One of the more alarming characteristics of the global financial meltdown is that –well, it’s global. That makes it very difficult to know where to turn to for help. British Prime Minister Gordon Brown reckoned relief might be found in Riyadh. After returning from Beijing with empty pockets, Pakistani President Asif Zardari has also gone hat-in-hand to the Saudis. There are a number of reasons why troubled economies can’t count on the cash wealthy oil producers in the Gulf for a bailout.
The hard truth is that major oil producing states in the Gulf face liquidity shortages and for the same reasons others do. They are heavily invested in the very Western banks that are in trouble owing, partly, to the sub-prime rate housing collapse in the United States and Europe.
Western economic downturn further negatively impacted the Gulf oil producers because demand for oil is down. The rest of the world simply won’t be buying as much oil as last year. The latest IMF forecasts for the Gulf region show that the combined external current account surplus of the six states in the Gulf Cooperation Council (GCC) is expected to fall by at least 7 percentage points of GDP in 2009. This drop effectively wipes out the large bonus from oil sales in 2008 that helped fund ambitious projects in the Gulf.
There are other reasons for caution. Earlier wise decisions of several GCC countries to diversify their economies by building the tourism, real estate, financial services, transportation and other non-oil sectors will help cushion the sharp decline in fiscal surpluses caused by a fall in demand for oil. But these sectors also took a hit with the global downtown.
The slowdown in GCC countries will reverberate negatively throughout the region. Currently, Gulf oil producers assist the developing economies of their neighbors by providing subsidized oil and access to jobs for expatriate labor. Any slowdown will eliminate jobs for the armies of guest workers who now send billions of dollars home to countries like Pakistan, and the Philippines. Those emerging economies have become dependent on the remittances of overseas workers and the slow-down will compound the global recession.
Outlook for major oil producers is manageable. The oil producers, under current expectations; will have comfortable foreign exchange reserves. But if the exchange rates of Gulf currencies remain tied to the appreciating U.S. dollar, the authorities in the GCC countries will find it difficult to tighten monetary policy and may encounter continued high inflationary pressures. Political pressures may also build to increase government expenditures to stimulate domestic growth, and avoid unemployment pressures.
In any case, the current global crisis will make the path toward the planned monetary union by 2010 in the GCC more challenging. This is a shame because coordination of financial policies that will be called for by the monetary union to support a common exchange rate would also help reduce destabilization of cross border capital flows.
What should be done to address the gathering storm? The GCC States could consider three broad initiatives.
First, at the national level, further improving regulation and prudential supervision could strengthen domestic banking sectors. Countries in the GCC have already taken some steps in that direction and this should be applauded. But the current crisis offers the opportunity to push for further restructuring and consolidation of distressed banks in order to minimize domestic contagion. Of course, these steps should be undertaken in concert with similar initiatives at the global level.
Second, at the regional level, a more organized approach should be taken to aiding those distressed economies in neighboring developing economies that are most negatively impacted because of their dependence on economic support from Gulf States -- like Pakistan. Consideration should be given to establishing a trust fund made up of multilateral and regional lending agencies, selected GCC countries, and the G-7 to pool resources and facilitate their effective use by vulnerable counties under IMF/World bank guidance. Regional stability hinges on the lowest common denominator. It is in everybody’s interest to prevent economic implosion in Pakistan. A rescue plan could have the advantage of presenting an opportunity to force countries like Pakistan to come to grips with entrenched structural distortions in its economy.
Finally, at the global level, the cash surplus oil producing countries of the Gulf, although also weakened, can still help the way out of the global crisis. The GCC States should be encouraged to maintain a degree of fiscal expansion so as to stimulate demand in the world economy. Such a policy is not entirely without self-interest. It would have the positive effect of increasing demand for oil exports.
Wendy J. Chamberlin is President of the Middle East Institute. Zubair Iqbal is an MEI Adjunct Scholar and former economist with the International Monetary Fund.
Disclaimer: Assertions and opinions in this Commentary are solely those of the above-mentioned author(s) and do not reflect necessarily the views of the Middle East Institute, which expressly does not take positions on Middle East policy.
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One of the more alarming characteristics of the global financial meltdown is that –well, it’s global. That makes it very difficult to know where to turn to for help. British Prime Minister Gordon Brown reckoned relief might be found in Riyadh. After returning from Beijing with empty pockets, Pakistani President Asif Zardari has also gone hat-in-hand to the Saudis. There are a number of reasons why troubled economies can’t count on the cash wealthy oil producers in the Gulf for a bailout.
The hard truth is that major oil producing states in the Gulf face liquidity shortages and for the same reasons others do. They are heavily invested in the very Western banks that are in trouble owing, partly, to the sub-prime rate housing collapse in the United States and Europe.
Western economic downturn further negatively impacted the Gulf oil producers because demand for oil is down. The rest of the world simply won’t be buying as much oil as last year. The latest IMF forecasts for the Gulf region show that the combined external current account surplus of the six states in the Gulf Cooperation Council (GCC) is expected to fall by at least 7 percentage points of GDP in 2009. This drop effectively wipes out the large bonus from oil sales in 2008 that helped fund ambitious projects in the Gulf.
There are other reasons for caution. Earlier wise decisions of several GCC countries to diversify their economies by building the tourism, real estate, financial services, transportation and other non-oil sectors will help cushion the sharp decline in fiscal surpluses caused by a fall in demand for oil. But these sectors also took a hit with the global downtown.
The slowdown in GCC countries will reverberate negatively throughout the region. Currently, Gulf oil producers assist the developing economies of their neighbors by providing subsidized oil and access to jobs for expatriate labor. Any slowdown will eliminate jobs for the armies of guest workers who now send billions of dollars home to countries like Pakistan, and the Philippines. Those emerging economies have become dependent on the remittances of overseas workers and the slow-down will compound the global recession.
Outlook for major oil producers is manageable. The oil producers, under current expectations; will have comfortable foreign exchange reserves. But if the exchange rates of Gulf currencies remain tied to the appreciating U.S. dollar, the authorities in the GCC countries will find it difficult to tighten monetary policy and may encounter continued high inflationary pressures. Political pressures may also build to increase government expenditures to stimulate domestic growth, and avoid unemployment pressures.
In any case, the current global crisis will make the path toward the planned monetary union by 2010 in the GCC more challenging. This is a shame because coordination of financial policies that will be called for by the monetary union to support a common exchange rate would also help reduce destabilization of cross border capital flows.
What should be done to address the gathering storm? The GCC States could consider three broad initiatives.
First, at the national level, further improving regulation and prudential supervision could strengthen domestic banking sectors. Countries in the GCC have already taken some steps in that direction and this should be applauded. But the current crisis offers the opportunity to push for further restructuring and consolidation of distressed banks in order to minimize domestic contagion. Of course, these steps should be undertaken in concert with similar initiatives at the global level.
Second, at the regional level, a more organized approach should be taken to aiding those distressed economies in neighboring developing economies that are most negatively impacted because of their dependence on economic support from Gulf States -- like Pakistan. Consideration should be given to establishing a trust fund made up of multilateral and regional lending agencies, selected GCC countries, and the G-7 to pool resources and facilitate their effective use by vulnerable counties under IMF/World bank guidance. Regional stability hinges on the lowest common denominator. It is in everybody’s interest to prevent economic implosion in Pakistan. A rescue plan could have the advantage of presenting an opportunity to force countries like Pakistan to come to grips with entrenched structural distortions in its economy.
Finally, at the global level, the cash surplus oil producing countries of the Gulf, although also weakened, can still help the way out of the global crisis. The GCC States should be encouraged to maintain a degree of fiscal expansion so as to stimulate demand in the world economy. Such a policy is not entirely without self-interest. It would have the positive effect of increasing demand for oil exports.
Wendy J. Chamberlin is President of the Middle East Institute. Zubair Iqbal is an MEI Adjunct Scholar and former economist with the International Monetary Fund.