Governments in the Middle East and North Africa (Mena) region are moving towards “fiscal reality” in view of the sustained low oil prices, making efforts to manage their public finances, a recent report has shown.
Initially, in 2015 most of the region's oil exporters chose the counter-cyclical approach, propping up spending by running down the huge reserve buffers built up during the years of rising prices, the Economist Intelligence Unit (EIU) has said in an analysis.
However, as 2016 has honed into view and global oil prices have touched 11-year lows, governments finally appear set to make a concerted effort to “repair” their public finances.
According to the EIU, all the countries in the region, with the exception of Qatar, had a fiscal break-even oil price above the estimated average of $53 a barrel in 2015 (and the forecast level of $53.2 in 2016).
However, seven of the nine Mena nations (excluding Yemen, whose production has almost entirely ceased in the wake of the country's civil war) made some steps towards bringing down their break-even level.
These reflect a combination of lower capital spending (in virtually all cases); higher oil production (in Oman, Saudi Arabia, UAE, Iran and, especially, Iraq); and other transitory factors.
Although oil-exporting governments have reordered their spending priorities, they have yet to take major steps to enhance non-oil fiscal revenue—largely reflecting a desire to avoid undermining their business environments and in turn hindering the long-term goal of diversifying their economies away from a reliance on oil and gas.
Yet, according to the EIU, any fiscal austerity drive will prove “exceptionally difficult” if solely focused on spending, and it now appears increasingly likely that revenue-raising tax measures will slowly be rolled out.
Most notably, in late August last year the UAE Ministry of Finance confirmed that it had been conducting studies with the other members of the GCC on the implementation of value-added tax (VAT) and corporate tax.
Although further progress on a GCC-wide VAT rate was announced in early December, it was “revealed that a slew of tax exemptions would be granted”, and initial indications are that the rate will be low.
A stepping-up of privatisation is more likely in the region, with Oman already publicly considering a partial sell-off of the Oman Oil Refineries and Petroleum Industries Company, and Saudi Arabia announcing an airport privatisation drive as part of a broader goal to divest "a range of sectors and economic activities". “However, even here, progress will be slow, as governments retain their overriding focus on creating jobs for their young and fast-growing populations,” the EIU said.