Gulf oil exporters must cut spending and narrow their budget shortfalls to keep their currencies pegged to the dollar, the International Monetary Fund said.
While substantial foreign assets have allowed the six members of the Gulf Cooperation Council to fix the value of their currencies to the greenback, keeping the status quo comes at a price as lower crude prices strain public finances, the lender said in a report titled “Learning to Live with Cheaper Oil.”
“When a country faces prolonged fiscal and external deficits, policy adjustment must come from fiscal consolidation measures,” the IMF said in the report authored by Martin Sommer, deputy chief of its regional studies division. Maintaining the currency pegs “will require sustained fiscal consolidation through direct expenditure cutbacks and non-oil revenue increases,” it said.
As investors increased bets that currency fixes may become too expensive to maintain, the UAE and Saudi Arabia renewed their commitment to their pegs - with the latter also said to ban betting against its currency. 
Gulf oil producers’ budgets swung from surplus to deficit as Brent crude fell by as much as 75% from June 2014 to January this year, before a partial recovery in recent months.
Even after cutting spending, the combined budget gap in the GCC region - which also includes Kuwait, Qatar, Bahrain and Oman - as well as Algeria is expected to reach $900bn for the 2016-2021 period, and represent 7% of their gross domestic product in the final year, the IMF said.
Their debt-to-GDP ratio is expected to rise to 45% in 2021 from 13% last year as governments issue debt to plug their budget gaps.
Foreign assets give governments varying amounts of “fiscal space” to cope with lower oil prices, with Kuwait, Qatar and the UAE enjoying sizeable buffers to finance more than 20 to 30 years of projected deficits, the IMF said.
Even so, the GCC and Algeria need a fiscal “adjustment” of about 10% to 15% of gross domestic product, with every $10-increase in the price of oil reducing that amount by about the equivalent of 4% of GDP, the IMF said. The lender expects oil to rebound to about $50–$55 a barrel by the end of this decade, based on futures markets.
GCC members can tackle imbalances via non-oil income and public-spending measures, the report said. A value-added tax of 5% would raise the equivalent of about 1.5% of the region’s GDP, while better public investment efficiency could save the equivalent of about 2% of economic output, it said.
Fiscal consolidation is no easy task given the rigidness in government spending on wages and social benefits which are seen as part of an “implicit social contract” between Gulf oil producers and their citizens, according to the IMF.