IMF downgrades UAE growth forecast, says Gulf governments must cut spending

First time since last year’s oil price fall that the IMF has called on GCC members to reduce total planned expenditures.

The Greek finance minister Yanis Varoufakis (top right) takes his place for a group photo of International Monetary and Financial Committee (IMFC) governors, during the IMF and World Bank's 2015 Annual Spring Meetings, in Washington on April 18, 2015. Mike Theiler / Reuters
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The IMF has called on Arabian Gulf governments to cut total public spending in response to lower oil prices, as it again downgraded its growth forecast for the UAE.

GCC members must “moderate the pace of spending in the medium term” to “save resources for future generation” and achieve a sustainable fiscal situation, Masood Ahmed, the IMF’s chief economist for the Middle East, said in Washington on Friday.

This is the first time since last year’s oil price fall that the IMF has called on GCC members to reduce total planned expenditures.

Mr Ahmed’s comments represent a strengthening of the IMF’s language on Gulf spending. As recently as January, the IMF warned Gulf states not to react to falling oil prices in “a knee-jerk way by cutting economic activity and government spending”.

The IMF also cut its projections for the UAE’s growth this year to 3.2 per cent – a decrease of 0.3 percentage points against its January forecast.

This is the second time in six months that the IMF has revised its growth forecast for the UAE downwards. In October, the IMF projected growth of 4.5 per cent – 1.3 percentage points higher than its current projection. The wider Middle East’s economic growth forecast has also been cut twice in the same period.

Last week, the IMF revised its estimate for the Middle East, North Africa, Afghanistan and Pakistan region, with GDP expansion down 0.4 percentage points to 2.9 per cent this year.

Mr Ahmed highlighted subsidies on energy, a frequent bugbear of the IMF, as one area in which Gulf states should tighten up.

Bahrain, Qatar, Kuwait, Iran, Yemen and the UAE have all moved to reform subsidies, but Mr Ahmed said that most energy products across the Gulf remained cheaper than their economic prices.

Mr Ahmed said that low oil prices would affect Gulf country’s finances much worse than their growth figures. “The growth implications have been limited by using the financial cushions, but the effect on the financial account [of the balance of payments] is much more direct. If you look at the external account, there has been a substantial weakening.”

Brent crude was trading at $63.45 per barrel on Friday, down 45 per cent since last June.

The Gulf is set to lose $380 billion in export earnings over the next year, the IMF projected – equal to almost a fifth of the size of the GCC economies. GCC countries are expected to run an average fiscal deficit of 8.5 per cent of GDP this year.

The Gulf states will sell up to $200bn of assets over the coming year in order to plug these fiscal and financial gaps, David Spegel, the head of sovereign credit research at BNP Paribas told Bloomberg. Saudi Arabia has sold $25bn of currency reserves since December, data showed.

“Only Kuwait and Qatar are projected to avoid a budget deficit this year,” Mr Ahmed said. “Every other oil exporting country is spending more than its income.”

Humaid Obaid Al Tayer, the UAE Minister of State for Financial Affairs, said in a speech to the IMF earlier this month: “[GCC] countries are pursuing strategies to rebalance growth towards more productive public spending and to strengthen the non-oil fiscal balances to preserve the oil wealth for future generations.”

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