GCC’s 2011 fiscal surplus to widen

Gulf hydrocarbon producers recorded a massive budget surplus of more than $55 billion in 2010 and the balance is set to surpass that level this year despite a surge in public spending, a well-known UAE economist has said.

Mohammed Al Asumi said the six Gulf Cooperation Council (GCC) countries, which control over 40 per cent of the world’s extractable crude deposits, should use such surpluses to pump more funds into their economies to guard them against fresh global shocks after they were jolted by the 2008 fiscal distress.

In an article published by the Abu Dhabi-based Emirates Centre for Strategic Studies and Research (ECSSR), Asumi said the GCC’s annual budgets.

Remain tied to developments in global oil markets despite the significant progress made by members toward diversifying their revenues in recent years.

He noted that current oil prices of more than $100 a barrel are at their most desirable levels for GCC states and the status of their budgets have never been better, especially over the last decade.

Following several years of sometimes high deficits (extending from the 1990s to the beginning of the new millennium), GCC nations have been registering significant surpluses in their annual budgets in recent years, he said.

“Even after the 2008 crisis, oil prices have been rising since mid-2010. According to estimates by the Emirates Industrial Bank, the surplus of GCC countries rose to one of its highest levels of around $55.4 billion last year,” he said.

“With oil prices crossing the $100 mark in the first quarter of this year, the surpluses are expected to top last year’s level, although expenditures are expected to rise because of a series of initiatives taken by all GCC countries; e.g. raising salaries and providing several allowances and incentives to citizens.”

Assumi said that although the GCC’s total budgeted expenditure this year amounts to about $300 billion, which approximately equals their last year’s spending levels; this figure is expected to increase by nearly15 per cent by the end of the year, making it necessary to inject more money in order to boost economic conditions in member states.

“In fact, the GCC countries have assumed their annual budgets on the basis of conservative estimates of oil prices for the year, ranging between $80 in Bahrain and $43 in Kuwait, at a time when oil prices far exceeded these levels.”
Asumi expected the fiscal surpluses this year to be concentrated in three GCC  countries - Saudi Arabia, Kuwait and the UAE.

The surplus is expected to reach about $25 billion in the Saudi Arabia thanks to increased oil production and higher crude prices while is would be around $25 billion in Kuwait due to its reliance on a very conservative oil price.

“Apparently, oil prices would ultimately settle at higher levels in coming years, increasing the accumulated budgetary surpluses. However, this again underscores the interdependence between oil prices, whether they rise or fall, with the kind of policies-austerity vis-à-vis-fiscal expansion adopted by the GCC countries, as these are shaped by price directions,” Asumi said.

“What supports this proposition is that fluctuations in prices are expected to continue in the coming period as well.”

Asumi said that with these conflicting forecasts, it is difficult for us to estimate the net surpluses in GCC budgets. But he noted that all projections-including those that suggest a downward correction in prices-agree that oil prices would remain above their base price, as specified in GCC annual budgets.

“Therefore, the current increase in crude prices presents an ideal opportunity for the GCC countries, not for decoupling oil revenues from the immediate and rapid financing of the annual budgets, as this requires a comprehensive development strategy to be adopted over several years, but to exploit the surpluses accrued from higher oil prices to ease the effects of high volatility in global oil markets on stability of Gulf economies, whether this volatility  is caused by stock market speculation, political events, natural disasters, or real causes related to fluctuations in supply and demand,” he said.

“If such a development strategy is adopted, the future will bring stability and balanced development for GCC economies and keep them free of the high volatility of global oil markets.”

Asumi warned that until such economic balance is attained, GCC budgets and growth rates will remain exposed to oil price volatility.

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