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Sat 6 Nov 2010 11:00 PM

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GCC may need to withdraw stimulus in 2011 on rising inflation

Four GCC states are working toward a single currency to harmonize economies

GCC may need to withdraw stimulus in 2011 on rising inflation
Most Gulf states slashed interest rates while some embarked on fiscal stimulus measures to boost their economies

The Gulf Cooperation Council nations may need to withdraw economic stimulus if inflation continues to accelerate in 2011, the International Monetary Fund said.

First deputy managing director of the IMF, John Lipsky, told a meeting of GCC finance ministers and central bank governors in Kuwait City today: “In some countries we are seeing early signs of a pickup in inflation, if sustained, this may call for a withdrawal of stimulus as early as 2011.”

Most Gulf states slashed interest rates while some embarked on fiscal stimulus measures to boost their economies following the worst global recession since the 1930s.

Saudi Arabia, the Arab world’s largest economy, which had seven consecutive months of accelerating inflation until September, announced a $400 billion spending program in 2008, the biggest in the Group of 20 nations as a percentage of gross domestic product.

Four of the 6 GCC states are working toward a single currency to harmonize their economies and allow the bloc to have more independent monetary policy.

According to the IMF, the euro crisis has led policy makers to evaluate the process of monetary union, though this won’t necessarily translate into a delay in establishing a single currency.

The IMF said on October 6 that economic growth in the Middle East and North Africa region may accelerate to 5.1 percent next year as oil prices rise.

The economic outlook of the countries in the GCC has “improved considerably,” Lipsky said today, adding the group has the short term challenge of supporting a revival in credit growth.

Lipsky said: “The fundamentals to address this challenge have been improved as considerable progress has been made in financial and corporate restructuring in 2010, helping shore up confidence.”

State owned Dubai World’s announcement last year that it planned to restructure debts, following defaults by two Saudi Arabian companies, forced banks to curtail lending and disrupted bond sales across the Middle East.

The UAE's central bank bought half of the unsecured $20 billion in five year notes issued at an annual interest rate of 4 percent in February 2009 to support Dubai on concern the emirate would struggle to repay its debt.

The UAE central bank cut its benchmark repurchase rate to 1 percent, while Abu Dhabi and the federal government lent $20 billion to Dubai last year.

Long term challenges include the need “to enhance supervision, macro prudential policy tools, liquidity management and resolution frameworks for banks and nonbanks, and to reduce the dependence on name-lending," said Lipsky. Name lending is the extension of credit based primarily on reputation.

Lipsky added: "Creditor rights and court enforceability should be clarified and disclosure standards strengthened’’ to meet the rising demand for sukuk, or Islamic bonds.