A catch-22 double-whammy, indeed, is shaping up for Gulf economies.
If an estimated 70% plunge in global oil prices from their mid-2014 peak to around $40 currently has hit Gulf finances hard, the six-nation grouping is heading for a protracted economic slowdown because of the austerity policies needed to curb budget deficits, the latest International Monetary Fund report has said.
Mideast non-oil economic expansion is set to slow to between 3.5% to 4% through 2021, compared with about 7.5% in the previous decade, according to the IMF. At this pace, governments and private businesses would be able to create 7mn jobs, about 3mn short of the number of entrants expected in the same period, it said.
For the Gulf Co-operation Council region, economic growth will almost halve to 1.8% this year from 3.3% in 2015. Saudi Arabia, the largest Arab economy, is now expected to grow by 1.2% this year, compared with 3.4% in 2015; the UAE will see a drop from 3.9% last year to 2.4%. Assuming oil prices stay low in coming years, the fiscal deficits of the GCC and Algeria will total almost $900bn between 2016 and 2021, the IMF calculated.
On the brighter side, Saudi Arabia, the world’s top oil exporter, has cut spending and turned to the bond market to finance the deficit. The UAE, the second-biggest Arab economy after Saudi Arabia, scrapped subsidies on transport fuel last year.
The “Saudi Vision 2030” economic reform plan announced by Deputy Crown Prince Mohamed bin Salman on Monday envisages “live without depending on oil by 2020”.
Qatar, which is in the second year of a $200bn infrastructure upgrade, will scrap gasoline and diesel subsidies next month, QNA said. Qatar is expected to post a budget deficit of 2.7% of gross domestic product this year, after recording a surplus of 10.3% in 2015, according to IMF estimates.
But the IMF figures are also a stark reminder of how the energy-rich nations in the region probably missed the best chance to diversify their economies when crude prices were at $100 a barrel or higher in the past decade. While public spending fuelled non-oil growth, governments used the windfall partly to hire more nationals and extend more handouts.
There are sure some signs of oil markets rebalancing by end-2016; but it may now be dicey for the GCC policymakers to price in higher oil in their long-term economic planning. An unenviable regime of relatively lower oil prices, contrasted with the consistent $100-levels Gulf countries had been quite comfortable with for long, is here to stay even if demand picks up later this year.
Sure, these are tough times for the oil-dependent Gulf nations. But lower oil prices should serve as a welcome opportunity for them to focus on long-term economic reforms. Gradual lifting of subsidies, particularly on hydrocarbons; a shift towards renewable energy; deeper role of the private sector with the active participation of the citizens; diversification of the export base and taxation all command greater attention now.