Winner of the Best Essay Competition at 10th Annual Multaqa Qatar
Since the onset of the 2008 economic downturn and credit crunch, the world economic stage has been set for an abnormally long period of protracted sub-par growth. The U.S. bore the full brunt of the credit crunch and proceeded with a programme of buying asset securities on a massive scale known as quantitative easing (QE). The effect of QE has been to drag interest rates down to low levels of 0.25% for a very long time.
The macroeconomic ramifications of this growth slowdown have been unprecedented:
- Europe and the BRIC countries (Brazil, Russia, India and China) have followed the U.S. into a low economic growth path.
- As the U.S. benefits from cheap money, hopes of a Federal Reserve Bank rate increase have sent the dollar up relative to other major currencies.
- Poor economic growth coupled with an exogenous increase in oil supply and strong dollar pummeled oil prices down to as low as $27 per barrel.
- The combination of the above led to deflationary pressures worldwide.
The MENA region (Middle East and North Africa) had already begun to experience the consequences:
- Low prices affect the oil exports, which represent a significant share of government revenues for many countries in the MENA area, especially Saudi Arabia (KSA), United Arab Emirates (UAE), Bahrain, Qatar and Kuwait.
- Many Cooperation Council for the Arab States of the Gulf (GCC) countries maintain a dollar peg; this means their currencies are directly linked to the U.S. dollar. Any U.S. interest rate review is therefore reflected domestically.
- Reduced government revenues disrupt the money transmission system by lowering deposits in banks and, as a result, increasing the costs of money market rates here.
- Similarly, lower government revenue would delay many ongoing investment projects – leading to unanticipated layoffs.