Learning to Live with Cheaper Oil in the Middle East

IMF Blog, January 22, 2015

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Global oil prices have declined by 55 percent since last September.
Estimated export and government revenue losses:
- About $300 billion (21 percent of GDP) in the Gulf Cooperation Council.
- About $90 billion (10 percent of GDP) in other oil-exporting countries.
Except for Kuwait, all countries in the region are expected to run fiscal deficits in 2015.
The Gulf Cooperation Council fiscal position:
- Fiscal surplus of 4.6 percent of GDP in 2014.
- Projected fiscal deficit of 6.3 percent of GDP in 2015.
- Downward swing of about 11 percent of GDP.
Growth outlook for the region’s oil exporters:
- Expected growth of 3 percent this year.
- This is somewhat higher than last year but nearly 1 percentage point lower than projected last October.

Most oil exporters have large buffers in the form of foreign assets and can draw down accumulated financial reserves to mitigate near-term impacts.
Governments are generally expected to reduce the growth of government spending in a measured way to avoid sharp negative effects on growth.
Because the pace of adjustment is expected to be measured, a very sharp negative effect on growth is not anticipated in the short term.

Uncertainty over where oil prices will eventually settle complicates policy calibration between temporary and persistent effects.
If lower oil prices persist, countries will need to reassess medium-term spending plans and progressively adapt to new global oil-market realities.
Key policy priorities:
- Gradually adjust government spending and better prioritize spending to meet social and economic development objectives.
- Advance energy subsidy reforms to address underpricing of energy products, which persists despite the fall in international oil prices.
- Consider options for increasing non-oil revenues.

The growth model anchored in rising government spending and oil revenues is no longer sufficient.
The private sector must become a much more self-sufficient engine of growth and jobs.
Required reforms to enable private-sector-led, export-driven growth:
- Improve the business environment.
- Strengthen governance.
- Reform education.
- Advance trade integration.
Labor market focus:
- Enable nationals to participate more in the private sector labor market to reduce pressure on governments to be the employer of first and last resort, which will be harder to sustain during an era of lower oil prices.

Source: Masood Ahmed, "Learning to Live with Cheaper Oil in the Middle East", January 22, 2015