Gulf countries urged to close the gap between public and private sector wages

The combined bill for public sector wages and subsidies to consumption accounts for more than a fifth of government spending across the Gulf.

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Gulf governments must cut public sector jobs and wages to weather a new era of volatile oil prices, the IMF said yesterday.

GCC states need to “change the incentive structure for nationals, and part of that involves reducing the wage differential between public and private sectors, and the number of new openings in the public sector,” said Masood Ahmed, the director of the Middle East at the IMF, after the release of the new regional outlook by the group.

The combined bill for public sector wages and subsidies to consumption accounts for more than a fifth of government spending across the Gulf, and more than 70 per cent in Bahrain and Kuwait, IMF data shows. With the IMF calling on Gulf states to tighten their belts, Mr Ahmed said that the region’s outsized social transfer payments were the natural place for the axe to fall.

“Even before the fall in oil prices, a number of Gulf countries were spending more than would be the optimal level, in terms of leaving enough resources for future generations,” Mr Ahmed said. “Gulf states’ break-even prices were growing faster than the oil price.”

Jason Tuvey, an emerging markets economist at the London-based consultancy Capital Economics, said that Gulf states were unlikely to cut public sector jobs and wages except as a “last resort”.

“Public sector wage bills will come under the spotlight as Gulf countries move to rationalise government spending,” he said. “But the risk of igniting social unrest means that governments may well cut public sector investment spending first.”

The IMF has cut its projections for non-oil growth in the UAE this year by 1 percentage point, as spillovers from the slump in oil hit the country's diversification efforts.

At 4.4 per cent, non-oil growth remains the driver of the UAE’s economy, as the IMF projects oil sector growth of 0.4 per cent this year. Data released yesterday from Markit’s monthly purchasing managers index suggest that output, hiring, and new orders in the non-oil sector all improved in April. The PMI edged up to 56.8 points last month from 56.3 in March.

Low oil prices will have a small impact on growth, but a big impact on government finances – making spending cuts more urgent, Mr Ahmed said.

While the UAE has reserves that should last for more than 25 years at the current rate of spending, the financial situation is more acute in Saudi Arabia, which has less than five years’ worth of reserves remaining. In February and March, Saudi Arabia used up US$36 billion of foreign exchange reserves to plug the gap between spending plans and revenues.

“There will be a need for significant fiscal consolidation [in Saudi Arabia] … to ensure the equitable sharing of oil wealth across generations,” Mr Ahmed said.

The IMF forecasts that spending in the kingdom will exceed $100bn this year – implying a deficit of between 13 and 15 per cent of the size of the country’s economy.

Mr Ahmed said that public spending cuts would give new impetus to the region’s diversification efforts.

“There may at some point be consequences in terms of non-oil growth,” he said. “Hence the need to increase private activity that is more focused on [private] investment not government spending.”

Prospects for a quick recovery of the oil price look unlikely, with Opec members committed to retaining market share in the face of competition from US shale producers, and potential new increases in oil supply from Libya, Iraq, and Iran.

“The oil price is unpredictable,” said Tim Fox, chief economist at Emirates NBD. “No one really knows what it’s going to be – we have to get ready for a much more volatile world of oil prices.”

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