IMF warns Arab nations not to squander oil windfalls

Fiscal deficits could become the norm among Arab world energy exporting nations as early as 2016 as governments spend too much of their oil windfalls, the IMF warned yesterday.

Some Arab countries cannot balance their budgets and have limited buffers gainst shocks despite their oil windfalls, the IMF said in its regional economic outlook. Hasan Jamali / AP Photo

Fiscal deficits could become the norm among Arab world energy exporting nations as early as 2016 if governments carry on spending too much of their oil windfalls, the IMF warned.

It said the fiscal vulnerability to a sustained drop in oil output and prices had risen, especially among non-GCC nations such as Libya and Iraq.

Under current policies, collectively countries in the region will run a fiscal deficit starting in 2016, the IMF said in its regional economic outlook report, released yesterday.

“While these countries are running a fiscal surplus, already half of them, mostly outside of the GCC, cannot balance their budgets and have limited buffers against shocks,” said Masood Ahmed, the director of the IMF’s Middle East and Central Asia Department. “Policies should therefore focus on strengthening budgets while minimising the impact on growth and enhancing equity.”

The UAE is already taking steps to scale back spending that increased in the wake of the global financial crisis. Total spending as a percentage of GDP dropped to 26.9 per cent last year, from a peak of 40.2 per cent in 2009, the IMF estimated in an earlier report released in July.

The IMF says some other states are also starting to cut back spending. It forecasts an average rise of more than 4 per cent in spending annually, compared to 15 per cent over the past 10 years, according to IMF data analysed by Reuters.

Expenditure reached an apex after the global financial crisis and the Arab Spring in 2011 as several countries increased spending on infrastructure, wages and unemployment benefits.

But the IMF said in many cases the spending pullback was not happening fast enough to stop budgets from slipping into the red.

Requiring a budget break even oil price of around US$120 per barrel, Bahrain is already in fiscal deficit. Within the GCC, the IMF forecast it would be joined by Oman by 2015 and Saudi Arabia by 2018. The UAE is cushioned by a lower break even price of just under $80 per barrel.

Non-GCC oil producers Iraq and Libya were both expected to record fiscal surpluses between 2013 and 2014. But downward revisions to crude output meant oil revenues would be too low to balance their budgets.

The report cited increasing volatility in oil output, as a result of regional tensions and the impact of unconventional energy output in elsewhere in the world, as one of the reasons government budgets were being buffeted.

“Rising oil production volatility implies increasing uncertainty for government revenues and balances,” the report said.

The monthly report from Opec, also released yesterday, further added to worries about the outlook for the region's oil output. It said Opec supply remained higher then the global requirement for its crude.

The price of benchmark Brent oil has averaged $108 so far this year, compared with $112 over the same period last year.

In its report, the IMF urged a more measured spending outlook among the region’s oil exporters to be complemented by capital investments, social initiatives and new non-oil sources of revenue.

“High on the agenda is also to continue to pursue structural reforms to bolster private-sector growth, economic diversification, and job creation for nationals,” said Mr Ahmed.