Gulf oil states need swift adjustment to lower prices, IMF warns

Saudi finance minister Ibrahim Alassaf said on Tuesday that the kingdom's financial position is very strong despite the plunge in oil prices since last year. Amr Abdallah Dalsh / Reuters

The IMF warned Middle Eastern oil exporters that their economies will pay a price if they don’t take rapid steps to scale back public spending amid the global oil-price slump.

Countries facing a loss of oil revenue are expected to use financial buffers to weather declining oil prices, while gradually reducing their fiscal spending, the IMF said in a report on Tuesday.

Governments should take steps such as capping public wages, reducing energy subsidies and increasing targeted social subsidies, it said. “Delaying such reforms will most likely require a more abrupt and costly adjustment in the future.”

The IMF has cut its 2015 growth forecast for the GCC, a bloc of six oil-rich nations, by 1 percentage point since October, to 3.4 per cent. It predicts that the bloc’s combined budget surplus of $76 billion in 2014 will turn into a deficit of $113 billion, or 8 per cent of GDP, this year.

Meanwhile, Saudi Arabia’s financial position is very strong despite the plunge in oil prices since last year, and the kingdom is focusing spending on economuc development projects to stimulate the private sector, finance minister Ibrahim Alassaf said on Tuesday.

In a speech to a major financial conference, Mr Alassaf also said he was optimistic that the global economy was emerging from its slump, citing indicators from Europe and Japan. But he added that one couldn’t expect a return to growth levels of 10 years ago.

Low oil prices are a challenge to oil exporting countries in general, including Saudi Arabia, but Riyadh is able to use its spending to avert the negative impact, Mr Alassaf said.

He said a new Council of Economic and Development Affairs, created by King Salman on taking the throne in January, would help to accelerate decision-making and support government efforts to improve the business environment.

Because of cheap oil, the government has projected a record budget deficit of $38.7 billion for 2015 and has started running down the central bank’s huge foreign currency reserves to cover the gap.

Private economists in a Reuters poll published last week expect Saudi GDP to grow a median 2.6 per cent in 2015, down from 3.6 per cent last year.

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