Dubai: In the context of persistent low oil prices resulting in lower economic 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. Five-year 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.
In the GCC, Saudi Arabia had announced ambitious consolidation plans. The IMF said Saudi could adjust more gradually in the short term so as to limit the adverse impact on growth. However the IMF said other countries such as Bahrain and Oman should do more to rein in deficits.
Fiscal consolidation plans in the GCC region include measures ranging from further reductions in non-wage recurrent spending, reductions in public wage bills as a share of GDP, additional cuts to 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. Saudi Arabia has started publishing quarterly fiscal reports, significantly increasing fiscal transparency.
More debt issuance expected to cover deficits
Debt issuance remains the main source of deficit financing for the region’s oil-exporting countries.
Many GCC countries continue to issue debt to meet their budget financing needs. Countries with market access have tapped significant amounts from international markets in the first half of 2017, GCC countries issued some $30 billion (Dh110 billion), as conditions in international financial markets remain favourable.
While issuing internationally avoids crowding out credit to the private sector, especially given limited capacity of domestic financial markets. However, issuing domestically can help support gradual financial market development (for example, Saudi Arabia). Greater reliance on domestic financing would also reduce the consequences of a deterioration in international market conditions. In some instances, countries have tapped international markets to rebuild buffers.
In general, the IMF said, borrowing and investment decisions should be made as part of a comprehensive asset-liability management strategy that takes into account macro-financial developments and risks. To help support that approach, debt management offices have been established in Kuwait, Oman, and Saudi Arabia and strengthened in Abu Dhabi and Dubai.
The IMF said risks can be reduced by issuing longer maturity debt, for example, Oman issued a 30-year bond in March 2017, although there are trade-offs with respect to cost. Outside of the GCC region, domestic debt issuance (including some monetisation of the deficit) has been the preferred financing strategy because external financing options are more limited for countries such as Iran, Iraq, Libya, Yemen.
