Stick with reform, IMF advises Gulf
The International Monetary Fund (IMF) has advised the Gulf Cooperation Council (GCC) countries to “maintain reform momentum, despite oil boom.” Additional revenues from higher energy prices could help the region achieve long-term prosperity by maintaining the recent reform momentum.
“GDP growth for the GCC countries – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE, is expected to more than double, reaching 6.5 percent in 2022,” an IMF report said, a recent Policy Paper. Surging commodity prices have limited the spillovers from the war in Ukraine and the impact from tighter global financial conditions and have allowed for a more positive outlook for GCC economies. Throughout its history, the GCC region has experienced distinct periods of rising oil revenues.
During those periods, countries deepened their dependency on oil and gas, increased wages and hirings in the public sector, expanded social safety nets, and ramped up capital expenditure. During 2002-08 and 2010-14 for example, the public sector wage bill increased by 51 and 40 percent, respectively. “Our analysis suggests that GCC countries will save far more resources than during previous episodes because of the fiscal and structural reforms taken in the region,” the report noted. In 2022 alone, the overall fiscal surplus will amount to over USD 100 billion, as the rise in expenditures – particularly on wages – remains contained so far.
While GCC countries have benefited from higher, albeit volatile, oil and gas prices, numerous risks still cloud the outlook – notably a slowdown in the global economy. In this context, the reform momentum established in previous years should be maintained – irrespective of the level of hydrocarbon prices, the IMF urged. A comprehensive package of policies should be implemented to respond to near-term shocks and firmly address medium-and long-term challenges:
* Fiscal policy in the near term should avoid procyclical spending, with the windfall from higher oil prices used to rebuild buffers and strengthen policy space. Given the available fiscal space, targeted support to deal with shocks that affect the most vulnerable should be privileged while leveraging on the progress achieved in the provision of targeted social benefits.
* Medium-term fiscal policy should remain geared towards achieving growth friendly consolidation to ensure fiscal sustainability and increase savings for intergenerational equity through a credible rules-based medium-term fiscal framework. while preparing a smooth energy transition. This should be supported through non-oil revenue mobilization, energy subsidy phase-out, containment of public sector wages, and increasing spending efficiency. Proper assessment of the fiscal stance would require full incorporation of the operations of the sovereign wealth funds, which are increasingly involved in national development.
* Maintaining financial sector stability is essential to sustain strong economic growth. Overall, financial sectors appear sound, with GCC bank balance sheets shielded from tighter global financial conditions by a concomitant period of high oil prices and abundant liquidity, which are facilitating credit expansion. But bank soundness should continue to be carefully monitored.
* Policies for a sustained private sector-led economic growth and diversification will be as key as ever. Ongoing structural reforms should be accelerated and distortions reduced, including by raising female labor force participation, increasing flexibility for expatriate workers, improving education quality, further leveraging technology and digitalization, enhancing regulatory frameworks, strengthening institutions and governance, deepening regional integration, and addressing climate change.
During those periods, countries deepened their dependency on oil and gas, increased wages and hirings in the public sector, expanded social safety nets, and ramped up capital expenditure. During 2002-08 and 2010-14 for example, the public sector wage bill increased by 51 and 40 percent, respectively. “Our analysis suggests that GCC countries will save far more resources than during previous episodes because of the fiscal and structural reforms taken in the region,” the report noted. In 2022 alone, the overall fiscal surplus will amount to over USD 100 billion, as the rise in expenditures – particularly on wages – remains contained so far.
While GCC countries have benefited from higher, albeit volatile, oil and gas prices, numerous risks still cloud the outlook – notably a slowdown in the global economy. In this context, the reform momentum established in previous years should be maintained – irrespective of the level of hydrocarbon prices, the IMF urged. A comprehensive package of policies should be implemented to respond to near-term shocks and firmly address medium-and long-term challenges:
* Fiscal policy in the near term should avoid procyclical spending, with the windfall from higher oil prices used to rebuild buffers and strengthen policy space. Given the available fiscal space, targeted support to deal with shocks that affect the most vulnerable should be privileged while leveraging on the progress achieved in the provision of targeted social benefits.
* Medium-term fiscal policy should remain geared towards achieving growth friendly consolidation to ensure fiscal sustainability and increase savings for intergenerational equity through a credible rules-based medium-term fiscal framework. while preparing a smooth energy transition. This should be supported through non-oil revenue mobilization, energy subsidy phase-out, containment of public sector wages, and increasing spending efficiency. Proper assessment of the fiscal stance would require full incorporation of the operations of the sovereign wealth funds, which are increasingly involved in national development.
* Maintaining financial sector stability is essential to sustain strong economic growth. Overall, financial sectors appear sound, with GCC bank balance sheets shielded from tighter global financial conditions by a concomitant period of high oil prices and abundant liquidity, which are facilitating credit expansion. But bank soundness should continue to be carefully monitored.
* Policies for a sustained private sector-led economic growth and diversification will be as key as ever. Ongoing structural reforms should be accelerated and distortions reduced, including by raising female labor force participation, increasing flexibility for expatriate workers, improving education quality, further leveraging technology and digitalization, enhancing regulatory frameworks, strengthening institutions and governance, deepening regional integration, and addressing climate change.
