Gulf States Need To Reform Spending As Oil Price Slips -Kuwait
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Gulf States Need To Reform Spending As Oil Price Slips -Kuwait

Gulf States Need To Reform Spending As Oil Price Slips -Kuwait

A sustained oil price decline of $25 reduces the revenue of most GCC countries by the equivalent of about eight percentage points of gross domestic product, and could therefore push many of them into fiscal deficits.

Gulf Business

Gulf Arab oil exporters will have to reform their state spending and make cuts in some areas because of weak oil prices, Kuwaiti Finance Minister Anas al-Saleh said on Saturday.

“We must undertake comprehensive economic reforms including the reform of imbalances in public finances,” Saleh told a meeting of Gulf Arab finance ministers, central bank governors and the International Monetary Fund in Kuwait.

“This must be undertaken through strengthening of efforts to diversify away from oil and decrease dependence on oil revenue, which is now inevitable.”

Global oil prices tumbled to four-year lows below $83 per barrel this month, threatening – if current levels are sustained for a long period – to push the state budgets of some of the six members of the Gulf Cooperation Council into deficit after several years of big surpluses.

The IMF has estimated Saudi Arabia will need an average oil price of $90.70 a barrel in 2015 to balance its budget; the United Arab Emirates would face a level of $73.30, Kuwait $53.30 and Qatar $77.60. Oman and Bahrain need much higher budget break-even prices.

A sustained oil price decline of $25 in effect reduces the revenue of most GCC countries by the equivalent of about eight percentage points of gross domestic product, and could therefore push many of them into fiscal deficits, IMF chief Christine Lagarde said.

“That’s why it is important to address the fiscal situation now, although clearly the GCC countries have the buffers to fiscally and financially resist the consequences of such a situation,” she told a news conference after the meeting.

Most Gulf states accumulated vast fiscal reserves during the oil-boom years that will enable them to keep spending up even if oil prices stay weak over a long period.

For example, Saudi Arabia has accumulated $736 billion of foreign assets, while the UAE is estimated to have a similar amount in its largest sovereign wealth fund. Also, very low levels of public debt – Saudi Arabia’s was at just 2.7 per cent of GDP in 2013 – mean GCC countries would have easy access to the debt markets if needed.

Despite the reformist rhetoric of some Gulf officials, it is not clear how far they will proceed with budget reforms. Cuts in social welfare spending are politically very sensitive, while infrastructure projects are designed to diversify economies and reduce their dependence on oil in the long run.

However, there are some signs that officials are using the oil price drop to justify reforms. This month Kuwait revealed plans to slash costly state subsidies on diesel, kerosene and jet fuel – relatively minor reforms – and it is studying hikes in electricity and water costs that would have a bigger effect. Oman has said it is considering cutting subsidies on petrol.

“Electricity is still under study by the higher planning council committee, and once it is done it is a law that will have to go to parliament,” Saleh said without giving details.

He said, however, that spending on economic development projects in Kuwait would not be affected by weakness in the oil market.

Economic growth in the GCC region is expected to be around 4.5 percent on average in 2014 and 2015 but the risk that it will slow has increased because of soft oil prices, Saleh said


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