The IMF said it expects non-oil economic growth in the GCC will be around 1.8% in 2016, down from 3.75% last year, due mainly to the effects of ongoing government spending cuts and a broader weakening of private sector confidence in the face of lower oil prices.
In 2017 the growth could recover to 3.1%, still much lower than the 7% average between 2000 and 2014, as oil prices stage a recovery and government spending cuts ease, the IMF said in its Regional Economic Outlook for the Middle East and Central Asia, released on Wednesday.
Uncertainties arising from conflicts in Iraq, Libya, Syria, and Yemen are also weakening confidence and lower oil prices are taking a toll on exports and economic activity among oil exporting nations, it said.
“Over the medium term, decelerating fiscal consolidation and a partial recovery in oil prices should modestly boost average non-oil growth to about 3.5%, still well below the 7% growth during 2000–14,” the monetary authority said.
Despite staging a recovery over recent months to reach more than $50 a barrel, oil prices, which continue to be the main driver of growth for the region’s oil exporters, are projected to remain low over the coming years.
The IMF said it expects prices to barely reach $60 a barrel by 2021, far removed from the highs of more than $100 a barrel just two years ago.
“Oil exporters are facing the difficult task of growing their economies in a climate of lower budget revenues and spending cuts,” said IMF Middle East and Central Asia Department Director Masood Ahmed at the report’s launch in Dubai.
“Therefore, the challenge now and into the future will be to find alternative sources of revenues and economic growth to maintain the level of prosperity many of them have become accustomed to,” he added.
The IMF said that the risks to its forecast were large to the downside.
“The negative impact of fiscal consolidation and tightening liquidity on growth could be larger than anticipated. Regional conflicts could intensify. A deeper slowdown in China could further weaken commodity prices, while a faster-than-expected U.S. monetary tightening could increase global financial volatility,” it said.
The risks to medium-term growth outlook were more double-sided, it said.
“Authorities could make faster-than-expected progress in implementing structural reform plans. However, considering the scope of the envisaged economic transformation, such plans could run into obstacles, which could lead to reform fatigue.
“The significant deficit-reduction efforts which began last year are continuing, with the aggregate 2016 non-oil fiscal deficit expected to improve by more than 5% of non-oil GDP.”
In the United Arab Emirates (UAE) the IMF said the government has had some success in diversifying its export base through financial, transport, and business services, as well as through tourism.
However it noted: "Labour market policies deserve special attention, with the large youth population facing the biggest challenge, given the expected slowdown in public sector hiring that has traditionally been the employer of first resort for nationals.
More work to do
While the IMF’s latest report highlighted the progress many countries in the Gulf region had made over recent months in adjusting to a world of lower oil revenues it nevertheless called on them to do more.