GCC faces slower growth, budget deficit over oil slump: IMF official

An official with the International Monetary Fund (IMF) said on Wednesday that while the Gulf Arab states can manage to sustain economic growth for 2015 and beyond, low oil prices will turn their budget surpluses mostly into deficits until at least 2020.

Masood Ahmed, director of the Middle East, North Africa and Central Asia Department at the IMF, said the six Gulf Arab oil exporting states, which form the Gulf Cooperation Council (GCC), will post a combined non-oil economic growth of 3.8 percent in 2015, down from 5.5 percent.

The overall GCC growth (oil industry plus non-oil industry) will decline from 3.4 percent last year to 3.3 percent in 2015 and will fall further to 2.8 percent in 2016 due to lower oil prices and because the GCC states, notably the UAE and Saudi Arabia began to implement fiscal consolidation, he said.

Non-oil growth prospects are more important than overall growth because non-oil growth drives the job market, said Ahmed. However, because the price of oil declined from above 110 U.S. dollars per barrel (Brent) in July last year to below 50 dollars at the moment, the GCC will have a budget deficit of 13 percent of the GCC gross domestic product (GDP) this year.

Moreover, the GCC is expected to pile up "a combined budget deficit of 700 billion dollars over the next five years, down from a fiscal surplus of 600 billion dollars in the last five years when oil prices were high, said Ahmed.

Thus, the governments of the GCC nations must choose between a number of options to keep the deficits at bay. While Saudi Arabia and the UAE would face budget deficits of 20 percent and 5.5 percent, respectively, this year, Kuwait and Qatar could still avoid running into deficits in 2015 "as they benefit from lower fiscal break-even prices regarding oil revenues," he added.

"Measures the GCC countries can take include reducing fiscal spending, divesting from foreign assets, withdrawing capital out of local banks, cutting subsidies as energy prices in the Gulf states are still very low or they can raise new taxes," he said.

The GCC states do not raise income taxes or value-added taxes (VAT). Earlier in August, the UAE government said it started studying to impose VAT, but the plan would not be implemented in less than 18 months due to differences with the other GCC neighbors.

The IMF regional director said the decision by the UAE ministry of energy from this August to cut government spending on fuel subsidies as step into the right direction.

"Hard political decisions and reforms are expected to be taken by the UAE government and its GCC neighbors in order to manage the expected inflated deficits in the coming years," he said.

Although the IMF does not publish forecasts of the price of oil, Ahmed said ample global supply of oil will likely to continue to face weak demand for oil globally.

"Markets expect oil prices to increase modestly over the medium term, but without recovering to 2014 peaks," said Ahmed. The 2015 oil price is expected to be 52 dollars per barrel, up gradually to about 63 dollars by 2020, according to the latest IMF outlook report for the Middle East and Central Asia.

More supply of crude oil in the region will result from Iran whose overall economy is expected to grow 4.4 percent in 2016, up from 0.8 percent this year "as the Islamic Republic will reap benefits from partially lifted sanctions following the successful deal with the P5+1 group," he noted. Endit