Dubai: Improving oil prices, a revival in non-oil sector growth and broad fiscal reforms have improved the 2018 growth prospects of Gulf Cooperation Council (GCC) countries.
In its latest Regional Economic Outlook, the International Monetary Fund (IMF) expects GCC countries to experience lower economic growth in 2017 but sees an economic upturn the following year.
Real GDP growth in the UAE is forecast to slow to 1.5 per cent in 2017, down from 2.7 per cent last year, but is expected to recover sharply to 4.4 per cent in 2018.
Saudi Arabia is projected to see real GDP growth of 0.4 per cent this year, compared to 1.4 per cent last year, before rebounding to 1.3 per cent in 2018.
While Qatar’s GDP growth is projected to exceed 3.4 per cent in 2017, the fund expects it to moderate to 2.8 per cent in 2018.
In Kuwait, real GDP growth is seen slipping into negative territory — to minus 0.2 per cent this year, down from last year’s 2.5 per cent, but is forecast at 3.5 per cent in 2018.
As for the growth forecast for the region comprising the Middle East, North Africa, Afghanistan and Pakistan (Menap), the IMF has cut the real GDP forecast to 2.6 per cent, down from the 3.1 per cent projected in January.
For the region’s oil exporters, the sharp fall in oil prices between late 2014 and the second quarter of 2016 was reflected in a surge in fiscal deficits. The average fiscal deficit was about 10 per cent of GDP in both 2015 and 2016.
The IMF said the fiscal situation had improved substantially across the GCC following sustained reforms in the form of spending cuts and subsidy reforms, aided by reviving oil prices — following production cuts by the Organisation of Petroleum Exporting Countries (Opec) — and a growing non-oil sector.
According to IMF estimates, the non-oil primary balance, excluding the effect of oil price movements, improved substantially in 2016, with non-oil primary deficits falling by 5 percentage points of non-oil GDP within the GCC.
“The projected increase in oil prices and continued consolidation will reduce 2017 overall fiscal deficits [for Middle East oil-exporting countries] significantly to 4 per cent of GDP on average,” said Jihad Azour, director of the IMF’s Middle East and Central Asia Department. “Planned adjustments in the GCC and Algeria, for example, imply that non-oil primary deficits will improve by 3 per cent and 50 percentage points of non-oil GDP respectively.”
The IMF expects a combination of further fiscal adjustment measures in the region to improve the fiscal outlook. These include further increases in energy prices, new expatriate labour fees, excise and value-added taxes (VAT) as well as greater control of current spending and reductions in capital spending.
IMF staff projections suggest that the fiscal deficits of Middle East oil exporters could fall below 1 per cent of GDP by 2022, a big improvement over 2016, thanks to fiscal reform efforts. The GCC is planning to introduce VAT in 2018.
“We believe VAT is an important component of the fiscal adjustment and revenue diversification plans of GCC countries and these measure are necessary for long-term fiscal sustainability,” Azour said.
Although all GCC countries have initiated fiscal adjustment programmes, Azour said the pace of reforms should be calibrated to country-specific circumstances.
According to the IMF, countries with large fiscal buffers, such as Kuwait, Qatar and the UAE, can adjust more gradually to minimise adverse effects on non-oil activity. However, the fund believes countries with smaller buffers will need to move faster.
The fund believes that in choosing a specific consolidation path, countries should prioritise growth-friendly measures such as further energy price reforms, additional cuts to current spending, and the adoption of measures to increase revenues, which include improved tax administration.
