DUBAI // While government outlays have successfully blunted the impact of the global financial crisis on the Gulf, the region must now shift its focus from spending petrodollars to reviving the flow of private money through the economy, the IMF said Sunday. The recommendations were part of the fund's semi-annual outlook on the Middle East, North Africa and Central Asia. The fund also lowered its projection of growth in the Gulf this year to 0.7 per cent from 1.3 per cent in its previous assessment six months ago because of a sharper drop in oil demand than forecast. The IMF predicted a stronger recovery next year as oil prices rebound, with growth reaching 5.2 per cent, higher than the 4.2 per cent growth for next year it predicted back in May. It reiterated its forecast of a mild recession this year in the UAE, with GDP contracting 0.2 per cent and rebounding next year to expand by 2.4 per cent. "Oil exporters continued to spend their way through the downturn. It was a sensible thing to do," said Masood Ahmed, the director of the IMF's Middle East and Central Asia Department. Like the rest of the world, authorities in the Gulf will need to slowly wean their economies from this support, he said. "The key will be to have this public stimulus replaced by private demand." The new regional outlook comes less than a week after the IMF's joint annual meeting with the World Bank in Istanbul, where it sought to cement the new relevance it has gained in the crisis by seeking US$500 billion (Dh1.84 trillion) in new funding. The fund, established in the waning days of the Second World War, was designed to serve as a global insurance policy against sudden economic shocks, where members can turn for assistance when financial tremors strike. Condemned for exacerbating the Asian financial crisis, the fund slowly ebbed in influence during the boom years that followed. Many developing nations, particularly China and its neighbours, started building reserve cushions, partly to keep their currencies from fluctuating against the dollar but also to avoid ever having to turn for help to an institution many regard as dominated by the US and western interests. The economic crisis resurrected the fund's sense of purpose. Seventeen countries have turned to the IMF for help since September last year when the crisis erupted, including Pakistan, which has received $11.3bn in loans. Now the fund is trying to convince developing nations to trust it again. Some economists believe their massive reserves piles may have helped destabilise the global economy by creating a glut of savings that lowered the cost of borrowing and encouraging excess risk among investors to the point that investors were encouraged to take wildly risky investments. To dispel the perception that it is an agent of western interests, the fund has adopted less stringent lending standards, jettisoning some of the more onerous reforms it once imposed on aid recipients. Instead, it has agreed to revise the formula by which it assigns voting rights to member countries, giving emerging economies a greater say in how it is run. "We need to adjust the voting shares within the IMF in a way that better reflects their economic weight," said Mr Ahmed. Still, greater voting rights for faster-growing economies in Asia and the Gulf will automatically require larger contributions from them to the IMF. "If you have an increase in quotas, every country has to pay its share," said Abdullah el Kuwaiz, formerly assistant secretary-general of economic affairs at the Council for the Arab States of the Gulf in Riyadh. After drawing down their oil surpluses to combat the global recession, Gulf nations will be able to rebuild their reserves next year as oil prices recover, the IMF said in its report. It predicted that oil prices would average $76.50 a barrel next year, boosting foreign currency reserves in the six nations comprising the GCC by $100bn. With the dollar in retreat amid concerns about ballooning US debt and inflation, many central banks and sovereign wealth funds in Asia and the Gulf have expressed a desire to diversify out of the US currency. Mr Ahmed suggested that contributing to the IMF might be one way they can do that. China recently lent the IMF an additional $50bn, thereby converting some of its $2tn in reserves into the IMF's special drawing rights. China has called for replacing the dollar as the world's reserve currency. Analysts are sceptical, though, about how fast Gulf nations might be willing to move away from the US currency. Perhaps the biggest challenge facing the Gulf is mobilising private-sector capital to replace government spending as fiscal programmes are rolled back, the fund said. Bank lending remains tight in the wake of the crisis, particularly in Bahrain and Dubai. Though Government efforts to revive liquidity have avoided the kind of bank failures and bailouts seen in the US and Europe, bank lending has yet to recover, a situation Mr Ahmed predicted could last for some time. Roughly 2.5 per cent of bank loans in the UAE are classified as non-performing, and 3.1 per cent in Kuwait. Bankers in the UAE have said those numbers very likely underestimate the number of loans whose borrowers have actually stopped paying. The IMF urged Gulf countries to promote local bond markets to give companies an alternative to banks for funding. That, it said, was likely to foster small and medium-sized enterprises, which many banks overlook as they grow larger and focused on their biggest, most profitable clients. These smaller businesses would in turn help Gulf nations more rapidly diversify away from oil as a source of jobs and economic growth. "A more diversified capital market than one that relies heavily on bank financing would give people a better match," said Mr Ahmed. warnold@thenational.ae
