Oil Exporters Learn to Live with Cheaper Oil

IMF Blog, June 8, 2016

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The significant and prolonged drop in oil prices since mid-2014 has changed the fortunes of many energy-exporting nations.
This applies particularly to countries of the Middle East and Central Asia, because these regions are home to 11 of the world’s top 20 energy exporters.
Budgets have generally turned from surpluses to large deficits, growth has slowed, and financial stability risks have increased.
A policy of "business as usual" will not suffice—policymakers will need to adopt significant measures to:
- put public budgets on a sounder footing,
- address risks to liquidity and the quality of assets in the financial sector,
- improve growth prospects.

In the early stages of the oil price decline, most countries appropriately used their savings to cope with the shortfall in oil revenues.
As it became clear that the oil price decline would persist, oil exporters made significant spending cuts.
The budget plans for 2016 indicate that deficit-reduction efforts will deepen further, with sizable adjustment measures planned especially in Oman, Qatar, and Saudi Arabia.
Countries have generally aimed for savings in both current and investment expenditures.
Cross-country evidence suggests that reviewing both spending categories is sensible—for instance:
- the Gulf countries, Algeria, and Central Asian oil exporters all have higher capital expenditure levels than their emerging market counterparts.
- the Gulf countries and Algeria also have a much larger public sector payroll, a longstanding element of the social contract between policymakers and their citizens.
Reforming artificially low domestic energy prices is being targeted:
- Government regulations ensuring inexpensive fuel, water, and electricity have traditionally been part of the social contract.
- Oman, the United Arab Emirates, and Qatar have introduced automatic pricing, whereby local energy prices adjust in tandem with international benchmarks.
- The challenge is to move energy prices toward international levels while minimizing adverse social impact—for example, through targeted transfers to vulnerable segments of the population.

Spending control is only part of the fiscal equation; finding new sources of revenue is also important.
Promising plans include discussions in Gulf countries to introduce a value-added tax (VAT).
In parallel, some Gulf countries have been raising fees, excises, and corporate income taxes.
In the Central Asian oil exporters, non-oil taxation is much more developed, but there is room to reduce exemptions and strengthen collections.
Central Asian oil exporters have achieved some fiscal adjustment indirectly by allowing their exchange rates to depreciate, which has raised the local-currency value of their export receipts and related taxes.
- These fiscal gains will only last if fiscal expenditures, in particular public wages, do not increase in tandem with the exchange rate depreciation.

Exchange rate adjustment in Central Asian oil exporters has brought undesired side effects, including inflationary pressures and concerns about stability of highly-dollarized financial systems.
These countries face the challenge of strengthening their monetary, exchange rate, and financial sector policy frameworks to manage those risks.
Policymakers need to address risks to liquidity and the quality of assets in the financial sector.

In the coming years, oil revenues will no longer be sufficient for governments to act as the main employer of their fast-growing young populations.
Policymakers must find new ways to promote private sector development and help their economies diversify away from oil.
Country-specific constraints and opportunities:
- Gulf countries benefit from high-quality infrastructure but are hindered by bureaucracy and lingering gaps in legal and regulatory frameworks; they could further improve the quality of education.
- Institutional quality could be enhanced in Central Asian oil-exporting countries and Algeria in areas including contract enforcement, corruption, and access to finance.

Martin Sommer, Juan Treviño, Neil Hickey — June 8, 2016