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International Monetary Fund

Executive Summary 1 GCC policymakers moved quickly to mitigate the health and economic impacts of twin COVID-19 and oil price shocks. Infection rates have declined across the GCC to well below previous peaks, though countries have experienced successive waves of the virus, and economic recoveries have begun to take hold. Nevertheless, GCC policymakers must navigate a challenging and uncertain landscape. The pandemic continues to cloud the global outlook as countries are in different phases of recovery, with varied growth prospects and policy space

International Monetary Fund

Policymakers in the GCC countries have correctly identified labor market issues as one of the key policy challenges—not only in those countries where unemployment is more of an immediate economic and social concern, but also in countries where there is presently no apparent unemployment but where strains are emerging. Also important has been the recognition by GCC policymakers that labor market issues are closely linked to other structural policies related to economic efficiency and the division of responsibility between the public and private sectors. As such

International Monetary Fund
GCC policymakers moved quickly to mitigate the health and economic impacts of twin COVID-19 and oil price shocks. Infection rates have declined across the GCC to well below previous peaks, though countries have experienced successive waves of the virus, and economic recoveries have begun to take hold. Nevertheless, GCC policymakers must navigate a challenging and uncertain landscape. The pandemic continues to cloud the global outlook as countries are in different phases of recovery, with varied growth prospects and policy space
International Monetary Fund
GCC policymakers moved quickly to mitigate the health and economic impacts of twin COVID-19 and oil price shocks. Infection rates have declined across the GCC to well below previous peaks, though countries have experienced successive waves of the virus, and economic recoveries have begun to take hold. Nevertheless, GCC policymakers must navigate a challenging and uncertain landscape. The pandemic continues to cloud the global outlook as countries are in different phases of recovery, with varied growth prospects and policy space
International Monetary Fund

participation; deepen and develop capital and equity markets; enhance prudential regulations and supervision; and upgrade the standards of transparency and the provision of financial information. These reforms will need to go hand in hand with structural reforms, including privatization and deregulation, as well as sustained efforts to maintain financial stability through prudent fiscal and monetary policies. The GCC policymakers are fully aware of these challenges and of the required structural changes, some of which are at various degrees of preparation or implementation

Ms. May Y Khamis and Mr. Abdelhak S Senhadji

been about 2.8 percent in 2009, and the rebound in overall growth in 2010 is expected to be stronger than in advanced economies. Still, there is much work ahead for GCC policymakers. The immediate priority is the cleanup of bank balance sheets (that is, continued upfront recognition of losses and immediate bank recapitalization) and the restructuring of the nonbanking sector in some countries. Stress testing and periodic reviews of banks’ asset quality will help determine whether the level of capital support is sufficient. Where possible, recapitalization should be

International Monetary Fund. Middle East and Central Asia Dept.

channels away from banks need to be pursued. In particular, GCC policymakers increasingly see value in developing alternatives to bank financing, such as local debt markets for large corporates, thus allowing banks to concentrate more on financing small and medium-size enterprises that create private sector jobs and more diversified economies. At the same time, this would attenuate the adverse impact of banking distress on the provision of credit and help enhance corporate governance as debt issuance will demand more rigorous financial disclosure and transparency

Mr. Esteban Jadresic

the maintenance of the peg. The tradeoff here will be pretty much one of flexibility versus credibility; i.e., between the increased degrees of freedom for dealing with potential macroeconomic imbalances that an “exit-option” from the peg would have, and the noises that may arise from the speculation that the peg may change, and their concomitant consequences on capital flows, interest rates, and the real economy. In deciding where to compromise in the range between an adjustable peg and a fully fledged currency board, one of the key factors that the GCC

International Monetary Fund

fiscal consolidation and structural economic reforms. Policy instruments available to the GCC policymakers cover a broad spectrum, ranging from market solutions at one extreme to mandatory and administrative policies at the other extreme. The key challenge is to develop an effective strategy to increase the efficiency of the labor market and reduce its segmentation by relying more on market forces and less on mandatory employment policies, which could prove counterproductive in the long run and would raise labor costs. This paper is organized as follows. Section

Ms. May Y Khamis and Mr. Abdelhak S Senhadji
Departmental papers are usually focused on a specific economic topic, country, or region. They are prepared in a timely way to support the outreach needs of the IMF’s area and functional departments.