Oil Price Decline Curbs GCC Economic Growth

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Although economies in the Middle East and North Africa region continue to expand, growth is too slow and oil exporters will see a deficit of $22 billion in 2015, said the International Monetary Fund on Tuesday. The decline in oil prices curbs GCC economic growth in particular, with GDP forecast at only 3.4 percent in 2015.

Oil prices halved between July 2015 and April 2015, but oil-exporting countries from the Gulf Cooperation Council (GCC) managed to keep growth steady by using the reserves they accumulated in the past decades, according to the IMF’s latest economic outlook for the Middle East, North Africa, Afghanistan, and Pakistan (MENAP). Published Tuesday, the “MENAP: Oil, Conflicts and Transitions”, the report points out that despite the slump in oil prices growth in oil-exporters will remain at 2.4 percent in 2015, the same level as last year, while in 2016, it is projected to improve to 3.5 percent.

For GCC economies the IMF expects growth to slow down from 3.6 percent in 2014 to 3.4 percent in 2015, while in 2016 countries in the bloc will see it fall further to 3.2 percent. Large oil revenue losses will be met by financial buffers and financing to ease the impact on growth. However, governments will need to cut their fiscal spending – oil-rich countries have spent billions on social structure in recent years. In addition, they will need to diversify their economies, advises the IMF, so that they can be less depending on oil. While oil growth is forecasted at 0.9 percent in 2015 (and 1.0 percent in 2016), non-oil growth, which heavily relies on the oil industry, will slow down from 5.7 percent in 2014 to 5.2 percent in 2015. In 2016, it is expected to decline to 4.6 percent.

While GDP growth in the UAE was 3.6 percent in 2014, it will also fall to 3.2 percent for 2015 and 2016. In Saudi Arabia, the IMF predicts a figure of 3 percent. Inflation in the GCC on the other hand, will decline slightly (0.5%) to 2.1 percent due to the currencies, pegged to the U.S. dollar. However, the strengthening dollar could also hurt the region’s competitiveness, also says the IMF. Another risk to economic growth in the GCC is posed by the regional conflicts in Iraq, Syria, Libya and Yemen, which undermine economic activity and business confidence.

Because of the plunging oil prices, hovering around $67 per barrel this week, export earnings in the MENA region are forecasted to fall by around $380 billion from the numbers projected before the oil price decline. The current account surplus of oil-exporters in the region will turn into a deficit of $22 billion in 2015. In addition, the combined budget surplus of GCC economies, which stood at $76 billion in 2014, will transform into a massive deficit of around 113 billion in 2015 or 8 percent of GDP.

States in the GCC will need to introduce diversification policies and cut extensive spending, which made budgets vulnerable to lower oil prices. However, as government spending in most of these countries is tied to non-oil growth, policy-makers will need to gradually slow down spending on hospitals, transport infrastructure, schools and housing projects, also says the IMF.

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