## 1. MENAP Oil Exporters: Adjustment to Cheaper Oil Continuing

## Source details

**Canonical URL:** [1. MENAP Oil Exporters: Adjustment to Cheaper Oil Continuing](https://www.imf.org/-/media/files/publications/reo/mcd-cca/2016/october/mreo1016ch1.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/reo/mcd-cca/2016/october/mreo1016ch1.pdf.md)
- [Structured JSON version](/-/media/files/publications/reo/mcd-cca/2016/october/mreo1016ch1.pdf.json)

---

### Growth outlook and composition
- Non-oil growth is expected to dip from 3¾ percent last year to 1¾ percent in 2016 owing to fiscal consolidation and credit constraints due to slowing deposit growth.
- Non-oil growth is forecast to pick up to 3 percent in 2017 as the pace of fiscal consolidation eases.
- Over the medium term, decelerating fiscal consolidation and a partial recovery in oil prices should modestly boost average non-oil growth to about 3½ percent, still well below the 7 percent growth during 2000–14.
- Overall growth will be limited by slow expansion in the hydrocarbon sector.
- Algeria: overall growth slowdown in 2016 will be countered by higher natural gas output, but non-oil growth will remain well below historical norms over the medium term.
- Iran: headline growth revised up to 4½ percent in 2016, with oil output rising to 3.6 million barrels per day; positive spillovers to the non-oil economy are occurring, but recovery in oil output is expected to taper sharply next year as production approaches pre-sanctions levels.
- Conflict countries (Iraq, Libya, Yemen): outlook predicated on an easing of conflicts; medium-term oil production in Iraq revised down due to lower investments and security challenges.

### Inflation dynamics
- GCC region: underlying inflation is expected to remain low; energy price reforms are expected to temporarily push up headline inflation to about 3½ percent in 2016, then drop back to 2½ percent in 2017.
- Algeria: price pressures projected to increase further in 2016 owing in part to the weaker dinar and higher domestic energy prices, before moderating.
- Iran: disinflation program bringing consumer price increases to single digits for the first time since 2000.
- Iraq: inflation will remain low.
- Libya and Yemen: shortages, currency depreciation, and monetization of the fiscal deficit have pushed up inflation.

### Risks to the outlook
- Growth risks are tilted to the downside:
  - Fiscal consolidation and tighter liquidity could have a larger negative impact than expected.
  - A substantial slowdown in China would further reduce commodity prices.
  - Faster-than-expected tightening by the Federal Reserve could increase global financial market volatility and reduce availability of international financing, especially for lower-rated oil exporters.
  - Brexit could worsen global risk aversion and exacerbate these effects.
- Upside risk: faster-than-expected implementation of structural reform plans, though reform fatigue and domestic obstacles could impede progress.

### Fiscal adjustment: progress, gaps, and implications
- Despite higher oil prices and consolidation measures, projected fiscal deficits remain large in the short and medium term.
- All countries are expected to record fiscal deficits in 2016 after announced fiscal policy measures; only Iraq, Kuwait, and the United Arab Emirates are projected to post surpluses by 2021.
- Hydrocarbon budget revenues for 2016 are projected to be lower by $400 billion compared with 2014.
- Cumulative fiscal deficits during 2016–21 are forecast to be about $765 billion, down from $1.1 trillion in the April 2016 REO Update.
- The 2016 non-oil fiscal deficit is expected to improve by more than 5 percent of non-oil GDP.
- Fiscal consolidation particularly rapid in Oman and Saudi Arabia, where non-oil deficits are projected to fall by more than 10 percentage points of non-oil GDP.
- In 2017, the pace of consolidation is expected to ease to about 1½ percent of non-oil GDP.
- Eliminating the 2016 budget deficit would demand an average spending cut of 25 percent.
- Medium-term fiscal balances will fall short of levels needed to save an adequate portion of exhaustible oil and gas income for future generations (distance to the intergenerationally neutral fiscal balance in 2021 referenced).

### Fiscal policy measures and institutional reforms
- Mix of spending cuts and revenue-raising measures implemented:
  - All GCC countries have hiked energy prices in recent years.
  - Measures to rein in public sector wage bills via hiring freezes (Algeria, Iraq, Oman) and streamlining benefits (Oman, Saudi Arabia).
- Potential revenue increases:
  - Introduction of a value-added tax being pursued in GCC countries.
  - Iraq aims to broaden the tax base.
- Other priorities: additional streamlining of current expenditures, improving public investment efficiency, additional energy price reforms while protecting the socially vulnerable.
- Institutional strengthening examples:
  - Macro-fiscal units established in Kuwait, Oman, Qatar, and Saudi Arabia.
  - Consolidated medium-term expenditure frameworks for health care and education in the United Arab Emirates.
  - Debt management and liquidity committee in Oman; debt management office in Saudi Arabia; enhanced capacity of the debt management office in Bahrain.
- Recommendation: phase in additional deficit-reduction measures gradually and embed them in a well-defined, medium-term fiscal framework to ensure steady implementation.

### Deficit-financing and sovereign financing
- After significant withdrawal of government financial buffers in the prior year, a larger portion of the 2016 fiscal deficits (about $200 billion) is likely to be covered by issuing debt.
- Bahrain, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (Abu Dhabi) have issued bonds and/or obtained syndicated loans in international markets in 2016.
- Diversifying financing sources is appropriate given international markets’ absorptive capacity and reduces pressure on domestic banks.
- International financing conditions broadly favorable for now, but risks must be managed carefully.

### Current account and external adjustment
- Oil-related receipts are projected to fall by about $435 billion in 2016 compared with 2014.
- Aggregate current account balance projected to turn from a surplus of 8¼ percent of GDP in 2014 to deficits of 4½ percent of GDP in 2016 and 1¾ percent of GDP in 2017.
- External adjustment in GCC countries should be accomplished through fiscal consolidation given long-standing currency pegs and relatively undiversified economies.
- Countries with more flexible exchange rate regimes can attain some external adjustment through exchange rate depreciation, particularly diversified oil exporters.
- Financing of current account deficits:
  - Algeria and Saudi Arabia used extensive reserves last year; some countries drew assets from sovereign wealth funds.
  - Conflict countries also drew down reserves.
  - Increased international sovereign debt issuance, tapping of international markets by government-related entities and the private sector, privatization, and structural reforms to attract foreign investors can support capital inflows.
  - Saudi Arabia announced intention to sell a stake in Aramco and accelerate capital market reforms; Oman drafted a foreign investment law; Iraq secured official financing from the IMF and other partners.

### Financial sector: conditions and policy priorities
- Financial sector has remained resilient, but liquidity has tightened and asset quality is likely to deteriorate.
- Domestic deposit growth—especially government deposits—has slowed significantly due to lower hydrocarbon receipts.
- The gap between sluggish domestic deposits and robust credit growth has been closed through higher foreign funding, including wholesale funding.
- In several GCC countries, rapidly growing foreign liabilities have financed continued credit expansion.
- Saudi Arabia: robust credit growth funded by drawing down excess liquidity at the Saudi Arabian Monetary Agency and running down foreign assets.
- Short-term interbank rates have generally increased more than in the United States.
- The slowdown in domestic deposits is likely to constrain credit supply over time and undermine private sector capacity to absorb a downsizing public sector, with negative consequences for growth and jobs.
- Banks remain well capitalized but face profitability pressures as growth slows and provisioning for nonperforming loans increases.
- Policy responses enacted by authorities:
  - Increase loan-to-deposit ratio and placing government entity deposits in commercial banks (Saudi Arabia).
  - Relax reserve requirements (Algeria, Oman).
  - Strengthen capacity to manage and forecast liquidity (Algeria).
- To boost liquidity, governments could consider transferring some foreign financial assets into the local banking system while continuing to raise budget-deficit financing from international markets.

### Financial sector policy recommendations (short term)
- Continue policies to mitigate liquidity and credit risks where necessary.
- Ensure coherence in fiscal and monetary operations to avoid further tightening domestic liquidity.
- Improve liquidity-forecasting capabilities at central banks.
- Ensure effective liquidity-assistance frameworks and enforce open-position limits.
- Ensure appropriate loan classification and provisioning.
- Maintain sufficient capital buffers to manage high-concentration risks, given pressures from low oil prices.
- Enhance financial sector surveillance, including more frequent and rigorous stress testing.
- Strengthen macroprudential frameworks.

### Strengthening macro-financial frameworks and regulation
- Clarify mandates for macro-financial stability, strengthen interagency coordination, formalize and refine the policy toolkit, and develop market infrastructure for effective policy implementation.
- Continued progress in the implementation of Basel regulations across the region is welcome.

### Accelerating diversification and private sector development
- Rationale: new oil market realities and public sector downsizing require accelerated structural reforms to diversify away from hydrocarbons and boost the private sector for employment.
- Strategic plans and measures in progress:
  - Most oil exporters have formulated strategic development plans (including Saudi Arabia’s Vision 2030) targeting logistics, tourism, energy, financial services, health care, and manufacturing.
  - Progress includes PPPs in Kuwait and Oman; privatization plans ongoing in Iran and in planning stages in Kuwait, Oman, and Saudi Arabia.
  - Promotion of SMEs across the GCC for job creation.
  - Modernization of investment and labor laws in Algeria, Bahrain, Oman, Qatar, and Saudi Arabia.
- Constraints and necessary actions:
  - Foreign direct investment inflows have been decreasing; reducing red tape and strengthening institutional quality would help attract more foreign investments.
  - Plans need to be developed into actionable, sequenced, and implemented measures, with risks and unintended consequences identified and addressed.
  - PPPs should be supported by robust regulatory frameworks ensuring cost-effectiveness and limited fiscal risks, with monitoring to ensure service delivery.
  - A strong legal and institutional framework for privatization would ensure a transparent and competitive environment.
  - Increasing the role of credit bureaus would strengthen lenders’ ability to monitor SME credit risk.
  - Upgrades to labor regulations should include feedback from the private sector.
- Evidence from other countries: reducing commodity dependence takes time; UAE and Bahrain examples cited for partial successes.

### Labor market policies and skills development
- Challenges:
  - Large youth population faces biggest challenge due to expected slowdown in public sector hiring.
  - In the GCC, businesses rank restrictive labor regulations and inadequately educated workforces as biggest barriers.
  - These challenges have prevented the private sector from significantly expanding its national workforce as public sector employment growth slows.
- Ongoing reforms and policy options:
  - Public sector hiring freezes (Iraq, Oman).
  - Plans for greater mobility of foreign workers among employers (Qatar, Saudi Arabia).
  - Increases in fees on foreign work visas (Bahrain, Oman, Saudi Arabia).
  - Narrowing the public–private wage gap to make private employment more attractive for nationals.
  - Complementary active labor market policies shown to improve outcomes when well designed.
- Importance of training:
  - Training, retraining, and education upgrades should reduce skill mismatches and align with private sector needs as diversification accelerates.
  - Examples: Malaysia’s continuous skill upgrades; Mexico’s local training of engineers combined with incentives for firms to provide further training abroad.

### Brexit and global spillovers
- Immediate market reactions to the June 2016 U.K. referendum:
  - Oil prices dropped by 5 percent immediately after the result.
  - Stock markets posted losses of 1–5 percent in Egypt, GCC, Kazakhstan, Pakistan.
  - Five-year credit default swap spreads widened by 10–25 basis points.
  - Currencies weakened marginally (1½ percent in Algeria, Kazakhstan, and Morocco; 5 percent in Georgia).
  - No significant impact on forward currency spreads in GCC (peg to the U.S. dollar).
- Broader channels of impact and vulnerabilities:
  - Brexit increased uncertainty about global prospects; protracted negotiations likely to reduce confidence and investment, affecting trade, financial markets, and commodity prices.
  - Bilateral linkages between MENAP/CCA countries and the U.K. are limited, with notable exceptions in banking reliance on U.K. wholesale borrowing.
  - A sharp increase in global risk aversion could raise external financing costs for vulnerable cases (Egypt, Pakistan, Saudi Arabia) and banks relying on offshore funding (Bahrain, UAE).
  - A growth slowdown in the euro area stemming from Brexit would significantly affect MENAP and CCA via trade, remittances, FDI, and tourism—particularly affecting Maghreb oil importers (Morocco, Tunisia).

### Energy price reforms in the GCC — design, effects, and implementation
- All GCC countries have increased energy prices since mid-2014; depth and breadth vary by country.
- Saudi Arabia initiated substantial energy price reforms in late 2015 and plans gradual further increases over the next five years.
- Qatar has started price reforms; domestic prices in Qatar and Saudi Arabia remain well below international levels.
- Kuwait increased gasoline prices in September this year and plans electricity price increases next year.
- Many GCC countries are implementing energy efficiency policies and exploring renewables.
- Higher energy prices will help slow rapid growth in energy consumption and support fiscal adjustment.
- Average estimated implicit cost of low energy prices (based on 2016 prices) for the six GCC countries ranges from 0.8 percent of GDP for the United Arab Emirates to over 7 percent of GDP for Kuwait.
- Explicit cost of energy subsidies in the budget averages about 1 percent of GCC GDP.
- Recent energy price reforms will support fiscal adjustment via reduced explicit subsidy costs and/or higher domestic energy sale revenues.
- Implementation recommendations: effective communication campaigns explaining rationale, objectives, benefits, pace of price increases, and clear, transparent compensation measures for low-income households.

### Key energy price datapoints (Average January–July 2016 or latest available)
- Gasoline (U.S. dollars per liter):
  - Bahrain 0.38
  - Kuwait 0.19
  - Oman 0.42
  - Qatar 0.35
  - saudi Arabia 0.22
  - United Arab Emirates 0.41
  - GCC average 0.33
  - GCC maximum 0.42
  - U.s. prices 0.51
- Diesel (U.S. dollars per liter):
  - Bahrain 0.32
  - Kuwait 0.39
  - Oman 0.43
  - Qatar 0.37
  - saudi Arabia 0.10
  - United Arab Emirates 0.43
  - GCC average 0.34
  - GCC maximum 0.43
  - U.s. prices 0.45
- Natural Gas (U.S. dollars per MMBtu):
  - Bahrain 2.75
  - Kuwait 1.50
  - Oman 3.00
  - Qatar 0.75
  - saudi Arabia 1.50
  - United Arab Emirates 0.75
  - GCC average 1.71
  - GCC maximum 3.00
  - U.s. prices 2.18
- Electricity (U.S. dollars per KWh):
  - Bahrain 0.04
  - Kuwait 0.01
  - Oman 0.04
  - Qatar 0.05
  - saudi Arabia 0.10
  - United Arab Emirates 0.12
  - GCC average 0.06
  - GCC maximum 0.12
  - U.s. prices 0.10

### Box: Progress in GCC energy price reforms — findings and implications
- Major reform episodes typically relied on mitigating measures to protect the poor: targeted cash transfers or expansion of existing social programs.
- Mitigating measures for the productive sector included gradual price adjustment and financial support to selected enterprises to reduce energy intensity.
- Introducing an automatic pricing formula (examples: Oman, United Arab Emirates, Qatar, announced in Kuwait) can reduce the risk of reforms being unwound and ensure timely pass-through of international prices.
- GCC implicit energy cost estimates (percent of GDP, 2014–2016 by country):
  - Bahrain 7.4 5.4 3.6
  - Kuwait 7.5 8.0 7.2
  - Oman 7.1 4.6 2.8
  - Qatar 5.0 4.5 3.5
  - saudi Arabia 9.3 7.3 4.2
  - United Arab Emirates 2.4 1.3 0.8
  - GCC 6.7 5.3 3.4
- GCC explicit energy cost estimates in the budget (billions of U.S. dollars and percent of GDP; 2015/2016 budgets as noted):
  - Bahrain: 1.1 (3.5 percent of GDP)
  - Kuwait: 7.8 (6.8 percent of GDP)
  - Oman: 0.8 (1.3 percent of GDP)
  - Qatar: 1.2 (0.7 percent of GDP)
  - saudi Arabia: 0.0 (0.0 percent of GDP)
  - United Arab Emirates: ...... 
  - GCC total: 10.9 (1.1 percent of GDP)
- Country-level recent updates summarized (Bahrain, Kuwait, Oman, Qatar, saudi Arabia, United Arab Emirates) with pre- and post-oil price drop actions and timing of price adjustments.
- Policy implications:
  - Protect vulnerable households through targeted cash transfers or expansions of existing social programs.
  - Use gradual price adjustments where abrupt changes could harm productive activity.
  - Consider financial support to selected enterprises to reduce energy intensity.
  - Introduce automatic pricing formulas to link domestic prices to international developments.

### Key statistics (selected indicators from MENAP oil exporters context)
- Real GDP Growth (Average 2011–12 and projections):
  - Average 2011–12: 5.4
  - 2013: 2.0
  - 2014: 2.7
  - 2015: 1.6
  - 2016: 3.3
  - 2017: 2.9
- Consumer Price Inflation (Year average; percent):
  - Average 2011–12: 7.5
  - 2013: 10.4
  - 2014: 5.8
  - 2015: 5.5
  - 2016: 4.7
  - 2017: 4.2
- General Government Overall Fiscal Balance (Percent of GDP, regional sequence shown): 6.7 4.3 –0.7 –9.5 –9.2 –6.2
- Current Account Balance (Percent of GDP, regional sequence shown): 13.4 15.1 8.3 –3.8 –4.4 –1.8

*Prepared by IMF staff; International Monetary Fund | October 2016*

### 1. MENAP Oil Exporters: Adjustment

### 1. MENAP Oil Exporters: Adjustment to Cheaper Oil Continuing

### Growth Outlook and Composition
- Non-oil growth is expected to dip from 3¾ percent last year to 1¾ percent in 2016 owing to fiscal consolidation and credit constraints due to slowing deposit growth.
- Non-oil growth is forecast to pick up to 3 percent in 2017 as the pace of fiscal consolidation eases.
- Over the medium term, decelerating fiscal consolidation and a partial recovery in oil prices should modestly boost average non-oil growth to about 3½ percent, still well below the 7 percent growth during 2000–14.
- Overall growth will be limited by slow expansion in the hydrocarbon sector.
- Algeria: overall growth slowdown in 2016 will be countered by higher natural gas output, but non-oil growth will remain well below historical norms over the medium term.
- Iran: headline growth revised up to 4½ percent in 2016, with oil output rising to 3.6 million barrels per day; positive spillovers to the non-oil economy are occurring, but recovery in oil output is expected to taper sharply next year as production approaches pre-sanctions levels.
- Conflict countries (Iraq, Libya, Yemen): outlook predicated on an easing of conflicts; medium-term oil production in Iraq revised down due to lower investments and security challenges.

### Inflation Dynamics
- GCC region: underlying inflation is expected to remain low; energy price reforms are expected to temporarily push up headline inflation to about 3½ percent in 2016, then drop back to 2½ percent in 2017.
- Algeria: price pressures projected to increase further in 2016 owing in part to the weaker dinar and higher domestic energy prices, before moderating.
- Iran: disinflation program bringing consumer price increases to single digits for the first time since 2000.
- Iraq: inflation will remain low.
- Libya and Yemen: shortages, currency depreciation, and monetization of the fiscal deficit have pushed up inflation.

### Risks to the Outlook
- Growth risks are tilted to the downside:
  - Fiscal consolidation and tighter liquidity could have a larger negative impact than expected (see Box 1.1).
  - A substantial slowdown in China would further reduce commodity prices.
  - Faster-than-expected tightening by the Federal Reserve could increase global financial market volatility and reduce availability of international financing, especially for lower-rated oil exporters.
  - Brexit could worsen global risk aversion and exacerbate these effects.
- Upside risk: faster-than-expected implementation of structural reform plans, though reform fatigue and domestic obstacles could impede progress.

### Fiscal Adjustment: Progress and Gaps
- Despite higher oil prices and consolidation measures, projected fiscal deficits remain large in the short and medium term.
- Taking into account announced fiscal policy measures, all countries are expected to record fiscal deficits in 2016; only Iraq, Kuwait, and the United Arab Emirates are projected to post surpluses by 2021.
- Hydrocarbon budget revenues for 2016 are projected to be lower by $400 billion compared with 2014.
- Cumulative fiscal deficits during 2016–21 are forecast to be about $765 billion, down from $1.1 trillion in the April 2016 REO Update.
- The 2016 non-oil fiscal deficit is expected to improve by more than 5 percent of non-oil GDP.
- Fiscal consolidation particularly rapid in Oman and Saudi Arabia, where non-oil deficits are projected to fall by more than 10 percentage points of non-oil GDP.
- In 2017, the pace of consolidation is expected to ease to about 1½ percent of non-oil GDP.
- Eliminating the 2016 budget deficit would demand an average spending cut of 25 percent.
- In all MENAP oil exporters, medium-term fiscal balances will fall short of levels needed to save an adequate portion of exhaustible oil and gas income for future generations (distance to the intergenerationally neutral fiscal balance in 2021 illustrated in Figure 1.4).

### Fiscal Policy Measures and Institutional Reforms
- Policymakers have implemented a mix of spending cuts and revenue-raising measures:
  - All GCC countries have hiked energy prices in recent years.
  - Some countries adopting measures to rein in public sector wage bills via hiring freezes (Algeria, Iraq, Oman) and streamlining benefits (Oman, Saudi Arabia).
- Potential revenue increases:
  - Introduction of a value-added tax being pursued in GCC countries.
  - Iraq aims to broaden the tax base.
- Other priorities: additional streamlining of current expenditures, improving public investment efficiency, and additional energy price reforms while protecting the socially vulnerable.
- Institutional strengthening examples:
  - Macro-fiscal units established in Kuwait, Oman, Qatar, and Saudi Arabia.
  - Consolidated medium-term expenditure frameworks for health care and education in the United Arab Emirates.
  - Debt management and liquidity committee in Oman; debt management office in Saudi Arabia; enhanced capacity of the debt management office in Bahrain.
- Recommendation: phase in additional deficit-reduction measures gradually and embed them in a well-defined, medium-term fiscal framework to ensure steady implementation.

### Deficit-Financing and Sovereign Financing
- After significant withdrawal of government financial buffers in the prior year, a larger portion of the 2016 fiscal deficits (about $200 billion) is likely to be covered by issuing debt.
- Bahrain, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (Abu Dhabi) have issued bonds and/or obtained syndicated loans in international markets in 2016.
- Diversifying financing sources is appropriate given international markets’ absorptive capacity and reduces pressure on domestic banks.
- International financing conditions broadly favorable for now, but risks must be managed carefully.

### Current Account and External Adjustment
- Oil-related receipts are projected to fall by about $435 billion in 2016 compared with 2014.
- Aggregate current account balance projected to turn from a surplus of 8¼ percent of GDP in 2014 to deficits of 4½ percent of GDP in 2016 and 1¾ percent of GDP in 2017.
- External adjustment in GCC countries should be accomplished through fiscal consolidation given long-standing currency pegs and relatively undiversified economies.
- Countries with more flexible exchange rate regimes can attain some external adjustment through exchange rate depreciation, particularly diversified oil exporters.
- Financing of current account deficits:
  - Algeria and Saudi Arabia used extensive reserves last year; some countries drew assets from sovereign wealth funds.
  - Conflict countries also drew down reserves.
  - Increased international sovereign debt issuance, tapping of international markets by government-related entities and the private sector, privatization, and structural reforms to attract foreign investors can support capital inflows.
  - Saudi Arabia announced intention to sell a stake in Aramco and accelerate capital market reforms; Oman drafted a foreign investment law; Iraq secured official financing from the IMF and other partners.

### Financial Sector: Conditions and Policy Priorities
- Financial sector has remained resilient, but liquidity has tightened and asset quality is likely to deteriorate.
- Domestic deposit growth—especially government deposits—has slowed significantly due to lower hydrocarbon receipts.
- The gap between sluggish domestic deposits and robust credit growth has been closed through higher foreign funding, including wholesale funding.
- In several GCC countries, rapidly growing foreign liabilities have financed continued credit expansion.
- Saudi Arabia: robust credit growth funded by drawing down excess liquidity at the Saudi Arabian Monetary Agency and running down foreign assets.
- Short-term interbank rates have generally increased more than in the United States.
- The slowdown in domestic deposits is likely to constrain credit supply over time and undermine private sector capacity to absorb a downsizing public sector, with negative consequences for growth and jobs.
- Banks remain well capitalized but face profitability pressures as growth slows and provisioning for nonperforming loans increases.
- Policy responses enacted by authorities:
  - Increase loan-to-deposit ratio and placing government entity deposits in commercial banks (Saudi Arabia).
  - Relax reserve requirements (Algeria, Oman).
  - Strengthen capacity to manage and forecast liquidity (Algeria).
- To boost liquidity, governments could consider transferring some foreign financial assets into the local banking system while continuing to raise budget-deficit financing from international markets.

### Financial Sector Policy Recommendations (short term)
- Continue policies to mitigate liquidity and credit risks where necessary.
- Ensure coherence in fiscal and monetary operations to avoid further tightening domestic liquidity.
- Improve liquidity-forecasting capabilities at central banks.
- Ensure effective liquidity-assistance frameworks and enforce open-position limits.
- Ensure appropriate loan classification and provisioning.
- Maintain sufficient capital buffers to manage high-concentration risks, given pressures from low oil prices.
- Enhance financial sector surveillance, including more frequent and rigorous stress testing.
- Strengthen macroprudential frameworks.

*Source: IMF staff calculations and analysis from “1. MENAP Oil Exporters: Adjustment to Cheaper Oil Continuing,” Regional Economic Outlook: Middle East and Central Asia, October 2016.*

### 1. MENAP OIL ExPORTERs: AdjUsTMENT TO ChEAPER OIL CONTINUING

### 1. MENAP OIL ExPORTERs: AdjUsTMENT TO ChEAPER OIL CONTINUING

### Strengthening macro-financial frameworks and regulation
- Continue to clarify mandates for macro-financial stability, strengthen interagency coordination, formalize and refine the policy toolkit, and develop market infrastructure for effective policy implementation (IMF 2015b).
- Continued progress in the implementation of Basel regulations across the region is welcome.

### Accelerating diversification and private sector development
- Rationale and objectives:
  - New oil market realities and public sector downsizing require accelerated structural reforms to diversify away from hydrocarbons and boost the private sector.
  - Reforms will be crucial for securing employment opportunities given the rapidly growing labor force.
- Strategic plans and measures in progress:
  - Most oil exporters have formulated strategic development plans (including Saudi Arabia’s Vision 2030) targeting logistics, tourism, energy, financial services, health care, and manufacturing.
  - Progress includes PPPs in Kuwait and Oman; privatization plans ongoing in Iran and in planning stages in Kuwait, Oman, and Saudi Arabia.
  - Promotion of SMEs across the GCC for job creation.
  - Modernization of investment and labor laws in Algeria, Bahrain, Oman, Qatar, and Saudi Arabia.
- Constraints and necessary actions:
  - Foreign direct investment inflows have been decreasing; reducing red tape and strengthening institutional quality would help attract more foreign investments (IMF 2016).
  - Plans need to be developed into actionable, sequenced, and implemented measures, with risks and unintended consequences identified and addressed.
  - PPPs should be supported by robust regulatory frameworks ensuring cost-effectiveness and limited fiscal risks, with monitoring to ensure service delivery.
  - A strong legal and institutional framework for privatization would ensure a transparent and competitive environment.
  - Increasing the role of credit bureaus would strengthen lenders’ ability to monitor SME credit risk.
  - Upgrades to labor regulations should include feedback from the private sector.
- Evidence from other countries:
  - Successful cases (Indonesia, Malaysia, Mexico) suggest reducing commodity dependence takes time (Cherif, Hasanov, and Zhu 2016).
  - UAE has had some success diversifying its export base through financial, transport, and business services and tourism; Bahrain increased roles of financial services and food processing.

### Labor market policies and skills development
- Challenges:
  - Large youth population faces biggest challenge due to expected slowdown in public sector hiring (traditional employer of first resort for nationals).
  - In the GCC, businesses rank restrictive labor regulations and inadequately educated workforces as biggest barriers.
  - These challenges have prevented the private sector from significantly expanding its national workforce as public sector employment growth slows.
- Ongoing reforms and policy options:
  - Public sector hiring freezes (Iraq, Oman).
  - Plans for greater mobility of foreign workers among employers (Qatar, Saudi Arabia).
  - Increases in fees on foreign work visas (Bahrain, Oman, Saudi Arabia).
  - Narrowing the public–private wage gap to make private employment more attractive for nationals.
  - Complementary active labor market policies shown to improve outcomes when well designed (see Box 2.2 referenced).
- Importance of training:
  - Training, retraining, and education upgrades should reduce skill mismatches and align with private sector needs as diversification accelerates.
  - Examples: Malaysia’s continuous skill upgrades; Mexico’s local training of engineers combined with incentives for firms to provide further training abroad.

### Fiscal adjustment in MENAP oil exporters and GCC growth outlook
- Fiscal consolidation:
  - Most MENAP oil-exporting countries have begun adjusting budgets to persistently low oil prices.
  - Deficit-reduction measures particularly significant in the GCC—the average non-oil deficit is projected to fall by about 20 percent of non-oil GDP during 2014–16.
  - Fiscal consolidation has been fastest in Oman and Saudi Arabia—about 25 percent of non-oil GDP during 2014–16.
- Growth implications:
  - GCC’s non-oil growth is projected to halve from 5½ percent in 2014 to 1¾ percent this year.
  - Saudi Arabia’s non-oil growth has recently turned negative on a year-over-year basis for two consecutive quarters.
  - Lower public consumption and investment may subtract more than 2 percentage points from the estimated GCC growth outturn in 2015 and projections for 2016 (Figure 1.1.1).
  - Last year, the drag was largely offset by resilient private consumption and investment, and higher hydrocarbon production; this year the adverse impact will be felt more strongly, although higher exports (notably stronger-than-expected petrochemical output in Saudi Arabia) and lower imports will partly soften the drag.
- Uncertainty around forecasts:
  - An econometric model of GCC growth indicates large uncertainty around central forecasts (Figure 1.1.2).
  - Downside risk: an adverse feedback loop between budget spending cuts and tightening credit conditions could reduce private sector ability to offset public sector contraction.
  - Upside risk: if the composition of fiscal consolidation is favorable, growth headwinds could be smaller.
- Policy recommendations to support growth and jobs during fiscal consolidation:
  - Use appropriate fiscal measures: target spending cuts toward expenditures with the smallest adverse impact on growth, such as those resulting mostly in lower imports and savings.
  - Introduce revenue measures that are likely to carry smaller adverse growth impacts: a value-added tax, property taxes, eliminating exemptions, and increasing excises.
  - Avoid sharp cuts: spread deficit-reduction over time to allow private sector adjustment.
  - Keep bank credit flowing: ensure adequate liquidity in the financial system—for example, reducing required reserves and increasing loan-to-deposit ratios where appropriate.
  - Look for new growth opportunities: implement deep structural reforms to support private sector activity and attract foreign investment (examples: Oman’s focused development plan, prioritization of public investment, draft foreign investment law; Bahrain’s upcoming expansions of an aluminum smelter and oil refinery).

### Brexit and global spillovers
- Immediate market reactions to the June 2016 U.K. referendum:
  - Oil prices dropped by 5 percent immediately after the result.
  - Stock markets posted losses of 1–5 percent in Egypt, GCC, Kazakhstan, Pakistan.
  - Five-year credit default swap spreads widened by 10–25 basis points.
  - Currencies weakened marginally (1½ percent in Algeria, Kazakhstan, and Morocco; 5 percent in Georgia).
  - No significant impact on forward currency spreads in GCC (peg to the U.S. dollar).
- Broader channels of impact and vulnerabilities:
  - Brexit increased uncertainty about global prospects; protracted negotiations likely to reduce confidence and investment, affecting trade, financial markets, and commodity prices.
  - Bilateral linkages between MENAP/CCA countries and the U.K. are limited through trade, remittances, banking, and FDI, with notable exceptions (some banks in Bahrain, Egypt, Qatar, UAE rely on UK wholesale borrowing).
  - A sharp increase in global risk aversion could raise external financing costs for MENAP and CCA countries; vulnerable cases include countries with weak fiscal positions or those planning to tap international markets soon (Egypt, Pakistan, Saudi Arabia) and banks relying on offshore funding (Bahrain, UAE).
  - A growth slowdown in the euro area stemming from Brexit would significantly affect MENAP and CCA via trade, remittances, FDI, and tourism—particularly affecting Maghreb oil importers (Morocco, Tunisia).

### Energy price reforms in the GCC
- Design and recent actions:
  - All GCC countries have increased energy prices since mid-2014, with depth and breadth of reforms varying across countries.
  - Saudi Arabia initiated substantial energy price reforms in late 2015 and plans gradual further increases over the next five years.
  - Qatar has started price reforms; domestic prices in Qatar and Saudi Arabia remain well below international levels.
  - Kuwait increased gasoline prices in September this year and plans electricity price increases next year.
  - Many GCC countries are implementing energy efficiency policies and exploring renewables.
- Effects and costs:
  - Higher energy prices will help slow rapid growth in energy consumption and support fiscal adjustment.
  - Energy consumption per capita is high and rising rapidly in Qatar, Saudi Arabia, and the United Arab Emirates.
  - Average estimated implicit cost of low energy prices (based on 2016 prices) for the six GCC countries ranges from 0.8 percent of GDP for the United Arab Emirates to over 7 percent of GDP for Kuwait (Table 1.3.2 referenced).
  - Explicit cost of energy subsidies in the budget averages about 1 percent of GCC GDP (Table 1.3.3 referenced).
  - Recent energy price reforms will support fiscal adjustment via reduced explicit subsidy costs and/or higher domestic energy sale revenues.
- Implementation recommendations:
  - Ensure success and sustainability of reforms through effective communication campaigns explaining rationale, objectives, benefits, pace of price increases, and clear, transparent compensation measures for low-income households.

### Key energy price datapoints (Average January–July 2016 or latest available)
- Gasoline (U.S. dollars per liter):
  - Bahrain 0.38
  - Kuwait 0.19
  - Oman 0.42
  - Qatar 0.35
  - saudi Arabia 0.22
  - United Arab Emirates 0.41
  - GCC average 0.33
  - GCC maximum 0.42
  - U.s. prices 0.51
- Diesel (U.S. dollars per liter):
  - Bahrain 0.32
  - Kuwait 0.39
  - Oman 0.43
  - Qatar 0.37
  - saudi Arabia 0.10
  - United Arab Emirates 0.43
  - GCC average 0.34
  - GCC maximum 0.43
  - U.s. prices 0.45
- Natural Gas (U.S. dollars per MMBtu):
  - Bahrain 2.75
  - Kuwait 1.50
  - Oman 3.00
  - Qatar 0.75
  - saudi Arabia 1.50
  - United Arab Emirates 0.75
  - GCC average 1.71
  - GCC maximum 3.00
  - U.s. prices 2.18
- Electricity (U.S. dollars per KWh):
  - Bahrain 0.04
  - Kuwait 0.01
  - Oman 0.04
  - Qatar 0.05
  - saudi Arabia 0.10
  - United Arab Emirates 0.12
  - GCC average 0.06
  - GCC maximum 0.12
  - U.s. prices 0.10

*Prepared by IMF staff; International Monetary Fund | October 2016*

### Box 1.3. Progress in GCC Energy Price Reforms

### Box 1.3. Progress in GCC Energy Price Reforms

### Overview and Key Findings
- Major energy price reform episodes (early 1990s to 2010s) typically relied on mitigating measures to protect the poor: targeted cash transfers or an expansion of existing social programs.
- In Armenia, Indonesia, and Jordan, transfer programs helped gain support for the reforms.
- Mitigating measures for the productive sector included a gradual adjustment in prices (for instance, for natural gas in Bahrain), and financial support to selected enterprises to reduce energy intensity (Iran).
- Once prices have been raised, introducing an automatic pricing formula—as seen in Oman, the United Arab Emirates, Qatar, and announced in Kuwait—can reduce the risk of reforms being unwound while ensuring changes in international prices are reflected in domestic prices in a timely manner.

### GCC Implicit Energy Cost Estimates (Percent of GDP)
- Method: The implicit cost of energy products—including gasoline, diesel, natural gas, and electricity—is estimated using the price gap methodology (2016 prices are averages for January–July 2016 or latest available) IMF (2015).
- 2014–2016 estimates by country:
  - Bahrain 7.4 5.4 3.6
  - Kuwait 7.5 8.0 7.2
  - Oman 7.1 4.6 2.8
  - Qatar 5.0 4.5 3.5
  - saudi Arabia 9.3 7.3 4.2
  - United Arab Emirates 2.4 1.3 0.8
  - GCC 6.7 5.3 3.4

### GCC Explicit Energy Cost Estimates in the Budget
- Notes: 2016 budget numbers are used for Bahrain and Oman; 2015 budget numbers are used for others. For Qatar, 2015 staff estimates are based on historical data. GCC total excludes United Arab Emirates.
- Billions of U.S. dollars and Percent of GDP (2015/2016 budgets as noted):
  - Bahrain: 1.1 (3.5 percent of GDP)
  - Kuwait: 7.8 (6.8 percent of GDP)
  - Oman: 0.8 (1.3 percent of GDP)
  - Qatar: 1.2 (0.7 percent of GDP)
  - saudi Arabia: 0.0 (0.0 percent of GDP)
  - United Arab Emirates: ......
  - GCC total: 10.9 (1.1 percent of GDP)

### Recent Updates on Energy Price Reforms in the GCC (Pre- and Post-oil Price Drop)
- Bahrain
  - Pre-oil price drop: The gas price for existing industrial customers was increased by 50 percent, starting in january 2012, from $1.50 to $2.25 per MMBtu, while the price for new industrial customers remained at $2.50 per MMBtu (prices for new customers were increased from $1.30 to $2.50 in April 2010).
  - Post-oil price drop: In March 2015, authorities announced annual increases of $0.25 per MMBtu in the gas price for industrial users starting on April 1, 2015, until the price reaches $4 per MMBtu by April 2021. In March 2015, fuel price in marine stations was increased. Electricity and water tariff structure adjusted for non-domestic users (October 2013). In january 2016, retail price of gasoline was raised by nearly 60 percent. Price increases for diesel, kerosene, liquified propane gas, and electricity and water tariffs are being phased in gradually by 2019. Bakeries and fishermen are exempt from the diesel and kerosene price increase, while a majority of Bahraini households and small businesses are exempt from higher electricity and water tariffs.
- Kuwait
  - Pre-oil price drop: ...
  - Post-oil price drop: Kuwait doubled the price of diesel in january 2015. Authorities have approved and announced an increase in gasoline prices of about 70 percent, on average, effective september 2016. Additionally, a government committee will revise the new gasoline prices every three months depending on international oil prices. A law was recently passed by parliament to reform water and electricity subsidies. The new tariffs will become effective in May 2017.
- Oman
  - Pre-oil price drop: In january 2015, the industrial price for natural gas doubled, following a 2013 agreement.
  - Post-oil price drop: In 2016, authorities implemented fuel subsidy reform, linking prices to international ones, with monthly revisions to consumer prices. Water tariffs were increased in March 2016 for government, commercial, and industrial users. There is also a proposal to increase electricity tariffs for these users.
- Qatar
  - Pre-oil price drop: Qatar raised the pump prices of gasoline by 25 percent and of diesel by 30 percent in january 2011. diesel prices were again raised in May 2014, by 50 percent.
  - Post-oil price drop: In October 2015, water and electricity prices were raised and tiered according to consumption. In january 2016, gasoline prices were increased again by 30 percent. Authorities have set up a committee that makes recommendations on whether prices should be adjusted, based on global markets and regional developments, and prices were increased again slightly by 4 percent in August.
- saudi Arabia
  - Pre-oil price drop: saudi Arabia increased the average price of electricity sold to non-individual users by more than 20 percent on july 1, 2010.
  - Post-oil price drop: In december 2015, authorities announced an increase in fuel prices (ranging from 10 percent to 134 percent increase) across most major energy and water products for businesses or households.
- United Arab Emirates
  - Pre-oil price drop: The United Arab Emirates increased gasoline prices in 2010 to the highest level in the Gulf Cooperation Council. dubai raised water and electricity tariffs by 15 percent in early 2011.
  - Post-oil price drop: In August 2015, the United Arab Emirates reformed its fuel pricing policy by adopting a mechanism to adjust monthly gasoline and diesel prices against international prices. With this reform, gasoline prices were increased by 25 percent and diesel prices were reduced by 29 percent. Abu dhabi is developing a comprehensive electricity and water consumption strategy, which led to an increase in tariffs in january 2015 (by 170 percent for water and by 40 percent for electricity). Water and electricity tariffs were increased again by 14–17 percent in january 2016. Authorities are planning to gradually phase out the remaining electricity, water, and gas subsidies, while protecting lower-tier consumers.
- Note: MMBtu = 1 million British thermal units.

### Policy Implications and Recommendations
- Protect vulnerable households through targeted cash transfers or expansions of existing social programs when raising energy prices.
- Use gradual price adjustments for sectors where abrupt changes could harm productive activity (example: natural gas pricing in Bahrain).
- Consider financial support to selected enterprises to reduce energy intensity (example: Iran).
- Introduce automatic pricing formulas to link domestic prices to international developments and reduce the political risk of policy reversal (examples: Oman, United Arab Emirates, Qatar, announced in Kuwait).

### Key Statistics from MENAP Oil Exporters Context (selected indicators from adjacent material)
- Real GDP Growth (Average 2011–12 and projections):
  - Average 2011–12: 5.4
  - 2013: 2.0
  - 2014: 2.7
  - 2015: 1.6
  - 2016: 3.3
  - 2017: 2.9
- Consumer Price Inflation (Year average; percent):
  - Average 2011–12: 7.5
  - 2013: 10.4
  - 2014: 5.8
  - 2015: 5.5
  - 2016: 4.7
  - 2017: 4.2
- General Government Overall Fiscal Balance (Percent of GDP, average 2011–12 to 2017 shown for region): 6.7 4.3 –0.7 –9.5 –9.2 –6.2
- Current Account Balance (Percent of GDP, average 2011–12 to 2017 shown for region): 13.4 15.1 8.3 –3.8 –4.4 –1.8

*International Monetary Fund | October 2016*

---


_Source: https://www.imf.org/-/media/files/publications/reo/mcd-cca/2016/october/mreo1016ch1.pdf_