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19 July 2024

GCC warned over non-oil fiscal deficit

By Staff

Gulf hydrocarbon producers have basked in immense fiscal surpluses over the past eight years because of strong crude prices but they are still reeling under heavy non-oil budget deficits, according to a Gulf analyst.

Despite a sharp rise in spending in 2011, the six Gulf Cooperation Council (GCC) countries recorded an increase of more than $50 billion in their combined actual fiscal surplus, said Mohammed Al Asumi, a former economic adviser at the Dubai Executive Council.

Citing official data, he said the GCC’s total actual expenditure swelled to nearly $359 billion in 2011 from $301 billion in 2010. But the surplus jumped to around $106 billion from $55 billion.

In an article published by the Abu Dhabi-based Emirates Centre for Strategic Studies and Research (ECSSR), Asumi said the surge in the surplus can be largely attributed to conservative oil prices assumed by GCC governments while preparing their annual budgets. For instance, the future oil price estimated by GCC members varies from $55 to $70, while the real price on average has been much higher than that.

Furthermore, rising production in some GCC countries has played a significant role in boosting oil revenues, and thereby public revenues.

“However, the weakest aspect in GCC budgets lies in their constant over-reliance on oil revenues, and the modest contribution of non-oil sectors. This has created a serious imbalance, which can be addressed by formulating effective strategies directed toward increasing the share of non-oil sectors in funding budgets,” said Asumi, who also served as an adviser at the Ministry of Planning and economic chief at the Emirates Industrial Bank.

“High oil revenues and budget surpluses create a golden opportunity for increased investment in non-oil productive sectors, and to implement more projects that can support the diversification process, and ultimately to have various sources of national income….in this context, GCC governments can benefit from the UAE federal budget experience, which in the last five years succeeded in making its sources of revenues more diversified and less dependent on the oil sector.”

He said this diversification process makes the UAE experience “so important that it deserves to be studied and utilized” amid efforts aimed at diversifying the sources of financing GCC budgets.

“The GCC budgets are particularly important not only for supporting economic growth, but to secure stability and prosperity in regional economic and social conditions in general,” he said.

Asumi noted that the rise in GCC public spending has had many advantages as it helps in the sustainability of growth and has been instrumental in the quick recovery of economies after the 2008 global financial crisis.

Budgetary increases also help enhance living standards, which was seen in salary and wage increases in all GCC countries last year, he said.

“Such expectations of large increases in public spending are encouraged by expectations of high oil prices, which remained stable above $100 barrel. Most forecasts suggest that oil prices will remain high for a variety of reasons this year. Furthermore, most GCC countries have announced some increases in oil production in early 2012, which will naturally boost revenues for these countries, and will encourage increases in all fields of spending,” he said.

“Therefore, it is likely that upbeat economic conditions will prevail in the GCC countries in 2012. GCC economies are expected to achieve growth rates in the range of 5-7 percent at current prices, as mentioned in reports of many international organizations, such as the IMF….simultaneously, increased spending will undoubtedly contribute to improvement in quality of public services—particularly education, healthcare, housing and infrastructure projects which account for a major part of the total public spending.”