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19 March 2024

Gulf urged to control spending, shelve projects

The paper warns that crude export earnings can be volatile. (REUTERS)

Published
By Nadim Kawach

A prominent Saudi newspaper on Sunday criticised Gulf oil producers for sharply boosting public spending and warned their economies could suffer given their heavy reliance on volatile crude export earnings.

The Arabic language daily Aleqtisadiah, one of the largest business newspapers in the Middle East, said Saudi Arabia and its partners in the six-nation Gulf Cooperation Council (GCC) need to heed IMF calls and control spiralling expenditure on the grounds they can not guarantee oil prices will remain strong.
 
The paper singled out Saudi Arabia and the UAE, which it said have kept public expenditure at high levels “in times of both global prosperity and recession”.
 
While part of the excess spending is needed for development, another part is “close to consumption expenditure,” it said in a rare critical editorial.
 
“During crises, governments normally control expenditure until the picture becomes clear and fears and risks are dissipated…it is true that the GCC countries have been less affected by the global fiscal crisis , but it is also true that oil constitutes the pillar of their economies,” it said.
 
“We know that Gulf nations are not reeling under heavy fiscal deficits and debt as is the case of developed countries…but that does not mean the policy of high spending should continue all the time as this carries great risks in the absence of any guarantees oil will remain the main source of energy and prices will stabilise at the fair and logical level set by Opec at $75 a barrel.”
 
The paper said the current oil price levels support GCC budgets but warned that they are not viable and could fall short of increases in budgeted spending.
 
“We are not calling for paralysing public expenditure but for adapting actual spending to the actual income until the picture becomes clearer….when the IMF urges GCC states to rationalise expenditure, it is taking into consideration a bad experience in Western countries, where spending could go out of control and lead to a crisis that could bring down firm and veteran economies,” it said.
 
The paper referred to a recent report by the Washington-based IMF, which revised its forecast about the GCC growth from four to 4.3 per cent.
 
“But we should realize that non-oil revenues in the GCC are still below the expectations of the people and governments…the absence of any guarantees that oil prices will stabilize at $75 underscores the importance of the policy of controlling spending without infringing on development strategies,” it said.
 
“Of course no one can stop spending altogether…but given previous experiences, GCC nations can shelve several or some projects which rely on heavy expenditure until the circumstances become right.”
 
The newspaper’s comment follows similar calls by a well-known Saudi-based US economist, who warned excessive spending could plunge the region again into massive and painful fiscal deficits in case oil prices plunge.
 
Brad Bourland, Chief economist at the Riyadh-based Jadwa Investments, said higher government spending was needed in the 29-year-old Gulf alliance as part of an overall stimulus package to counter the global crisis.
 
But he cautioned that oil prices are not expected to match the steady rise in expenditure in the region and this could result in a painful fiscal situation in the region, which controls nearly 45 per cent of the world’s proven crude deposits.
 
Addressing a recent economic conference in Abu Dhabi, Bourland noted that governments in the GCC need to keep spending at reasonable levels since public expenditure is vital for the creation of jobs and economic growth as the public sector still accounts for the bulk of the group’s economy.
 
“There are concerns about the steady increase in government spending in the GCC…oil prices are not expected to rise from their $70 level on a steady basis by $five to six a barrel, which is much needed for the governments in this part of the world to balance their budgets,” Bourland said.
 
“As you know, governments in the GCC increase spending to ensure employment for their citizens and support growth…so I think this high spending will continue and continue because government expenditure is the main driver of growth in the countries of this region…I believe they should now be watchful because this excessive spending can not be supported by a similar increase in oil prices in the next four years…they should also be careful about any unexpected developments when the next crisis hits.”
 
Most GCC nations have announced record high budget spending since the eruption of the global crisis to mitigate its impact and keep their economy on track. Spending has already been on the increase since oil prices began their steady climb in 2000 to peak at an average $95 in 2008.
 
In the UAE, actual spending shot up to around $52 billion in 2008 from $24.8 billion in 2003 and is believed to have exceeded Dh200 billion for the first time in 2009. The UAE has not yet published 2010 data for its consolidated financial account but analysts expect higher spending on the grounds the country has traditionally boosted expenditure by nearly 10 per cent every year.
 
Saudi Arabia also approved a record high budget for 2010 as part of anti-crisis measures although it suffered from a deficit of SR45 billion in 2009.
 
Spending was put at SR540 billion and revenue at SR470 billion, creating a shortfall of SR70 billion. But analysts believe the Kingdom will again overshoot budgeted spending, tempted by the improvement in crude prices.
 
Spending in most GCC states was sharply higher in 2009 despite the decline of around 35 per cent in crude prices and a cut of nearly 1.5 million barrels per day in the region’s oil supplies in line with a collective Opec agreement.
 
Despite the surge in expenditure, the six members have amassed nearly $605 billion in fiscal surpluses during 2003-2008 as a result of strong crude prices, which also allowed them to sharply bolster their foreign assets. The situation was in sharp contrast with the previous years during 1990s, when members suffered from large fiscal and current account deficits because of low crude prices.
 
The rapid rise in oil prices allied with higher output to boost the GCC’s combined oil export earnings from around $188 billion in 2003 to a record $459 billion in 2008. They are estimated to have plunged to nearly $258 billion in 2009.
 
In a recent study, the government-controlled Emirates Industrial Bank said the  combined GCC spending increased by around 14.4 per cent to $269.3 billion (Dh987 billion) in 2010 from a budgeted $235.4 billion (Dh862 billion) in 2009 while forecast revenues swelled by about 4.4 per cent to nearly $266.3 billion (Dh977 billion) from $255 billion (Dh936 billion).