GCC states need to rein in spending for sustainable growth

Mammoth spending projections for the Gulf Co-operation Council (GCC) countries have experts concerned about its impact on their budget surpluses as well as longer-term fiscal outlook.

According to business-intelligence publication Meed, the combined value of Gulf projects that are being planned, or already underway, is nearing $2.46tn, more than 150% of the combined Gulf GDP.

After the 2011 Arab Spring unrest, Saudi Arabia announced about $130bn in spending to ensure government’s welfare benefits reach poorer sections of the society. Qatar raised public salaries as much as 120% and Kuwait offered citizens a year of free food.

Kuwait’s budget surplus narrowed to $50bn in the first nine months of this fiscal year as spending rose 18%, according to official figures released last week. Subsidies are expected to cost $18.08bn next fiscal to cover items like fuel and energy. But former Kuwait finance minister Sheikh Salem Abdulaziz al-Sabah, who ran the central bank for 25 years, warned in January that the government would be forced to take damaging measures such as devaluing the dinar or dipping into its Future Generations Fund if spending continues unabated.

Oman may have to start selling foreign assets or borrow on international markets in coming years if government spending rises during a period of lower oil prices and economic growth, a recent report in Al Markazi, a banking and economic publication by the central bank, said.

In October, the International Monetary Fund warned that Oman would slip into a fiscal deficit of 0.2% of GDP in 2015, widening to as much as 7.1% in 2018.

Qatar’s economic growth will slow to 4.6% this year as gas exports level off, the Ministry of Development Planning and Statistics said in December. That is down from an expansion of 17% in 2010, according to the IMF. The slowing growth may lead to “modest” budget deficits from 2015 through 2017, Citigroup’s chief economist for the Middle East, Farouk Soussa said in a report last year.

The IMF has repeatedly urged Kuwait and the other five GCC countries to reduce subsidies. It predicts that Saudi Arabia will join GCC members Oman and Bahrain in posting deficits by 2018.

In welcoming sign, Gulf countries are reining in spending as borrowing costs rise across the GCC after the US Federal Reserve cut its bond purchase programme to $65bn a month. Saudi Arabia’s growth in expenditure will slow to 4.3% this year from 24% last year, while Oman budgeted a 5% increase after a 20% rise a year earlier.

Qatar is imposing a 20% cut in funding for government agencies in the 2014-2015 budget, which starts in April, the Al Sharq said in an unsourced report on February 2.

Gulf nations, which enjoy limited monetary policy manoeuvrability with their currencies pegged to the US dollar, should work to build a self-sustaining private sector, which can cushion the economy from oil revenue volatility, says Amit Tyagi, vice president at National Bank of Abu Dhabi. He also suggests decoupling spending decisions from oil prices to evaluate the non-oil economy on a stand-alone basis.

Highly imports-dependent Gulf countries should take advantage of the oil windfall to finance longer-term labour market and intellectual property reforms. They need to rein in hard-to-reverse expenditures to pursue high-quality capital investments and social programmes to ensure sustainable growth, according to the IMF.