DUBAI // The International Monetary Fund (IMF) is calling on authorities in the Gulf to develop a co-ordinated response to the global financial crisis as it slows growth and employment prospects across the Middle East and Central Asia, and pushes weaker economies like Pakistan to the brink of default. In its half-yearly economic outlook for the region's 30 countries, the IMF predicted that regional growth would slow to about six per cent next year from 6.5 per cent this year, a modest decline that would keep the economy expanding faster than the rest of the world, but would still be too low to absorb new entrants to the job market. "What you're going to see is a reduction in job creation," said Mohsin Khan, the director of the IMF's Middle East and Central Asia department, who was in Dubai today to present the report. In the Gulf, that would mean fewer jobs for immigrants seeking refuge from hard times elsewhere, he said, whereas "in some countries that means growth in unemployment". The latest report comes only a week after the annual meeting of the IMF and World Bank in Washington, held during what the IMF managing director Dominique Strauss-Kahn called "the most dangerous financial crisis since the one that led to the Great Depression". Mr Khan cautioned that the IMF's latest forecasts may turn out to be overly optimistic because its economists were scrambling last month to adjust their forecasts to the rapidly deteriorating global financial environment. Pakistan and the Ukraine are now asking the IMF for emergency cash to help prop up their economies. "We're playing catch-up," said Mr Khan. Echoing calls from other economists within the region, he warned that central banks around the Gulf needed to co-ordinate their responses to the financial crisis as governments in Europe had done. While most Gulf authorities have moved to increase liquidity and shore up confidence in their banks, each has adopted different measures. These are resulting in divergent interest rates that economists warn could prompt investors to shift funds from one country to another, making financial markets even more volatile. "If you have different interest rates and different perceived levels of risk, capital starts moving around," said Eckart Woertz, an economist at the Gulf Research Center in Dubai. The IMF's report outlines a gloomy global economic backdrop with credit receding, demand falling and protectionism rising. In this environment, the report said that growth would slow across most of the region, with inflation and property prices posing additional downward risks. Growth in the UAE, the IMF forecast, is likely to mirror a slowdown in the rest of the region's oil-exporting nations, dropping a full percentage point next year to six per cent, from seven per cent this year. Falling food prices, however, could actually stimulate growth in some of the region's poorest countries such as Afghanistan, Sudan and Yemen. But growth will slow in emerging markets, it predicted, particularly in Egypt, Jordan and Lebanon. The situation in Pakistan is much more severe. Moves by the government of the former president Pervez Musharraf - who resigned in August - to boost fuel subsidies and government salaries helped push inflation to 25 per cent. The country's foreign currency reserves have slumped by US$10 billion (Dh36.7bn) to just under $5bn, enough for only two months of imports. The government of the newly elected Pakistani president Asif Ali Zardari has since reduced subsidies and stopped borrowing from the country's reserves, but it still needs cash to avoid a balance of payments crisis, Mr Khan said. With global capital markets in deep freeze, Pakistan has been forced to seek official aid. Pakistan has won $3.6bn in funding form the World Bank and Asian Development Bank, but China turned down its request for cash this week. Mr Khan said that a meeting of the "Friends of Pakistan" - Britain, France, Germany, the US, China, the UAE, Canada, Turkey, Australia, Italy, the UN and EU - was scheduled in Abu Dhabi next month to try to raise funds. In the meantime, he said, Pakistan had begun preparing conditions for an IMF bailout. Elsewhere in the region, Mr Khan warned that job growth was likely to slump with slower growth, exacerbating unemployment. A region-wide skills shortage had prevented the region from reducing joblessness, he said. "The jobs being created require skills that people entering the job market don't have." Falling commodity prices could prove a boon to the region, according to the IMF report. Lower inflation could help ease food and fuel inflation in less affluent countries and perhaps even help lower the impact of the global downturn on the GCC's non-oil industries. However, inflation still poses a greater risk, Mr Khan said. Moves by regional central banks to boost liquidity are pushing real interest rates - already negative - even lower, Mr Khan warned, potentially creating an inflationary wage-price spiral. The IMF projected that inflation in the UAE would fall next year from 12.9 per cent to 10.8 per cent. Oil income should still insulate the Gulf form the worst of the storm, however. "They still have a sufficient cash buffer in this region," Mr Khan said. Oil prices have been falling, but remain historically high. The IMF estimates that Gulf oil and gas exports will fetch $7 trillion between now and 2013, pumping an additional $5.6 trillion into government coffers and boosting accumulated assets held in sovereign wealth funds to $2.8 trillion by 2013, from $1 trillion this year. But falling oil prices will contribute to slower growth in the GCC, the report said. With oil at $74 a barrel, the IMF estimates that the governments of Bahrain and Oman will be forced to run budget deficits next year. It estimates that the UAE will continue to run budget surpluses as long as oil prices stay above $23 a barrel, lower than most other estimates. The UAE does not publish its budget. warnold@thenational.ae
