Ongoing reforms in the GCC region are moving in the right direction but countries need to accelerate the pace to be prepared for a post-oil future, according to the International Monetary Fund.
"The transition to a post-oil future will involve potentially significant challenges," the Washington-based lender said on Thursday in a report titled The Future of Oil and Fiscal Sustainability in the GCC Region.
"Faster progress with economic diversification and private sector development will be critical to ensure sustainable growth down the road, and it needs to be supported by wide-ranging reforms,” the IMF said .
The world’s demand for oil is expected to grow more slowly and eventually begin to decline in the next two decades due to improvements in energy-saving technologies as well as a rise in renewable energy and a stronger policy response to climate change. That view is also held by the International Energy Agency which forecasts a "material slowdown" after 2025.
The developments are expected to reshape the economic landscape of many oil-exporting countries, including those in the GCC, the IMF said.
“Even with rapid diversification, sizable fiscal adjustment will be needed in the long term," the lender said.
That adjustment "will require countries to step up their efforts to raise non-oil fiscal revenue, reduce government expenditure, and prioritise financial saving.”
“The economic well-being of future generations would be helped by a strong early start with these reforms, although they will entail greater effort by the current generation.”
Progress has already been achieved in some areas, such as the introduction of a value-added tax and excise taxes to boost revenues by some countries. Several countries have also reduced energy and water subsidies, but significant scope remains for rationalising other categories of spending, including reforming the region’s large civil service and reducing public wage bills which are high by international standards, according to the report.
The 2014 oil price slump led to large fiscal deficits but has also served as a catalyst for significant reforms and recognising the need to accelerate efforts to reduce dependence on oil. All countries have adopted new (or modified existing) strategic “visions” for their economies envisaging faster diversification and private sector development, the fund said.
The GCC region, home to the largest concentration of oil exporters, produces over one-fifth of the global oil supply. And despite making headway, "oil remains critical to both external and fiscal revenues and overall GDP,” it said, adding that the 2014–15 oil price shock "notably slowed non-oil growth in most of the region, [and] was a stark reminder of this dependence.”
The sudden and unexpected oil price decline of more than 50 per cent during 2014–15 was among the largest in the past century, according to the report.
“It amounted to a transfer of nearly $6.5 trillion (Dh23.87tn) from oil-exporting to oil-importing countries, in the form of cumulative oil revenue decline, between 2014 and 2018. Many oil-exporting countries are still adjusting to the effects of this oil price decline.”
The report also said oil market has experienced a significant turnaround in recent years due to technological advancements as well as climate change concerns.