The Middle East has dodged  fallout from the global credit crunch but still has problems  stemming from overheating domestic economies and undervalued  exchange rates, the IMF said.

"The global financial turmoil has had relatively little effect on the region thus far, beyond pressing stock markets to  surrender earlier gains," the International Monetary Fund said  in its latest World Economic Outlook report. 

It expects economic growth in the region to slip only  slightly, to 5.9 percent next year from 6.4 percent in 2008,  with economic activity being supported by burgeoning non-oil  sectors like construction, transportation and financial  services. 

"Activity continues to grow at a robust pace in much of the  Middle East, while inflation pressures either remain high or  keep rising," it said. "Signs of overheating are multiplying." 

This is a real problem. Inflation is in double digits in a  number of countries, including those that have a tradition of  price stability like Saudi Arabia, and is above 20 percent in  Egypt and Iran. 

"Countries that are not pegging exchange rates to foreign  currencies (for example, Egypt and Iran) can further tighten  monetary policy while enhancing its effectiveness through  greater exchange rate flexibility," it said. 

In countries with pegged exchange rates, monetary policy is  imported from abroad, mainly from the United States. 

"In many oil exporters, currencies are undervalued, although  by varying degrees, and higher inflation is contributing to an  appreciation of real effective exchange rates." 

In these countries, inflation pressures would fade once  price levels had adjusted upward enough, so long as expectations  for future inflation are kept in check. 

The IMF said a similar outcome could be achieved through  currency revaluation, but argued that this would be complicated. 
Another solution would be to switch from current dollar pegs to  attaching to a broader basket of trade-weighted currencies, the  IMF said. - Reuters