Dubai: The International Monetary Fund has projected tougher economic outlook for GCC countries as the oil price decline and potential spending cuts to result in further economic slowdown in its latest regional economic outlook.

GCC growth is expected to slow to 3.25 per cent this year and further to 2.75 per cent next year from 3.25 per cent in 2014. GCC’s non-oil growth is projected at just below 4 per cent for both 2015 and 2016, a reduction of 1.75 per cent per cent compared with 2014, as fiscal adjustment, or the anticipation thereof, begins to have effects, notably in Saudi Arabia and the UAE.

“The oil price decline has increased the urgency for regional oil exporters to adjust their fiscal policies. GCC members’ average fiscal deficits are expected to reach 13 per cent of GDP this year, with the region’s largest economy, Saudi Arabia, facing a deficit of 21.6 per cent in 2015 and 19.4 per cent in 2016,” said Masoud Ahmad, the IMF’s regional director for Middle East and Central Asia.

Saudi Arabia is likely to fall short of financial assets needed to support spending within five years if the government maintains current spending levels, the IMF said. While Bahrain and Oman also faces the prospect of fast depletion of reserves and mounting fiscal deficits, the IMF said Kuwait, Qatar and the UAE have relatively more financial assets that could support them for more than 20 years.

Overall GCC countries are expected to see their current account balance dwindle from a surplus of 15 per cent of GDP in 2014 to a deficit of 0.5 per cent in 2015.

Conflicts

Apart from lower oil prices, the region’s economic growth is adversely impacted by regional conflicts such as the ongoing wars in countries such as Syria, Iraq, Libya and direct involvement of GCC states in some of these conflicts such as the one in Yemen will have an impact on their economies in terms of defence spending.

“Although some of GCC countries have large savings from accumulated oil export surpluses of the past which could be put to use to iron out revenue shortfalls in the short term. But for medium to long term fiscal sustainability they will be required to make adjustments on both revenue and spending plans,” said Ahmad.

The UAE has come in for praise from Ahmad for its early efforts in making fiscal reforms to cope with the oil revenue decline. The IMF has projected a moderation in the UAE’s real GDP growth from 4.6 per cent in 2014 to 3 per cent in 2015 and 3.1 per cent in 2016.

“The UAE is able to absorb deficits faster than many of its Gulf neighbours, thanks to the well diversified economy with hydrocarbon exports accounting for only a third of the GDP,” he said.

While the country as the advantage of an early starter in fiscal adjustment programmes in the region such as the cut in energy subsidies and deregulation of fuel prices, on the expenditure front, the country has greater flexibility than its regional peers.

“The recent move by the UAE to lift subsidies on fuel as a “good example” for other GCC countries,” said Ahmad.