Dubai: The sharp decline in oil prices exacerbated by demand lose from COVID-19 outbreak will result in $270 billion lost revenues for GCC countries, according to the International Monetary Fund (IMF).
The IMF’s latest Regional Economic Outlook (REO) said the oil exporters in the Middle East region are expected to face an overall economic contraction of 7.3 per cent. The contraction is 2 per cent larger than the IMF's initial projections in April.
The large downward revisions for this group for both 2020 and 2021 (3.1 and 0.8 percentage points, respectively, compared to the April 2020 REO) reflect the “double whammy” from oil price fluctuations (and supply cuts) and the pandemic-linked lockdowns, the IMF report said.
“The larger-than expected production cuts implied by the OPEC+ agreements together with lower oil prices will have a negative impact on exports. These factors have led to a stronger-than-anticipated impact on activity in the first half of 2020, while the recovery is projected to be more gradual than previously forecast, in line with a weaker global recovery, said Jihad Jihad Azour, the IMF’s Director of the Middle East and Central Asia Department.
Downward revisions in oil GDP reflects a sharper-than-anticipated drop in crude production.
“Non-oil GDP in these economies has also been marked down as stay-at-home rules and other COVID-19 containment measures are causing larger-than-expected disruptions to the tourism, hospitality, transportation, and retail sectors,” said Azour.
The IMF had projected in April that Saudi Arabia's economy would contract by about 2.3 per cent this year this year. It has since revised that figure downward, saying the kingdom stands to see economic growth shrink by 6.8 per cent before climbing to around 3 per cent growth next year.
In addition to lower crude prices and cuts to production, Saudi Arabia stands to lose billions of dollars in revenue because the Islamic pilgrimage to Mecca is suspended due to the pandemic. For the first time in Saudi history, the hajj pilgrimage this month, which drew 2.5 million people last year, will not include pilgrims from outside the kingdom. To raise state revenue, Saudi Arabia tripled taxes on basic goods and services this month, increasing value-added tax to 15 per cent.
UAE’s quick response
The UAE, the second largest economy was impacted by the double whammy of the shock in oil prices and the COVID-19.
“The biggest positive element about the UAE economy is that the authorities reacted very quickly in checking the spread of the corona virus. This has helped the UAE to gradually open up the economy. This shock will have an impact on the oil sector as well as on the non-oil sectors such as travel, tourism and aviation,” said Azour.
The IMF official noted that despite the impact of COVID on financial markets, the UAE was quick to gain its access to international markets to raise funds while supporting the economy through various support measures including massive liquidity support through the banking system.
The IMF noted that while the oil importers benefit from lower oil prices are mostly being offset by hampered trade, tourism, and remittances and tighter global financial conditions and spillovers on domestic credit conditions, which, along with confinement measures, continue to depress growth.
Oil importing countries in the region such as Egypt, Jordan and Sudan, are expected to see an overall economic contraction of 1.1 per cent , nearly unchanged from the IMF's April projections. The overall level of inflation in these countries, however, is expected to reach 10 per cent.
There are massive challenges across the region, including in Lebanon, where inflation has zoomed to 56 per cent over the past year and where the currency has lost nearly two-thirds of its value. The most current IMF forecast predicts a 12 per cent economic contraction this year in Lebanon.
The IMF has held more than a dozen meetings with Lebanese authorities over a $10 billion loan request. The IMF says it is still working to assess the country's financial losses as different arms of the government offer diverging figures.