## Macroprudential Policy in the GCC Countries

_Staff Discussion Notes, February 1, 2014_

## Source details

**Canonical URL:** [Macroprudential Policy in the GCC Countries](https://www.imf.org/en/publications/staff-discussion-notes/issues/2016/12/31/macroprudential-policy-in-the-gcc-countries-40781)

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## Bibliographic details
- Authors: Zsofia Arvai, Ananthakrishnan Prasad, Kentaro Katayama
- Published: February 1, 2014
- Series: Staff Discussion Notes
- DOI: https://doi.org/10.5089/9781484334430.006

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### Context and Rationale
- 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.

### Experience and Evidence: Boom/Bust Cycle in the Second Half of the 2000s
- 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.

### Policy Tools and Frameworks
- 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).

### Policy Recommendations and Strengthening Frameworks
- 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).

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_Source: https://www.imf.org/en/publications/staff-discussion-notes/issues/2016/12/31/macroprudential-policy-in-the-gcc-countries-40781_