By Martin Dokoupil and Eman Goma
Policymakers need to focus on financial stability - Kuwait's central bank head.
Inflationary pressures in Gulf Arab countries have eased significantly but have not disappeared and policymakers need to focus on financial stability, Kuwait's central bank chief said on Wednesday.
Sheikh Salem Abdul Aziz al Sabah added that his own economy should turn around this year, forecasting Kuwaiti gross domestic product would grow by 4 to 5 percent after an expected contraction in 2009.
The global downturn slashed inflation across the Gulf from 2008 record peaks with some countries such as the UAE and Qatar experiencing deflation last year.
Speaking at the opening of the GCC central bankers' meeting in Kuwait, Sheikh Salem said: "Inflationary pressure in the GCC (Gulf Cooperation Council) has fallen remarkably, but this does not mean at all a complete disappearance of this pressure."
Price pressures are seen rising again this year as Gulf economies recover but inflation is expected to stay in low single digits across the region.
Sheikh Salem told policymakers from the six nation GCC that central banks need to focus on financial stability.
Without going into details, he said: "Accomplishing this task is not an easy one. It involves many challenges related to practical implementation."
Debt restructuring of UAE's Dubai World conglomerate and Saudi family businesses hit banks in the UAE and Saudia, the Gulf's two biggest economies, and slow credit growth is seen as the main drag on the region's economic performance this year.
Sheikh Salem said he expected Kuwait's economy to pick up following an expected contraction of 1.5 to 2 percent in 2009, and said the worst was over for Kuwaiti banks. He said he expected more credit growth in the coming period.
Speaking at a news conference, he said: "We think for 2010 GDP in Kuwait will expand by 4 to 5 percent."
A Reuters poll in January forecast economic growth in Kuwait, the world's fourth largest oil exporter, of 3.4 percent this year.
Asked if Kuwaiti banks would continue booking provisions in 2010, Sheikh Salem said: "This depends on the quality of the credit portfolio and will there be more defaults or not. It looks like the worst is over ... Banks are in a great condition."
Kuwait is president of the GCC this year and Sheikh Salem said he hoped the UAE and Oman would rejoin a planned Gulf monetary union being pursued by Saudi Arabia, Kuwait, Qatar and Bahrain.
The UAE pulled out of the project in May 2009, three years after Oman withdrew, in protest at a decision to site the joint central bank in Saudi Arabia.
He said: "I still hope that the UAE and Oman would give the issue a second chance."
Kuwait has made bringing the UAE and Oman back into the union a priority of its GCC presidency. (Reuters)