Oil exporting member states of the Gulf Cooperation Council (GCC), having been severely impacted by the global economic slowdown and the pandemic, are expected to see the contribution of hydrocarbons to the region’s Gross Domestic Product (GDP) recover to around 3.5 per cent next year, according to the International Monetary Fund (IMF). This compares with a hefty 7.3 per cent decline in the sector’s contribution to the GDP in 2020.
Jihad Azour, Director, Middle East and Central Asia Department, IMF, warned that the six member states of the GCC, comprising Oman, United Arab Emirates, Bahrain, Kuwait, Qatar and Saudi Arabia, could witness a drop in oil export revenues to the tune of a staggering $270 billion during 2020.
Despite a recent uptick in oil prices since the extension of the OPEC+ agreement, current prices averaging $43 a barrel are still around 30 per cent lower that the average of $68 a barrel that prevailed at the start of the year. Any further recovery will be dependent on a pickup in global demand, OPEC+ negotiations, inventory levels, and developments in the shale oil industry, he noted.
“Therefore, all these elements play into the composition of the price, and this is why we're seeing a high level of volatility currently still in the oil market. Yet, the expectations for the oil price to remain in the corridor of $40 to $45 which means that the impact, the negative impact on the oil sector for this year will be deep. We expect a drop in the oil GDP this year for the GCC to exceed to 7.3 percent as a negative growth this year with a potential recovery to 3 and 3.5 percent in 2021,” Azour remarked.
Sharing his outlook for the Middle East and Central Asian countries – a region that includes Oman and the GCC bloc – the IMF official said the “double whammy and lockdown and severe oil price fluctuations” would result in a 7.3 per cent decline in GDP growth across a region encompassing the Middle East, North Africa, Afghanistan and Pakistan in 2020.
Azour noted measures adopted by the GCC states in response to the COVID-19 pandemic. A fiscal package announced at the outset of the outbreak was designed to support the livelihoods of people through cash transfers, reductions in some bills, and deferment of tax payments. Central banks too rolled out measures extending liquidity and financing support, while some states reduced the level of interest rates.
In this regard, he stressed the need for continued support to sectors that have been central to the economic diversification strategies of the Gulf region. Affected sectors include tourism, real estate, airline transportation logistics, and so on, he said.
Key to fuelling a strong recovery, Azour stressed, will be the non-oil sector where high value-add activities and technologies will play an important role. “We expect also that this will give an opportunity to streamline some of the public entities and to make them more productive, and allow the private sector to gain an additional space in the economy. This also can be done by looking at the support to SMEs, which was one of the issues of the past and to see how access to finance can be expanded here in this area. Importantly, is to make sure that over the medium term, that this process of reducing the dependence on oil and oil cycle will be maintained.”
Commodity dependent economies are also starting to transform their economic structures and adopt newer fiscal management policies, he noted. “We saw several countries diversifying their source of revenues and also recalibrating some of their expenditures. This is something that we also saw during the COVID-19 shock. Some countries have reallocated some of their expenditure items in order to, on one hand, increase the support to the economy, but also do it by reallocating and reprioritizing among the list of expenditures those who are important. Some also have continued in reforming the subsidy system in order to increase the effectiveness of public spending,” he added.
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