IMF warns GCC members to cut government spending

30 October 2012

Washington-based IMF warns region faces fiscal deficit by 2017 if policies remain unchanged  

GCC governments should aim to curb government spending to prevent the six-member bloc sinking into a combined fiscal deficit by 2017, the IMF warns in a new report.

The Washington-headquartered IMF says the pace of growth in government spending could be scaled down due to the region’s current robust economy, which is buoyed by high oil prices, expanded oil production, expansionary fiscal politics and low interest rates.

“While expansionary fiscal policies helped the region weather the global financial crisis, given the healthy economic expansion currently under way, the need for continued fiscal stimulus is diminishing,” the IMF says in a report released on 29 October.

“Most GCC countries should therefore plan to reduce the growth rate in government expenditure in the period ahead … This would help ensure long-term sustainability given the prospective of budgets moving into deficit over the medium term,” it adds.

The combined GCC economies have grown at a strong pace since the trough of 2009, with overall gross domestic product (GDP) growth reaching 7.5 per cent in 2011 – a seven-year high – and non-hydrocarbon growth rising in all countries except unrest-hit Bahrain.

However, the IMF forecast crude prices to decline gradually over the medium term, projecting a dip below $100 a barrel by 2015, while oil production is also expected to fall slightly in the year ahead.

“Accordingly, along with continued increases in government spending, fiscal and external surpluses are, with unchanged policies, projected to decline in 2013 and beyond, with the combined fiscal surplus turning to deficit around 2017,” the report forecasts.

High government spending has increased the breakeven oil prices of the six members to an average historical high. Although mostly remaining below actual oil prices, the report highlighted, the higher bar makes GCC economies more vulnerable to the possibility of a weaker crude market.

Non-oil growth is forecast by the IMF to slow from 7 per cent in 2011 to 6 per cent in 2012, with 5.5 per cent projected for the year after.

“This slowdown reflects lower growth in government spending, as well as weaker external conditions, with the effects partially offset by still accommodative monetary conditions and the positive momentum in private-sector activity,” says the IMF in its report.

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