The Gulf economies, whose growth is slated to more than double to 6.5% in 2022 on higher energy prices, should maintain momentum in reforms, irrespective of the level of hydrocarbon prices, according to a recent policy paper of the International Monetary Fund (IMF).
Accordingly, it suggested using additional revenues from higher oil prices to rebuild buffers and strengthen policy space; keeping medium-term fiscal policy geared towards ensuring fiscal sustainability and increasing savings, through a credible fiscal framework; maintaining financial sector stability; and accelerating ongoing structural reforms.
"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 the GCC (Gulf Co-operation Council) economies," it said.
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 hiring in the public sector, expanded social safety nets, and ramped up capital expenditure.
During 2002-08 and 2010-14, the public sector wage bill increased by 51% and 40% respectively.
The policy paper analysis suggests that the GCC countries will save far more resources than during previous episodes because of the fiscal and structural reforms taken in the region.
In 2022 alone, the overall fiscal surplus will amount to over $100bn, as the rise in expenditures — particularly on wages —remains contained so far.
While the 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, the paper cautioned.
In this context, it said the "reform momentum established in previous years should be maintained — irrespective of the level of hydrocarbon prices".
To respond to near-term shocks and firmly address medium-and long-term challenges, the policy paper recommended implementing a comprehensive package of policies that includes using additional revenues from higher oil prices to rebuild buffers and strengthen policy space.
"Given the available fiscal space, targeted support for the most vulnerable can be prioritised, leveraging the progress made on digitalisation," it said.
On keeping medium-term fiscal policy geared towards ensuring fiscal sustainability and increasing savings, it said over the long term, this "is critical" to ensure equity between generations and a smooth energy transition out of fossil fuels.
This can be supported through non-oil revenue mobilisation and energy subsidy phase-out, which will also contribute to climate change mitigation.
Other supporting measures include the gradual reduction of public sector wage bills and increasing spending efficiency through continuing reforms to improve procurement and investment planning.
"A proper assessment of the fiscal stance will require fully incorporating the sovereign wealth funds’ operations, given their role in diversifying savings from oil revenues and their involvement in national development strategies," it said.
As a result of high oil prices and abundant liquidity, which are facilitating credit expansion, the GCC bank balance sheets are currently shielded from tighter global financial conditions. However, bank soundness should continue to be carefully monitored, according to the paper.
It suggested accelerating ongoing structural reforms, including by raising female labour force participation, increasing flexibility for expatriate workers, improving education quality, further leveraging technology and digitalisation, enhancing regulatory frameworks, strengthening institutions and governance, deepening regional integration, and addressing climate change adaptation and mitigation challenges.
Implementing policies for sustained private sector-led economic growth and diversification will be as important as ever, it said.
To respond to near-term shocks and firmly address medium-and long-term challenges, the IMF policy paper recommended implementing a comprehensive package of policies that includes using additional revenues from higher oil prices to rebuild buffers and strengthen policy space