The announcement of the key areas in Kuwait’s budget for 2015-16 seems to confirm the conclusions we reached in last week’s column about the economic conditions in the GCC states and their linkage to oil prices.

We highlighted that these conditions will not be affected significantly in the short run, and that the economies are able to absorb the shock of an oil price slide. Also, that spending cuts will principally affect non-essential items.

Earlier in the week, Kuwait revealed key points of its 2015-16 budget that involves cutting spending by 17 per cent to $60.8 billion, compared to $74 billion last year. Spending cuts will only be limited to running expenses, such as official missions, conferences and cash rewards — all of which are unnecessary expenses. Public sector salaries, investment expenses and funds allocated for development projects will not be touched by the cuts.

However, Kuwait’s approach to rationalise and cut spending has a positive side since it is meant to rein in excessive spending. For example, the reserve deduction for future generations will fall to 10 per cent, instead of 25 per cent that was set in past years when oil prices were high.

In an important step towards economic reform, Kuwait will also reconsider subsidies that account for 19 per cent of the state’s total expenses of $14 billion. It has announced a hike in fuel prices — a right move that aims to stop the wasteful use of energy resulting from subsidised and cheap pricing strategies.

The indicative oil price in the budget is set between $50-60 a barrel, which means generating oil revenues worth $48 billion with a deficit of $9 billion. It must be noted that Kuwait achieved surpluses of $96 billion over the past five years.

This simply means that the deficit constitutes only 9.4 per cent of generated surpluses, and thereby Kuwait can deal with low oil prices for years to come, given that prices will fluctuate in the next three years due to economic, security and geopolitical conditions in the region, the main oil producer for the world.

What applies to Kuwait applies to the Gulf’s other oil exporters; Saudi Arabia, the UAE and Qatar will have to be flexible in dealing with the significant price decline and yet be able to carry on with the earlier approved development projects and announce new ones.

Even more, GCC countries must make use of these developments to reduce unnecessary spending and reconsider subsidies that add a heavy burden on their budgets. Consequently, they must conduct structural financial reforms needed to reduce dependence on oil revenues and diversify sources of income.

On the other hand, oil exporters are expected to benefit from the rising dollar, in which oil is priced. A decline in oil is supposed to lead to a fall in commodity prices, which have risen in recent years and brought in inflation to rates never seen in these countries before. This will benefit consumers and help raise savings.

What is happening on the stock markets reflects intense speculation caused by panic selling and a lack of sufficiently tested regulations to govern them. Such regulations can ensure a fast-track maturing of the markets, and reflect the reality of stable economic conditions in the GCC. These economies have turned into a global trade and financial services hub that attracts many investors and companies not operating in oil alone as was the case in the past, but in areas such as finance, media, technology, transport and communications.

Kuwait’s new budget data as well as those announced by the UAE and upcoming ones from the other GCC states will reflect the durability of these economies despite the collapse in oil prices. This is well understood by the business sector and global investment institutions to which the Gulf markets will remain an attraction.

Dr Mohammad Al Asoomi is a UAE economic expert and specialist in economic and social development in the UAE and the GCC countries.