International Monetary Fund (IMF) released the May 2007 Regional Economic Outlook: Middle East and Central Asia. Mohsin Khan, Director of the IMF’s Middle East and Central Asia Department, highlighted the report’s main findings:
The region covered by the Middle East and Central Asia Department (MCD) appears set for another year of strong growth. Real GDP should average over 6 percent in 2007, for the fifth year in a row.
All country groupings within the region--oil exporters, emerging markets, and low-income countries--have been performing well, with growth especially strong in the Caucasus and Central Asia (CCA). Continued high oil and non-oil commodity prices, robust global growth, a favorable international financial environment, and sound policies in many MCD countries are underpinning this performance.
But inflation is rising, fueled by rapid demand growth and strong foreign inflows. With monetary policy largely accommodative in many countries, inflation is expected to average nearly 9Êpercent in 2007 compared with 7.5 percent last year.
The uptick is particularly notable in some oil-exporting countries. In these countries, higher inflation is beginning to translate into more appreciated real exchange rates, as would be expected in response to increased oil prices.
The region’s external and fiscal surpluses remain very high, but are expected to decline in 2007. For oil exporters, only one-fourth of the projected fall in the external current account surplus in 2007 is due to lower oil prices. The remainder is accounted for by the impact of higher spending, with imports rising strongly as major public and private infrastructure projects get under way and spending on social programs increases.
Oil export revenues are projected to decline slightly to $570 billion in 2007, based on an average oil price of $61 a barrel, down from $64 last year. Naturally, the revenue projections are highly sensitive to oil prices, with a $5 a barrel decline estimated to reduce the region’s annual exports by $45Êbillion, and fiscal receipts by $35Êbillion.
The performance of the MCD region’s capital markets has been mixed. In the Persian Gulf Cooperation Council (PGCC) countries, stock market corrections that started in early 2006 have continued, but outflows from these markets have benefited some other regional markets, especially those in the Maghreb countries. With ample liquidity and increasing demand for investment project financing, there has been a jump in the issuance of Islamic bonds (sukuk), particularly in the PGCC.
There are risks to the generally very positive outlook, but the region is becoming increasingly resilient to potential shocks. Potentially adverse global developments include the possibility of slower world growth, perhaps triggered by a sharper-than-expected slowdown in the United States, or a sustained rise in financial market volatility.
At the regional level, escalating conflicts are a perennial threat. The IMF is actively engaged in several post-conflict countries in the region, including Lebanon, for which the Fund is providing financing through the recently approved Emergency Post-Conflict Assistance.
Sharply lower oil prices would also hit regional growth, although the balance of risks in the oil market appears to be on the upside. Strong macroeconomic policies, increases in international reserves, and declining debt in recent years will help the region withstand all but the most severe shocks.
The key policy challenge for the region is to sustain or even accelerate growth, in order to make significant inroads into reducing poverty and unemployment. Strong growth has not yet generated sufficient jobs for the rapidly expanding labor force, and poverty rates have not yet declined much, even in the rapidly growing low-income countries.
Oil-exporting countries’ policies are on the right track. Even with moderately lower oil prices, programs to boost social and infrastructure investment can still be financed comfortably. Investments to promote economic diversification will also be important, particularly in countries that face an imminent decline in oil production, as well as in countries benefiting from buoyant metal prices that may not be sustained.
A stable macroeconomic setting and reforms to improve the business environment and strengthen the financial sector are key to attracting more private investment to the non-commodity sectors.
Fiscal consolidation remains a priority in emerging market countries. Fiscal deficits are still high in several of these countries, preventing debt from declining sufficiently. Further efforts to broaden tax bases, strengthen tax administration, and reduce subsidies would help limit deficits while creating room for well-targeted programs to reduce poverty.
Managing the macroeconomic impact of large-scale foreign-financed investments is an important challenge for low-income countries. With improved policies and declining debt, these countries are attracting substantial financing for infrastructure projects, particularly in the energy and transportation sectors.
While the projects have the potential to boost growth and reduce poverty substantially, they will only be effective if accompanied by essential structural reforms and a cautious debt management strategy that prevents the buildup of excessive debt.
The PGCC countries need to be vigilant against inflationary pressures, fueled by very strong demand growth and large inflows of capital, remittances, and, in some cases, oil revenues. Tighter monetary policy and more nominal exchange rate appreciation would help prevent these pressures from becoming entrenched, while faster structural reforms to boost productivity would help maintain international competitiveness.
All countries in the region would benefit from more developed financial institutions and deeper markets, and increased integration with neighboring countries. The need to efficiently utilize the region’s large savings has made this especially important. Encouraging progress is being made in several countries, including in the PGCC and the Maghreb.“

Structural reforms delayed by the first oil boom of the 1970s have been implemented in recent years and strengthened the economic fundamentals of many countries in the region.

Twenty years ago, petrodollars flowing into the oil-producing countries of the Middle East were “recycled“ into London and New York real estate markets and US treasury bonds. In the current oil boom, the flood of petrodollars is being invested closer to home, in Dubai and Doha real estate and in fast-growing local economies, reported gfmag.com.
Economic growth in the six countries of the Persian Gulf Cooperation Council, or PGCC, reached 26.6 percent in 2005 and 18.7 percent in 2006, according to the Washington, DC-based Institute of International Finance (IIF). These oil- and gas-producing countries bordering the Persian Gulf comprise Saudi Arabia, Kuwait, Bahrain, Qatar, the United Arab Emirates and Oman.
The economies of most of the countries such as Iran in the Middle East have also witnessed high growth rates for the past four years due to the increase in energy prices and strong growth in the private sector.
The cost of ongoing and upcoming projects in the PGCC countries in the next five years will total almost $1.2 trillion, Kamal told the IIF’s 10th annual meeting of Middle East and North Africa region bank chief executives in Qatar earlier this year. Development costs for such projects in Qatar alone are estimated at $130 billion.
“These big figures exceed the capacities of the banking sector of the region,“ he says. “Therefore, the development of capital markets and related tools are an urgent need.“
Effective capital markets will help to attract the wealth of individual and institutional investors from outside of the region to contribute to regional economic development, Kamal says. Further consolidation of the banking sector in the region will create bigger and stronger local financial institutions that are able to compete more effectively with the foreign banks that are entering new markets in the region, he adds.
While no one can predict the future of oil prices with any certainty, Brad Bourland, chief economist of Riyadh-based Samba Financial Group, says demand for energy from China and other emerging markets has created a new structural reality in the oil markets that likely will keep prices high for decades to come.
This will be the year in which the boom moves from being an oil-revenue story to one of broad-based private sector growth, Bourland predicts. Saudi Arabia’s economy has doubled in size in the past four years.
“To put this in more tangible terms, an economy the size of Malaysia has been added to the Saudi economy since 2002, mainly due to rising oil revenues,“ he says.
Industrial activity outside of the oil industry was the fastest-growing sector in 2006, spurred by higher petrochemicals and metals production.
Structural reforms that were delayed by the first oil boom of the 1970s have been implemented in recent years and have strengthened the economic fundamentals of many countries in the region. Meanwhile, Islamic financing products have expanded rapidly in the past five years, as financial institutions have sought new ways to tap into liquidity in the region.
Despite these advances, the Middle East remains a politically unstable region. From the first Palestinian uprising in December 1987 through to the current sectarian violence in Iraq, the past 20 years have had their share of political troubles. There is always a possibility that political developments could have some destabilizing effects on the investment environment.
Another worry is the threat of inflation, which could be difficult to control in a fast-growing region where most currencies are pegged to the dollar. Nonetheless, the economic outlook remains favorable, due to strong private consumption and large investments by the public and private sectors.

The silver, zinc and other metals under Bolivian soil are fetching their highest prices in decades, and Evo Morales has dedicated his presidency to claiming a larger share of the money for his country’s people. But first he’ll have to deal with miners like Marco Taboada.
Taboada is a formidable sight and one of about 60,000 independent Bolivian miners organized into small cooperatives. These men mostly backed Morales’ 2005 landslide election, but are ready to fight the president’s efforts to impose more state control over their industry.
“We’re like a time bomb,“ Taboada told the AP. “Throw it and you’ll see.“
Bolivia is the world’s fourth largest tin producer and a significant source of silver and zinc, but kept less than 5 percent of the profits from mining last year.
Morales aims to change that by raising taxes and seizing the occasional foreign-owned business, such as the smelter he took back from Swiss mining giant Glencore in February. But going after foreign interests is an easier sell than challenging the independents, proud workers willing to risk their short, hard lives defending their piece of the mineral boom.
In October, miners from the cooperatives stormed the state-operated Huanuni mine demanding more access to its rich tin deposits. State-employed miners fought back, and the two sides exchanged gunfire and threw dynamite. Sixteen died before riot police restored order.
And when Morales announced a tax increase on mineral revenues in February, more than 20,000 cooperative miners converged on La Paz, hurling dynamite through the downtown streets.
The government quickly made peace, freezing taxes at current levels and pledging $20 million in badly needed new technology for the cooperatives. Months later, Morales is still eyeing a tax hike--and hoping the miners have outgrown their dynamite displays.
“They have to realize that sort of thing has its limits, not only with the government, but also with the people,“ mining minister Alberto Echazu told The Associated Press. “They have to realize that everyone has to pay their share.“
Cooperatives produce roughly a third of the nation’s mineral ore and employ more than 80 percent of its miners--an immense bloc with a record of squeezing concessions from Bolivian leaders.
“Each administration thinks it can use the cooperatives to its own political ends, but it’s the cooperatives who end up using the government,“ said mining analyst Jorge Lema Patino.
And mistrust of the government runs deep in the cooperatives, many of which formed after the state mining company Comibol laid off some 27,000 miners during a 1980s crash in global mineral prices. Determined to survive where the state failed, many banded together and returned to work the mines with their own rudimentary tools.
Though many miners are too young to remember it, the Comibol collapse still inspires their fierce pride in carrying the industry through its darkest hours--and righteous indignation over the state’s efforts to take it back.
“In Bolivia it has been demonstrated historically that the state is not a good administrator of its own property,“ said Antonio Pardo, Potosi security director for the National Federation of Mining Cooperatives. “If they want a fight, we’ll give them a fight, because we’re fighting for our livelihood, and they’re fighting for fortune.“
Though Morales repeatedly vows to “nationalize“ mining, the entire industry has been at least nominally under state control since Bolivia’s 1952 revolution. Both cooperatives and international companies operate under Comibol concessions.
Morales is seeking to regain control the government lost after the 1980s crash and a run of privatizations in the 1990s, while claiming a bigger share of mineral export revenues that soared from $547 million in 2005 to more than $1 billion last year, mostly because zinc prices doubled.
Despite the windfall, the government collected only $48 million in mineral taxes in 2006, and $14 million the year before. Echazu, the mining minister, says the government is preparing a bill that would impose safety standards and fair labor practices on the cooperatives--a move never dared by Morales’ predecessors.
For all the inefficiency and danger, the cooperatives provide jobs that South America’s poorest country can hardly replace.