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21 April, 2016

Budget deficit in Arab economies set to climb

Consolidated budget deficit of Arab countries as a group is expected to increase marginally in 2016 to 11.6 per cent of GDP.

21 April 2016
Muscat Consolidated budget deficit of Arab countries as a group is expected to increase marginally in 2016 to 11.6 per cent of gross domestic product (GDP), as oil revenues will continue to fall, while tax revenues are expected to be affected by sluggish growth at the international and regional levels, according to a report released by Arab Monetary Fund.

Lower crude oil prices eased pressures on public finance in Arab oil-importing countries, especially in light of the rising cost of energy subsidies.

As a result, the estimated consolidated budget deficit for the Arab countries as a group is estimated to increase to 11.4 per cent in 2015 compared to 2.8 per cent of GDP in 2014. It is obvious that the tendency of many Arab countries is to implement wide and diversified range of fiscal reforms aiming at rationalising public spending, enhancing public revenues to ensure budget consolidation and fiscal sustainability, particularly in the light of the challenges facing fiscal policy in these countries.

Tax reform came at top of these reforms, as several reforms have been implemented in a number of Arab countries to enhance tax revenues and ensure equitable and efficient tax system through revising income and corporate tax systems, adoption or reforming value added tax, and directing taxation to support small and medium-sized enterprises and promising regions.

On the other hand, several policies have been implemented to lower public spending mainly through rationalising current expenditures via containing increases in payroll expenses and reforming subsidy systems, in addition to measures to increase the efficiency of capital expenditures. Arab governments also, paid great attention to achieve higher levels of efficiency and transparency of public finance and debt management.

Public spending is projected to fall by 6 per cent this year as a result of fiscal discipline policies, which will help reduce pressures on consolidated public budget of Arab countries as a group. In 2017, public finance is expected to see a significant improvement, amid expectations of higher revenue as a result of expected increase of oil prices by 15 per cent next year.

The report said that tax revenues are expected to rise owing to the anticipated expansion of economic activity in the Arab countries and their major trading partners. Moreover, the consolidated public budget will positively benefit from fiscal reforms implemented in Arab countries within time frame extending to 2020.

The current account deficit for Arab countries as a group will reach $137.8 billion (representing 5.5 per cent of GDP) in 2016 compared to $105.7 billion for the deficit recorded in 2015. Concerning 2017, the report expects that the current account deficit for Arab countries as a group to decline to $97 billion dollars (representing 3.6 per cent of GDP), amid expectation of relatively higher international oil prices next year.

Also, lower oil prices and an economic slowdown in oil exporting countries are expected to negatively affect the growth rate of deposits, especially considering the size of their financial systems. Yet, the main challenge in the coming years is to maintain a low level of non-performing loans, highlighting the importance of sustaining government expenditure levels to boost domestic demand without jeopardising fiscal sustainability.

© Times of Oman 2016