The Middle East’s oil producers are bracing for continued pressure from lower oil prices, with the International Monetary Fund projecting cumulative budget deficits of $320 billion over the next five years, according to a new report released on Tuesday.
Approximately half of that amount – or $160 billion – will be sustained by energy-rich Gulf Arab nations between 2018 and 2022.
Still, the projection is significantly lower than the shortfall of $350 billion that Saudi Arabia, the United Arab Emirates, Qatar, Kuwait, Oman and Bahrain racked up since 2015, when oil prices plunged to their lowest in years.
The IMF said economic growth in these countries bottomed out to around half a per cent in 2017.
Overall growth in oil exporters is expected to bottom out at 1.7 percent in 2017, driven by lower oil output under the Organization of Petroleum Exporting Countries (OPEC)-led agreement. In contrast, non-oil growth is expected to recover to about 2.6 percent in 2017 as the pace of budget deficit reduction slows.
Despite the progress already made, low oil prices have kept the fiscal deficits large in many oil exporters, highlighting the need for a continued focus on deficit reduction. Budget deficits of oil exporters jumped to 10.6 percent of GDP in 2016 from 1.1 percent of GDP in 2014.
These are expected to halve this year due to a modest recovery in oil prices and significant deficit reduction efforts. But since oil prices are expected to remain in the range of $50-60 a barrel, oil exporters will need to sustain—and in some cases intensify—their budget deficit-reduction efforts.
“Over the medium term, growth is anticipated to accelerate gradually in most oil exporter economies, but it will remain below what is needed to tackle the high level of unemployment in the region and raise standards of living for all,” said Jihad Azour, Director of the Middle East and Central Asia Department at the IMF.
A major diplomatic rift between four Arab countries and Qatar underway over the past several months has so far had limited impact on economic growth, though the IMF said the impasse could have an impact on investors’ appetites in the region.
Meanwhile, Saudi Arabia, one of the world’s top oil producers and the Arab region’s biggest economy, is introducing economic and social reforms to wean the country off its reliance on oil for revenue. In a move aimed in part at boosting women’s participation in the economy, Saudi Arabia lifted a longstanding ban on women driving that was seen as a damper on potential economic growth.
Azour added that for the Saudi economy to see a real boost, the decision to allow women to drive has to go hand-in-hand with creating more opportunities for women in the workplace.
“I think the real important element here is more on gradual recognition and taking gradual measures to allow women to participate more into the economy,” he said. “Allowing women to have better access to (the) market, to participate into the economy and create jobs.”
Azour said countries in the region must push ahead with structural reforms. The IMF cautions that across the Middle East, growth is below what is needed to “effectively tackle the unemployment challenges” of the region.
Conflicts in Yemen, Libya, Syria and Iraq are also having an impact on the region’s overall economic outlook. In Yemen, for example, inflation shot to nearly 40 percent in 2015 and is projected to be nearly 30 percent next year.
Meanwhile, oil importing countries are benefiting from lower oil prices, but Egypt, for example, is also battling inflation of close to 30 per cent.
The IMF has encouraged Mideast oil importers and exporters to reduce spending and find new sources of revenue by introducing new taxes and lifting subsidies.
In the outlook report, the IMF said progress on these efforts has been uneven. Oil-exporters like Iran, the UAE and Qatar have had lower budget deficits in comparison to their GDP than Saudi Arabia, Iraq and Oman. That’s in part because Iran, for example, is less dependent on oil revenues than Saudi Arabia.
The IMF’s figures are based on assumed oil prices of about $50 a barrel through the end of this year and next, up from last year’s average of $43. On Friday, Brent crude, the international benchmark oil, rose above $60 for the first time since 2015 as Saudi Arabia signaled its would support extending an agreement by major oil producers to limit output beyond next March.