‘It is true that it’s a bit of a man-bites-dog story,’ says Mohsin Khan, IMF director for the Middle East and Central Asia. ‘What we are saying is that governments in countries such as Kuwait, the UAE, Algeria and Libya should increase spending in areas such as infrastructure and education to foster the conditions for private sector growth.’ Measured by the ratio of the increase in the current account surplus to the increase in oil export earnings, producers in the region as a whole are reckoned to have saved about two-thirds of the oil price boon since 2002. Kuwait, Libya and Qatar saved the highest proportion of the windfall, while Oman was among those saving the least.
Oil prices are now at $70 a barrel and in common with most forecasters, the IMF expects high prices to prevail over the short to medium term – even if not at quite such an elevated level. ‘Projecting out from futures market prices, we expect prices to remain in the $60-70-a-barrel range right through to 2011,’ says Khan. ‘However, producers still remember the 1990s, when prices suddenly plummeted. And they are basing their budgets on prices such as $35 a barrel in spite of the fact that they’ve been at $60 a barrel since the start of the year.’
Many Middle East governments could reasonably argue that they are already heeding the IMF’s advice. Oil price forecasts used in state budgets are always conservative, but most governments increased substantially the figure used in their 2006 projections. Saudi Arabia’s budget for this year is estimated to be based on an oil price of about $31 a barrel, up from $25 in 2005, while Qatar’s is based on $36 a barrel, up from $27. Both Riyadh and Doha announced substantial spending increases for 2006, of 19.6 per cent and 44.4 per cent respectively, much of it going on infrastructure and education.
It is also debateable whether it is possible further to increase state spending, particularly in the GCC: already, infrastructure and industrial projects are being hit by delays and cost overruns as materials prices soar and contractors’ order books fill up. And governments are having increasing difficulty finding the capacity to manage and implement such a rapid expansion in project expenditure.
‘It’s true that many countries are already heeding the advice, but spending plans have not accelerated as fast as revenues and the situation varies between states,’ says Khan. ‘The UAE has been particularly good at planned spending, Qatar has lots of spending plans, Saudi Arabia is still planning to spend a bit less [proportionally] than these two.’ Some countries, including Algeria, Iran and Saudi Arabia, have preferred to prioritise debt repayment in allocating surplus funds. Algiers, for example, recently reached an agreement to settle early its entire $7,900 million debt owed to the Paris Club of sovereign creditors.
The IMF’s guidance to oil-importing countries is more in character, with governments advised to reduce fuel subsidies and pass on more of the cost of high oil prices to consumers. ‘The average pass-through for the region since 2002 is only 50 per cent; for oil exporters it is under 20 per cent,’ says the report. ‘Although this has helped contain inflation and limit the adverse impact on non-oil activity, the fiscal costs for some oil importers have been high.’
Regional gross domestic product (GDP) growth in 2006 is generally expected to be strong among oil importers as well as exporters. Morocco, Lebanon and Sudan are singled out for surprisingly strong growth forecasts, on the back, respectively, of agricultur