Question.2681 - In your third individual assignment you are asked to search and comment on data about central Banks’ reserves in the Middle East Area. Go to the data repository of the Federal Reserve Bank of St. Louis (https://fred.stlouisfed.org/ ) In the search window type ‘bank reserves’. In the opening search results scroll down to find data on Gross International Reserves from the Central Banks of: Lebanon, Egypt, Qatar, KSA, Kuwait, Oman, Bahrain and UAE. Download the graphs in a word document and comment on their relative development over time: are reserves increasing or decreasing? Why? (your textbook refers to the cases where a Central Bank wants to increase or decrease its reserves)
Answer Below:
The swift and upright policy responses to the pandemic helped the country to mitigate the health and economic crisis. Amidst the pandemic, volatile oil market and tighter global financial conditions along with worse geopolitical tensions have posed risks and threats in the country. However, the gradual exit strategy and steady approach towards more targeted and segregated support has helped the country over the years towards financial stability. Enhanced insolvency regime and strong bank resolution framework have strongly facilitated resource reallocation along with strengthening resilience in the core sectors. The constant shift from rising and declining reserves can be contributed to the country’s constant adjustment to internal growth in contrast to external scenarios. Constant political gridlock has hindered progress in fiscal growth leading to a need of growth wherein the structural reforms are seriously considered. Reforms bills including new debt law is the dire need of the country for smooth operations in present and future. Owing to the pandemic, sharp declines in oil prices and cuts to oil production under the OPEC+ agreement has significantly weighed down the oil sector up till 2020. With lower discount rates for lending coupled with ample liquidity and relaxation of other prudent measures, the monetary aspect of the country has been supporting a rebound in credit growth. However delays in structural reforms have been amplifying the risk of procyclical fiscal policies thereby undermining the investor confidence thereby affecting the economic diversification and competitiveness. The country is in tracks to recovery. The pandemic mitigation steps and revival of hydrocarbon sector coupled with relaxation of social restrictions prove strong commitment of the country towards Oman vision 2040. The Oman vision 2040 focuses on reinforcing fiscal sustainability, strengthening governance of state owned enterprises, boosting non-oil private sector growth along with creating more job opportunities in the country. Oil prices have reached a multi-year high in this time frame and is expected to remain high over medium and long term strengthening fiscal and external buffers. The steady growth in this period has led to the launch of Vision 2040 with the aim of curbing government spending. Attracting foreign investment and diversifying the economy for a better tomorrow. Saudi Arabia has been the fastest growing economy in the G20 reflecting strong oil production and a strong economic growth fuelled by robust private consumption and non-oil private investment. The main segments of non-oil growth drivers were wholesale, retail trade, construction and transport. The country has been focused towards high growth along with low unemployment and low inflation. The banks have been striving well in these couple of years with the aim of strong capital adequacy ratio, higher net interest margins and favorable oil market dynamics. These in turn have led to strengthening the fiscal position to 2.5 percent of GDP surplus, the first since 2013. The commitment to Vision 2030 definitely helped in boosting growth in these times. The country is getting steady in its operations and have been propelling towards green economy with a strong focus towards non- oil investments leading to economy diversification amidst uncertain external oil environment. The economic growth of UAE has been strengthening even from a rapid and effective COVID response showing supportive fiscal measures ad reaping the benefits of social and business friendly reforms. Following the OPEC+ agreement the GDP is expected to grow in the further years with external and fiscal surplus to remain high backing on elevated oil prices. Supported by strong domestic activity the country still faces uncertainties pertaining to global weaker growth and tighter global financial conditions. The growth since 2007-2008 financial crisis have been promising leading to increase in reserves every year. The country and its economy has been experiencing readjustments owing to drastic exchange rate readjustments and a need for external financing need because of amortization of external debt and international creditors such as Gulf States and IMF. The costly reforms have forced the Egyptian economy to a downward spiral and constant changes in the last ten years. The over dependence on imports and restriction on foreign currency transaction have adversely affected the balance of payment crisis in the recent years leading to a prospect of an exit of Egyptian financial assets from certain international indices followed by sudden resumption of political tension in the country. After the civil war 1975-1990, the country was balanced by tourism receipts, foreign aid, earnings from financial industry and largesse of Gulf Arab state. The major reliable source of dollar were remittances from Lebanese working abroad. However, the country is in a deep economic crisis after government piled up debt due to spending binge leading to global financial crisis in 2008. Today, the banks are paralyzed and savers can now access only a portion of their own funds. With crashing currency and the economy driving into poverty every day, the gross reserves have been declining every year owing to heavy dollarized economy with recurring public deficits and monetary financing of public debt coupled with contained inflation and a de facto fixed exchange rate lasting for more than 20 years (Bitar, 2021). Bahrain’s economy has been significantly been dependent on oil revenues and has been vulnerable to external shocks including price fluctuations. With large fiscal deficits the public debt and debt financing costs have been increasing steadily. Due to s strong and interdependence on Saudi Arabia,, the country remains highly susceptible to threats outside of the internal environment thereby affecting the overall economy and investors. With continuous fall in gross foreign reserves the country is seen to be able to finance only 1.3 months of obligation in respect of imports of goods in 2020. This was the lowest in the last twenty years of the country. References Arslanalp, S., Eichengreen, B., & Simpson-Bell, C. (2023). Gold as international reserves: A barbarous relic no more? Journal of International Economics, 145, 103822. https://doi.org/10.1016/j.jinteco.2023.103822 Bahrain Foreign Exchange Reserves. Bahrain Foreign Exchange Reserves, 1965 – 2023 | CEIC Data. (n.d.). https://www.ceicdata.com/en/indicator/bahrain/foreign-exchange- reserves Bitar, J. (2021). The unique dollarization case of Lebanon. Economic Systems, 45(2), 100765. https://doi.org/10.1016/j.ecosys.2020.100765 Devaux, P. (2023, October 9). Egypt: Dark prospects. economic. https://economic- research.bnpparibas.com/html/en-US/Egypt-Dark-prospects-10/16/2023,48999 Federal Reserve Economic Data: Your trusted data source since 1991. FRED. (n.d.). https://fred.stlouisfed.org/searchresults/?st=gross+international+reserves Kuwait: 2021 Article IV Consultation-Press Release; staff report; and statement by the executive director for Kuwait. (2022a). IMF Staff Country Reports, 2022(089), 1. https://doi.org/10.5089/9798400205736.002 Oman: 2021 Article IV Consultation-Press Release; staff report; and statement by the executive director for Oman. (2022b). IMF Staff Country Reports, 2022(343), 1. https://doi.org/10.5089/9781513596020.002 Qatar: 2022 Article IV Consultation-Press Release; and staff report. (2022c). IMF Staff Country Reports, 2022(175), 1. https://doi.org/10.5089/9798400213342.002 Saudi Arabia: 2022 Article IV Consultation-Press Release; staff report; and informational annex. (2023a). IMF Staff Country Reports, 23(323), 1. https://doi.org/10.5089/9781475539523.002 United Arab Emirates: 2021 Article IV Consultation-Press Release; and staff report. (2023b). IMF Staff Country Reports, 23(223), 1. https://doi.org/10.5089/9798400202834.002More Articles From Finance
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