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02 October 2023

GCC cautioned against excessive spending

This excessive spending can not be supported by a similar increase in oil prices. (EB FILE)

By Nadim Kawach

Gulf oil producers need to put brakes on their drive to sharply boost public expenditure as a fresh global fiscal crisis could drive oil prices down and plunge their budgets into massive deficits again, a US economist warned yesterday.

Brad Bourland, chief economist at the Riyadh-based Jadwa Investments, said higher government spending was needed in the six-nation Gulf Co-operation Council (GCC) as part of an overall stimulus package to counter the impact of 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 the Abu Dhabi Economic Forum in the Capital, Bourland said 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 $5 to $6 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 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," he said.

Bourland, one of the best known economists in the region, noted that in 2003 Saudi Arabia recorded a relatively largest budget surplus after several years of persistent shortfalls following a surge in crude prices during that year. "In 2003, oil prices started to rise and reached $28 a barrel and the Saudi Government, for example, ran a large budget surplus.

"Last year oil prices averaged $62 and the Saudi Government ran a deficit of SR45 billion (Dh44bn)," he said.

"As you see, $62 was not enough to balance the budget in 2009 and $28 was enough to achieve a surplus in 2003. Things have changed and the GCC governments should be aware of the fact that oil prices will not stay high."

Reacting to Bourland's views, the Arab League's top economists argued that while most GCC countries overshoot budgeted spending, they normally base their budgets on what he described as a very conservative oil price.

"We should take into consideration the large difference between the actual oil price through the year and the price level budgeted by the GCC countries," said Jassim Al Manai, Chairman of the Abu Dhabi-based Arab Monetary Fund (AMF), the Arab League's main financial establishment.

"Most GCC governments assume very conservative oil prices in their annual budgets to ensure a sort of a balance between spending and revenue… For example, last year some of them forecast oil prices at around $45 and others at $50 but actual prices averaged above $60 a barrel," he said.

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 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 (Dh191bn) in 2008 from $24.8bn in 2003 while it surged to $138.6bn from $68.5bn in Saudi Arabia and around $34.6bn from $16.3bn in Kuwait. Actual expenditure leaped to $24.6bn from $7.4bn in Qatar, to $19.6bn from $8.2bn in Oman and to $5.5bn from $3.6bn in Bahrain.

Spending in most members 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 pact.

Despite the surge in expenditure, the six members of the GCC have amassed nearly $605bn in fiscal surpluses during 2003-2008 as a result of strong crude prices.

The rapid rise in crude prices allied with higher output to boost the GCC's combined oil export earnings to a record $459bn in 2008.

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