Oil exporters in the Middle East and North Africa region are continuing to make purposeful efforts to diversify and have a longer-term view of how to face headwinds and steer their economies through booms and busts, according to the World Bank.
“For GCC countries – their long-term view, and you can see that reflected in their visions in different degrees [as well as] in their current policies – is one of diversification,” World Bank chief economist Roberta Gatti told The National in a recent interview.
“They are definitely doing a very purposeful progress towards diversification.”
Gulf states, which are home to about a third of the world’s proven oil reserves, are at varying stages in terms of their diversification journeys. Countries such as the UAE have made strides, as they started the diversification process earlier.
“Some of these diversifications are also being triggered by the estimates of where they stand vis-a-vis how much oil reserves they have,” Ms Gatti said.
The six-member economic bloc of the GCC, which includes Opec’s top oil exporter Saudi Arabia and the Arab world’s second-largest economy, the UAE, are diversifying their economies to cut their dependence on hydrocarbon revenue to fuel their economies.
Gulf states are radically reforming their economies under their separate longer-term transformation vision programmes that seek to develop non-oil economic sectors, expand the industrial base, open up various sectors for investment and carry out social reforms including boosting women’s participation in the labour force.
Growth in the broader Mena region is expected to slow sharply this year as regional oil exporters continue to cap crude production amid stiff global economic headwinds, the World Bank said in its Mena Economic Update report earlier this month.
Aggregate economic growth in the region is expected to drop to 1.9 per cent in 2023, down sharply from the 6 per cent gross domestic product expansion recorded last year, the multilateral lender said before the Israel-Gaza war broke out on October 7.
It underlined global financial conditions as well as high inflation in many Mena economies as contributors to the slowdown.
The GCC, which recorded 7.3 per cent GDP growth in 2022, is set to expand by 1 per cent in 2023.
The World Bank’s Mena economic outlook is in line with estimates of the International Monetary Fund, which expects the regional GDP to expand by 2 per cent this year.
Neither the World Bank nor the IMF have updated their economic forecasts for the region since the outbreak of the Israel-Gaza war, which has turned into a humanitarian crisis, with more than 6,500 Palestinians killed.
The war is so far contained, but oil prices have shot up over concerns that a spillover of the conflict into the wider region could potentially disrupt crude supplies to the global energy market.
Kristalina Georgieva, managing director of the IMF, on Wednesday said that the war in the Middle East will result in more economic jitters for an “already anxious world”.
“We are concerned first and foremost about the epicentre of the war, the tragic loss of lives, but also the destruction and the reduction of economic activity,” she told the Future Investment Initiative in Riyadh.
The “chains of the impact” are already visible in neighbouring countries such as Egypt, Lebanon and Jordan, Ms Georgieva said, adding that the uncertainty could “kill” tourist revenue inflows.
World Bank president Ajay Banga on Tuesday said the world needs “peace and stability” as the global economy is at a “dangerous juncture”, with geopolitical challenges such as the Israel-Gaza war expected to have an impact on the pace of economic growth.
Ms Gatti said adopting something that is like “a fiscal rule” and doing the budgeting of the state, with a steady oil price in mind is a way to ride the waves of uncertainty and tougher headwinds.
It is “an effective way to smooth these booms and busts”, she said.
Mena oil-exporting economies grew sharply in 2022 when oil prices surged after Russia’s invasion of Ukraine but subsequently fell on demand concerns amid slowing global economy.
The Opec+ group of oil producers, led by Saudi Arabia, has enforced total crude production curbs of 3.66 million barrels per day, or about 3.7 per cent of global demand, to stabilise crude markets.
These curbs include a reduction of 2 million bpd agreed last year, and voluntary cuts of 1.66 million bpd, announced in April and extended to December 2024.
Last month, Saudi Arabia and Russia announced they would extend their combined supply cuts of 1.3 million bpd to the end of the year.
“In a country like Saudi Arabia, budgeting to my knowledge is done with the quasi-fiscal rule, meaning $70 per barrel [as base prices for the budget for example], so yes, there might be booms and busts, but now the budgeting is done with the long-term in mind,” Ms Gatti said.
She added that Saudi Arabia has also taken “very serious steps” to transform its economy, starting with increasing women's labour force participation.
“What is happening there, I think, is a purposeful effort to diversify the endowment of a country, not just oil, but also human capital. And that's a kind of capital that will be fundamental to deploy different types of growth,” Ms Gatti said.
One key thing for the broader region, including the GCC and oil-importing economies alike, is to “experiment with what [different] type of policies might be important [for them] going forward”, Ms Gatti said.
“For GCC countries, diversification is a fundamental purpose, and in good times, they can actually experiment what policies work … [as] they have the money to do it, they can measure the results,” she said.
“They can be purposeful in thinking about what could be the course of action that they can take to be on the right track in terms of their nominal GDP development.”