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Arab central bankers cautioned their governments on Thursday against basking in the confidence of escaping the global financial crisis mostly unscathed.

The Arab Middle East, which includes service oriented Lebanon and the oil producing Gulf, will not be out of the woods unless governments strengthen their finances and banks improve their management, they said.

The heads of the central banks of Iraq, Lebanon, Jordan, Syria and Bahrain were taking part in a debate about the volatility triggered by Greece’s financial crisis at the Arab Economic Forum, an annual event in Beirut.

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“We saw how budget deficits caused problems for us in Iraq when oil prices fell and the government, faced with a shortfall, had to borrow more,” said the country’s top monetary official Sinan al-Shabibi.

“If a government wants to run a deficit it must ensure sustainable financing,” Shabibi said.

Lebanon expects a budget deficit of around 11 percent of gross domestic product in 2010, and Jordan’s deficit doubled to 8.8 percent of GDP last year.

But most Gulf countries will run budget surpluses this year due to higher oil prices.

Lebanon’s central bank governor Riad Salameh said Lebanon is witnessing an economic boom partly because markets were starting to become confident the government could take measures to curb the deficit.

Salameh said Lebanon’s economic growth would remain strong at 7-8 percent this year.

A Reuters poll forecast Saudi Arabia would grow 3.9 percent this year compared with 0.2 percent in 2009.

The 2010 forecast was 3.3 percent growth for Kuwait and 2.5 percent for the United Arab Emirates, whose flagship companies have run into financial problems.

Rasheed al-Maraj, central bank governor of Bahrain, said Arab banks also had weaknesses, especially management boards that he said lacked qualifications.

“These boards are not performing their role and are unaware of the nature of the risks the banks they are ultimately responsible for are taking,” Maraj said.

“Whatever regulation we impose will remain insufficient without internal oversight. We cannot keep saying that the region has not been affected by the global crisis. We are a link in the chain, whether we like it or not,” he added.

Umayya Toukan of Jordan’s central bank said any reforms must not tamper with free market principles but banks should take the initiative and bolster their risk management.

“We have seen what systems other than free economies have done to the world in the last 70 years,” he said.

Khalid Wazani, head of the Syrian subsidiary of Jordan’s Arab Bank ARBK.AM , took exception, saying banks in the region have preserved depositors’ money throughout the global crisis, proving that their management is effective. Reuters

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