The fall in oil prices is hitting the GCC hard, and the six countries have swung from a combined surplus of 10.6 per cent of GDP in 2013 to a deficit of 13.2 per cent of GDP in 2015, according to the Washington-based IMF’s latest Regional Economic Outlook for the Middle East.

Next year the combined deficit is forecast to continue, with the IMF anticipating it will be 12.6 per cent of GDP.

The IMF’s predictions are based on countries making some budget cuts, but the institution warns that what has already been announced and undertaken is not deep-reaching enough to address the size of the deficits in the medium term.

Depleting reserves

If these budget cuts are not undertaken and no additional debt is issued, Saudi Arabia, Oman and Bahrain will run through foreign assets and reserves in five years or less. The UAE, Kuwait and Qatar are much less vulnerable due to their higher hydrocarbons revenue per capita and could rely on buffers for more than 20 years under the same conditions.

In any case, the IMF recommends the GCC states use the fiscal buffers they have built up in the form of reserves and sovereign wealth to cushion the impact of lower oil prices.

“All these countries have strong starting positions,” said Masood Ahmed, director of the Middle East and Central Asia department at the IMF, speaking at the launch of the report. “They built up financial resources, which they can use to offset the pace of the adjustment… and take a phased gradual approach. But this is not avoiding the need to adjust, as these buffers will get exhausted.”

Building up debt is also risky. It took Saudi Arabia and the UAE a generation to pay off debt issued when oil prices were low in the 1980s and 1990s.

Despite intensive investments in diversifying their economies, non-oil GDP growth in GCC countries is expected to slow as government spending falls, from 5.5 per cent in 2014 to 3.8 in 2015 and 2016.

“It’s very important now that each country has plans to address its deficit so there is clarity and certainty for the private sector,” said Ahmed “Uncertainty makes the private sector more hesitant to invest and hire.”

Only Kuwait will buck the trend as the failure to spend as budgeted in the past five years means infrastructure investment cannot be delayed in the country. The necessary public spending will mean non-oil GDP growth will fall only 0.5 percentage points to 3 per cent in 2015 and 2016.

The next few years will show to what extent public spending drives the private sector, and how successful the GCC’s diversification efforts have been.

Spending efficiently

This highlights the issue of efficiency in public spending and investment. The IMF estimates that Middle East and North Africa infrastructure projects could reach the same results with 20 per cent less spending if they were more efficient, saving 2 per cent of GDP.

GCC countries are likely to target capital spending due to the political sensitivity of cutting public sector wage bills and subsidies. The IMF, as usual, recommends reducing subsidies and introducing some form of taxation, although it does not factor this into its calculations. The fund estimates that energy subsidies cost the GCC $70bn a year, or 5 per cent of its GDP.

“A VAT [value-added tax] instrument lends itself to early implementation,” said Ahmed. “It has been studied for severalyears, the technical work is advanced, and it is one of the better tax options. It is time to move from study to implementation, but this is best done as a GCC-coordinated effort.”

Unemployment concerns

The projected economic slowdown has worrying implications for job creation in the region.

Already 1 million Saudi, Qatari, Kuwaiti, Bahraini and Omani nationals are out of work, and an extra 2 million are expected to enter the job market by 2020. If the public sector reduces its hiring and the private sector is hit by reduced government spending, 28.5 per cent of the new entrants will remain unemployed.

This would push the GCC’s unemployment rate from about 12.8 per cent to 16 per cent over the next five years.