Ongoing GCC fiscal adjustment could be less costly: IMF

Significant consolidation and lower less productive current spending make the ongoing fiscal adjustment in the Gulf Co-operation Council (GCC) less costly than previously thought, according to an International Monetary Fund (IMF) study.
"The ongoing fiscal adjustment in the GCC could be less costly than suggested by prior estimates of fiscal multipliers for the region," said an IMF working paper.
It highlighted that empirical assessment suggests that as the Gulf countries have embarked on significant fiscal consolidation measures, reducing (less productive) current spending will help limit the adverse impact of such measures on economic activity.
"Given the larger and more persistent impact of capital spending on non-oil growth, (efficient) investment expenditures need to be protected," it said.
A weaker relationship between fiscal spending and non-oil growth points to lower economic costs of fiscal adjustment currently underway in the GCC, the paper sad, simulating non-oil GDP growth, based on updated estimates of fiscal multipliers.
"These simulations confirm that the substantial reduction in government expenditure in the GCC will likely have a more limited adverse effect on their economies," it said.
Based on the actual composition of the fiscal consolidation, the simulations predict the trough of non-oil GDP growth in 2017 at 2.7%, or 4%, when using multipliers for the most recent period (2011–16), compared to 5.7 in the baseline.
The non-oil growth impact of consolidation could be lower if the adjustment weighs primarily on current spending. Based on estimates of fiscal multipliers for the period 2011–16, if spending adjustment were to fall solely on current expenditure, non- oil growth would be at the maximum 1.2 percentage points lower in 2017 (non-oil GDP growth would be 4.5).
However, if the adjustment were to fully translate into cuts in capital spending, the impact on non-oil growth would be much larger, in which case, non-oil growth could be as low as -1% in 2017.
Studies on the GCC countries suggest that fiscal multipliers are smaller than in most countries and that multipliers are larger for capital than for current spending, it said.
The GCC countries heavily depend on oil. During 2000–2014 (commodity boom era) the GCC's average oil revenue was 81% of total fiscal revenues. However, oil prices started to drop in mid-2014, bottoming at $30 per barrel in January 2016.
Lower oil prices significantly deteriorated the fiscal positions of GCC - from an average fiscal surplus of 12.7% of non-oil GDP in 2014 to a deficit of 14.5% by 2016, the IMF study said, adding the deterioration in fiscal balances triggered large fiscal adjustments.
Between 2015and 2016, the GCC countries on average consolidated by 13.8%, it said, adding since fiscal adjustments can have a negative impact on growth, it is important to study the impact such adjustment has had on growth in the GCC.