The United Nations annual economic report, which this year bears the title “World Economic Situation and Prospects 2008”, said that countries of the Western Asian region have maintained their fifth consecutive year of growth of more than 4.5 per cent. The region is benefiting from the revenue effects of resurgent oil prices and the unprecedented world demand. In the outlook, strong regional growth is expected to continue in 2008, at 5.2 per cent, supported by the high global demand and price of oil according to the “World Economic Situation and Prospects 2008”.
The UN publication, which was released on 9 January, signals that the region is benefiting from the revenue effects of resurgent oil prices and the consequent strength of consumer demand. Higher growth is expected in the oil-exporting countries, but the more diversified economies have also obtained growth benefits through various spillover mechanisms.
The report added that “The present economic boom opens a window of opportunity for the countries of the Western Asian region. With continued strong oil prices and steady production, Governments can take advantage of the relative abundance of capital generated by the current oil boom to implement a number of overdue structural changes in their economies, with a view to promoting greater economic diversification as a source for more sustainable growth and employment creation”.
The medium-term prospects in the region are clouded by the economic slowdown in the United States, which could lower demand for and, subsequently, the price of oil and other non-oil exports from the region. There is also a concern that a continued weakening of the dollar could aggravate the already persistent inflationary pressure in the region.
Positive spillover effects on non-oil exporting countries
Strong growth in the oil-exporting economies has created positive spillover effects on other economies in the region through increased FDI, worker remittances and tourism receipts. This has stimulated growth in Jordan, the Syrian Arab Republic and, to a lesser extent, Lebanon and Yemen.
According to the UN publication, FDI is expected to reach 13 per cent of GDP in Jordan in 2007 and 5 per cent in Lebanon. Tourism receipts remain important sources of income, notably for Jordan, where they have been growing steadily over the past few years. In Lebanon, normally a major tourist destination, receipts from tourism declined 35 per cent during the first half of 2007 as the economy is still suffering from the effects of the conflict with Israel.
Worker remittances remain important to several of these countries. They represent 20-25% of GDP in Jordan and in Lebanon, and 35% in West Bank and Gaza, which is one of the highest ratios in the world. Recently, the GCC countries have been recruiting more workers from outside the region, leading to slower growth in worker remittances to the other Western Asian countries.
Currency pegs and foreign reserves management are criticized
Most of the region’s exchange rates are fixed to the dollar. Currently, all GCC countries, except Kuwait, peg their national currencies to the United States dollar. Western Asia is facing higher costs of euro-denominated and other non-dollar imports as the dollar declines. If the dollar continues its slide, discussions regarding revaluation of national currencies will likely take centre stage.
This debate is all the more relevant at a time when the Governments of Bahrain, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates must decide whether to proceed with the plans of establishing a monetary union by 2010, or to postpone the target date following Oman’s decision in late 2006 to pull out of the single-currency plan.
The sound management of foreign exchange reserves is related to that. The oil-exporting countries in the region continue to buy into financial instruments in the United States as well as dollar-based hedge funds outside the United States. The region’s gross official reserves are soaring and are expected to reach $400 billion in 2007.
Foreign reserves are typically held for precautionary motives such as defending floating exchange rates, servicing debt and securing imports. Given the GCC fixed exchange rates, very low debt and immense wealth, the need for such precautionary foreign exchange reserves is questionable.
Recently announced investment plans by the GCC member States worth $700 billion between 2006 and 2010 must be seen as a positive indicator. New investments are also to fund large-scale diversification projects and stimulate broader-based growth. Saudi Arabia is planning several large-scale cities that will expand growth beyond the capital and cover a range of economic sectors. The United Arab Emirates, where oil’s share in GDP has been declining steadily, is undertaking reforms to attract FDI to the tourism, real estate and manufacturing sectors.
Copies of the report are available at the UN Information Center, Riad Solh Square, Beirut, or it can be consulted on the following address: