The fiscal deficit in the Gulf Cooperation Council (GCC) is expected to widen to $143bn or 10.5% of the gross domestic product (GDP) this year and the region may increasingly tap global debts to finance the deficit in the medium to long term, according to the Institute of International Finance (IIF).
Notwithstanding the consolidation efforts, the GCC fiscal balance has shifted from a surplus of $49bn in 2014 to a deficit of $127bn in 2015, equivalent to 9.1% of GDP, the largest deficit in the history of the GCC, IIF said in a report, adding the registered deficit has been financed largely by using official reserves and local bank loans. 
“We expect the fiscal deficit to widen to $143bn (10.5% of GDP) in 2016 under the assumption of an average oil price of $40 per barrel,” the Washington-based IIF said.
Highlighting that lower oil revenues will more than offset the projected 11% decrease in real spending, it said while public foreign assets are large and are sufficient to finance the deficit at least for the next few years, “the GCC authorities are increasingly turning to international debt markets to limit crowding out of local business financing.”
IIF said the sizeable fiscal consolidation efforts should put the fiscal stance on a more sustainable footing in the medium term provided that oil prices recover gradually to about $60 per barrel by 2025, as assumed in its baseline scenario.
“Our projections show that the consolidated fiscal deficit would narrow steadily to 1.5% of GDP by 2025,” it said, adding the government debt would peak at 50% of GDP in 2022 and then stabilise.
The fiscal breakeven price of oil which balances the budget is expected to decline from a peak of $97 per barrel in 2014 to $82 this year and further to $66 by 2025. This improvement is achieved through the reduction of fuel subsidies, which have increased exports of crude oil in volume terms, mobilisation of additional nonoil revenues and by the significant decline in real public spending, according to the report.
Finding that fiscal adjustment is currently underway through mobilisation of additional non-oil revenue, it said the GCC authorities are raising fees for public services and “sin” taxes (on tobacco and soft drinks).
A value added tax (VAT) at a rate of 5% is expected to be introduced in early 2018 in all GCC countries, which could raise revenues by about 2% of GDP. Also, the authorities plan to privatise a range of public sector assets.
A reduction of government stakes in listed companies could yield at least 6% of GDP in fiscal revenues over the next five years. As a result of the above measures, the share of non-hydrocarbon government revenue in total revenues is projected to rise from 38% in 2015 to 46% by 2020.
Asserting that the sharp and sustained decline in oil prices since mid-2014 has made fiscal adjustment “unavoidable”; IIF said consolidated government spending across the GCC was cut by 12% in real terms in 2015 (as compared to an average annual increase of 11% in 2003-2014), and further significant cuts are envisaged for this year.
“Public investment has borne the brunt of the fiscal consolidation,” it said, adding low-priority projects are being cancelled, subsidies are being reduced or eliminated, and the wage bill is being contained by reducing the number of foreign workers in the public sector.
With the significant further decline in expenditure in 2016 and 2017 and the freezing of the level of spending beyond 2017 in real terms, the ratio of government expenditure to non-oil GDP is projected to drop from a peak of 64% in 2014 to 45% by 2020, it said.