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28 March 2024

GCC states urged to curb spending in long run

Its estimates showed the consolidated GCC fiscal balance could be in a significant surplus, equivalent to 6.2 per cent of GDP in 2010 and 5.7 per cent in 2011 despite the continued large increase in government spending. (AP)

Published
By Nadim Kawach

Gulf oil producers need to put brakes on their widening public expenditure in the long term to avert running a massive fiscal deficit following surpluses over the past few years, a key western financial centre has said.

The combined budgets of the six-nation Gulf Cooperation Council (GCC) are again expected to record a surplus this year and in 2011 but they run the risk of reverting to shortfalls unless they rationalize spending, the Washington-based Institute for International Finance (IIF) said in a study.

Its estimates showed the consolidated GCC fiscal balance could be in a significant surplus, equivalent to 6.2 per cent of GDP in 2010 and 5.7 per cent in 2011 despite the continued large increase in government spending.

“If prices of Brent oil were to remain at about $79 per barrel in real terms (which is the expected average for 2010) for a protracted period of time, and if the current pace of rapid growth in government spending is reduced from an annual average of 18 per cent in 2004-2009 to 10 per cent in 2010-2020, the GCC as a whole would still run the risk of widening government deficits from 2016 onwards, and as a result accumulate large government debt,” it said.

“We believe that the region would need to slow the pace of growth in spending even more over the medium to long term.”

IIF, which groups several banks in key western industries, expected GCC government spending growth to be reduced from an annual rate of 18 per cent in 2004-2009 to 7.5 per cent in 2011-2020.

It also projected the share of government spending in non-hydrocarbon GDP would decline from around 67 per cent in 2009 to 58 per cent in 2020, close to the average for the second half of the 1990s.

“The projected overall fiscal surplus of about five per cent of GDP in 2010 will gradually narrow and shift to a small deficit of 1.4 per cent of GDP by 2020.”

The report said it believed the breakeven oil price that would balance the consolidated budgets of the GCC countries will continue to rise from about $55 per barrel in 2010 to around $105 per barrel by 2020, slightly higher than the projected oil prices, “as long as the increase in government spending more than offsets the increase in nonoil revenue.”

GCC countries—UAE, Saudi Arabia, Kuwait, Qatar, Bahrain and Oman—usually base their budgets on conservative oil prices to avert large deficits although most of them overshoot planned expenditure through the year.

After recording its highest ever budget surplus of around SR580 billion in 2008, Saudi Arabia suffered from a deficit of nearly SR85 billion in 2009 following a steep fall in crude prices compared with 2008 and a sharp rise in public expenditure as part of counter-crisis fiscal measures.

But the Kingdom, the largest Arab economy and the world’s top oil exporter, is expected to revert to a surplus this year because of high oil prices.

According to projections by the Emirates Industrial Bank (EIB), the GCC’s consolidated fiscal balance could be in a surplus of around $50 billion this year despite a massive increase in spending by some members.

From a record $189 (Dh693 billion) in 2008, the GCC’s combined fiscal surplus dipped to only $19.6 billion in 2009 but the balance is expected to rebound sharply this year, EIB said in a recent study.

“Although the six member countries forecast a deficit of $2.9 billion in their budgets for this year, the actual balance is expected to turn into a surplus of nearly $50 billion….this is because most of the budgets were based on an oil price of $50 a barrel while prices are expected to average over $70,” it said.

“The 2010 budgets were the highest in the GCC as they were nearly 3.5 to 20 per cent higher than the previous year’s budgets…naturally, the record expenditure will stimulate the economies of member countries…the surplus will be achieved despite an expected rise in actual spending.”

EIB estimated that the combined spending in the 29-year-old Gulf economic, defence and political alliance increased by around 14.4 per cent to $269.3 billion in 2010 from a budgeted $235.4 billion in 2009 while forecast revenues swelled by about 4.4 per cent to nearly $266.3 billion from $255 billion.

EIB said it expected the improvement in oil prices to tempt GCC governments to largely exceed planned spending this year, adding the increase would positively impact their economies and offset the repercussions of the global crisis.

“Given the expectations that oil prices will remain relatively high, public spending in the GCC will increase and this will have a positive effect on the economy…it will also allow member states to extend more support to the financial and banking institutions, which in turn will encourage them to ease curbs on lending and contribute to accelerating growth rates,” it said.

Strong crude prices allied with high crude output sharply boosted the GCC’s fiscal surpluses during the last oil boom and allowed them to bolster their foreign assets despite losses caused by the crisis.

Official figures showed the cumulative fiscal surplus in the six members totaled around 546.8 billion during 2005-2008. Nearly half the surplus was recorded in 2008, when the GCC’s oil income hit a record high of nearly $460 billion.