ECONOMY: Oil price slide piles on the pressure

27 February 1998
NEWS

THE economy is about to experience the downside of its over-dependence on oil revenues. Depressed crude prices will temper growth this year and could even push the budget back into the red. Advocates of economic reform hope the income squeeze will encourage the government to implement promised structural reforms.

The IMF gives the economy a mixed review in its latest Article IV report. It commends the progress achieved during 1996 in eliminating fiscal imbalances, enhancing bank supervision, making progress towards resolving the difficult debts problem, and moving forward with the sell-off of state assets. 'Reflecting that progress and aided by higher oil export prices, confidence had improved, economic activity had picked up, inflation had remained low, and the stock of foreign assets has risen,' the report says.

The fund says that a sound basis has been created for a medium-term programme of structural reforms aimed at diversifying the economic base, strengthening the role of the private sector and providing new employment opportunities.

It urges the government to proceed with the privatisation of utilities and warns against the adoption of a Kuwaitisation policy.

The report calls on the government to strengthen the structure of the budget by raising non-oil revenues in order to minimise the volatility of income. Oil revenues make up almost 90 per cent of state income, making it extremely vulnerable to oil price fluctuations. 'Revenue-raising measures could include a restructuring of company taxes, the introduction of a consumption tax, and increases in fees and charges on public sector services,' the report suggests. The fund also recommends the complete overhaul of the salary and welfare system.

Most analysts believe the government will be slow to take up the fund's recommendations. 'There has to be a consensus,' says Adnan al-Bahar, chairman of Islamic finance house The International Investor. 'This will take time.'

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