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24 February 2024

High oil prices sustain defence spending

By Nadeem Kawaach


Crude prices at nearly $100 per barrel have allowed the Gulf states to keep spending on defence without impacting economic development.

The six Gulf Co-operation Council (GCC) countries, which control nearly 45 per cent of the world’s extractable oil wealth, have invested $290 billion (Dh1.06 trillion) in the defence sector between 2000 and 2007 to maintain their position as the world’s largest military spenders relative to their total expenditure and gross domestic product.

In stark contrast to the 1990s when such high defence allocations had smothered their economies and widened their fiscal deficits, this spending has had little impact over the past seven years because of a sharp increase in oil revenues.

The revenues during 2000-2007, estimated at more than $1trn (Dh3.67trn), are nearly triple their earnings in the previous seven-year period. Such a massive increase has allowed them to record high economic growth rates, slashed their debt, boosted their eroding financial reserves and turned fiscal deficits into large surpluses.

“I know defence expenditure has been very high in the region but it has been more than offset by high oil prices over the past years,” said Ihsan bu Hulaiga, a Saudi economist. “I expect such spending to remain high due to the Iranian nuclear issue, insecurity in Iraq and possible spillover into other Gulf states, and repeated attacks by terrorists in Saudi Arabia.”

GCC members Saudi Arabia, Kuwait, Bahrain, Qatar, Oman and the UAE have long been among the world’s biggest military spenders, allocating nearly a third of their current expenditure to the purchase of weapons and other military sectors.

Between 2000 and 2007 such allocations stood at 32 per cent of the current expenditure, which in turn accounted for 80 per cent of their total spending, according to estimates by their governments, published in the joint Arab economic report, which is published annually by the Arab League.

With total GCC spending about $1.13trn (Dh4.15trn) during that seven-year period, current expenditure is estimated at about $908bn (Dh3.33trn). At 32 per cent, allocations for defence, security and justice totalled about $290bn, an annual average of $36bn (Dh132bn).

While such a ratio has remained almost unchanged over the past 20 years, the figures showed an increase in the size of allocations for defence as total expenditure, and consequently current spending, has steadily grown in the six GCC members.

Saudi Arabia, which has emerged as the most vulnerable Gulf state to terror attacks, earmarked record funds for defence of SR110bn ($29bn) in 2007. These allocations were more than double the SR49bn ($13.2bn) allocated for defence and security in 1995, according to Saudi budget figures.

The surge in such spending was a natural result of an intensified anti-terror drive that has also affected the country’s vital oil sector, where at least 5,000 private security men have been recruited and up to 30,000 troops have been deployed.

In Oman, figures by the Ministry of National Economy showed defence spending hit a record OR967m ($2.5bn) in the first nine months of 2006 while Bahrain and Qatar allocated more than $2bn (Dh7.34bn) each in 2006.

The UAE also kept defence expenditure as high as Dh23bn ($6.26bn) in 2005 and is expected to have maintained that level in 2006 and 2007.

Kuwait has not provided defence spending figures for the past three years, but Arab League data showed allocations for defence, security and justice remained as high as 32 per cent of its current expenditure.

With defence commitments growing, the surge in oil prices is seen as a boon for these countries as it has revived their economies, reversed a painful current account and budget deficit, and replenished their eroding financial reserves.

Figures by the International Monetary Fund showed the GCC’s combined financial reserves were projected to peak at $317bn (Dh1.16trn) at the end of 2007, more than five times their level five years ago and 30 times their reserves in 1998.

Unlike during the 1990s, when the GCC states reeled under heavy budget deficits and negative economic growth, high defence spending has had little impact over the past seven years. Their economies have recorded steady growth since 2000 while their budgets and current accounts were in surplus in most fiscal years.

IMF figures showed the UAE real GDP has grown by an average nine per cent between 2003 and 2007 compared with only four per cent between 1998 and 2002, and one to two per cent in the previous five years.

Growth between 2003 and 2007 was put at six per cent in Saudi Arabia, nine per cent in Kuwait, 9.5 per cent in Qatar, five per cent in Oman and seven per cent in Bahrain. The current account surplus of these states was estimated at about $128bn (Dh470bn) in 2007.