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Speech by Rodrigo de Rato, Managing Director, International Monetary Fund, At the Meeting of the Ministers of Finance and Governors of the Cooperation Council of the Arab States of the Gulf
October 18, 2005
As Prepared for Delivery
1. Ministers, Governors, Mr. Secretary General. Thank you very much for inviting me to attend this important meeting.
2. It is a pleasure for me to be here in Jeddah once again to meet with you. The past year has been both good and bad for the world economy. Sustained world economic growth in an environment of low inflation has contributed to improved economic well-being globally, as well as in the GCC region. At the same time, countries in different parts of the world have suffered from natural disasters, food shortages, and security problems. This annual regional meeting of GCC Ministers and Governors provides a unique opportunity to discuss common challenges and explore ways to address them. I greatly value this opportunity to listen to your views and receive your advice first hand.
3. This meeting is taking place at a time when the global economic expansion remains broadly on track with world growth this year averaging 4.3 percent. All major regions of the world, including the Middle East and the GCC, have contributed to, and benefited from, this ongoing broad-based global economic expansion. For the global economy, the increase in oil prices has so far been manageable, but the lagged effect of past increases might weigh more heavily on future economic activity, particularly if prices continue to rise. The GCC countries have benefited from the global rebound and the associated increase in demand for oil and non-oil exports. As a result, GCC real GDP is projected to grow at about 6 percent in 2005, per capita income in the member countries has risen by more than 50 percent during the past three years, consumer prices are stable, and stock markets have surged to record high levels.
4. Sustaining the strong global recovery over the medium term will require concerted efforts to deal with two major vulnerabilities: first, the growing global imbalances that threaten prosperity if not reduced in an orderly fashion; and second, restoration of stability in the oil market in a manner that serves the interests of producers and consumers alike.
5. The problem of global imbalances is perhaps the most important medium-term risk to the positive economic outlook. The external current account deficit of the United States is projected to reach at least 6 percent of GDP this year. The recent large current account deficits have caused an enormous increase in U.S. net external liabilities. The largest counterpart surpluses to the U.S. deficit are those of the emerging Asia and the oil exporting countries, with the surplus of oil exporters now exceeding the surplus of emerging Asia. For example, the GCC current account surplus this year is projected by the Fund to be around $185 billion. Imbalances of this magnitude cannot go on forever. Given the outlook for oil prices, the process of further accumulation of foreign assets by oil exporting countries is expected to continue in the coming years. In the short run, these large surpluses would add to global imbalances. Over the medium-term, the GCC authorities' strategy to continue increasing expenditures in areas where social returns are high and accelerating growth-enhancing structural reforms would help the adjustment process through an increase in domestic absorption and imports.
6. As regards the oil market, the decision of GCC countries to increase production significantly in response to the rapidly growing demand was most constructive and timely. 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. The investment plans undertaken by the GCC countries to expand crude oil and gas output capacity will play a central role in meeting the projected global demand for energy and sustaining world economic growth over the medium term. The large investment programs to boost oil production and refining capacity, undertaken in Saudi Arabia ($50 billion) and Kuwait ($20 billion) and by Qatar in the area of gas ($50 billion), are particularly noteworthy. As I underscored in my Annual Meetings speech, both the producing and consuming nations need to handle the issue in a cooperative manner. The oil-producing countries should continue with their investment programs to increase production and refining capacity; oil consuming countries also need to invest in refining capacity, and to strengthen energy conservation, improve energy efficiency, and encourage the development of alternative energy sources. Domestic oil prices in all countries should move in line with international oil prices to ensure efficient allocation and effective conservation of oil resources. Subsidies of this type are not only costly, they also do not necessarily benefit the ones they are designed for. In this context, I would like to commend the U.A.E. authorities for the recent large adjustment in domestic gasoline prices. Increases in fuel prices in oil-producing countries set a very good example for all countries to follow.
7. Projections indicate that oil prices will remain firm over the medium term, reflecting growth in demand in both industrial countries and the emerging economies of Asia. The resulting terms-of-trade gains for the GCC countries and other oil exporters in the region will then be large over the medium term. This provides an excellent opportunity for these countries. For a long time, much of this region has experienced slow economic growth and secular decline in the terms-of-trade, leading to declining per capita incomes, increasing unemployment, and deteriorating infrastructure. Over time, economic performance of the region also lagged behind other regions, despite its enormous potential. I am therefore greatly encouraged by your governments' resolve to maintain macroeconomic stability and to take the opportunity provided by the global economic recovery and higher oil prices to build stronger institutions, and raise investment in human development and physical infrastructure. This is also an opportune time to modernize public sector employment by introducing a more professional structure and increased flexibility.
8. I am also encouraged by the fact that structural reforms undertaken by the GCC countries have already contributed to private sector investment and to a rebound in non-oil economic activity across the region over the past few years. There are many good examples of how GCC countries are promoting the private sector: reform of the investment, capital market, and labor laws in Saudi Arabia; private sector management and development of infrastructure projects in the U.A.E.; and improvements in banking sector regulations in Bahrain and other GCC countries that has advanced financial sector development and intermediation in the region. I hope that growth-enhancing structural reforms can be accelerated and deepened in the period ahead which, coupled with greater public sector spending on programs with high social returns, would help increase nonoil growth and employment in the GCC countries, while alleviating the global current account imbalance. Regulatory authorities have to be vigilant and provide clear rules of the game in such areas as transparency and audit.
9. One cannot help but be impressed by the very strong performance of the GCC stock markets in terms of large increases in the price indices, market capitalization, and trading volumes in recent years. Although these increases have been supported by significantly higher international oil prices and improved corporate profitability and lower interest rates, the stock markets have also benefited from structural reforms undertaken by the GCC governments on several fronts. These include, in particular, privatization of the telecommunications and other public enterprises in Saudi Arabia, Oman and the U.A.E., the ongoing regulatory and supervisory changes to enhance transparency and oversight in all GCC markets, as well as further opening up of these stock markets to foreign investors. Although banking sector exposure to the stock market is limited and the authorities have taken measures to strengthen oversight on direct and indirect bank exposure, in some markets share price valuations may have pushed up beyond the fundamentals. The continuing upward trend in the stock price index poses some risks and warrants close monitoring by the central banks and monetary agencies.
10. As you know, the IMF has strongly supported the GCC objective of establishing a monetary union by 2010. We congratulate you on the significant progress toward regional integration that has already been achieved through elimination of barriers to free movement of goods, services, capital, and national labor; a common external tariff; and sound financial systems operating in the framework of strong prudential regulations and supervision of the banking sectors. And all countries have good macroeconomic fundamentals characterized by large surpluses in the fiscal and external current account positions, credible (pegged) exchange regimes and low nominal interest rate environments.
11. 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. It is indeed a good step that the governors of the GCC central banks and monetary agencies have agreed on the convergence criteria to be met by the GCC countries by end-2007 and that all GCC countries are already largely in compliance with these criteria. I hope that this meeting of GCC Finance Ministers and Governors will recommend the agreed convergence criteria for adoption at the GCC Heads of State Summit later in the year. As you know, in order to facilitate the convergence process and enhance internal surveillance, the establishment of a common fiscal accounting framework and strengthened budgetary procedures, as well as improved quality and coverage and common standards of data are essential. For this purpose, creating an institution perhaps along the lines of Eurostat in the European Union, will provide the GCC authorities with high-quality statistical information.
12. I understand that the governors of the GCC central banks and monetary agencies have in principle also agreed on a common GCC monetary authority with mandate to formulate and implement monetary and exchange rate policies. However, much work is needed to bring about quickly the necessary institutional and legal changes during the transition period to the establishment of a common central bank and introduction of a common currency. From my own experience as Minister of Finance of Spain during the period of adoption of the Euro and establishment of the European Central Bank, I know that this is not an easy task. It will require 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.
13. The emergence of a peaceful and prosperous Iraq and a viable West Bank and Gaza is of vital importance for the Middle East region. Your support for their reconstruction and development would be in keeping with the GCC tradition of supporting economic progress in the region by providing official financial support. While the situation in both Iraq and West Bank and Gaza remains difficult, the international community has pledged significant resources for their reconstruction and development. The Fund is also committed to doing its part. We have already provided financial support to Iraq through its Emergency Post-Conflict Assistance facility. Iraq has made good progress in meeting its commitments under the program associated with this support, and we have now moved to negotiations on a program with Iraq which could be supported by a stand-by arrangement. This would trigger the second stage of debt reduction under the November 2004 Paris Club agreement. As Iraq is engaging its creditors on obtaining debt relief and help for its reconstruction, your continued support through debt relief and bilateral assistance will be vital. We have also been providing policy advice and technical assistance to West Bank and Gaza, and are keenly aware of the Palestinian Authority's need for the financial support that the GCC countries have been providing. We hope this support will continue, and possibly enhanced, in the future.
14. While growth prospects for emerging and developing countries in aggregate have remained broadly favorable, many of these countries are facing significant difficulties, particularly on account of the significantly higher oil prices. As was mentioned at the recent IMF Annual Meetings, we are moving to establish a shocks facility to provide policy support and concessional financing to low-income PRGF-eligible member countries to overcome their temporary balance of payments need arising from exogenous shocks. Qualifying events include commodity price changes (including oil price changes), natural disasters, and conflicts and crises in neighboring countries. As you know, the Fund's ability to provide concessional financing is limited. We would, therefore, be seeking contributions for financing this facility from member countries—including OECD, and oil exporting countries—in a position to make such contributions. Once the financial aspects of the facility, including the sources and nature of contributions, are worked out, I will be happy to provide you more details of the modalities and timetable. I hope we can count on your generosity as always.
15. The IMF has always 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 currently involved with Afghanistan, Iraq, and Sudan under either Emergency Post-Conflict Assistance or staff monitored programs. The Middle East Technical Assistance Center (METAC) has now completed almost a year in Beirut and has been facilitating the massive institution building needs of post-conflict countries like Iraq, Afghanistan, Sudan, and West Bank and Gaza. METAC also provides technical assistance to Egypt, Jordan, Lebanon, Libya, Syria, and Yemen. We have collaborated with the GCC Secretariat on regional economic and institutional development issues, and as you move forward to a monetary union, we are ready to intensify this collaboration.
16. In response to our mutual concerns regarding the lack of GCC representation in Fund staff, I am pleased to inform you that since my visit here over a year ago, a GCC Secondment Program has been instituted at the IMF. In this program, two officials from central banks and ministries of finance in the GCC would be seconded to work in the Middle East and Central Asia Department of the Fund. This program is now underway and one official from the Saudi Arabian Monetary Agency is already in the process of joining the IMF and two officials from the Bahrain Monetary Agency will be coming to Washington this year for a shorter stay. We hope that other GCC countries will take up this offer. The Fund will, in addition, continue to make intensified efforts to recruit suitable GCC nationals.
17. Let me conclude by saying that I am very optimistic about the region and about the GCC. Policy initiatives over the past few years have contributed to a strong macroeconomic foundation and accelerating non-oil economic growth. Your very strong financial position and the current favorable global environment provide a great opportunity for additional decisive policy initiatives. I am confident that, with a further acceleration of the reform process and stronger global and regional integration, the region can move to a higher growth path, which would be sustainable, broad based, and in line with your own goals of increased job creation and higher standards of living. 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, the policies to address them, the role that GCC countries can play in sustaining global economic expansion, and how the Fund can assist you in achieving your objectives.
18. Thank you.
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