Deficit cuts must for Gulf currency pegs

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KUWAIT CITY, June 9, (Agencies): Countries in the Gulf region must trim down their expenditures and budget deficits to maintain their currency pegs, says the International Monetary Fund (IMF) in a report released Wednesday.

According to the report written by Deputy Chief of the IMF’s Regional Studies Division Martin Sommer, the significant and continuous oil price decline, which started in mid-2014, has affected the wealth of oil exporting countries including those in the Gulf.

The report also pointed out that “the GCC countries have maintained their long-standing exchange rate pegs underpinned by substantial net foreign assets. This strategy will require sustained fiscal consolidation through direct expenditure cutbacks and non-oil revenue increases.

Given lower oil prices and expectations of large fiscal and external deficits for years to come, there are some signs of pressure on the GCC pegs in the foreign currency forward markets. That said, these forward markets are relatively illiquid and most GCC countries continue to have significant buffers for now.

However, these buffers would clearly erode over time in the absence of additional fiscal consolidation measures and if oil prices remain low, as implied by futures prices.”

Budget
The report went on to say that budget surpluses turned into deficits; hence, the need for the affected countries “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, and improve growth prospects.” The report stated, “In the early stages of oil price decline, most countries appropriately used their savings to cope with the shortfall in oil revenues.”

However, when they realized that the oil price decline will continue, the oil exporting countries decided to take more measures, such as reducing expenditures, regulating subsidies and finding other sources of national income. Elaborating on the steps taken by the affected countries to look for other sources of income, the IMF report cited ongoing talks among Gulf countries to introduce value-added tax (VAT).

“In parallel, some Gulf countries have been raising fees, excises and corporate income taxes.” The 51-page report mentioned that a sizable “fiscal, external, financial, and structural” policy adjustment is needed to face the “serious and persistent impacts” of the drop in oil prices. “Most GCC oil exporters enter this challenging period from a position of strength, having built up large financial buffers during the years of high oil prices. “These resources can be drawn down in the coming years to smooth out — but not avoid — the adjustment to lower oil revenues,” it added.

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