Qatar's spending cuts modest compared to other GCC countries

(MENAFN- The Peninsula) DOHA: Qatar’s spending cutbacks will be modest compared to other GCC countries. The country’s greater diversification of revenues large policy buffers and immovable infrastructure requirements associated with the 2022 World Cup will mean government spending cutbacks will be modest.

Weaker oil prices present a serious challenge to the growth outlook for the GCC region which was already facing economic concerns. However serious fiscal reform should see the region avoid recession a new ICAEW report noted. The report is produced by Oxford Economics ICAEW’s partner and economic forecaster.

Commissioned by ICAEW the report a quarterly review of the GCC+5 (Egypt Iran Iraq Jordan and Lebanon) ICAEW takes a look at the fallout from the accelerated decline in oil prices in recent months as well as the potentially transformational impact of the lifting of sanctions on the Iranian economy.

“Oil prices are set to remain lower until at least 2017 due to the continuation of current Organisation of Petrol Exporting Countries (OPEC) policy and increasing concerns over growth in China and other emerging markets. Opec’s policy of keeping oil production high in order to maintain market share and squeeze higher-cost producers out of the market coupled by existing high stock levels and modest demand growth will see Brent crude average $32 per barrel this year and remain below $70 for the rest of this decade. Economic data from China suggests increasing problems with overcapacity further undermining expectations for resource demand growth.

“Sustained low oil prices will erode existing buffers like subsidies in oil-rich Gulf countries more rapidly threaten to undermine long-standing currency pegs and slow economic growth further as trade investment and capital flows fall back. Although recession should be avoided growth across the GCC will be just 2.1% - it’s lowest since the financial crisis” said Tom Rogers ICAEW Economic Adviser and Economist at Oxford Economics.

With the exception of the UAE true economic diversification away from a heavy dependence on oil exports is yet to be achieved. Although non-oil growth averaged an impressive 7.2 percent per year from 2003-2014 much of this growth was fuelled by oil-financed government spending on infrastructure key development projects public sector salaries benefits and subsidies. With government spending now set to be cut back these growth drivers will fade.

In recent months GCC governments have given serious consideration to fiscal consolidation. The Saudi Government has announced a year-on-year decline in planned spending for the first time in 14 years while Oman has announced a 16 percnet cut in spending for 2016 and a rise in corporation tax. All GCC governments have also committed to establishing a region-wide Value Added Tax (VAT) over the medium term to lift non-oil revenues and most have already started on cutting energy subsidies. Overall government spending in the GCC region is expected to decline by 8 percent this year and rise more slowly in future years.

Another threat to stability and growth in the GCC has emerged from pressure on long-standing currency pegs against the US dollar. For example markets expect an unprecedented 10 percnet depreciation of the Saudi riyal over the next year. Countries like Oman and Bahrain are particularly vulnerable due to low financial reserves. While de-pegging would generate greater government revenues by lifting the dollar oil revenues in local currency terms it would also impose heavy costs including rising inflation a loss of policy credibility and additional volatility in oil revenues.The Peninsula