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Dubai: The International Monetary Fund (IMF) has warned the Gulf countries of a "regional geopolitical uncertainties" that could pose substantial risks to the Gulf economies.
It also warned of a "possible asset price bubble".
The UAE's consumer price index (CPI) inflation, at above 9 per cent is a 19-year high, that 'remains a growing concern' along with other countries in the Middle East, according to the IMF's latest half-yearly World Economic Outlook released recently.
"Inflation pressures in the region have risen considerably in recent months, owing to strong domestic demand, rising food prices, and higher rents in the Gulf Cooperation Council (GCC) countries, where a large influx of expatriate workers and the growing prosperity of local residents have caused a housing shortage," the report said.
A possible asset price bubble, regional geopolitical uncertainties and a global slowdown that resulted in a substantial drop in oil prices - poses substantial risks to the Gulf economies, it said.
"Continued high oil prices and/or the large cut in US interest rates could stimulate a stronger than- expected expansion of domestic demand, although this would likely come at the cost of higher inflation and would create risks of a possible asset price bubble," the report said. "A broad-based global slowdown that resulted in a substantial drop in oil prices and regional geo-political uncertainties are the main near-term downside risks to the outlook.
"The authorities should stay focused on guarding against asset price inflation and a possible buildup in related vulnerabilities on bank balance sheets through appropriate prudential measures."
Outlook
The key macroeconomic policy challenge is to contain rising inflationary pressures, the report says.
Despite these, IMF says, the short-term outlook for the region generally remains positive.
Growth is projected to rise to over 6 per cent in both 2008 and 2009.
"The current account surplus is expected to remain very large, and inflation pressures should moderate as rents ease with the completion of a large number of new housing units and limited price controls take effect (caps on rents in the UAE and Oman, and subsidies on some food items in Saudi Arabia)," it says.
Global financial market turmoil has had little direct effect on the Middle East, it says, adding, "although the depreciation of the US dollar is complicating policymaking in some countries".
The pegged exchange rate policy of the Gulf countries (except Kuwait) constrains the flexibility of monetary policy, given that capital accounts are essentially open, the WEO report said.
"In this context, the recent monetary policy easing in the US has not been helpful for the GCC countries, leading to increasingly negative real interest rates at a time when the regional economic cycle is moving ahead strongly," it explains.
Moreover, the weakness of the US dollar has implied real effective depreciation for many Middle Eastern currencies, while fiscal and incomes policies are turning more expansionary in response to the sharp increase in oil revenues. All these factors add to domestic demand pressures.
Looking beyond the immediate short-term macro-economic challenges, policymakers will need to focus on encouraging the development of vibrant private-sector-led economies in the region, the report suggests. Central to these efforts will be reforms that help generate jobs for the rapidly growing working-age population.
Among the priorities in this regard are reforms to improve the business climate and make investment in the non-oil sector more attractive.
"Action is needed to reduce barriers to trade, simplify tax systems, reduce pervasive government controls and regulations, and enhance the transparency of legal and administrative systems," it says.
Financial sector reforms are also a priority in order to develop financial systems that can support high and sustained growth.
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