IMF chief urges prudent approach to GCC spending
IMF managing director Christine Lagarde has urged the GCC governments to reduce their current spending and put prudent fiscal policies in place
The GCC region’s economic growth is projected to slow, with IMF projection suggesting 3.2% in 2015 and 2.7% in 2016, compared to 3.4% in 2014.
IMF Managing Director Christine Lagarde said the fiscal and current account balances in the region are deteriorating sharply.
While addressing the joint meeting of the GCC Committee on Financial and Economic Cooperation in Doha, she added that the fiscal balance projected by the IMF to be in a deficit of 12.7% of GDP in 2015.
Lagarde continued: “At the moment, a large share of fiscal and export revenues in the GCC come from oil.
“With oil price shaving declined sharply since mid-2014, export revenues are expected to be nearly $275bn lower in 2015 than in 2014.”
She urged the GCC nations to implement prudential fiscal policies and for the governments to reduce their current spending growth.
Lagarde went on further to advise that public spending in mega projects is not advisable and there is no room for public wages to be further raised, she said.
However, the GCC countries face the challenge of lower oil prices from a position of strength.
With prudent policies in place over the past decade the region has been able to build up financial buffers, avoiding having to adjust their fiscal policies.
The IMF Chief said that well-planned fiscal consolidation strategies need to be put in place, nevertheless, as low oil prices are expected to continue for a number of years.
She urged all GCC countries to embark on some fiscal adjustment, the size and urgency of which varies across countries and made some observations and suggestions:
“…main elements are common across countries; an expansion of non-oil tax revenues; raising energy prices which are still well below international norms; firm control of current spending, particularly on public sector wages; and a review of capital expenditures. Reforms to strengthen the fiscal frameworks would support these consolidation efforts,” she observed.
Qatar was highlighted as is a good case in point, with regards to initiating fiscal adjustments, the IMF chief said.
On the financing side, she said local debt issuance can be used as a tool to support the economy and, for its part, Qatar is doing it effectively.
“Banking systems in the GCC generally appear well-placed to weather lower oil prices, weaker growth, and higher US interest rates.
“Nevertheless, as oil revenues decrease, external financing conditions tighten, and government debt issuance increases, central banks will need to remain vigilant for stresses in the system and provide liquidity to the financial sector if needed,” Lagarde added.