Wednesday, Jun 08, 2016
Dubai: Ambitious fiscal consolidation measures are being implemented this year in the Gulf Cooperation Council (GCC) region but budget balances will nonetheless deteriorate in several countries, given the sharp drop in oil prices, the IMF has said.
“An additional substantial deficit reduction effort is required over the medium term to preserve fiscal sustainability and, in the GCC countries, to support the exchange rate pegs. Policymakers need to be mindful of emerging signs of liquidity pressures in their financial systems and the risk of deteriorating asset quality,” an IMF staff paper said.
The GCC, with substantial financial buffers, used these reserves to absorb the initial oil price shock and smooth policy adjustment.
This has been reflected in falling foreign exchange reserves in most countries. The actual drawdown of financial buffers may have been larger, as some countries also withdrew assets from their sovereign wealth funds.
At the same time, most countries have started to rein in budget spending. The fiscal consolidation process is expected to continue and intensify in most countries in 2016.
However, the IMF estimates that due to the further deterioration in oil prices, their fiscal deficits will not, on average, visibly improve this year.
Most GCC countries have not yet increased non-oil revenues in a meaningful way, although several policymakers have announced the introduction of a GCC-wide value added tax (VAT), as well as other fees, charges, and excises.
Bahrain has started increasing a number of fees, including for health care services, and recently increased tobacco and liquor taxes.
Oman has increased corporate taxes and fees this year. Saudi Arabia has boosted non-oil receipts, primarily through higher transfers from entities outside the central government budget. There are no plans to introduce personal income taxes in the GCC countries at this time.
GCC countries have pursued substantial energy price reforms.
Fuel, water, and electricity charges have been raised significantly from very low levels in most of the countries.
The IMF team has observed that implementing further large fiscal adjustment is not an easy task. It will require difficult choices and adjustments in the implicit social contract between governments and citizens, not least because spending on items such as wages and social benefits tends to be rigid and difficult to cut.
Policymakers will need to implement measures in a way that minimises the adverse impact on growth, while maintaining social cohesion, including by protecting essential spending on health, education, and other high-return categories, and by protecting the vulnerable segments of population.
According to the IMF, on the revenue side, the GCC countries have room to raise receipts in all areas, from both indirect taxes (VAT, property) and direct taxes (personal and corporate income taxes).
Growth impact
Fiscal consolidation efforts are expected have impact on economic growth across the region. Standard estimates of fiscal multipliers suggest that fiscal adjustment to a persistent $10 (Dh36.70) oil price reduction should temporarily reduce overall real GDP growth by about 0.5 percentage point in the GCC region.
The relationship between growth and public spending may vary considerably over time. In particular, the large increase in government spending after the Arab Spring might have had a limited impact on growth. Conversely, spending reductions aimed at inefficient expenditures could have a lower-than-usual multiplier, reducing imports and private saving rather than private domestic demand.
“Given the large run-up in government expenditures during the oil price boom, policymakers should be able to identify wasteful expenditures that could be cut without adversely affecting growth. This task would, of course, become more challenging over time as fiscal consolidation advances,” the report said.
By Babu Das Augustine Banking Editor
Gulf News 2016. All rights reserved.
