Region’s non-oil growth set to rise but medium-term growth prospects “subdued”
GCC’s real GDP growth to slow in 2017 on lower oil output, says IMF
The GCC will see its real GDP growth slow to 0.5 per cent in 2017 due to lower oil output, even as its non-oil growth rises on improved global conditions and slower fiscal reforms, according to new projections from the IMF.
“Growth prospects in the medium-term remain subdued amid relatively low oil prices and geopolitical risks,” the IMF’s latest GCC economic outlook report said.
The energy-exporting Arabian Gulf region’s growth has slowed this year from 2.2 per cent last year due to the low oil prices and some countries’ compliance with a global oil output cut that is trimming 1.8 million barrels of oil per day from the oversupplied market.
The agreement, which came into force in January, has been extended till the end of 2018, further dampening prospects for oil growth. Qatar, Saudi Arabia, Kuwait and the UAE are adhering to the oil curbs.
GCC countries are continuing to adjust to lower oil prices and substantial fiscal consolidation has taken place in most countries.
Non-oil GDP growth in some countries has slowed as governments implement fiscal consolidation reforms to bring down ballooning fiscal deficits caused by lower income from oil. The cumulative budget shortfalls in the region during 2018–22 are projected at about $160 billion, the fund said.
Growth in the non-oil sector is expected to increase by the end of this year as the pace of fiscal consolidation slows. Non-oil growth will rise to 2.6 per cent for 2017, up from 1.8 per cent last year, according to the report. Over the medium-term, non-oil growth is projected to hover around 3.4 per cent, half of the 6.7 per cent average growth rate achieved during 2000–15.
“While non-oil growth is recovering in some countries, medium-term prospects remain relatively subdued, highlighting the importance of accelerated efforts towards economic diversification and private sector development,” the fund said.
The projected growth is benefiting from a pick-up in global economic activity. Global growth is forecast at 3.6 percent this year and 3.7 percent in 2018, compared to 3.2 percent in 2016.
GCC countries should continue to focus on expenditure rationalisation, further energy price reforms, increased non-oil revenues, and improved efficiency of capital spending, the report said.
Governments in the region are introducing some reforms to shore up government revenue and cut expenditures, with varying degrees of implementation across countries.
The UAE and Saudi Arabia introduced this year an excise tax on energy drinks and tobacco at a rate of 100 per cent and on fizzy drinks at a rate of 50 per cent and both plan to levy a 5 per cent valued-added tax on January 1.
The fund estimates that revenue from these reforms, which will vary across countries, could generate 1.7 to 6.6 per cent of non-oil GDP by 2020 depending on each country’s reforms.
The introduction of VAT in the region could generate new revenue of 1.5-3 per cent of non-oil GDP, the fund said.
Policies should also aim to gear up banks to adjust to tighter liquidity situations so they can still support the private sector’s access to funding.
Most Gulf countries are raising interest rates, mimicking hikes in the US because of their currencies’ peg to the dollar. Only Kuwait links its dinar to a basket of currencies. With the US Fed predicting three interest rates hikes next year, the Gulf economies are set to face some problems as their economies are not aligned with the US.