GCC countries need to step up crucial reforms to cope with low oil prices and slower regional economic growth, both of which are predicted for the foreseeable future, according to the IMF.
The oil-producing GCC members have experienced a sharp slowdown in economic growth in the past two years, from the oil price slump and from subsequent government budget-cutting needed to fill the fiscal hole left by lower oil revenue.
As the IMF said last month, the GCC oil producers are now seeing the economic brakes pumped again this year because of lower oil export volume as a result of the output-cutting deal they struck in December to mitigate the world oil glut.
Real GDP growth for GCC oil exporters is forecast at 0.9 per cent this year, down from 2 per cent last year and 3.8 per cent the year before, said the IMF. The good news is that the group’s non-oil GDP growth this year will improve – to 3 per cent from 1.9 per cent last year – helped by an expected pick-up in the world economy and an easing of regional governments’ cost-cutting.
But there are growing medium-term risks, said Jihad Azour, the IMF’s director for the Middle East, North Africa and Pakistan (Menap). “Yes, the outlook is improving but also the risks are growing,” said Mr Azour, who is in Dubai to discuss the IMF’s economic report on the region.
“We are not underestimating the level of risk for the Menap oil exporters and that is why we believe they need to keep reducing their budget deficits, expanding new revenue sources and also pursuing the structural reforms that will allow them to diversify outside the oil sector,” he said.
It is a familiar menu of recommendations from the IMF but the urgency is growing because of building economic pressure and the political difficulty of delivering on some of the reforms, especially labour market and subsidy changes.
The GCC’s relative economic laggardness – world growth is forecast to pick up to 3.5 per cent this year and 3.6 per cent next year from 3.1 per cent last year – comes at a time when there is a growing need for jobs in the region, while the ability of the public sector to provide the bulk of employment for the indigenous population is being constrained by lower oil revenue.
“Since public-sector employment growth will be much more limited, new private-sector jobs will be needed for the 6.5 million labour force entrants expected by 2022 in Algeria, Iran and the GCC,” the IMF said.
The IMF said energy subsidies made by the region’s oil exporters dropped to about US$86 billion last year from $190bn in 2014. Those cost savings came largely from lower oil prices but also from varying levels of reforms, led by a move to market-based energy pricing in Oman, UAE and Qatar, with Saudi Arabia, Iraq and others making ad hoc cuts in subsidies.
The region has the world’s lowest energy prices and accounts for one fifth of the world’s energy subsidies. It still spends about 4 per cent of its GDP on energy subsidies and will have to make politically difficult decisions to cut those, as well as to broaden the tax base – starting with value added tax, which is coming to the GCC next year – and push ahead with labour market reforms that wean indigenous populations from public-sector employment to the private sector, the IMF said, adding that it will only get harder to take those initiatives the longer governments wait.
amcauley@thenational.ae
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