How to spend a $210B windfall from oil prices
The significant rise in oil prices over the past year has big implications for the Middle East and North Africa (Mena), where hydrocarbons still play a pivotal role in the economy. Despite this change, it’s imperative that countries in the region stay resolved to cut their dependence on oil and make their economies more diverse and resilient.
Just a year ago, crude was trading below $50 a barrel, amid stories of oversupply and tumbling prices. Today, it is pushing closer to $80 — a level not seen since 2014. It’s the strongest rally since 2011, the last time prices jumped by 60 per cent in less than a year. So what impact does this have on Mena countries, and how should they respond?
For most oil-exporting nations, higher crude prices mean windfall export and fiscal revenues. We estimate that Mena oil exporters will earn about $210 billion more in 2018-19 than they would have if oil prices had stayed at 2017 levels. Higher prices will probably boost confidence, helping spur growth and investment in non-oil industries — although heightened geopolitical risk could dampen that optimism.
The favourable environment carries its own danger too: Pressure could mount on policymakers to slow the reforms that aim to diversify their economies away from oil. Exporters may be tempted too to significantly relax their deficit-reduction programmes, which they embarked on after the sharp oil price drop in 2014 cut their revenues.
Doing so would be ill-advised. Crude exporters shouldn’t miss this chance to prepare for the next price slump. Indeed, oil futures suggest that prices will fall below $60 per barrel by 2023. Some exporters have already taken steps to strengthen their fiscal positions by curbing their spending and trying to boost non-oil revenue. For instance, Saudi Arabia and the UAE recently introduced a value-added tax.
There may be scope to ease the pace of deficit reduction in some countries in order to accelerate infrastructure projects and boost education and social spending. However, medium-term targets for non-oil fiscal balance should be kept largely intact to reduce hydrocarbon dependency and ensure adequate savings for future generations.
As you’d expect, the region’s oil importers are having a harder time of it. They face a dual shock of rising crude prices and the risk of sharply lower capital inflows because of pressure on emerging markets globally. Higher energy import bills will weigh on external balances and increase borrowing needs just as it might be getting harder to raise financing to roll over maturing debt.
Under such circumstances, the best choice for Mena oil importers is to keep shoring up state finances by reining in poorly targeted spending, improving public investment and finding ways to lift tax revenue in a fair way. They should take steps too to strengthen their resilience to external shocks, as Morocco is doing with the move towards a more flexible exchange rate regime and Egypt with structural reforms to boost competitiveness.