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Sun 26 Oct 2014 01:34 PM

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GCC may need to tighten its belt in the short term, warns IMF chief

Christine Lagarde praises Gulf economic performance but warns that spending plans may need to be reviewed

GCC may need to tighten its belt in the short term, warns IMF chief
IMF Managing Director Christine Lagarde. (Photo by Stephen Jaffe/IMF via Getty Images)

The managing director of the International Monetary Fund (IMF) has urged Gulf states to implement "fiscal consolidation" in the medium term as oil prices fall and financial buffers shrink.

Christine Lagarde issued a statement following a meeting in Kuwait with the finance ministers and central bank governors of the Gulf Cooperation Council (GCC).

While she praised the performance of GCC economies, describing them as being among the "best performing in the world in recent years", she warned that ambitious spending plans may need to be reviewed in the medium term.

“The near-term outlook is positive, with growth of about four and a half percent projected in 2014–15. Particularly, growth in the non-oil sector is expected to remain strong at about 6 percent, driven by large investments in infrastructure and private sector confidence," she said.

But she added: “Oil prices have fallen by about 25 percent since the summer, and this will affect fiscal and external balances in the region.

"While the substantial fiscal buffers that have been built-up in most countries over the past decade will allow governments to maintain spending plans in the near-term, in almost all GCC countries it increases the urgency for fiscal consolidation in the medium-term.

“There is scope to strengthen policy frameworks in the GCC to support economic management. On the fiscal side, this could involve reforms to the annual budget process and the introduction of a medium-term budget framework. Regarding macroprudential policies, the introduction of a formal macroprudential policy framework would clarify responsibilities and coordination among regulators."

Lagarde said the future success of the GCC economies will be closely tied to ongoing efforts to boost the employment of nationals in the private sector and to increase economic diversification.

"Many policies are being implemented to achieve these objectives, and important progress is being made. Nevertheless, getting the economic incentives right so as to encourage workers to seek employment in the private sector and firms to produce in exported-oriented sectors is a key missing element of policies to date," she said.

Her comments echo those of Kuwaiti Finance Minister Anas Al Saleh who said on Saturday that Gulf Arab oil exporters face inevitable spending cuts as weak oil prices cloud their economic outlook.

"We must undertake comprehensive economic reforms including the reform of imbalances in public finances," Al Saleh said.

"This must be undertaken through strengthening of efforts to diversify away from oil and decrease dependence on oil revenue, which is now inevitable," he said.

Oil prices have tumbled to four-year lows of below $83 per barrel this month, exposing swollen state budgets in the six-member Gulf Cooperation Council that also includes Saudi Arabia, the United Arab Emirates, Qatar, Oman and Bahrain.