IMF urges Mideast states to adjust policies to high oil prices

London (Platts)--4May2006

High oil prices and a "benign global environment" have underpinned Middle
Eastern and Central Asian economic growth, which averaged 6.5% last year
despite ongoing geopolitical tensions, the International Montetary Fund said
Thursday in its just-published Regional Economic Outlook. With growth
expected to continue at about the same pace in 2006, the IMF said, governments
in the region now needed to adjust policies "to better suit a world of high
oil prices."

"Prices have remained high mainly because of concerns about the risk of a
future supply disruption," the IMF said, adding that "futures markets do not
signal any easing of oil prices in the foreseeable future." It projects an
average oil price of $61/barrel in 2006, compared with $53/barrel last year.

Policymakers in the region have so far acted as though the oil price rise
is largely temporary, with most exporters continuing to set cautious budgets,
"apparently assuming that oil prices will decline," the IMF said, noting that
these countries were saving on average two thirds of the higher oil revenues
earned since 2002. It noted that 2006 budgets were "generally very
conservative, based on implied oil price projections of $35/barrel on
average," while oil prices fluctuated between $55 and $65/barrel in the first
quarter of this year but climbed above $70/barrel in April.

"Largely as a result of higher prices, oil export receipts have risen
from $185 billion in 2002 to $460 billion in 2005," the IMF said, noting that
Kuwait, Libya and Qatar had saved the highest proportion of their increased
revenue, while Azerbaijan, Kazakhstan and Oman had saved the least. "In Iran,
Kazakhstan, Kuwait and Saudi Arabia, the governments used a significant part
of the revenue to reduce debt."

Now, the IMF said, oil exporting countries "should take the opportunity
provided by high oil prices, which are likely here to stay, to put the region
on a higher growth path." Repaying debt might be the correct strategy for some
countries, but "most should use their oil revenue to increase spending on
projects with high returns." Among other things, increasing investment in
infrastructure and human capital would raise growth rates and reduce
unemployment and poverty. At the same time, both oil producing and consuming
countries should reduce oil price subsidies and provide adequate compensation
mechanisms for the poor.

In particular, the IMF noted strong growth in the oil sectors of Algeria,
Azerbaijan, Kuwait and the UAE. Hydrocarbon GDP continued to contract in
Bahrain, Oman and Syria, the IMF said, although all three countries recorded
significant growth in the non-hydrocarbon sector.

In monetary terms, oil exports jumped by more than 25% in all producers
apart from Syria, the IMF said, citing increases in both prices and output.

Among oil exporters, the six Gulf Cooperation Council countries --
Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE -- accounted for most
of the large foreign investment inflows over the past two years. These inflows
were linked to privatizations in transportation and telecommunications,
"massive investments in petrochemicals, gas and LNG," and infrastructure.

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