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High oil prices driven by rising demand and medium term supply constraints are boosting the fortunes of GCC countries that is likely to drive economic diversification, deep structural reforms and reduced oil dependency.

All recent forecasts suggest the GCC economies are going to gain significant growth momentum during the current year, largely driven by high oil revenues and higher export volumes. Undoubtedly, relatively low levels of inflation, aided by dollar pegged currencies, which appreciated vis-à-vis most trading partners gives further boost to real GDP growth.

According to the latest Regional Economic Outlook of the International Monetary Fund (IMF), the windfall from higher oil prices is expected to improve fiscal and external balances and GDP growth of GCC.

Forecasts suggest, the region’s economic resurgence will be led by UAE, Saudi Arabia, Kuwait and Qatar. A recent Reuters poll predicted growth overall in the six GCC economies would average 5.9 per cent this year, which would be the fastest since 2012. Forecasts by the IMF, the Institute of International Finance (IIF) and various independent think tanks are close to these projections.

Era of surpluses

While the fiscal breakeven oil prices [minimum oil price required to balance budgets] to continue to decline as oil export revenues rise, a further increase in non-oil revenues is bound to reinforce GCC’s growth story.

The region’s oil revenues in 2022 are projected to increase by an average of 5.3 percentage points of GDP compared to 2021. With average oil prices forecast around $100 a barrel in 2022, most GCC countries will post current and fiscal surpluses in 2022.

Clearly, as higher hydrocarbon production, increasing domestic non-oil activity, and the implementation of additional structural reforms will add further impetus to regional economic growth and foreign direct investment will become the main conduit for nonresident capital inflows.

The long-drawn oil demand slump and low prices and the looming threat of energy substitution have driven home the urgency of need to diversify government income streams triggering deep fiscal and structural reforms in many GCC economies in recent times.

Given the cyclical nature of oil demand and prices, the current elevated levels of oil revenues should work as a catalyst for further diversification rather than slipping back to the boom bust cycles of the past.