Fiscal reform moving Gulf in 'right direction'

Oil-exporting Arab states of the Gulf are heading "in the right direction" to plug budgetary gaps thanks to fiscal reforms, but more change is still necessary, the International Monetary Fund said Tuesday.

"If they continue on this path in the next three to five years, the level of deficit will be less than 2 percent" of gross domestic product, IMF regional chief Jihad Azour told AFP in an interview. 

"This is going in the right direction," said Azour, who was in Dubai on Tuesday to launch the IMF update for its regional Economic Outlook for the Middle East and central Asia.

Revenues in the oil-dependent economies of the six Gulf Cooperation Council states have nosedived since the price of crude plummeted from its mid-2014 peak, forcing the monarchies to cut expenditure.

Such cuts have included energy subsidies in nations that have traditionally subsidised main services both for their own citizens and also for large populations of expatriate workers.

"Fiscal adjustment is still needed. Additional reforms are still needed, especially on the structural side," Azour said.

This would be "in order to diversify the economy and to allow the economy to grow outside the oil sector, to create additional jobs as well as to be less dependent on the volatility in the oil market", he added.

The GCC groups Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.

Saudi Arabia unexpectedly announced last week it would reinstate some allowances for civil servants that were cut last year as part of a reduction in expenditure.

Although this could be interpreted as a step backwards in the kingdom's programme to cut spending, the IMF regional chief called the measure "minor compared to the overall trend".

- Stronger non-oil growth -

"Whenever you have a large programme of adjustment, you still need to adjust or tweak some measures here and there," Azour said, referring to the kingdom's "Vision 2030" strategy to diversify its economy and reduce public spending.

"The Saudi government made strong fiscal adjustments over the past two years and were able to reduce expenditure," he said, adding that Riyadh has renewed its commitment to achieving a fiscal balance in 2020.

"Given the level of buffers that Saudi has, they can phase in a more progressive way their fiscal adjustment and they can space it over time," Azour added.

GCC states have agreed to introduce value-added tax in 2018.

Azour said imposing VAT is an "important move" that will help diversify revenues outside oil and help strengthen tax institutions.

The GCC countries have established a reputation for being tax havens.

In an attempt to prop up prices, members of the OPEC oil-exporting cartel and non-member exporters -- notably Russia -- agreed last year to cut production for six months, a decision that could be renewed in late May.

The IMF has lowered its forecast for economic growth in Arab oil-exporting countries in the wake of the output cuts.

But Azour pointed out that the non-oil sector has been gathering pace.

"In the GCC, the oil sector was affected by the cut in production. However the non-oil sector grew," he said, adding that the "2017 outcome is showing in fact that the non-oil sector is gaining more growth potential and recovering faster than the oil sector".

The regional report shows that non-oil growth in the GCC is projected to strengthen from almost two percent in 2016 to three percent this year.

Source: AFP