Oil Exporters Learn to Live with Cheaper Oil - Posted on June 8, 2016 by iMFdirect
The significant and prolonged drop in oil prices since mid-2014 has changed the fortunes of many energy-exporting nations around the world. 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 (Chart 1), growth has slowed, and financial stability risks have increased. In such a challenging environment, 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, and improve growth prospects. This will be a difficult long-term process, but the good news is that many countries have made a strong start, especially in terms of budget policies.
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, an obvious area to target since public expenditures had ballooned during the oil-price boom. 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 (Chart 2). The Gulf countries and Algeria, meanwhile, also have a much larger public sector payroll, a longstanding element of the social contract between policymakers and their citizens.
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