IMF Says As Oil Prices Rise, Middle East Will See Ballooning Deficits Tumble

A director at the International Monetary Fund (IMF) said that as austerity, taxes and stable oil prices begin to take effect, oil exporters in the Middle East and North Africa will see their budget deficits shrink.

“Sizeable adjustments were made in the last two years and yesterday (Sunday) the Saudi government reemphasized commitment to bring the deficit down to balance the budget by 2020,” Jihad Azour, the IMF’s director of the Middle East and Central Asia Department, said on Monday.

Oil exporters dipped into international reserves to fund their budgets as oil prices began their slump in mid 2014. Saudi Arabia, announced plans to diversify its economy, slashing energy and utility subsidies, introducing a value-added tax, and introduced austerity measures, like many of its neighbors.

The Saudi government restored some perks and bonuses for government employees last month to soften the impact of austerity measures and curtail a public backlash.

“When you have a massive or sizeable adjustment on the public finances sometimes you have to fine tune it. And those adjustments or those reductions in the cuts are about 1 percent of the budget. Therefore, I think they will be compensated by other measures,” Azour added.

The IMF said in its latest Regional Economic Outlook that down from a 2016 projection of $565 billion, the cumulative overall budget deficits for the five-year period between 2016 and 2021 are estimated at $375 billion for the oil exporting nations of the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) region. The IMF said that the deficit could fall below 1 percent in 2022 even as the average fiscal deficits soared to about 10 percent of GDP (gross domestic product) in 2015 and 2016.

In 2016, the budget deficit shrank to 297 billion riyals ($79 billion) in Saudi Arabia. According to Reuters, that was below the government’s projection in its original 2016 budget plan of a deficit of 326 billion riyals and well below a record 367 billion gap in 2015.

“What has been happening is two fronts, one is, to reduce the level of the budget deficit, and on the other hand, the diversification program through structural reforms in order to allow the economy to grow faster and the private sector to reach growth,” Azour said.

“Bringing down the level of budget deficit will allow the Saudi government to have additional fiscal space that can be used for more investment and more specific social programs.”

“The improvement of (the) oil price helped reduce the level of budget deficit this year. And there are a certain number of fiscal reforms planned going forward. On the revenue side, the value added tax is to be implemented in 2018 and this will, in fact, be a very important fiscal reform. On the expenditure side, a continuation of the removal of subsidies on energy and oil will help reduce the current level of expenditures.”

Saudi Arabia and Kuwait tapped international investors to raise money in order to preserve those reserves and to finance deficits. the IMF said that external sovereign issuance reached $50 billion in 2016, more than five times the 2015 amount.

“The level of indebtedness of the GCC (Gulf Cooperation Council) nations is low,” Azour said.

“They have very good access to the international capital markets and they are able to finance their deficit at a very low rate. Which is, in fact, giving the level of liquidity that exists in the markets. This is something that they are resorting to that is better for them than to use their reserves to finance their deficit.”

(Adapted from CNBC)

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Categories: Economy & Finance, Strategy, Sustainability, Uncategorized

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