Exploring the Effects of Budget Deficit in GCC Countries

There were announced strategies before for the diversification of the Gulf economies in order to reduce its dependence on oil revenues due to the volatility of the international oil market.  However, these strategies have yet to bore fruit; that is, with the decline in oil prices, the Gulf economies were living a harsh reality that appears in several forms such as the depletion of foreign exchange monetary, the surge of public debt, and the rise of budget deficit.

   According to reports of the Unified Arab Economic for the year 2014, the oil revenues represent an average of 91.1% of public revenues in Saudi Arabia, 93.6% in Kuwait, 84.1% in the Sultanate of Oman, 84.9% in Bahrain, 68% in the UAE, and 58.7% in Qatar.

   Henceforth, we perceive that oil revenues represent the independent variable in the structure of the general revenues of the GCC countries, the architect of budget deficits and surpluses. According to IMF (International Monetary Fund), the Gulf States will significantly experience a shortfall in their balancing. Therefore, the IMF is expecting the deficit of Saudi Arabia in 2015 to be minus 19.5%, as a percentage of GDP (Gross Domestic Product). In the UAE, it is expected to reach minus 2.9%, and in Qatar it is expected that the surplus will drop significantly in 2015 to reach 0.3%, less, of course, than 9.7% in 2014. Also, the budget deficit in Qatar in 2016 is expected to reach minus 4.1%, in the Sultanate of Oman will reach minus 14.8% in 2015, and it is expected to decline in 2016 to minus 11.6%.

   It is worth mentioning that the budgets of the Gulf States had bid farewell to the phenomenon of deficit since 2003 in the beginning of the Third Oil Boom, with the exception of 2009; that is, due to the global financial crisis, which span only for one year.  Then, the budgets of the GCC countries achieved a surplus in general until 2014. Afterward, budget deficit began to return again, and is expected to carry on in the short and medium term because of the collapse of oil prices.

  • Measures taken by the Gulf States to cope with deficit.

The past months witnessed a series of actions that came as a reaction to counter the potential shortfall in the budgets of the Gulf states such as the liberalization of oil prices in the UAE in August 2015 just as Kuwait did with some of the petroleum products.  As for Saudi Arabia, it resorted to local float bonds to finance budget deficit. One was in June 2015, equivalent to $ 4 billion, and the second was in August reaching $ 5.3 billion. It meant to increase the faded domestic public debt that reached 2.7% of the GDP in 2014 after it had been 70% in 2003.

   As for Bahrain, it resorted to raising fuel prices for the sake of the industry by 11% in the beginning of 2015 and increasing the proportion of employees’ health insurance fees, which are taken care of by the employer. The procedure in Kuwait was direct when it came to the reduction of the value of 2015/2016 expenditure budget by about 18%. In the Sultanate of Oman, defense budget allocations had been reduced in 2015.

  • The Negative Effects of Budget Deficits.

   In a preliminary reading based on the scenario of ongoing crisis regarding the collapse of oil prices in the international market in the short and medium term, it the budgets of the Gulf are expected to witness more shortfalls, and of course, measures would be taken in order to affect the resources allocation and the nature of economic activity for the Gulf States, which will incorporate the following:

  1. The Inevitable Expense on Security and Defense

   There is not a speck of doubt that the Gulf countries are facing a security challenge through several axes. The first threat in the region is the expansion “ISIL”.  On the other hand, the political considerations of the Iranian project that took a new direction with the apparent armed conflict in Yemen. Therefore, the Gulf states will be obliged to carry on spending on defense and security, which stands about 30% of total public expenditure as the Unified Arab Economic report estimated. These challenging provisions that we have mentioned may increase without any significant action taken by the Sultanate of Oman, considering its positive relations with Iran, and its refusal to engage in any action that leads to clashes with the Iranian project in the region.

   There is no doubt that the increased spending on security and defense in light of growing budget deficit will represent an additional burden upon the rest of the Gulf allocations, both in respect to services in the sectors of education and health, or other infrastructure areas and activities.

  1. Economic Deflationary

   All estimates of the International Monetary Fund indicate a decline of economic growth rate for the Gulf States during 2015 and 2016, which means an increase of unemployment rates for Gulf nationals, particularly in light of the actions listed in the reports of the IMF in order to avoid unemployment, and push for creating more employment opportunities.

   The Gulf States are expected to reduce their demands on expatriate labors; reducing the expected fund on public spending would only result in limiting the work of private sector in the field of construction especially since the Gulf States fund this particular field significantly. This field is essential because it is active, noting specifically the small companies working within the framework of sub-contracting.

  1. The Decline of the State’s Role

     There were expectations regarding the decline of the state’s role in the economic activity because of the rationalization of public spending, which would be imposed by budget deficit pressures in the Gulf region. This matter requires creating a legislative and administrative establishment so the private sector would take over instead of ratifying the support system that includes multiple aspects in the economic and social field in the Gulf region.  This should unleash the bridled inflation, which had been experienced in the Gulf region for a long time.

   There is a set of questions that present themselves to the economic management of the Gulf states such as: Where is the role of the Gulf’s cumulative investments over the past decades in order to finance the budget based on those investments? As well, where are the alternative strategies that suppose to cope with the swings of the oil market? The fluctuations are well-known, and anyone who had been through them should have different alternatives.

  • A Disproportionate Effect

   Undoubtedly, the off-putting effects of the budget deficit distress all the Gulf states because of the collapse of oil revenues, but it differs from one country to another. In Saudi Arabia, the negative effect of this case will be huge for two reasons: the first one is the continuation of the Saudi policy towards oil production, and the second having the largest population amongst the rest of Gulf states, which is followed by ensuing public expenditure. Then there are the states with weak production quotas such as Oman and Bahrain that follow Saudi Arabia.  As for Qatar and Kuwait, they were less affected by the impact of budget deficit because of the small number of their population, and because Qatar owns a large share of natural gas production. Kuwait, as well, owns a large share of productivity of oil.

   It is worth that we address the issue of the budget deficit to point out the results of the Open Budget Survey for 2015, which includes 102 countries worldwide. Its index is composed of 100 degrees, and it includes only two Gulf states, namely Saudi Arabia and Qatar, but they got zero in the index, and amongst group of countries that do not provide information regarding the budget, or have a dearth of information available.

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