IMF lowers Gulf’s GDP growth forecast to 1.8%

The International Monetary Fund (IMF) once again revised downward its GDP growth outlook for GCC countries to 1.8 percent this year from 3.3 percent in 2015.

Lower oil prices will continue to hang over the region, leading to further deterioration in fiscal balances.

 “If you look at futures markets for the medium term, it’s still only showing a fairly modest recovery of around $50 per barrel, so oil prices are going to stay in a low range for a long time,” Masood Ahmed, director for the IMF’s Middle East and Central Asia department.

“Policies need to respond to this new reality. A further $150 billion decrease in the value of oil exports in the region is expected this year,” Ahmed explained at a conference in Dubai.

GCC economies are seen to post a higher combined deficit of around 12.6 percent this year, nearing $900 billion within the next six years.

Saudi Arabia and Bahrain are seen to become “significant debtors” during this period, as their financing requirements are set to exceed their current liquid financial buffers.  Policymakers will need to strike a balance between drawing down buffers and issuing domestic debt during this process.

Commenting on Saudi Arabia’s much anticipated vision and National Transformation Plan, Ahmed said he’s expecting an ambitious strategy.

“We think it’s very useful to lay out a vision because it helps to give the population a destination of where the economy is going and how you need to get there,” he said. “The biggest challenge for Saudi Arabia in terms of its economic diversification plan will be implementation and building institutional capacity to deliver on what's promised.”

Beyond fiscal policy, one of the biggest headwinds facing the region’s economies will be the need to drive job growth in the private sector as the public sector shifts its focus to cost-cutting and improving efficiency.

Meanwhile, acceleration in fiscal reforms is expected, as countries look to new sources of revenue to shrink their deficits. According to the IMF, there is more room to cut public spending and raise taxes and other new revenues streams. In addition, the fund estimates that further energy price reforms could save around 2 percent of regional GDP.

Looking ahead, countries in the region would be able to achieve higher growth in the mid-term if they rethink their economic structure and adopt a model that is less reliant on the public sector in driving economic activity.

Write to Joumana Saad at joumana.saad@argaamplus.com