The International Monetary Fund (IMF) has predicted that the GCC region will achieve a total fiscal surplus of $100 billion in 2022, and expects GDP growth in this region to double this year to reach 6.5 percent.
In a paper by associate director Amine Mati and senior economist Jérôme Vacher, both in the IMF’s Middle East and Central Asia Department, the additional revenue from higher energy prices could help Gulf states achieve long-term prosperity by maintaining the recently begun reform momentum.
The commodity price boom has mitigated the fallout from the war in Ukraine and the impact of tightening global financial conditions and has allowed for a more positive outlook for GCC economies.
The paper, seen by Economy Middle East, says that throughout its history, the GCC region has gone through notable periods of rise in oil revenues. During these periods, countries deepened their dependence on oil and gas, raised wages and public sector employment, expanded social safety nets, and boosted capital spending.
In 2002-2008 and 2010-2014, for example, the public-sector wage bill increased by 51 percent and 40 percent, respectively.
The IMF expects GCC countries to be able to provide significantly greater resources than they achieved in the previous two periods, thanks to the region’s fiscal and structural reforms. In 2022 alone, the overall fiscal surplus will reach more than $100 billion, as rising expenditures—particularly wage related—are still under control so far.
But the IMF cautions that while GCC countries have generally benefited from higher oil and gas prices, despite their continued volatility, many risks remain hanging over the outlook – particularly risks of a global economic slowdown. In this context, it stresses that the momentum of reform initiated in previous years should be maintained – regardless of the level of hydrocarbon prices.
But how?
The IMF recommends a comprehensive policy package to address short-term shocks and address medium- to long-term challenges, decisively. This package includes:
- Use the additional revenues generated from higher oil prices to rebuild buffers and expand space for movement through fiscal policy. Given the availability of fiscal space, priority should be given to supporting the most vulnerable populations, while consolidating progress in digital transformation.
- Continued medium-term fiscal policy orientation towards ensuring fiscal sustainability and increasing savings, through a credible fiscal framework. This is critical in the long term to ensure intergenerational equity and a smooth transition away from fossil fuels. This trend could be supported by mobilizing non-oil revenues and phasing out energy subsidies, which would also contribute to climate change mitigation. Other supportive measures include gradually reducing the public sector wage bill and increasing the efficiency of spending—for example, by continuing reforms to improve procurement and investment planning.
- Maintaining the stability of the financial sector is essential to maintaining strong economic growth. As a result of high oil prices and ample liquidity, which facilitate credit expansion, the balance sheets of GCC banks are protected from the impact of tightening global financial conditions. However, the safety of banks must continue to be carefully monitored.
- Accelerate ongoing structural reforms, including increasing women’s participation in the labor market, enhancing resilience in expatriate labor conditions, improving the quality of education, leveraging the potential of technology and digital transformation, strengthening regulatory frameworks, strengthening institutions and governance, deepening regional integration, and addressing climate change adaptation and mitigation challenges. Policies to sustain economic growth and private-sector-led diversification remain as essential as ever.
