The GCC needs to peg its public spending firmly to oil prices in order to avoid endangering the fiscal equilibrium, an expert has warned.
“With respect to the oil rich GCC countries, one has to recall that after the growth revival ignited by the oil price increase of 2010-2011, public spending added to the growth momentum,” said Paul Wetterwald, chief economist, Crédit Agricole Private Banking.
“This government support has to rely on firm oil prices if one does not want to endanger the fiscal and/or external equilibriums.”
According to the International Monetary Fund (IMF), Kuwait, Saudi Arabia, and the UAE are safe with the current oil prices but Bahrain might not be able to achieve a fiscal surplus at the current rate.
The latest research report from Crédit Agricole indicated that GCC countries are primed for strong growth in the coming years supported by budget surpluses resulting from high oil prices.
“The hydrocarbon-based GCC economies displayed GDP increases high enough to define these countries as a pocket of above average growth,” said Wetterwald.
“On the other hand, some improvements were spotted in countries where the activity had been deeply disturbed by the Arab Spring-like uprising.”
But these countries also stand a risk of inflation, the report said.
“There is a link between growth and inflation, but the answer is not yet affirmative as to whether countries with the highest growth are the most prone to inflation,” said Wetterwald.
“Iran tops the inflation league, followed by Egypt, Yemen, Turkey, Syria, Bahrain, Libya, Lebanon, Jordan, Saudi Arabia, Kuwait, Qatar, Iraq, Morocco, UAE, Oman, and finally Algeria. This suggests that inflation tends to go hand in hand with social instability.
“One is tempted to assume that the rise in consumer prices ignite protests, generating a vicious circle where logistic issues stemming from large scale protests add to inflation,” he said.