In what is seen as a “significant recalibration” of fiscal policies, most GCC countries have begun to improve their public financial management while also making efforts to strengthen fiscal positions, International Monetary Fund has said in a report.
The latter involved deploying a variety of quick fixes—such as short-term freezes and cuts in various discretionary items—as well as more substantive reforms, such as phasing out of inefficient energy and water subsidies and the introduction of new taxes and fees, IMF noted.
In its recent report on ‘The future of oil and fiscal sustainability in the GCC region’, IMF said the introduction of excise and value-added taxes in three GCC countries was a “significant” change that the three other GCC countries are expected to follow.
As a result of these efforts, the average non-oil primary fiscal balance (NOPB) in the GCC has improved from a deficit of more than 60% of non-oil GDP (in 2014) to 44% in 2018 — a “remarkable” effort in any international comparison, IMF noted.
The 2014 oil price decline resulted in large fiscal deficits and sparked significant reforms in the region.
The decade from 1997 was one of “rising saving” and the next six years had seen “accelerated spending” in the GCC, IMF said.
Recognising the need to accelerate efforts to reduce their dependence on oil, all countries have adopted new (or modified existing) strategic “visions” for their economies envisaging faster diversification and private sector development. To this end, governments have begun to roll out wide-ranging structural and fiscal reforms.
But overcoming the legacy of nearly a decade of strongly rising spending will require more time and effort. Although the fiscal consolidations to date have managed to stop the rising trend in current spending, they have yet to fully offset the decline in oil revenue.
During 2014 –18, most GCC countries were running overall fiscal deficits that required increased borrowing and/or drawing down central bank and sovereign wealth fund (SWF) assets.
Consequently, aggregate public wealth accumulation in the GCC region came to a halt while public net financial wealth declined during this period.
The long-term shifts in the oil market would pose additional fiscal challenges for the region. The GCC countries’ hydrocarbon GDP will likely follow the hump-shaped path of global oil demand, but with a more gradual deceleration owing to the expected gain in market share from higher-cost producers.
Continued growth of demand for natural gas will benefit Qatar and Oman, where it accounts for 75% and 25% of hydrocarbon revenue respectively, as well as other countries with sizeable gas reserves.
In the benchmark projection, these factors will delay the peak in hydrocarbon GDP by about a decade. Hydrocarbon GDP is expected to be lower in the alternative scenarios.
The lower producer price effect arising in the scenarios of stronger regulatory response to climate change (carbon tax) and faster improvements in energy efficiency will expand the GCC region’s market share. But these gains would be more than offset by the decline in demand.
These developments would be mirrored in a decelerating path of fiscal revenue. In the benchmark projection, IMF said the hydrocarbon revenue will peak by about 2048. Assuming continued annual non-oil real GDP growth rate of 3%, this implies a path of a persistent decline in hydrocarbon fiscal revenue in percent of GDP.
In the benchmark projection, IMF noted this ratio would halve by 2050 from the present level of 23%.
“The decline would be steeper should the alternative scenarios of faster improvements in energy efficiency and stricter environmental protection policies materialise,” IMF said.