Debts Down; Reserves Up.

According to the IMF, savings have been used to pay down internal debt and to build up foreign reserves. But unlike the oil booms of the 1970s and 1980s, when the extra oil revenues were largely recycled to the west through western banks, there are indications that Arab governments, and investors, have been diversifying foreign holdings across regions, investment vehicles and currencies.

Following the trail of petrodollars is difficult, and made more complicated by greater secrecy by GCC investors after 9/11. The line between government and ruling family money is blurred as is the line between government and private sector entities.

While foreign exchange reserves are managed conservatively, economists and bankers say government investment arms are increasingly looking for higher yielding assets. The biggest of the investment arms in the GCC is the Abu Dhabi Investment Authority (ADIA), with assets estimated by some bankers at $250 bn and by others at up to $500 bn.

Economists and bankers say most government funds are still largely investing in dollar-denominated assets abroad, but in a greater variety of products. The FT quoted Khan of the IMF as saying: "We see a lot more investment with hedge funds in [US] dollars or deposits in banks in Beirut or Egypt, where returns are higher. They haven't gone out of dollars but [are] not holding so much T-bills and deposits in US banks".

There are signs that financial institutions are diversifying equity and bond holdings across regions and looking for investment opportunities in emerging markets, particularly in Asia. Sa'eed Mubarak al-Hajeri, an ADIA board member, says the authority's exposure to emerging markets equity accounted for 14% of its equity portfolio. ADIA is looking at investing in Chinese firms due to be privatised and Indian infrastructure assets. GCC financial institutions are also re-deploying capital in other Middle Eastern economies, with ADIA, for example, keen to buy into privatisations in Saudi Arabia, Kuwait and Tunisia.

Some of the region's biggest companies - the partly Dubai government-owned Emaar, for example - are branching out of the domestic market and investing in real estate projects across the region. The FT quoted Florence Eid, senior economist for the GCC region at JP Morgan Securities, as saying: "Much of the region's money is circulating within the region and this is unprecedented". The injection of GCC capital, she says, has helped lift GDP growth rates in the poorer economies of Morocco, Lebanon and Egypt over the past two years.

Though governments appear to be acting more responsibly than in previous oil booms, Ms Eid says the biggest challenge is to use the oil wealth to build more sustainable and diversified economies. She adds: "If the projects end up building ghost cities, they'll have a problem. The infrastructure has to be accompanied with good ideas that add value to the economy. This is most pressing for the Saudis [with a larger population] but it's true for all the Gulf" (GCC).