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Adapt to lower oil prices, IMF urges Gulf leaders

It will take years before oil prices rise significantly, the IMF warned [Getty]

Date of publication: 25 April, 2016

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The International Monetary Fund has urged the six-nation Gulf Cooperation Council to diversify their revenue base in the face of declining crude prices.

The International Monetary Fund forecast on Monday economic growth in the six-nation Gulf Cooperation Council would be just 1.8 percent this year, down from 3.3 percent in 2015, and urged spending cutbacks.

In an interview with AFP, IMF regional chief Masood Ahmed also said the oil-exporting Gulf states should press forward with diversifying their revenue bases, faced with persistent low crude prices.

OPEC heavyweight Saudi Arabia on Monday floated a raft of reforms aimed at diversifying its almost total economic reliance on crumbling oil prices.

This year will see "a continuation of a low oil-price environment, so we are going to see further - maybe $100 billion or so - in terms of lower revenues from oil exports," Ahmed said of the GCC which groups Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.

"This is now beginning to affect not just the financing [of governments] but also the economies in terms of their economic activities," he said in Dubai, where he launched the IMF's regional economic outlook update.

Oil prices have tanked by 70 percent from their mid-2014 peak value to just $40 per barrel. The IMF said markets expect prices to recover modestly to $50 by the end of this decade.

The largest Arab economy, Saudi Arabia, is now expected to grow by 1.2 percent this year, compared with 3.4 percent in 2015.

Economic growth in the UAE will also drop from 3.9 percent last year to 2.4 percent in 2016.

This is now beginning to affect not just the financing (of governments) but also the economies in terms of their economic activities.
- Masood Ahmed

Saudi Arabia, Bahrain and Oman will become "significant debtors" between 2016 and 2021, the IMF report said, with financing needs exceeding their reserves.

The plunge in revenues has forced the Gulf monarchies to make unprecedented fuel and energy subsidy cuts and plan to introduce indirect taxation. They have also scaled back spending on large projects.

"They need to pursue the measures they have started on cutting back and adjusting their spending, and to put in place revenue like VAT," Ahmed said.

Phased adjustments

VAT would add another 1.5 percent to gross domestic product "once it has come into place hopefully by 2018", he said.

But such measures will take years to implement, and authorities should ensure "implementing them in a sustained way, and building the institutional capacity to be able to do this is going to be important".

Many Gulf countries can introduce phased adjustments thanks to the "comfortable financial surplus" amassed over years of high oil revenues, he said.

In addition to balancing their budgets, Gulf countries face a major challenge ensuring that the private sector grows in a way that provides employment, Ahmed said.

The private sector is currently slowing "because partly they used to sell many of their products to the government" which is curbing spending.

"The big challenge is to revitalise the private sector, and that is really a transformation of the economies going forward," Ahmed said.

Diversification of economies that depend on a single commodity like oil is not an easy task, and experience around the world shows that this is something that requires sustained effort, learning by doing and learning from each other.
- Masood Ahmed

Another priority is to create incentives for nationals to seek private sector instead of public sector jobs.

"Diversification of economies that depend on a single commodity like oil is not an easy task, and experience around the world shows that this is something that requires sustained effort, learning by doing and learning from each other, so I see this as an ongoing challenge over the coming years," Ahmed said.

Oil revenues constitute the bulk of GDP for most Gulf countries.

Ahmed also argued that GCC countries that peg their currencies to the US dollar should maintain the link which has "served the GCC well".

"It provides an anchor of stability during a period when many other things, including the price of oil, are changing and quite volatile. It also reflects the nature of these economies," which trade in commodities priced in dollars.

Of Riyadh's reforms, Ahmed said: "In terms of what has already been said about it, it is an ambitious strategy to not only try and balance the budget of the kingdom over the next five years, but also to create an economy that is not so much dependent on oil.

"I think that these are exactly the right kinds of objectives," he said. "The level of ambition responds to the challenge that is faced."

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