By Paul Hannon
Of DOW JONES NEWSWIRES
(This story was originally published at 0401 GMT Sunday.)
LONDON (Zawya Dow Jones)--Global economic policy makers have long fretted over the threat posed by growing imbalances in world trade, with the focus of their concerns firmly on the large U.S. current account deficit and China's similarly huge trade surpluses.
But with oil prices likely to remain high for some time, the Middle East is increasingly seen as a key player in helping to rebalance the global economy.
That became clear when the International Monetary Fund announced earlier this month that it would launch a series of multilateral consultations with key nations intended to work out a strategy for addressing the imbalances without slowing world growth.
Most of the economies involved were the usual suspects: China, the U.S., Japan and the euro zone. But there was one surprising addition: Saudi Arabia.
"These economies are either ones with large current account surpluses or deficits, or they represent a larger share of global output," said IMF Managing Director Rodrigo de Rato. "Their cooperative action can play a major role in sustaining global growth."
At issue is what major oil exporters in the Middle East do with the increased oil revenue they have received as a result of the surge in oil prices since 2003.
To they extent that they spend that additional revenue, exports from countries with large trade deficits such as the U.S. should be boosted, contributing to a reduction in imbalances.
But that isn't what's been happening.
"The pattern of re-spending seems to be different in the current oil-price cycle from that in previous ones," the Organization for Economic Cooperation and Development noted in its most recent report on the global economic outlook. "In earlier cycles, oil prices spiked and re-spending effects kicked in fairly rapidly but, with the current oil-price shock, effects seem to be more drawn out."
Instead of going on a spending spree, governments in the region have been remarkably prudent, saving most of the additional revenues for a time when oil prices may not be as high as they are now.
The IMF estimates that as a result of higher prices, oil revenue in the Middle East and central Asia rose to $460 billion in 2005 from $185 billion in 2002. Roughly two-thirds of that increase in revenue was saved, largely by governments that received 75% of oil receipts during the period.
The result has been an increase in official central bank reserves to $360 billion at the end of 2005 from $150 billion before the rise in oil prices began. A number of governments have also used a significant portion of the increased revenue to cut their debts and increase reserves managed by a variety of investment funds not controlled by central banks.
In 2005, Saudi Arabia cut its government debt by more than 29% to 475 billion riyals ($127 billion), following a 9% reduction in 2004.
For the IMF, that caution suggests governments are assuming oil prices will fall from current levels, whereas it believes high oil prices "are likely here to stay."
Instead, it urged oil producers to increase their investment in infrastructure and education to boost their longer-term growth potential and cut still-high levels of unemployment and poverty.
"Policy makers in the region have so far acted as though the oil price rise is largely temporary," said Mohsin Khan, director of the IMF's Middle East and central Asia department. "Governments will need to adjust policies to better suit a world of high oil prices and address emerging risks."
Some governments are already planning significant increases in spending. According to Saudi Arabia's 2006 budget, total spending will increase by 20% from 2005 to SAR335 billion, with SAR126 billion of that allocated for capital investments.
But one of the problems with focusing on infrastructure development is that it can take quite a long time to actually spend the money. So the pace at which additional oil revenue is re-spent may not pick up right away, even if oil producers heed the IMF's advice and can be persuaded to make their contribution to reducing global imbalances.
-By Paul Hannon, Dow Jones Newswires; +44 20 7842 9491; paul.hannon@dowjones.com
(END) Dow Jones Newswires
06-19-06 0248ET
Copyright Zawya Dow Jones Newswires 2006
