World Economy

(P)GCC Advised Against Deficit Spending

(P)GCC Advised Against Deficit Spending(P)GCC Advised Against Deficit Spending

Persian Gulf Arab states should try to introduce radical tax and spending reforms, remarked International Monetary Fund chief Christine Lagarde.

Low oil prices have slashed state revenues in the six-nation (Persian) Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE).

All of the countries have begun to restrain spending, but most have so far hesitated to take politically sensitive steps that would directly reduce consumers’ disposable income, Reuters reported.

At a meeting with (P)GCC finance ministers in Doha, Lagarde said governments needed to do more to get their budget deficits under control.

She urged governments to slow growth of their current spending, taking aim at their practice of giving cushy, high-paying jobs to their citizens to ensure political support. Most employed (P)GCC citizens work for the public sector.

“Given the new fiscal realities, there is no room for public wage bills to grow further. We have to face that reality,” Lagarde said in a statement after the meeting.

She also urged (P)GCC countries, including Saudi Arabia and the United Arab Emirates, to introduce a regional value-added tax as soon as possible. That reform should not be delayed, she said.

The six governments have been debating the introduction of VAT for years but have so far not agreed to act. Officials have said that to limit smuggling and damage to economies’ competitiveness, the tax would probably have to be introduced regionally rather than by individual nations at different times.

The IMF’s public pressure for budget reforms in the Persian Gulf Arab states could help governments justify controversial measures to their populations, civil services and the business community.

These states are under different degrees of financial pressure from low oil prices. The UAE has such huge fiscal reserves that it is relatively comfortable, but it has been proactive in cutting spending, for example by reducing domestic gasoline subsidies in August.

Saudi Arabia looks much more vulnerable. The IMF estimates it is running an annual budget deficit of over $100 billion, and it has hesitated to make controversial reforms, though it has said it is considering them.

Lagarde said most but not all (P)GCC countries had introduced fiscal policies which would allow them to make adjustments from a position of strength, limiting the impact on their economic growth rates.

“Those who have not done it can certainly learn from those who have,” she said without naming individual countries.

She also warned (P)GCC governments that their spending on public investment projects would have to become more careful and efficient. While they could issue debt to finance deficits, she said, they would have to make sure this did not suck funds away from the private sector.

Money market rates across the region have risen sharply in the last few months as low oil prices reduce the flow of new money into banks, and as the banks anticipate they may have to buy large amounts of government bonds for years to come.