Speech

Managing Director of the International Monetary Fund
At the Meeting of the Ministers of Finance and Governors of the Cooperation Council of the Arab States of the Gulf
Jeddah, Saudi Arabia, October 23, 2004

1. It is a pleasure for me to be here today in Jeddah to meet finance ministers and central bank governors of the GCC. This is my first visit to the Middle East region as the Managing Director of the IMF, and these are also early days in my tenure at the IMF. I greatly value this opportunity and look forward to listening first hand to your views and advice. These regional dialogues are very important as we can discuss common challenges and explore ways to address them.

2. This gathering is taking place at a time when the global economy is growing at the strongest pace in many years. All major regions of the world including the GCC and the Middle East region, have contributed to, and benefited from, this ongoing broad-based global economic expansion. Supporting economic policies and more resilient financial systems have contributed to the strong recovery. The Middle East region, and particularly the GCC countries, have benefited from the global rebound and the associated increase in demand for the region's oil and non-oil exports. As a result, per capita income in the GCC countries has risen by about 25 percent during the past two years.

3. Sustaining this strong global recovery over the medium term will require concerted efforts to deal with a number of vulnerabilities. Among these: containing the unsustainably large U. S. fiscal and external current account deficits; acceleration of structural reforms in Europe; and exchange rates in Asia that reflect fundamentals and contribute to reducing global imbalance; and restoration of stability in the oil market. While the World Economic Outlook Report, which was released at the time of our Annual Meetings a few weeks ago, has highlighted the positive prospects for the global economy, we have also underscored these systemic vulnerabilities and the need for corrective actions to address them. As regard the oil market, the decision of GCC countries to increase production significantly was constructive and timely. Nevertheless, supply uncertainties and speculative pressures continue to keep the oil market unstable. In this context, we welcome your governments' clearly stated position that excessively high and volatile oil prices are not in the interest of either producers or consumers. In particular, we commend Saudi Arabia's forceful actions to increase oil supplies in the world market at this critical juncture.

4. Oil prices are projected to remain firm over the medium term, reflecting growth in demand in both industrial countries and emerging economies of Asia. The resulting terms-of-trade gains for the GCC countries and the broader Middle East region are projected to be large over the medium term. This provides a unique opportunity for oil exporting countries. For a long time, much of this region has experienced slow economic growth and secular deterioration in the terms-of-trade leading to declining per capita income and increasing unemployment. Non-oil GDP growth failed to keep pace with the growing population and labor force. At the same time, financial dependence on volatile oil export receipts has remained high, compounding economic vulnerability to oil price shocks. Over time, economic performance of the region also lagged behind other regions despite its enormous potential. I am therefore greatly encouraged by the authorities' resolve to seize the opportunity provided by the global economic recovery to build stronger macroeconomic foundations and enlarge savings for the future generations, while at the same time increasing investment in human development and physical infrastructure. I am also encouraged that structural reforms to foster greater participation and job creation by the private sector are being undertaken, and I hope that these reforms can be accelerated and deepened in the period ahead.

5. The IMF fully supports the GCC's objective of establishing a monetary union by 2010. We believe that a monetary union will promote regional integration, a more efficient allocation of resources, and enhance the benefits to the GCC countries of increased integration into the global economy. It appears that significant progress toward regional integration has already been achieved: barriers to free movement of goods, services, capital, and national labor have been largely eliminated; a common external tariff is now in place; and all GCC countries have sound financial systems and prudential regulations and supervision of the banking sector are being gradually harmonized. All countries have strengthened their macroeconomic fundamentals significantly in recent years with large surpluses in the fiscal and external current account positions and very low inflation. Moreover, bilateral nominal exchange rates have been stable and nominal interest rates are similar across the GCC area.

6. As experience has shown, a successful monetary union depends on the ability to build political consensus on critical policy issues and rules, and on the development of effective institutions, most notably a common central bank. Among the needed steps are the establishment of a common fiscal accounting framework and strengthened budgetary procedures, as well as improved quality and coverage and common standards of data in order to facilitate the convergence process and enhance internal surveillance. Economic convergence will also depend critically on the readiness to adjust economic policies in a concerted manner. From my own experience, I know that the road to a monetary union can be bumpy at times, requiring strong political commitment and the ability to undertake the policies and economic management associated with a single currency. The Fund stands ready to assist by providing policy advice and technical assistance in our areas of competence and expertise, and by sharing with you the experience of other regions.

7. Economic prosperity in the GCC cannot be separated from the social, political and economic environment in the region at large. In particular, re-emergence of a peaceful and prosperous Iraq will be vital for all the countries in the region. For a long time, the GCC countries have contributed to regional economic progress by providing official financial support and employment opportunities for expatriate workers. Your support of Iraq's reconstruction would be in keeping with that tradition. Following the serious disruptions caused by the conflict in 2003, and notwithstanding the still-difficult security environment, macroeconomic stability has been achieved in the first part of 2004. Oil production has recovered to about pre-conflict levels, and non-oil activity has also been picking up with a rebound in construction and commercial activity. Inflation has been brought under control, the exchange rate is stable, and Iraqi central bank reserves position has strengthened. But much more needs to be done. While the situation in Iraq remains difficult, we are committed to doing our part.

8. The international community has pledged significant resources to Iraq's reconstruction. At the International Donors' Conference held in Madrid in October 2003, representatives from 73 countries and 20 international organizations pledged US$33 billion in grants and loans to support the reconstruction of Iraq. As part of that effort, the Fund's Executive Board has recently approved financial assistance (in an amount of SDR 297 million (equivalent to US$436 million) under the Emergency Post-Conflict Assistance facility. Efforts are also underway to alleviate Iraq's unsustainable level of external debt, about half of which is owed to countries in the region. As Iraq engages its creditors on obtaining debt relief in the context of Paris Club framework, your support will also be vital. With your support, the regional financial and development institutions such as the Arab Monetary Fund, the Arab Fund for Economic and Social Development, and the Islamic Development Bank can also play a crucial role, each in its respective area, in the reconstruction and development of Iraq. I should also express appreciation for your support in the West Bank and Gaza.

9. The IMF has been a partner in the quest for economic progress and development throughout the region. Through Fund-supported programs we have helped countries (like Jordan, Pakistan, and Yemen) in successfully overcoming balance of payments difficulties and moving to sustained macroeconomic stability. We are extensively involved with Afghanistan, Iraq, and Sudan under either Emergency Post-Conflict Assistance or staff monitored programs. I will be inaugurating the Middle East Technical Assistance Center (METAC) this week in Beirut to facilitate the massive institution building needs of post-conflict countries like Iraq, Afghanistan, Sudan, and the West Bank and Gaza. The METAC will also provide technical assistance to Egypt, Jordan, Lebanon, Libya, Syria, and Yemen. With regard to the GCC, the Fund continues to be available to assist you as you move forward to a monetary union. We are ready to increase our collaboration with the GCC secretariat on regional economic and institutional development issues.

10. As I mentioned at the outset, I would like to take this opportunity to hear your views about the challenges facing your countries and the region and the policies to address them. While the potential list of issues and preoccupations is undoubtedly large, I will touch on a few key questions, which I hope will stimulate our dialogue:

· First: What are the areas of reform in your countries which you consider as priority to accelerate growth and job creation in the non-oil sectors, and what are the impediments in pursuing these reforms more vigorously? How can the IMF be of help in this process?

· Second: Fiscal revenues from oil are rising sharply at the same time that you are correctly seeking a diminishing role of the public sector relative to the private sector? How do you plan to reconcile or balance these seemingly opposing forces?

· Third: What are your views regarding developments in the global oil market? How do you see the GCC oil policies—both short and medium term—responding to the fast growing global demand for oil and gas, in such a way that contributes to market stability and also benefit from the sustained global demand?

· Fourth: GCC countries have a long tradition in providing assistance to the rest of the region. Do you see an enhanced role or possibly new avenues for the GCC to help catalyze reforms and contribute to stability across the broader Middle East region?

· Fifth: What are your views on the key challenges that face your countries in the preparation for the monetary union? What role can the Fund play in this regard?

11. Let me conclude by saying that I am fundamentally optimistic about the region and about the GCC. The currently favorable global environment and your very strong financial position provide an opportunity to take additional decisive steps. With forceful reform policies and strong regional and international cooperation, the region can move to a higher growth path, which is sustainable, broad based, and in line with your own goals of increased job creation and higher standards of living. We share these goals and we are ready to be partners in this effort.

12. Thank you.