IMF Warns (P)GCC States Against Looming Debt Crisis

The International Monetary Fund on Wednesday warned (Persian) Gulf Cooperation Council Arab states against complacency over a looming debt crisis, urging continued economic reforms despite a rise in oil prices.

Crude prices have rebounded in the region thanks to a deal by producers to trim production, but the IMF said such a change in fortunes should not get in the way of overhauling state spending, AFP reported.

"Required reforms include further steps toward full elimination of energy subsidies, and changes to pension and social security systems—including revisions to retirement age and benefits," the IMF said in its Regional Economic Outlook for May.

Jihad Azour, director of the IMF's Middle East and Central Asia department, told AFP higher oil prices should spur change. "We should not be complacent... oil prices are going up. That definitely does not mean that we should not introduce the reforms. On the contrary, the current environment offers the opportunity to accelerate some of these reforms," he said.

Oil prices have reached around $75 a barrel from under $30 a barrel in early 2016.

Overall growth in the Middle East and North Africa region, which includes all Arab countries, was forecast by the IMF to reach 3.2% this year compared to just 2.2% in 2017.

Recovery in Oil Price

The partial recovery in oil prices will be a boost for the (P)GCC states—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates—which supply almost a fifth of global crude oil.

After the (P)GCC saw their economic growth shrink by 0.2% last year, impacted by a 0.7% contraction by the Saudi economy, their economy is expected to return to growth in 2018.

The (P)GCC's economy is forecast to grow by 2.2% this year and 2.6% in 2019, the IMF said.

Following the oil price slump in mid-2014, (P)GCC members undertook fiscal measures and reforms to cut public spending and boost non-oil revenues.

Debt Rising

Despite the improved economic forecast, the IMF estimated cumulative overall fiscal deficits in the region to be $294 billion in 2018-22.

Around $71 billion of government debt is expected to mature during the same period.

"The rapid buildup of debt in many of the Middle East and North Africa countries is a cause for concern. Debt has increased by an average of 10 percentage points of GDP each year since 2013, with countries financing large fiscal deficits," the IMF report said.

An impending increase in interest rates, making borrowing more expensive, will complicate the problem, it added.

According to the IMF, the economy of oil-importers should grow by 6.2% annually to maintain unemployment at the current rate of 10%.

MENA countries need to create 25 million new jobs over the next five years, Azour said, while warning of the negative consequences of unemployment coupled with rising debt levels.

"The average debt in the region for oil-importing countries exceeds 80%," of gross domestic product, he said, stressing such a figure is "beyond what is acceptable."

Youth unemployment in Saudi Arabia is expected to increase from 33.5% last year to over 42% in 2030 as the Middle East continues to struggle to create enough jobs for its growing population

Not Benefiting From Global Growth

High or rapidly increasing debt levels have forced (P)GCC countries to take significant measures to reduce deficits, by limiting government spending or mobilizing revenue. These steps will help the region keep its economic house in order, control debt and inflation, and create an environment conducive to sustainable and inclusive growth. However, they can also hold economic growth back, Einnews reported.

Countries in the region also need to integrate further into the global economy and diversify their products and services. This will require greater access to finance for the private sector (especially small and medium-sized enterprises) and upgrading workforce skills.

Uncertainty surrounding oil prices, rising trade tensions, and the effects of ongoing conflicts and their spillovers have further constrained growth and remain risks going forward.

Needs Strong Fiscal, Monetary Policies

Increased debt levels will limit the extent to which fiscal policy can boost short-term demand. As governments work to bring down their debt to manageable levels, they should look to broaden tax bases and improve the efficiency of spending, including the completion of energy subsidy reforms. This will help address ongoing fiscal challenges and generate savings that could be directed for priority spending, such as health, education and public investment.

Strengthening monetary policy credibility will be essential to anchor inflation expectations. Under these circumstances, room to reduce interest rates to spur economic growth will be limited, even if inflation has been moderating. Given their fixed exchange rate regimes, the (P)GCC countries will need to adjust monetary policy in line with the anticipated increases in policy rates in the United States, which would weigh on growth going forward.

Accelerating Structural Reforms

Countries in the region should take advantage of the global recovery to accelerate structural reforms that will reduce their reliance on commodities and help build dynamic private sectors. Reforms should focus on measures that improve the business environment, such as Pakistan’s recent efforts to strengthen its bankruptcy framework. Labor market and education reforms are also needed to boost productivity.

It will be critical to strengthen governance and transparency to promote inclusive growth in the region. Some countries are taking positive steps in that direction. For instance, Afghanistan recently enacted legislation to criminalize acts of corruption, and anti-corruption laws have taken effect in Morocco, Somalia and Tunisia.

Must Provide Opportunities for All

Countries should ensure that prosperity is shared by all. The IMF's Regional Economic Outlook has identified some encouraging examples already underway. The United Arab Emirates has made important investments in education and innovation. Morocco recently launched a program to improve the quality of education and vocational training, and to raise female labor force participation, while Egypt doubled the budget allocation for public nurseries to help integrate women in the labor force. These actions are commendable, though much more must be done across the region to build on these efforts and accelerate progress.