- Speculation has mounted that dollar fixes are too expensive
- Lower oil revenue has taken toll on exporters’ public finances
Gulf oil exporters must cut spending and narrow their budget shortfalls to keep their currencies pegged to the dollar, the International Monetary Fund said.
While substantial foreign assets have allowed the six members of the Gulf Cooperation Council to fix the value of their currencies to the greenback, keeping the status quo comes at a price as lower crude prices strain public finances, the lender said in a report titled “Learning to Live with Cheaper Oil.”
“When a country faces prolonged fiscal and external deficits, policy adjustment must come from fiscal consolidation measures,” the IMF said in the report authored by Martin Sommer, deputy chief of its regional studies division. Maintaining the currency pegs “will require sustained fiscal consolidation through direct expenditure cutbacks and non-oil revenue increases,” it said.
As investors increased bets that currency fixes may become too expensive to maintain, the United Arab Emirates and Saudi Arabia renewed their commitment to their pegs -- with the latter also said to ban betting against its currency. Gulf oil producers’ budgets swung from surplus to deficit as Brent crude fell by as much as 75 percent from June 2014 to January this year, before a partial recovery in recent months.
Even after cutting spending, the combined budget gap in the GCC region -- which also includes Kuwait, Qatar, Bahrain and Oman -- as well as Algeria is expected to reach $900 billion for the 2016-2021 period, and represent 7 percent of their gross domestic product in the final year, the IMF said.
Their debt-to-GDP ratio is expected to rise to 45 percent in 2021 from 13 percent last year as governments issue debt to plug their budget gaps.
Foreign assets give governments varying amounts of “fiscal space” to cope with lower oil prices, with Kuwait, Qatar and the U.A.E. enjoying sizable buffers to finance more than 20- to 30 years of projected deficits, the IMF said.
Even so, the GCC and Algeria need a fiscal “adjustment” of about 10 to 15 percent of gross domestic product, with every $10-increase in the price of oil reducing that amount by about the equivalent of 4 percent of GDP, the IMF said. The lender expects oil to rebound to about $50–$55 a barrel by the end of this decade, based on futures markets.
GCC members can tackle imbalances via non-oil income and public-spending measures, the report said. A value-added tax of 5 percent would raise the equivalent of about 1.5 percent of the region’s GDP, while better public investment efficiency could save the equivalent of about 2 percent of economic output, it said.
Fiscal consolidation is no easy task given the rigidness in government spending on wages and social benefits which are seen as part of an “implicit social contract” between Gulf oil producers and their citizens, according to the IMF. Philippe Dauba-Pantanacce, a senior economist and global political analyst at Standard Chartered Plc in London, says retrenchment is “imperative in order to imagine a post-oil economy.”
“It is a major challenge for countries where the populations have come to see the state as the essential provider of basic utilities, jobs and in a way, status.” he said by e-mail on Thursday. “But it is not impossible, if it is done gradually. Taxation comes with accountability and in that sense the implicit social contract will progressively evolve.”