GDP growth in the GCC (Gulf Cooperation Council) is expected to decline from 3.3 percent in 2015 to 2.8 percent next year, according projections by the International Monetary Fund (IMF) in its latest regional economic outlook for the Middle East, North Africa and Central Asia region.
The six GCC states are also expected to post a fiscal deficit of 13.2 percent, which will only marginally reduce to 12.6 percent in 2016. Last year, the GCC posted a 2.9 percent fiscal surplus. The states will also see their current account balance dwindle from a surplus of 15 percent in 2014 to a deficit of 0.2 percent in 2015 and 0.25 percent in 2016, as lower oil export revenue – to the tune of $360 billion for all of MENAP oil exporters – takes a toll on external earnings.
“Over the medium term, as oil prices recover somewhat and fiscal adjustment proceeds, the GCC’s current account position is expected to return to a surplus of two percent of GDP,” the IMF said in its report.
The decline in the price of oil and the continuing and persisting uncertainty over recovery projections (IMF expects the 2015 oil price to be $52 a barrel, increasing gradually to roughly $63 by 2020) have “increased the urgency for MENAP oil exporters to adjust their fiscal policies” the fund warns.
It says oil exporters will need to “adjust their spending and revenue policies to secure fiscal sustainability, attain intergenerational equity and gradually rebuild space for policy maneuvering. The speed of adjustment should depend on the availability of buffers and fiscal space, and the composition of fiscal consolidation should be designed so that the negative impact on growth is minimized.”
Lower oil prices and resultant adjustment in fiscal policies have already taken a toll on non-oil growth in the GCC, which is expected to remain at four percent in 2015 and 2016, a 175-basis-point reduction over 2015. Also, according to IMF estimates, apart from Kuwait, Qatar and the United Arab Emirates, if current policies are continued, countries in the region would run out of fiscal buffers in less than five years.
Adjustment plans in most oil exporters are currently insufficient to address the large fiscal challenge, says the fund.
“Large and persistent oil price volatility calls for precautionary buffers to be replenished over the medium term, so that any new shocks can again be dealt with in an orderly way… The composition of fiscal adjustment should be tilted toward curbing current spending, while preserving high-return public capital spending and essential social expenditures,” the report adds.
Access the full IMF report here.