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Dubai – Gulf economies need to adjust to the ‘new reality’ of oil prices expected to remain low for some time, the International Monetary Fund (IMF) said, recommending spending cuts and income diversification.
But the oil-rich Gulf states remain in a strong position to make the necessary adjustments thanks to the large financial reserves they have built up during years of firmer prices, said the IMF Regional Outlook published on Wednesday.
IMF Middle East and Central Asia chief Masood Ahmed, who was in Dubai for the Outlook’s release, said: “Not only this year, but for the years to come, these countries will need to make an adjustment to better balance their spending to the new reality of the oil prices.”
The budgets of Gulf Cooperation Council (GCC) members Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE are facing an average deficit this year of 13 per cent of gross domestic product (GDP), Ahmed said.
Their combined budget deficit over the next five years will exceed US$1tn, he said, as oil prices have plunged to about US$50 a barrel from about US$115 in June 2014, pressured by oversupply and weak demand.
“Most people today believe that oil prices may come up a little bit from where they are today…By 2020, we are expecting to see oil prices in the lowand mid 60s rather than the numbers they were used to,” said Ahmed.
“That means that most of these countries will need to undertake a process of sizeable and sustained adjustment on the fiscal side.”
Those adjustments should include finding ways to cut public spending and diversify income away from oil, said Ahmed, pointing mainly at the need to cut subsidies and reduce the public sector wage bill.
“Most nationals of the GCC countries work in the public sector, and that’s a model that has to change over the next few years,” he said.
Ahmed applauded a recent move by the UAE to lift subsidies on fuel as a ‘good example’ for other GCC countries.
Capital spending on projects should also be moderated with the focus on efficiency. “Capital spending has increased a lot in many of these countries. Some of these projects are already being slowed down; others are being postponed. But in all cases you can look at the efficiency,” he said.
As for income diversification, Ahmed said GCC countries, known for their low-taxation systems, could look at taxing consumption to raise revenues outside the oil sector.
“There are difficult choices ahead. But it is important to set out for each country what they want to do in each of these areas and to lay out a medium-term plan,” he said.
“GCC countries have very wisely built up financial savings during the time when oil prices were high. That puts them in a very strong position today to face the shock of the magnitude of lower oil prices that we are seeing today,” said Ahmed.
These countries should use these some of those financial buffers ‘to make the process of adjusting to new oil price more gradual, [and] take more time to do it’.
