Annual budgets are especially important in Gulf Cooperation Council (GCC) countries because of the huge economic and social role played by the state. Budgets in these countries are also important because spending through the annual budget is still the main driver of GCC countries' economic activities.
Hence, the business and economic world waits for the announcement of GCC countries' annual budgets to understand the direction of economic growth, especially as most infrastructure plans pass through the budget's projects item.
Since 2003, with the huge rise in oil prices which make up 80-90 per cent of these budgets' incomes, GCC countries said goodbye to annual deficits in their budgets which accompanied them throughout the 1990s. Thus, the tables were turned and surpluses have become a constant feature for GCC countries' budgets ever since.
And because annual spending is so important for Gulf economies, GCC countries increased spending with the first sign of an oil price hike and its stability at high rates. The price of oil settled at $100 (Dh367) per barrel on average in 2011, which contributed to the increase of overall revenues. This led to increased spending in GCC combined budgets by 19.3 per cent, reaching $359.1 billion in 2012 opposed to an actual spending of $301.1 billion in 2010.
While spending increased in almost all GCC countries, Saudi Arabia witnessed a huge increase of 25 per cent after a number of decisions and royal decrees which contributed to a 224 billion riyal (Dh219 billion) increase in spending. In other GCC countries, spending varied. It rose 22 per cent in Bahrain, 11 per cent in Kuwait, and 9 per cent in Oman.
Vital projects
In the UAE, where the federal budget accounts for a modest amount compared with Abu Dhabi's budget, spending remained stable. However, local budgets for different emirates witnessed important increases.
Among the positive points in the increase of GCC spending are the continued growth of these economies, their speedy recovery from the repercussions of the world crisis, and the higher standards of living through salary increases throughout the GCC countries last year.
Also noted is the actual surplus doubling in GCC budgets of 2011 reaching $106.7 billion, opposed to a declared surplus of $55 billion at the beginning of the year, despite the rise in GCC countries' collective spending by 19.3 per cent as mentioned earlier.
The main reason is attributed to the extremely conservative oil price estimate by GCC countries in preparing their annual budgets, which vary from $55-$70 per barrel at a time when the average price per barrel exceeded this price by a large amount. The increase in oil production by some GCC countries also contributed to an increase in oil and general revenues.
And although GCC countries' annual budgets point to the possibility of reduced general spending by 5.5 per cent for 2012 in comparison to general spending in 2011, it is expected — as what happened over the past two years — that spending will rise to exceed stated figures.
This is expected especially because GCC countries have announced so far the implementation of vital projects in infrastructure and energy, such as the UAE's Etihad Rail and the Gulf Railway Network at a cost of $25 billion that will be completed by 2017.
These expectations related to an increase in spending are backed by the fact that oil prices remain over the $100 per barrel barrier, and most expectations point to the fact that these prices will remain at their high rates for several reasons.
Moreover, most GCC countries have announced they are stepping up oil production in 2012 which will contribute to an increase in the income of these countries and will encourage additional spending.
Hence, the economic situation in GCC countries will witness additional improvements this year and their economies will achieve growth rates of five to seven per cent at current prices, as indicated by many international organisations such as the International Monetary Fund (IMF.)
Living standards
The increase in spending will improve general services, especially in the field of education, health, housing, and infrastructure which accounts for a large part of total spending. Raising salaries at high rates across GCC countries will also contribute to a rise in living standards and savings, which are of great significance for economic growth.
The weak point in GCC countries' annual budgets is their almost complete dependence on oil revenue and the humble contribution of other non-oil sectors to the annual budget's incomes. This resembles a great imbalance that has to be taken care of by GCC countries through setting up strategies in the future to increase the contribution of other sectors in financing their budgets.
High oil revenue and these budgets' surplus are a golden opportunity to increase investment in productive sectors and set up additional projects that will contribute to diversifying the sources of national income.
It is possible to make use of the UAE's federal budget experience in this context, as its financing sources over the past five years have been more diversified and less dependent on the oil sector alone. This represents a very important precedent that must be studied and made use of, not to enhance economic growth alone, but also to stabilise economic and social conditions in GCC countries in general.
Dr Mohammad Al Asoomi is a UAE economic expert and specialist in economic and social development in the UAE and the GCC countries.
