Macroprudential Policy in the GCC Countries

Staff Discussion Notes, February 1, 2014

Source details

GCC economies are undiversified commodity exporters and are prone to pro-cyclical systemic risk in the financial system.
Periods of high hydrocarbon prices create favorable economic prospects that encourage the financial sector to increase lending, leading to higher domestic credit growth and easier access to external financing.
Fiscal policy is an important macroeconomic tool but has significant time lags and expenditure rigidities, limiting its flexibility to prevent credit booms and the build-up of systemic risk in the GCC.
Limited monetary policy independence due to the pegged exchange rate increases the importance of macro-prudential policy for limiting systemic risk.
Underdeveloped financial markets in the region provide limited risk management tools and there are shortcomings in crisis resolution frameworks, reinforcing the need for strong macro-prudential policy.

The paper examines the experience with macro-prudential policies during the boom/bust cycle in the second half of the 2000s (as described in the source).
Key observation: pro-cyclical lending behavior during commodity price booms contributed to credit growth and systemic risk buildup in the region.

The note uses broad frameworks being developed in the Fund and elsewhere to assess how existing frameworks and policy toolkits in the region can be strengthened.
Emphasis on tailoring macro-prudential frameworks to the characteristics of GCC economies (commodity dependence, fixed exchange rate regimes, underdeveloped financial markets).

Strengthen macro-prudential policy frameworks and toolkits in light of:
- The limited flexibility of fiscal policy due to time lags and expenditure rigidities.
- The limited monetary policy independence resulting from the pegged exchange rate.
- Market and institutional shortcomings that constrain risk management and crisis resolution.
Use IMF and international broad frameworks to guide enhancements to regional macro-prudential approaches (the paper discusses ways existing frameworks and policy toolkits can be strengthened).