Swift action to mitigate the effects of the coronavirus pandemic and oil price shocks have driven a broad-based recovery in GCC economies that are set to double growth this year despite geopolitical and macroeconomic headwinds, according to an International Monetary Fund staff report.
Overall fiscal balances of countries in the six-member economic bloc have improved strongly, in line with the rise in hydrocarbon prices and receding effects of the pandemic, the Washington-based lender said in its latest policy paper on the GCC.
The primary fiscal balances of Gulf countries are expected to average 25 per cent of their gross domestic products during the 2022-2026 period as they contain expenditure.
“Liquidity and fiscal support above or comparable to what was provided by most emerging economies, successful vaccination campaigns, reform momentum and recovery in oil prices and production — in line with Opec production agreements — have helped GCC countries to recover swiftly and move to a more sustained growth,” the report said.
“In addition to the positive shock from the hydrocarbon sector, non-oil GDP benefited most countries from a rebound in the retail, trade and hospitality sectors.”
The IMF expects the oil-rich economies of GCC to grow 6.5 per cent this year, up from 3.1 per cent in 2021. The growth led by Saudi Arabia and the UAE, the two biggest Arab economies, is expected to moderate to 3.6 per cent next year.
The World Bank projects Gulf economies to grow 6.9 per cent this year before decelerating to 3.7 per cent and 2.4 per cent in 2023 and 2024, respectively.
The total economic output of the countries in the bloc is projected to reach $2 trillion in 2022, the IMF said in its Gulf Economic Outlook in October.
If the Gulf countries continue business as usual, the region’s combined GDP will grow to $6tn by 2050. That figure could shoot up to more than $13 trillion by 2050 if they adopt a green-growth strategy that accelerates economic diversification, the lender said.
Economies in the GCC bounced back strongly after the pandemic-driven slowdown last year and the growth momentum has picked up further pace this year, driven by Russia’s military offensive in Ukraine.
Brent, the benchmark for more than to thirds of the world’s oil, is trading near $84 per barrel level, about 8 per cent higher since the beginning of the year.
Gulf economies will receive up to $1.4tn in additional revenue in the next four to five years as oil prices remain high and headline inflation remains low in the region, Jihad Azour, director of the Middle East and Central Asia Department at the IMF, said in May.
While the world is bracing for a possible recession next year, challenges linked to the Russia-Ukraine war, tighter global financial conditions rising inflation and increases in interest rates are expected to have a limited impact on GCC economies, according to the report.
“Surging commodity prices have limited the spillover from the war in Ukraine and the impact from tighter global financial conditions and have allowed for a more positive outlook for GCC economies,” Amine Mati, an IMF assistant director and Jerome Vacher, a senior economist with the fund, wrote in a blog on Wednesday.
The GCC countries reported higher oil windfalls in the past commodities super cycles. However, this time they are expected to curtail spending.
“Our analysis suggests that GCC countries will save far more resources than during previous episodes because of the fiscal and structural reforms taken in the region,” Mr Mati and Mr Vacher said.
“In 2022 alone, the overall fiscal surplus will amount to over $100 billion, as the rise in expenditures — particularly on wages — remains contained so far.”
However, risks to the global outlook are firmly on the downside and GCC countries should use additional revenue to “rebuild buffers and strengthen policy space” and targeted support for the most vulnerable.
Keeping medium-term fiscal policy geared towards ensuring fiscal sustainability and increasing savings, through a credible fiscal framework, should also be prioritised, the report said.
“This can be supported through non-oil revenue mobilisation and energy subsidy phase-out, which will also contribute to climate change mitigation,” IMF officials said.
“Other supporting measures include the gradual reduction of public sector wage bills and increasing spending efficiency.”
Accelerating structural reforms and maintaining financial sector stability should also remain a priority for policymakers in the region, they said.