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Oil's rebound of the past two years helped some of the GCC economies to fast-track the scaling up of the non-oil GDP. Image Credit: Reuters

Oil prices have been through a series of fluctuations due to a myriad factors, and brought on renewed queries regarding the repercussions on economies heavily reliant on oil, including the Gulf nations.

This is pertinent given that the global economy is still grappling with the aftermath of the pandemic and the ongoing Russian-Ukrainian crisis, both casting ominous shadows. Here, we will focus on the impact of oil price fluctuations on GCC economies, which have been making numerous public announcements that offer insight into their economic situation and evaluation of near-term prospects.

Buoyant finances

The GCC has substantially benefited from the surge in oil prices over the past two years, managing not only to significantly reduce their annual budget deficits but also accumulate substantial surpluses, far outperforming expectations. This financial buoyancy has paved the way for escalated spending, economic invigoration, and the execution of several pivotal projects with long-term implications.

Among these, renewable energy initiatives stand out, along with the development of hi-tech industries, advances in transportation, and bolstering financial and trade activities. These have been instrumental in attracting renewed domestic and foreign investments.

These developments are expected to yield favourable outcomes by fostering structural changes on the GDP, augmenting the contribution of non-oil sectors, and curbing reliance on oil revenues. Over the past three years, there has been a notable shift, with some GCC countries joining the group of nations where non-oil sectors make up the largest proportion of GDP.

Diversification is showing up in GDP

This is noteworthy due to the economic significance of these countries. Consequently, the non-oil sector now constitutes the bulk of the overall GDP of GCC countries. This transformation stands as one of the crucial outcomes from the surge in oil revenues, which some GCC nations have utilized to promote diversification.

While accelerated growth frequently gives rise to accelerated inflation, the data pertaining to the GCC reveal a contrasting scenario. Inflation rates in these countries have remained within tolerable thresholds and hovered between 3-3.5 per cent. This subdued inflationary pressure can be attributed to the relatively low energy prices compared to that in developed countries, and which helped keep the lid on price escalation. An exception to this has been the prices of imported goods, which experienced an uptick and consequently led to the hike in imported inflation rates.

Oil prices have experienced a 20 per cent decline since the beginning of this year, which will inevitably have repercussions, primarily due to the corresponding decrease in the revenues fro the states. It is important to note that as long as prices remain at their current levels, the Gulf these economies are not anticipated to face any significant negative effects. The growth momentum, projected to range between 4-5 per cent, is expected to continue through this year and next.

Get a handle on budgetary spending

Countries with higher oil returns may experience a reduction in their budgetary surpluses, while those with lower revenues will need to exercise prudent management to control potential deficits. These scenarios are contingent upon oil prices remaining stable at their present rates, a likelihood that is anticipated due to the strong coordination and solidarity exhibited by OPEC+ countries, which are actively working together to sustain oil price stability by ensuring a balance between global supply and demand.

It is expected GCC countries will once again achieve one of the highest growth rates globally this year. This trajectory will not only facilitate increased capital inflows but enable the implementation of forward-looking development projects that contribute to further diversification.

There is a strong likelihood of declining inflation rates, attributed to the improved efficiency of supply chains and reduced transportation costs from lower oil prices. These factors will further enhance economic conditions in the GCC, promoting continued growth through the year.