-even prices for oil exporters are approaching or are above the projected 2010 price (Figure 1.10).

Figure 1.10
Figure 1.10

Break-Even Oil Prices in 2010

(U.S. dollars per barrel)

Sources: National authorities; and IMF staff estimates.

In all countries, fiscal measures should be enacted beyond 2011 to ensure progress in several key areas, particularly reorienting spending, rationalizing energy subsidies, and diversifying the revenue base:

  • Reorienting spending: Countries are evaluating how best to allocate public resources so as to address critical social needs (Sudan and Yemen), reconstruction requirements (Iraq), and general infrastructure and education projects that may complement private-sector activity and thereby promote greater economic diversification (the GCC). Saudi Arabia has targeted housing construction as a means to ease supply bottlenecks in this key sector. In Libya, the challenge is to ensure that government expenditure is not wasteful and is in line with the economy’s absorption capacity.

  • Rationalizing energy subsidies: Energy subsidies are prevalent across all MENAP oil exporters. For example, in 2008, implicit fuel subsidies relative to GDP are estimated to have amounted to 15 percent in Iraq, 12 percent in Iran and Yemen, 7–8 percent in Kuwait and the United Arab Emirates, 4–5 percent in Libya and Qatar, and 3½ percent in Oman. A number of governments have recently become increasingly concerned about the fiscal costs of such subsidies, the corresponding waste of resources, and the dependence of the industrial base on indefinite subsidies. Accordingly, some countries have begun to tackle these issues. An essential first step to that end is to identify subsidies explicitly in the budget, as Libya has done recently. In Iran, where retail gasoline prices are among the lowest in the region, comprehensive energy subsidy reform has been approved for implementation in 2010, although its ultimate impact on the budget is likely to be neutral.6 Countries that phase out energy subsidies need to be mindful of the impact of higher energy prices on the poor and ensure that social safety nets can effectively mitigate this impact.

  • Diversifying the revenue base: Efforts should be made to reduce the dependence on oil revenues, either by introducing taxes on the non-oil sector or increasing the collection efficiency of existing ones. While Yemen recently introduced a general sales tax, other countries are moving in this direction over the medium term: Iraq is planning to implement a sales tax, and the GCC is considering a region-wide introduction of a value-added tax regime in the context of an eventual monetary union. In addition, many countries are focusing on broadening the tax base, reducing exemptions, and curbing tax evasion.

Moving on Financial Sector Development

Given the diversity in initial conditions and in the crisis-related shocks encountered over the past two years (Box 1.4), financial-sector strategies in the future will differ across countries:

  • For the non-GCC countries, the challenge is to spur greater financial development, by removing entry and exit barriers and, in some cases, reducing state ownership in the banking system. Balance sheet cleanup should continue where nonperforming loans are high, and an adequate regulatory and supervisory framework should be put in place to ensure that nonperforming loans do not follow past upward trends and that adequate capital buffers are built to absorb future shocks. The latter is particularly relevant, given that fiscal space is also limited in many of these countries, greatly limiting the possibility for government capital injections during times of distress.

  • For the more financially developed countries of the GCC, the challenge is to consolidate the gains made in the past and to address vulnerabilities uncovered by the crisis. While high prior capital buffers and overall financial health contributed to the resilience of these systems, there is still ample room for improvement in both the regulatory and supervisory arenas. Regulatory reform should follow global initiatives to reduce cyclicality through the use of macroprudential tools, establish stronger liquidity standards, address systemically important financial institutions, and improve bank resolution frameworks, while allowing for some degree of country-specific discretion. Efforts should be made to empower supervisory authorities and create the proper environment and incentives for forceful, proactive, and flexible supervision.

  • The region has already had some success in implementing macroprudential policies. Saudi Arabia’s experience with countercyclical provisioning during the boom years—reaching more than 140 percent of nonperforming loans in 2007—provides an example of the possible benefits of this type of approach. Countries can build on this success by instituting mechanisms that may provide automatic shock-absorbing capabilities, in line with the recently agreed Basel III guidelines.

  • For both the GCC and non-GCC countries, the development of bond markets as an alternative and complementary source of funding can prove beneficial. The government can take a catalytic role, expanding its placement of securities in the domestic market—even if not required for public financing purposes—in order to assist in creating a benchmark yield curve against which private-sector placements may be priced.7

  • Finally, financial sector policy coordination across countries will be crucial in three main areas. First, with the ever-increasing cross-border activities of banks, countries will need to design and implement their resolution and supervisory strategies in a coordinated fashion. Second, the phasing in of new measures—for example, increasing capital and liquidity requirements—should be harmonized to the extent possible to prevent regulatory arbitrage, whereby risky activities gravitate toward countries with the weakest standards. Third, given the growing share of Islamic financial institutions in the region, it is imperative to develop common minimum standards and best practices for Shari’a-compliant activities.

Financial Sector Policy Responses to the Crisis Vary With Different Initial Conditions

MENAP oil exporters fall into two main categories in terms of how the global financial crisis affected their banking systems. GCC countries—with relatively deep banking systems that were heavily exposed to the flagging real estate and construction sectors—were hardest hit. However, their banks were also in a stronger position to withstand the shocks, and thus have proved to be quite resilient to the crisis. The generally more shallow non-GCC banking systems, characterized by considerably weaker balance sheets, were not as exposed to large, real-sector shocks emanating from the crisis, but continue to be plagued by chronically high levels of nonperforming loans.

In addition to slowing down credit in MENAP oil exporters, the global financial crisis has strained bank balance sheets, by reducing liquidity and profitability, eroding asset quality, and ultimately forcing drawdowns of capital precisely at a time when resorting to the private sector to rebuild capital is difficult and/or relatively costly. The impact on the macroeconomy, channeled through the banking system, has depended on the extent to which (i) the banking sector has been exposed to sectors that have fallen the deepest, such as the real estate and construction sectors in the GCC; (ii) banks have provisioned for loan losses and/or built up capital buffers; (iii) the government has been willing and able to fill the capital shortfall where needed; and (iv) real activity has relied on bank financing.

These characteristics vary significantly across MENAP oil exporters. The initial shock to profitability and asset quality was markedly greater in the GCC than in other oil-exporting countries. Although from a very low initial level, the nonperforming loan ratio more than doubled in Saudi Arabia, and doubled in the United Arab Emirates, while increasing substantially in other GCC countries. In contrast, the non-GCC countries have exhibited a more chronic problem of high nonperforming loans, even prior to the crisis; in 2008 their average nonperforming loan ratio was 20.5 percent,1 compared with only 2.5 percent for the GCC (Figure 1).

Figure 1
Figure 1

Financial Stability Indicators, 2009

Source: National authorities.1 December 2008.

Precrisis capital adequacy ratios were also higher in GCC countries on average (15.8 percent of risk-weighted assets, compared with 12.1 percent for non-GCC countries), although several non-GCC countries had comfortable buffers, such as Algeria (16.5 percent) and Yemen (14.6 percent). Furthermore, throughout the GCC, governments expended a substantial effort—in fact, a large portion of their quantitative easing—to shore up bank capital. Of particular note are the vigorous government capital injections in Qatar, amounting to US$1.5 billion, combined with asset purchases (equity and real estate portfolios) from banks, both of which had an estimated impact of 2 percentage points on the capital adequacy ratio of the eight major listed banks.2 In the United Arab Emirates, government capital injections helped increase the capital adequacy ratio by 7 percentage points, to 20 percent.

The dependence of the real economy on bank intermediation is also strikingly heterogeneous among MENAP oil exporters (Figure 2). The ratio of broad money to GDP—an indicator of the degree of monetization of an economy—at more than 50 percent in most countries, is roughly comparable to typical emerging-economy levels. However, private-sector credit to GDP, a better measure of actual financial intermediation, differs much more widely. For some GCC countries (Bahrain, Kuwait, and the United Arab Emirates), this ratio is above 76 percent—roughly equivalent to that of Finland in 2008. For others (Algeria, Iraq, Libya, Sudan, and Yemen),3 the ratios are well below 20 percent, indicating that the banking sector still does not play a significant role in channeling funds into productive and growth-enhancing activities.

Figure 2
Figure 2

Measures of Financial Deepening, 2009

(Percent of GDP)

Source: National authorities.
1 Excluding Iraq.2 Note that capital injections cause the numerator of the capital adequacy ratio to increase, whereas asset purchases reduce the denominator by changing the composition of assets, which reduces risk-weighted assets.3 Although Iran’s credit-to-GDP ratio, at almost 80 percent, appears high, a large share of this figure represents state-directed credit extended by public banks.

Selected Economic Indicators: MENAP Oil Exporters

article image
Sources: National authorities; and IMF staff estimates and projections.

Central government.

Consolidated accounts of the federal government and the emirates Abu Dhabi, Dubai, and Sharjah.


Prepared by Adolfo Barajas with input from country teams.


Based on futures markets, the IMF World Economic Outlook (October 2010) projects average oil prices per barrel in 2010 and 2011 at US$76.20 and US$78.75, respectively.


See IMF, Regional Economic Outlook (May 2010), www.imf.org/external/pubs/ft/reo/2010/mcd/eng/mreo0510.htm.


The June 2010 World Economic Outlook price indices for nonfuel commodities and for food and beverages, respectively, are 27 percent and 14 percent higher than their December 2008 levels.


For example, in Kuwait, transfers to the Future Generations Fund and the recapitalization of social security are also excluded.


In line with the government’s long-standing commitment to distribute oil wealth to the population, the authorities plan to distribute the fiscal savings to households and enterprises to compensate them for higher fuel costs.


In this area the IMF, with the Arab Monetary Fund, provides technical assistance under the Arab Debt Market Development Initiative (ADMDI), which was launched in 2009.