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Middle East Economy
IMF urges Gulf states to cut spending
From the Financial Times of Mon, 27 Oct 2014 18:25:12 GMT
Picture shows an Aerial view of the Balal offshore oil platform in the Gulf waters, in the Gulf on the edge of Qatar's territorial waters, 16 May 2004. Iran's Vice President Mohammad Ali Aref officially inaugurated the Balal offshore oil field developed by French major Total together with BowValley of Canada and Italy's Agip. The Balal field is currently producing 40,000 barrels per day and was developed under a 310-million-dollar agreement signed in 1999.©AFP

The International Monetary Fund has urged Middle Eastern oil producers to cut spending and speed up economic reforms to reduce the fiscal risks of a sustained period of lower oil prices, warning that Saudi Arabia, the region’s largest oil exporter, could run a budget deficit as early as next year.

Speaking at the launch of the IMF’s latest regional economic outlook report, Masood Ahmed, the IMF’s regional director, said that if oil prices fell to $75 a barrel for a sustained period, Gulf states would see projected fiscal surpluses of $275bn falling to $100bn.

Lower oil prices would increase pressure on regional governments to curb swollen spending plans and slash politically sensitive energy subsidies, despite their having financial war chests built up during years of high prices, the report said.

The fund estimates that falling oil prices could reduce gross domestic product growth by one per cent in the oil-rich Gulf Co-operation Council states, where economic growth of 4.1 per cent last year is forecast to grow to 4.4 per cent this year and 4.5 per cent next year.

Across the Middle East and north Africa, GDP growth is forecast to rise from 2.6 per cent this year to 3.8 per cent next year. However, this was in jeopardy as oil prices fall and regional conflicts deepen, the fund said.

According to the report, which was prepared before the 25 per cent oil price slide over the summer, regional oil exporters’ fiscal surpluses would decline from a peak of 7.75 per cent of gross domestic product in 2012 to 1.25 per cent in 2015 and would vanish by 2017.

Oil exporters, which have in recent years enjoyed oil prices of around $105 a barrel, saw spending rise by 7 per cent between 2011 and 2015.

Even if oil prices remained at their 2014 peak levels, fiscal balances would deteriorate without reform, the IMF said. An additional 1m barrels a day of oil supply outside the region could result in a 12 per cent fall in oil revenues, weakening fiscal balances by 3 per cent of GDP.

The IMF called for reforms such as boosting education, reducing energy subsidies and slashing bureaucracy. It also urged regional governments to restrain public-sector wages growth and incentivise nationals to seek private sector work.

Temporary, targeted wage subsidies could be used to reduce the cost of nationals over expatriates, who form the majority of the private sector workforce, the report said.

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