GCC must pursue fiscal consolidation: IMF
While Saudi and UAE can afford gradual approach to consolidation, Oman and Bahrain need to do more
In the context of persistent low oil prices resulting in lower growth across the oil exporting countries, the GCC countries need to continue fiscal consolidation at a gradual phase, the International Monetary Fund (IMF) said in its latest Regional Economic Outlook.
Lower oil prices have contributed to large fiscal deficits across Middle East North Arica and Pakistan (MENAP) region’s oil exporters. Deficits jumped from 1.1 per cent of GDP in 2014 to 10.6 per cent of GDP in 2016, but are expected to ease to 5.2 per cent of GDP this year on the back of a modest recovery in oil prices and significant deficit-reduction efforts. Fiveyear cumulative budget deficits are projected to be $320 billion (Dh1.18 trillion) over 2018—22.
“Progress in deficit management across the region among oil exporter is uneven and, three years after the initial oil price drop, fiscal positions and prospects have diverged. Thus, the approach to fiscal adjustments in the region will have to be country specific,” said Jihad Azour, director of the IMF’s Middle East and Central Asia Department.
About half of MENAP [Middle East, North Africa Afghanistan and Pakistan] oil exporters such as Iran, Kuwait, Qatar and UAE had fiscal deficits of less than 5 per cent of GDP in 2016, while the other half had deficits well above 10 per cent of GDP. The countries with low deficits typically have substantial buffers and are planning a gradual fiscal adjustment to the lower oil price environment.
Ambitious plans
In the GCC, Saudi Arabia announced ambitious consolidation plans.
The IMF said Saudi Arabia could adjust more gradually in the short term so as to limit the adverse impact on growth.
However the IMF said countries such as Bahrain and Oman should do more to rein in deficits.
Fiscal consolidation plans in the GCC include measures ranging from further reductions in non-wage recurrent spending, reductions in public wage bills as a share of GDP, additional cuts in capital expenditures, and higher non-oil revenues, particularly the introduction of value-added taxes and excise taxes.
Fiscal consolidation is supported by continued improvements in fiscal frameworks and institutions. In this regard, substantial progress has been made in establishing medium-term budgetary frameworks in Kuwait, Qatar, and Saudi Arabia, as well as in the UAE at both the federal and emirate levels. Macro-fiscal units are now operational in Kuwait, Oman, Qatar, Saudi Arabia, and the UAE.
More broadly, strengthening public financial management, including improving transparency and accountability, would support the fiscal consolidation efforts and could generate additional fiscal space.