In line with its continuous efforts to support decision-making process in the Arab countries, the Arab Monetary Fund (AMF) has released a study on “the government spending multipliers under oil price swings”. The study aimed at assessing the impact of government spending on the Gross Domestic Product (GDP) in the Arab countries, with a special distinction between two cases of spending multipliers in periods of oil price increases compared to periods of oil price decreases.

The price of oil is considered an important variable due to its significant impact on the world economies and particularly on the Arab region. In 2014, oil prices began to decline and stagnate, since then, at moderate levels compared to their high levels recorded in 2013. This situation has imposed some challenges on the budgets of oil-exporting economies, which have embarked on fiscal measures and reforms such as introducing the value-added tax in some Arab Gulf Cooperation Council States, and the tendency to liberalize domestic oil prices, whether in oil-exporting or oil importing countries.

Following this trend in oil prices, most studies have focused on reviewing fiscal policies in oil-exporting countries and the Arab region as well. While oil-producing countries affected by low oil prices must make significant fiscal consolidations efforts, to correct imbalances in their budgets and current accounts in periods of lower oil prices, an assessment and review of fiscal multipliers considering oil price movements should be prioritized. Moreover, oil importing countries have been long affected by the increase in oil prices. Therefore, assessing fiscal multipliers for these countries under oil prices changes is important, to support making the best choice regarding the fiscal policy-mix tools that should be used, especially, that these countries characterised by a relatively diversified tax systems that can be used actively when their public spending is inefficient.

From this perspective, and since many Arab countries rely heavily on the oil sector as a main source of export, or by fully being net importers of it, evaluation of fiscal multipliers, particularly spending multipliers, has become critical to determining fiscal policies’ choices and priorities following oil prices swings.

In this context, the study evaluated the public spending multipliers in the Arab countries during the period (1983-2018), using structural autoregressive models (SVAR). The results show that, under oil price decrease, expenditure multipliers are much higher than under oil price increase and could reach more than one for many countries in the sample, in the short run while their value could exceed two in the long run. Moreover, it is noted that, on average, spending multipliers in the oil exporting countries are higher than those in the oil importing countries at the times of decreasing oil prices, while the opposite is noticed at the times of increasing oil prices.

These results are in line with what is observed in the recent literature about fiscal multipliers, in the advanced economies, which found to be large in times of recessions while they tend to be weak or even negative in times of expansions. For many oil exporting countries, a sustained decrease in oil prices is to be considered as a proxy for a recession cycle.  In fact, a sustained decrease in oil prices is more likely to induce these economies in recessions.

Considering the previous results, the study recommends that fiscal policy should be designed considering oil prices movements. Especially in oil exporting countries, fiscal policies should be countercyclical to oil prices cycle. In times of recessions, an increase in the government spending is welcomed by the economy, while in times of expansions, which is the case in time of oil price increase, some government expenditures are likely to crowd out private expenditures, which leads to lowering expenditure multipliers.

A full version of the study is available at the link: https://www.amf.org.ae/en/content/government-expenditure-multipliers-under-oil-price-swings 

© Press Release 2020

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