Gulf braces for aus­ter­ity as oil in­come slump bites

GCC states face record deficit of $180bn in 2015

Kuwait Times - - FRONT PAGE -

KUWAIT: Faced with heavy losses from low oil prices, Gulf states have em­barked on belt-tight­en­ing mea­sures to cut spend­ing and boost non-crude rev­enues, but an­a­lysts warn much more needs to be done. Af­ter more than a decade of abun­dant sur­pluses thanks to high oil prices, the six Gulf Co­op­er­a­tion Coun­cil (GCC) states are pro­jected to post a com­bined record bud­getary short­fall of $180 bil­lion in 2015 and the drought is ex­pected to con­tinue for years. Some coun­tries have al­ready cut sub­si­dies, while oth­ers are con­sid­er­ing mea­sures to re­duce their spend­ing.

In­ter­na­tional Mone­tary Fund chief Chris­tine La­garde told GCC fi­nance min­is­ters in Qatar this month that “global en­ergy prices could re­main low for years” and urged them to ad­just their bud­gets. La­garde warned that the GCC, which has re­lied on en­ergy in­come for 90 per­cent of their rev­enues, should re­duce de­pen­dence on oil and gas. In 2014, GCC states - Bahrain, Kuwait, Oman, Qatar, Saudi Ara­bia and the United Arab Emi­rates - posted a small sur­plus of $24 bil­lion, down from $182 bil­lion the previous year, ac­cord­ing to IMF fig­ures.

Each of Bahrain, Oman and Saudi Ara­bia ended 2014 in the red for the first time since the global fi­nan­cial cri­sis in 2009. World oil prices have dropped by more than 50 per­cent since June 2014 and the IMF has pro­jected that it will re­sult in a $275 bil­lion drop in GCC rev­enues this year. But hav­ing amassed a wealth of around $2.7 tril­lion over the past decade, the IMF ad­vised GCC states to take a grad­ual ap­proach to im­ple­ment­ing re­forms and di­ver­si­fy­ing the econ­omy.

Although the mea­sures may not be easy to en­force in coun­tries that have long of­fered gen­er­ous wel­fare sys­tems, an­a­lysts be­lieve this time fis­cal con­sol­i­da­tion, di­ver­si­fi­ca­tion and re­forms must be deeper, long-term and sus­tain­able. “The mag­ni­tude of the prob­lem is much larger this time be­cause sub­si­dies and salaries have im­mensely in­creased in the past few years to­gether they form 90 per­cent of cur­rent ex­pen­di­ture,” said the head of eco­nomic re­search at Kuwait Fi­nan­cial Cen­ter (Markaz), M R Raghu. “They can­not roll back on salaries be­cause this is too sen­si­tive,” Raghu told AFP.

Spend­ing in Gulf states, mostly on salaries and sub­si­dies, al­most dou­bled to $550 bil­lion be­tween 2008 and 2013, ac­cord­ing to IMF sta­tis­tics. The six na­tions have a pop­u­la­tion of 50 mil­lion, half of them for­eign­ers, and pump around 18 mil­lion bar­rels per day. The steep rise in ex­pen­di­tures greatly in­creased the breakeven price for oil, to $106 a bar­rel in the case of Saudi Ara­bia from un­der $70 a few years ago. It is higher for Bahrain and Oman.

IMF and the World Bank es­ti­mate that the di­rect cost of en­ergy sub­si­dies in the GCC was $60 bil­lion last year. Steps taken by the GCC states to cut spend­ing and raise non-oil in­come have been mod­est so far. The UAE took the lead by lib­er­al­iz­ing fuel prices in June and raised elec­tric­ity charges in Abu Dhabi. Both mea­sures are ex­pected to save bil­lions of dol­lars. Hav­ing the most di­ver­si­fied econ­omy in the Gulf, the UAE said it has ear­marked more than $80 bil­lion for projects away from oil.

Kuwait be­gan sell­ing diesel and kerosene at mar­ket prices at the start of 2015. It has cut spend­ing by 17 per­cent and is in the process of rais­ing petrol prices and charges on elec­tric­ity and wa­ter. How­ever, it has still awarded projects worth a record $30 bil­lion so far this year, ac­cord­ing to of­fi­cials and ex­perts. Saudi Ara­bia, for its part, said it was con­sid­er­ing de­lay­ing “un­nec­es­sary” projects and study­ing en­ergy sub­si­dies re­forms.

Gas-rich Qatar said it is also con­sid­er­ing some spend­ing cuts and re­duc­ing sub­si­dies. Oman and Bahrain, the poor­est mem­bers of the GCC in terms of en­ergy wealth, have an­nounced sim­i­lar plans. “This is not enough. They have a long way to go,” said Shanta De­vara­jan, World Bank chief econ­o­mist for the Mid­dle East and North Africa. “This is just the be­gin­ning ... the mea­sures must fo­cus on re­forms, un­em­ploy­ment and di­ver­si­fi­ca­tion. Much more steps are needed,” De­vara­jan told AFP.

The IMF said re­forms should in­clude com­pre­hen­sive en­ergy ef­fi­ciency and price al­ter­ations, ex­pand­ing nonoil rev­enues, re­view­ing cap­i­tal and cur­rent ex­pen­di­tures and re­duc­ing the govern­ment wage bill. The IMF said Saudi Ara­bia, Oman and Bahrain will spend all their fis­cal re­serves in un­der five years if they fail to take ad­di­tional aus­ter­ity mea­sures. “GCC states must be se­ri­ous this time ... The $100 a bar­rel days are gone and they have to live with a $40-$50 price,” Raghu said.

DUBAI: A worker fills up a car at a petrol sta­tion on Tues­day. — AFP

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