## Oil Exporters Learn to Live with Cheaper Oil

_IMF Blog, June 8, 2016_

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**Canonical URL:** [Oil Exporters Learn to Live with Cheaper Oil](https://www.imf.org/en/blogs/articles/2016/06/08/oil-exporters-learn-to-live-with-cheaper-oil)

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## Bibliographic details
- Authors: Martin Sommer, Juan Trevio, Neil Hickey
- Published: June 8, 2016

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### Major impacts and context
- 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.

### Spending restraint
- 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.

### New sources of revenues
- 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.

### Currency, inflation, and financial sector risks
- 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.

### Push for diversification and growth
- 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*

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## References

- [عربي](http://blog-montada.imf.org/?p=4322)
- [significant measures](http://www.imf.org/external/pubs/cat/longres.aspx?sk=43934)
- [https://www.imf.org/wp-content/uploads/2016/06/oil-chart1.jpg](https://www.imf.org/wp-content/uploads/2016/06/oil-chart1.jpg)
- [https://www.imf.org/wp-content/uploads/2016/06/oil-chart2.jpg](https://www.imf.org/wp-content/uploads/2016/06/oil-chart2.jpg)
- [https://www.imf.org/wp-content/uploads/2016/06/oil-chart3.jpg](https://www.imf.org/wp-content/uploads/2016/06/oil-chart3.jpg)

_Source: https://www.imf.org/en/blogs/articles/2016/06/08/oil-exporters-learn-to-live-with-cheaper-oil_