Thursday, Oct 20, 2016

Dubai: The multi-pronged fiscal responses by Gulf Cooperation Council (GCC) countries to sharp fall in oil prices over the past two years are yielding positive results in the form of fall in fiscal breakeven oil prices according to data from Institute of International Finance (IIF), a Washington based association of global financial institutions.

According to the IIF estimates, the GCC average budget breakeven oil price will decline to $69 a barrel this year and 66 per barrel in 2017 from a peak of $87 per barrel in 2014.

While Kuwait maintained a relatively low budget breakeven oil price at $54 in 2014 and $58 in 2015, the IIF has forecast, it will come down further to $52 and $55 respectively for 2016 and 2017.

The UAE’s budget breakeven oil price that peaked at $76 per barrel in 2014, moderated to $58 per barrel in 2015 and is projected to shrink to $56 and $55 per barrel, respectively in the current year and the next.

The fiscal consolidation efforts across the GCC has seen a total spending cut 12 per cent in real terms in 2015 compared to an average annual increase of 15 per cent in 2003-2014, and the IIF expect a further 8 per cent cut this year.

In addition to spending cuts fiscal adjustment is also underway through mobilization of additional nonoil revenue. The authorities are raising fees for public services, and a value added tax (VAT) at 5 per cent is expected to be introduced in 2018 in all GCC countries. Also, the authorities plan to privatize a range of public sector assets.

With average oil prices expected to be $46 per barrel, the fiscal deficits are expected to widen somewhat in 2016. The drop in oil prices has shifted the aggregate current account from a surplus of $223 billion in 2014 to a deficit of $69 billion in 2016.

“Falling export income and government revenues and the resulting fiscal adjustments are taking their toll on economic activity. We now expect overall growth of 1.9 per cent this year, down from 2.9 per cent in 2015, But on a positive note, improving breakeven oil price lends credibility to the consolidation efforts, “ said Garbis Iradian, Chief Economist, Mena, IIF.

The apparent end of the oil boom has increased the importance of structural reforms to switch the focus of growth away from the public sector and toward the private sector. The number of national entrants into the labor force is growing rapidly given the demographic structure. To promote the creation of adequate jobs, the region needs educational systems better geared towards private sector needs and further improvement of the business environment.

By Babu Das Augustine Banking Editor

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