The International Monetary Fund revised once again its projection about the economic growth in the GCC countries. The latest estimate for 2016 has been reduced to 1.8 per cent. The oil-dependent region continues to reduce spending to counterfight fiscal deficits reaching 11.6 per cent of gross domestic product. Last October, the IMF forecast growth of 2.75 per cent this year.
Analysts point to tighter fiscal policy, weaker private sector confidence and lower liquidity in the banking system as the reasons for the sharp decline.
In an update to the regional economic outlook released on Monday, the IMF projects even slower economic activity in the GCC countries. Ambitious fiscal consolidation measures are being implemented this year, but budget balances will deteriorate nonetheless given the sharp drop in oil prices.
The IMF, which said growth would recover to 2.3 per cent next year as fiscal deficits moderate to 10.8 per cent, warned that low oil prices and fiscal tightening would continue to weigh on these economies for the medium term.
GCC non-oil growth, for example, is projected at 3.25 per cent over the next five years, well below the 7.75 per cent recorded during 2006-2015.
Further risks to growth include a more profound knock-on from fiscal tightening, more oil price declines or faster-than-expected US rate rises.
Increasing oil producing and non-oil economic activity in post-sanctions Iran and the projected bottoming out of conflicts in Libya and Yemen are expected to see Middle Eastern oil exporters raise growth from 1.9 per cent last year to 2.9 per cent this year and 3.1 per cent next year
Regional oil producers’ export receipts declined by $390bn last year, the equivalent of 17.5 per cent of GDP.
Steep GCC spending cuts introduced in 2015 are expected to be replicated this year as governments struggle to balance their budgets.
Saudi Arabia, for example, last year introduced spending cuts approaching 15 per cent of non-oil GDP, with reductions in expenditure forecast at almost 10 per cent this year. Oman is forecast to make spending cuts of around 10 per cent this year.
The IMF says there is scope for more consolidation. GCC countries — Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates — spend twice as much on public wage bills than other emerging markets, and almost 50 per cent more on public investment.
While most GCC countries have reduced fuel and utilities subsidies, the IMF says further reforms could save 2 per cent of GDP and plans to introduce a 5 per cent sales tax from 2018 could raise a further 1.5 per cent of GDP.
Given the slump in oil prices, the IMF said the need for exporters to reduce oil dependence was even more critical.
“The current growth model based on the redistribution of resources by the government is no longer sustainable, given the fiscal retrenchment and a rapidly growing labour force,” the report said. “In light of budget pressures, the public sector will not be able to absorb all the new labour market entrants.”