Speech

The Managing Director’s Remarks at GCC Ministerial Meeting

October 3, 2024

Assalamu alaikum! Ministers, Governors, and GCC Secretary General. I am pleased to be back for the Annual GCC ministerial meeting. And thank you Minister Al-Kuwari for hosting us in Doha, ahead of our Annual Meetings in Washington!

Since we last saw each other during the Spring Meetings, we have seen some rebalancing of global growth. Emerging Asia, for example, is the main engine of global growth, supported by surging demand for semiconductors and electronics. At the same time, the near-term growth outlook is constrained by conflicts and disruptions to commodity production and shipping in the Middle East and Central Asia, sub-Saharan Africa, and Latin America.

As for the world economy, recent developments continue to suggest a smooth landing is in sight, but we will be able to elaborate further in the World Economic Outlook later this month. But let me highlight two of my main concerns.

First, there is considerable uncertainty surrounding the global outlook, especially as the ratcheting up of protectionism risks raising trade and production costs. There is also considerable uncertainty around monetary and fiscal policy choices that will largely shape the world economy in the coming period.

• As for monetary policy, “the direction of travel is clear,” as Jay Powell put it in Jackson Hole in August. Two weeks ago, the journey started as the Federal Reserve went ahead with a 50-basis-point interest rate cut. But the pace and magnitude of this shift, and the extent to which it is synchronized across countries will have important spillovers to the rest of the world. As a warning, we witnessed some market turbulence following a rate hike by the Bank of Japan.
• To complete the “rotation” of the policy mix, fiscal policy is also expected to change course. As looser monetary conditions create breathing room, there will be more space for overdue fiscal consolidation in some countries.

My second concern is that global growth remains mediocre in the medium term. For many countries, expected growth in five years remains weaker than in one year, suggesting that the world economy faces persistent headwinds.

As for the GCC, the region remains a bright spot despite the numerous shocks over the past few years. Unemployment is low, inflation has been contained, exports from major ports have recovered quickly, and international flight arrivals have held up. And the outlook is positive. We now expect overall growth in the GCC to rebound in 2024, and to strengthen to close to 4 percent in 2025 as oil production cuts are gradually unwound.

Over the medium term, non-hydrocarbon activity is set to remain strong on the back of ambitious reform efforts. Despite all this good news, there are risks to the outlook. Most notably, fluctuations in oil prices and production could reduce financial buffers and have negative spillovers to the non-oil economy.

Key messages for GCC policymakers

Regardless of what happens to oil prices, the strong reform momentum should be maintained, and even accelerated in some cases – while managing risks. The goal should be to achieve digital, green, and inclusive growth.

I would like to focus here my remarks on three key reform priority areas:

First, on fiscal policy, most GCC countries are undertaking consolidation, but more needs to be done to build sufficient savings for future generations.

• Tax reforms have started to bear fruit in some countries, but further progress is needed. For example, the global minimum tax initiative provides the GCC with an opportunity to implement wider corporate tax reforms.
• The ongoing rationalization of public expenditures—including by reducing energy subsidies—also remains crucial. This would not only help fiscal consolidation efforts but create space for targeted support to the vulnerable. It could also pave the way for priority public investments that fit into the broader economic diversification agenda.
• Finally, the sustainability of fiscal policy would benefit from strong fiscal institutions and frameworks, such as the adoption of fiscal rules and the use of medium-term fiscal frameworks.

Second, impressive strides in structural reforms have improved the business climate remarkably in recent years. Four GCC countries are now among the top 30 most competitive economies in the world. But the progress on diversification needs to be accelerated. And the risks coming with some reforms need to be properly managed.

• For example, digitalization and AI could play a key role in the economic diversification strategy. The prospects are certainly good in the GCC, as digital access is on par with advanced economies. And the region is placing large bets on AI technologies. But it is crucial to be mindful of the risks that come with AI, and to properly manage them.
• Labor-market outcomes have also improved substantially in recent years. But the ability of the labor force to adapt to the new growth model continues to be constrained by the mismatch of skills, and the segmentation of the labor market. Therefore, policies should continue to focus on containing public-sector employment, lifting nationals’ skills, and enhancing women’s role in the workplace.

Third, integration into regional and global trade and financial systems will play an important role in economic diversification.

• Ibn Khaldun wrote about the benefits of foreign trade more than 600 years ago: “Merchandise becomes more valuable when merchants transport it from one country to another. (Merchants who do so) quickly get rich and wealthy”. Maybe it’s not that simple, but it is certainly a welcome development that intra-GCC goods exports increased from between $3 billion and $5 billion in the 1980s to 90s to more than $70 billion in 2021.
• That said, they amount to less than 10 percent of total exports, so the potential for further regional integration is enormous. A reduction in non-tariff barriers could play an important role to reach this potential. Moreover, this would enhance the resilience of the GCC to the risk of geoeconomic fragmentation.
• Increasing financial integration remains crucial. Foreign investments would not only unlock financing for costly reforms, but also bring know-how and technology. As global competition for FDI is intense, it is not an easy task to attract foreign investors. But further improvements in the business climate and human capital reforms would increase the chance of success.

How can the IMF work with you?

As you progress toward the Vision targets, we will support your reform efforts with policy advice and capacity development. Our new Regional Office in Riyadh, together with our Center for Economics and Finance in Kuwait, will work closely with you to scale up our engagement.

We very much welcome the efforts to strengthen regional integration and collaboration with other regions. And we look forward to facilitating such collaboration, as illustrated in the forthcoming meeting between GCC and CCA countries during the Annual Meetings.

Our partnership will also benefit from our joint work in the context of the IMFC, which is chaired by Minister Al-Jadaan over the next three years.

It is perfect timing, as this year marks the 80th anniversary of the Bretton Woods conference. We have launched the Bretton Woods at 80 Initiative to see how the IMF and the World Bank can best continue to serve their membership in a changing world. I look forward to hearing from you all on how the IMF should evolve and best support the region.

Finally, we very much appreciate your generous contributions to the IMF trusts and co-financing of IMF-supported programs to help countries most affected by global and regional developments. This is a testament to your commitment to international cooperation and partnering with the Fund to incentivize economic reforms and provide financing, where needed, in developing countries. We look forward to further strengthening this partnership.

Thank you very much. Shukran Jazilan.