By Fawaz Karami
KUWAIT, Oct 25 (KUNA) -- International Monetary Fund chief Christine Lagarde warned on Saturday that a sustained USD 25 decline in global oil prices presents GCC states with a reduction of revenues of eight percent of GDP.
IMF Managing Director Lagarde made the comments in an interview with Kuwait News Agency (KUNA) after a meeting with Gulf Cooperation Council (GCC) finance ministers and central bank governors, at the inauguration of the IMF-Middle East Center for Economics and Finance.
The IMF will focus its work, over the next few months, on "this particular issue and oil market/oil prices impact on these economies. That will be the work ongoing for the next few weeks." She said that some "modulation from a baseline of USD 104" has been made by the IMF, reiterating that, Gulf countries would be put in a fiscal deficit situation going forward if this USD 25 price is sustained over a period of time.
"We recommended, first of all, the use of their fiscal and financial buffers as they have them, but most importantly, they consider proper fiscal tightening to reduce their exposure to revenue decline resulting from oil price decline," said Lagarde.
Asked how this could be done, she commended Kuwait's plans to curb public spending.
"You have multiple ways of doing that, one is already considered by Kuwait, irrespective of oil decline, which was the shift of public spending from general subsidies to more targeted spending that will serve those that need financial support, and that is a good way to reorientate public spending." The IMF has already made recommendations "to diversify economy away from predominantly oil and oil-related activities, to edge against the risk induced by price volatility." These include encouraging, supporting and stimulating the private sector through opening up local competition, and giving local companies the support to export goods in order to reap additional resources.
She also noted need to encouraging young talented Kuwaitis to join the private sector, instead of public sector, adding this "can be done by re-aligning the incentives, and making sure the private sector is attractive to them and not the public sector." On the IMF decision to reduce its outlook on the global economy, she responded, "there will always be crisis ... Are we better equipped to deal with these issues? Yes," she said, adding that the world is now "better equipped" at dealing with financial crises.
The massive bubble in the housing sector and banks with very little capital, which resulted in the crisis, have now been replaced with banks being under more scrutiny and regulation than "ever before" along with a massive recapitalization, she said.
She also noted to 'shadow banking' that has developed around the banking sector, "which needs to be kept in check and under adequate control.
"I am not saying shadow banking is bad but it needs to be transparent and supervised." On the IMF's recommendations related to developed nations' keenness to stop their monetary easing policies and programmes, she said "we neither have a date nor a set of recommendations in terms of when it will happen, because monetary policy in the US is determined by various indicators which has been clearly explained by the FED chairman." She added, in the meantime that, the only thing that the IMF said would be better was if ceasing quantitative easing policies were "gradual over time and very well communicated so that markets can anticipate what will happen." Going back to economies of the Gulf, she said that they have been the best in the world in recent years, while their short-time prospects look positive.
She expected growth, over the 2014-15 fiscal year, to remain at 4.5 percent, being particularly strong in the non-oil sector at six percent, backed by large investments in infrastructure and confidence in the private sector.
On the IMF-Middle East Center for Economics and Finance, she said the Kuwait-hosted HQ represents a prominent symbol of IMF cooperation with the GCC aimed at mutual interests.
The centre, formed with the support of the Kuwaiti government, is one of the most important bases for economic training of state officials, she added. (end) fnk.sd