1. MENAP Oil Exporters: Opportunity to Pursue Fundamental Reforms

International Monetary Fund. Middle East and Central Asia Dept.
Published Date:
April 2011
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Sharp increases in oil prices, particularly after the beginning of the recent events in the region, have benefited the MENAP oil exporters’ fiscal and current account surpluses. Part of the increased oil revenues has been used to respond to social tensions. In managing the short-term uncertainties, oil exporters should not lose sight of their longer-term challenges: achieving strong and sustainable inclusive growth to provide employment for the rapidly growing labor force, especially for the youth; better fiscal management; and further development of the financial system.

Increased Uncertainty, But Financial Windfalls

The ripple effects of the political events in Tunisia and Egypt have spread in varying degrees to the oil exporters in the region, and many of these countries are responding with public spending and job-creation measures to alleviate social tensions. The social unrest also highlights the need to pursue fundamental economic reforms–social policy, fiscal management, governance, business environment, labor markets, financial sector access–to facilitate more inclusive economic growth. The unrest has increased the assessment of risk in the region, but the consequential hike in oil prices has brought in windfall financial benefits. Average spot oil prices, which had steadily increased by 25 percent to US$95 per barrel between August 2010 and January 2011, underpinned by fundamentals, shot up amid greater volatility to over US$110 per barrel during March (Figure 1.1). Prices increased further in early April, as social and political unrest intensified in Libya, also placing increased emphasis on the role of other oil producers in stabilizing oil supplies (Box 1.1).1

Figure 1.1Crude Oil Prices Rise Sharply

(Millions of barrels per day)

Sources: International Energy Agency; and IMF staff estimates.

Growth is likely to be uneven in 2011, but the GCC as a group is racing ahead. Average economic growth is expected to increase to 4.9 percent in 2011 for the MENAP oil exporters (excluding Libya) (Figure 1.2). Bahrain, Iran, Libya, Sudan, and Yemen are likely to be negatively affected, but the rest are expected to grow well above trend.2 In particular, the GCC is expected to show particularly strong growth of 7.8 percent in 2011, driven mainly by the oil sector as countries expand production, but also supported by high levels of public spending. The strongest performer is expected to be Qatar at 20 percent, underpinned by continued gas expansion and large public investments, followed by Saudi Arabia at 7.5 percent, where much of the increase is from enhanced oil production.3 Among the non-GCC countries, growth is expected to decline sharply in Libya, where the conflict has severely disrupted the hydrocarbon sector (accounting for over 70 percent of GDP and 90 percent or more of Libyan exports and government revenue).

Figure 1.2Growth Is Progressing in MENAP Oil Exporters1

(Real GDP growth; percent)

Sources: National authorities; and IMF staff estimates.

12011 data exclude Libya.

Box 1.1Stabilizing Global Oil Markets

The GCC has 41 percent of the world’s proven crude oil reserves, of which Saudi Arabia alone accounts for 21 percent. The GCC countries, particularly Saudi Arabia, have undertaken substantial investments to increase crude oil capacity—including in 2008 when oil prices fell sharply—providing a supply-side buffer to help smooth shocks in global oil markets. Indeed, OPEC and Saudi Arabia have stated that oil production will be expanded to meet any global shortfalls from supply disruptions. Several MENAP oil exporters (Algeria, Iraq, Kuwait, Saudi Arabia, the United Arab Emirates) have already responded to the global shortfall in oil supply following the unrest in Libya.

OPEC Crude Production(Millions of barrels per day)
Nov. 2010Dec. 2010Change in Production (Dec. 2010-Feb. 2011)Sustainable Capacity1Spare Capacity vs. Feb. 2011
Saudi Arabia8.508.500.4012.103.20
United Arab Emirates2.292.380.102.700.22
Memorandum Items
Total OPEC229.3329.520.5435.105.04
Non-OPEC Supply353.000.11
Global Oil Supply488.1088.97
Global Oil Demand587.9089.40
Source: International Energy Agency.

Capacity levels can be reached within 30 days and sustained for 90 days.

Crude oil.

Includes crude oil, condensates, natural gas liquids, and oil from nonconventional sources.

Data relate to December 2010 and February 2011.

Average oil demand for the years 2010 and 2011.

Source: International Energy Agency.

Capacity levels can be reached within 30 days and sustained for 90 days.

Crude oil.

Includes crude oil, condensates, natural gas liquids, and oil from nonconventional sources.

Data relate to December 2010 and February 2011.

Average oil demand for the years 2010 and 2011.

Non-oil growth is expected to remain robust across countries (except in Iran), mainly as a result of additional fiscal spending (Figure 1.3). Growth in Iran is likely to remain below trend in 2011 as the economy responds to the implementation of energy subsidy reform that began in December 2010 and which is expected to have positive long-term benefits (Box 3.2.3). In Sudan, the six-month transition period prior to the July 2011 independence of South Sudan could result in lower growth rates in 2011 (Box 1.2). The performance of the GCC countries will remain strong in 2011, with the exception of Bahrain, where uncertainties prevail. Robust non-oil growth in the region partly reflects implementation of plans to promote economic diversification—by amending foreign direct investment (FDI) laws, initiating public–private partnerships, and encouraging joint ventures. These measures aim to broaden the tax base and generate employment; joblessness remains high, particularly among the youth in many of these countries (Box 1.3).

Figure 1.3Non-Oil Sector Activity Remains Robust

(Real non-oil GDP growth; percent)

Sources: National authorities; and IMF staff estimates.

Financial markets have taken a hit. Equity markets across MENAP oil exporters have fallen since January 11 (Figure 1.4), and some markets (Bahrain, Dubai) are now around the troughs in the aftermath of the 2008 global crisis. Sovereign credit default swap spreads have widened in all GCC countries after the current crisis (Figure 1.5), but are narrower than the post-global crisis levels. Rating agencies have downgraded Bahrain and Libya since the beginning of the unrest.

Figure 1.4Stock Markets Have Fallen

(Index; Oct 1, 2009 = 100; Aug 31, 2008–Mar 28, 2011)

Source: Bloomberg.

Figure 1.5CDS Spreads Have Widened

(Basis points; Oct 1, 2009–Mar 28, 2011)

Source: Markit.

Fiscal and external balances are improving amid oil price uncertainty. Strong growth in oil revenue will generate substantial fiscal and current account surpluses in 2011. The current account surplus of the oil exporters (excluding Libya) in 2011 is projected at about US$378 billion, with the GCC countries accounting for about US$304 billion (Figure 1.6).4 Nevertheless, considerable uncertainty surrounds these projections. For the oil exporters as a group, revenue uncertainty—as measured by the difference in current account surpluses calculated at the low point of oil futures prices (US$88 per barrel) and the high point (US$114 per barrel) during the first quarter of 2011—is immense (Figure 1.7).

Figure 1.6Current Accounts Improve Across the Board

(Billions of U.S. dollars)

Sources: National authorities; and IMF staff estimates.

Figure 1.7Current Accounts Under Alternative Price Scenarios

Source: National authorities.

1Minimum and maximum oil prices between Jan. 1, 2011 and Mar. 22, 2011.

The fiscal surplus is estimated to be about 7.5 percent of GDP in 2011, compared to 3.0 percent in 2010, despite higher discretionary spending measures announced by many of the oil exporters (Algeria, Bahrain, Kuwait, Oman, Saudi Arabia, Yemen) (Figure 1.8). However, this overall trend masks the actual fiscal stance of many countries, as measured by the non-oil fiscal and primary balances. The general government non-oil fiscal balance to non-oil GDP ratio is expected to deteriorate in Iraq, Kuwait, Oman, Saudi Arabia, Sudan, and Yemen (Figure 1.9).

Figure 1.8Fiscal Balances Improve

(Percent of GDP)

Sources: National authorities; and IMF staff estimates.

Figure 1.9Non-Oil Fiscal Balances Expansionary

(Percent of non-oil GDP)

Sources: National authorities; and IMF staff estimates.

Despite the Windfalls, Near-Term Policy Challenges Remain

Risks to the outlook are on the downside and could intensify, particularly if the unrest becomes more widespread. The evolving security situation in Libya has already had spillover effects on the region through reduced remittances to Egypt and Tunisia, adding to the challenges facing these countries.5 Protracted unrest could adversely affect investor sentiment, weigh on private-sector activity (Bahrain, Libya, Oman, Yemen), and affect the cost and availability of financing for the region as a whole. FDI and the nascent tourism sector will be adversely affected (Bahrain, Libya, Oman, Yemen), potentially setting back recent progress toward much-needed job creation and economic diversification. Furthermore, equity price declines, if they persist, could dampen recovery in real estate markets and adversely affect financial sector balance sheets (GCC countries). Nevertheless, there are positive spillovers from the GCC countries to the rest of the world (Box 1.4).

Box 1.2Sudan: Economic Challenges for North and South Sudan

The planned independence of South Sudan in July 2011 will have important macroeconomic implications. For the North, the loss of southern oil production will result in domestic and external imbalances. Preserving macroeconomic stability in the face of this permanent shock could be challenging, particularly at a time when the country has limited access to external financing. For the South, the main challenges will be to build strong institutions with good governance, clear accountability, and transparency to ensure that the oil windfall is channeled toward promoting sustainable growth and reducing widespread poverty.

Impact on North Sudan

Independence will have an immediate impact on North Sudan’s fiscal and external revenues. Oil revenues, which constitute more than half of government revenues, could drop by about 75 percent (6 percent of GDP). About half of this revenue loss would be offset by the reduction in transfers to the South; hence the overall fiscal deficit could widen by about 3 percentage points of GDP. The current account balance would deteriorate by about 4 percentage points of GDP over the next 2 years, reflecting both a decline in oil exports—which constitute about 90 percent of exports—and an increase in petroleum product imports. Capital inflows, including FDI, could decline in the short term, contributing to the emergence of a financing gap that could reach 3–4 percent of GDP in 2012.

Challenges for South Sudan

An independent South Sudan will face several challenges, namely a total dependence on oil revenue (currently about 98 percent of government revenue), weak government institutions, the lack of infrastructure, and a dearth of trained civil servants. These challenges are compounded by the fact that about half of the South’s population lives below the national poverty line. Moreover, South Sudan lags far behind in most Millennium Development Goals relative to the North and other sub-Saharan African countries. To address these challenges, South Sudan will need to rely on substantial assistance from the international community in the years to come.

Status of Millennium Development Goals (MDGs) in Sudan in 2010
MDG 1 Eradicate Extreme Poverty and Hunger
Estimated poverty incidence (percent of total population)47235145
Prevalence of child malnutrition (underweight for age; percentage under 5)32164824
Proportion of population below minimum level of dietary energy consumption28144711
MDG 2 Achieve Universal Primary Education
Gross primary enrolment ratio7110048100
Adult literacy rate7810036-
MDG 3 Promote Gender Equality and Empower Women
Ratio of girls to boys in primary education541001100
Percentage of women in National Assembly/Council of States25-32-
MDG 4 Reduce Child Mortality
Under-5 mortality rate (per 1,000)1024138183
Infant mortality rate (per 1,000 live births)7153131-
One-year-olds immunized against measles8510020-
MDG 5 Improve Maternal Health
Maternal mortality ratio (per 100,000 live births)6381341,9891,680
Birth attended by skilled health staff579010-
Antenatal care coverage (at least one visit and at least four visits)70-16-
MDG 7 Integrate the Principles of Sustainable Development into Country
Policies and Programmes; Reverse Loss of Environmental Resources
Access to improved drinking water source (percent of population)59824875
Access to improved sanitation (percent of population)4067653
Source: United Nations Development Programme, Sudan.
Source: United Nations Development Programme, Sudan.
Prepared by Jemma Dridi.

Box 1.3Employment Creation in Oil Exporters

During the past decade, the MENAP oil exporters have created many jobs. In the GCC, job creation was mainly in the private sector and mostly for expatriates. Skill mismatches and sizable wage differentials between nationals and expatriate workers largely explain the low employment level of nationals in the private sector.

Providing employment for a growing population is the main medium-term challenge. Unemployment among nationals in some GCC countries (Oman, Saudi Arabia) and non-GCC countries (Algeria, Iraq) is relatively high, particularly among the youth.

Fostering an environment that encourages private-sector development is key to improving employment prospects. Diversifying the economy with a view to providing employment will hinge on the effectiveness of reforms in education, stepped-up training, and enhanced productivity. Merely raising minimum wages in the private sector, as was recently done in Oman, without accompanying measures, is unlikely to solve the problem of unemployment of the local population. Countries should continue to build on their reform agendas, raising the quality of human capital and improving the business environment.

MENA Employment Creation1(Millions)
20002009Annual percent change
Saudi Arabia6.08.14.0
United Arab Emirates1.73.511.5
Source: IMF, World Economic Outlook.

Total employment.

Source: IMF, World Economic Outlook.

Total employment.

GCC: Private and Public Sector Employment

(Average; thousands of workers)

Source: National authorities.

Prepared by Joshua Charap, Ananthakrishnan Prasad, and Renas Sidahmed.

Short-term fiscal expansions have been financed by higher oil revenues but may have permanently raised spending. Many MENAP oil exporters have ample fiscal space and have increased public spending in response to domestic unrest and increased uncertainty, and to cushion the impact of rising food and fuel prices (Figure 1.9). In Bahrain and Oman, the newly created Gulf Development Fund is expected to provide an additional US$10 billion to each country (40 percent of 2010 GDP in the case of Bahrain) to finance housing and infrastructure costs, effectively expanding fiscal space. Countries with little fiscal space, such as Iran, Sudan, and Yemen, had initiated measures–to enhance non-oil revenues and to contain spending and improve its quality–to narrow their fiscal deficits in 2010-11. Newly announced measures attempt to dampen pressures from higher food prices, provide support to the unemployed, and alleviate housing constraints (Table 1.1). The cost of these measures ranges between 0.3 percent of GDP (for Algeria) and about 22 percent of GDP (for Saudi Arabia, spread over a number of years). Many of these measures are permanent, and scaling them back may be difficult, which might add to fiscal pressures in the future, particularly if the increase in oil prices is transitory. Iran (substantial subsidy reforms) and Qatar (increase in domestic petrol prices) are exceptions in that they are seeking to reduce distortions associated with large subsidies on domestic fuel prices.

Table 1.1Summary of Recent Fiscal Policy Measures
Description of MeasureDate AnnouncedEstimated Fiscal Cost (Percent of GDP)Nature of Measure
BahrainProvide cash transfers of US$2,660 each to familiesFebruary 13, 20111.5Temporary
KuwaitProvide free staple food to citizens for the next 14 months together with cash transfersJanuary 17, 2011Above 2.5 (magnitude of food subsidy cannot be quantified at this time)Temporary
OmanEmployment for 50,000 Omanis; establishment of monthly unemployment benefit of US$390February 27, 20111.25Permanent
Saudi ArabiaConstruct 500,000 housing units, build and expand hospitalsMarch 18, 2011
Pay a two-month salary bonus to state employeesMarch 18, 201115Temporary
Increase the public-sector minimum wage by 19 percentMarch 18, 2011Permanent
Inject capital into specialized credit institutions to facilitate debt write-offs and increase mortgage lending, provide affordable housing, and extend social insurance and unemployment benefitsFebruary 23, 2011Temporary
Extend indefinitely the 15 percent inflation allowance for state employees that had been phased in over the past 3 yearsNovember 20101.7Permanent
United ArabInfrastructure stimulus program focusing on the northern emiratesFebruary 1,20110.5Temporary
Emirates70 percent increase in pensions for military personnelFebruary 1,2011Permanent
State subsidies for rice and breadFebruary 1,2011
Other Oil Exporters
AlgeriaTemporary exemption in the tax burden on sugar and edible oilJanuary 13, 20110.3Temporary
YemenIncrease in public wagesJanuary 23, 20111.4Permanent
Expand coverage of the social welfare fund by 500,000 additional familiesJanuary 23, 20110.2
Pay interim monthly stipend to new school graduatesFebruary 12, 20110.2Temporary
Exempt students from paying tuition feesFebruary 12, 20110.2
Reintroduce bonuses and allowances to civil servantsFebruary 12, 20111.0Permanent
Hire 60,000 new graduatesFebruary 12, 20110.2Permanent
OtherFebruary 13, 20110.3
Source: IMF staff estimates.
Source: IMF staff estimates.

Box 1.4Spillovers from the GCC

The GCC has historically had important economic spillovers to the rest of the world. High levels of remittances and outward FDI from the GCC mitigated the impact of the global crisis on many countries in the region in 2008 and 2009. In addition, GCC imports, although not as significant, continue to support the region’s exports.

GCC: Outward Spillovers to Rest of the World(Billions of U.S. dollars)
Outward remittances52.960.465.674.9
Outward FDI38.616.020.942.7
Nonbank deposits113.6112.9134.12
Sources: Bank for International Settlements; national authorities; World Bank; and IMF staff estimates.

IMF staff projections.

Q3 2010.

Sources: Bank for International Settlements; national authorities; World Bank; and IMF staff estimates.

IMF staff projections.

Q3 2010.

Aid flows—mainly from Kuwait, Saudi Arabia, and the United Arab Emirates—have averaged about 1.5 percent of their combined gross national income between 1973 and 2008. Countries in the MENAP region have received between 10 percent and 70 percent of their total official development assistance from other countries in the region.

Growth linkages between the GCC and the other countries in the region are also significant. Estimates indicate that an increase of 1 percentage point in the GCC’s real GDP growth will increase GDP growth in migrant workers’ countries of origin by ⅓ percentage point. High oil prices have provided an additional incentive to these countries to continue with their ongoing investment programs and to recycle their oil revenues abroad.

The outlook for remittances is clouded by new initiatives under consideration in some countries, such as Saudi Arabia, to provide greater incentives for the hiring of nationals in an attempt to reduce national unemployment.

Prepared by Ananthakrishnan Prasad.

Inflation pressures are rising together with concerns about food security. Inflation is expected to increase in almost all countries in 2011, to an average of 11 percent for the oil exporters as a group. The biggest increase is expected in Iran, due to the subsidy reform (Figure 1.10), but the GCC will also see a pickup in inflation in 2011 to 5.3 percent from 3.2 percent in 2010 (Figure 1.11). The key driver of headline inflation is food prices, but core inflation is increasing in many countries, reflecting a rise in inflationary expectations.

Figure 1.10Non-GCC Headline Inflation

(Consumer price index, year-on-year growth)

Source: National authorities.

Figure 1.11GCC Headline Inflation

(Consumer price index, year-on-year growth)

Source: National authorities.

Key grain prices, including those of corn and wheat, have risen sharply, heightening food security concerns, given that many MENAP oil exporters are among the largest importers of wheat in the world—Algeria and Iraq, respectively, rank third and ninth. World wheat prices rose by over 75 percent in the 12-month period ending on March 31, 2011. Larger harvests resulting from an increase in global acreage and less severe weather conditions should ease some market tightness over the next 12 months. Structural factors (changing diet patterns in emerging and developing economies, and the boom in biofuels that has buoyed the demand for feedback crops) have also contributed to rising demand for food.

Oil exporters should monitor the second-round effects whereby food inflation translates rapidly into nonfood inflation. Some governments, particularly in the GCC (Kuwait, Qatar, Saudi Arabia, the United Arab Emirates), will need to carefully monitor the impact of expansionary fiscal spending on aggregate demand to prevent a resurgence of inflationary pressures. So far, only Sudan has tightened monetary policy in response to emerging inflationary pressures.

Medium Term: Outlook Good, But Deep Structural Reforms Needed

Growth is expected to remain robust, with inflation declining as the food and oil price shocks abate. Importantly, non-oil growth is expected to pick up, which would typically be associated with increased employment opportunities. Nevertheless, lessons can be drawn from recent developments.

Inclusive growth. To be sustainable, growth strategies need to result in job creation and rising incomes for all segments of the population, and address unemployment and housing problems, especially for the youth. In this context, efforts to foster private-sector development should be sustained. Credit plays a vital role in private sector–led growth that should create employment. Ensuring sustainable credit growth with improved access, particularly to small- and medium-sized enterprises, is, therefore, a priority. The success of efforts to diversify the economy will also hinge on the effectiveness of reforms in education, stepped-up training for nationals, and enhanced productivity; competitiveness will be essential to sustaining inclusive growth.

Better fiscal management. Public spending has increased dramatically in recent years in many countries, often allocated toward growth-enhancing physical and social infrastructure. The quality of spending needs greater attention, including the continued strengthening of public financial management. One step would be for additional countries in the region to move away from reliance on untargeted subsidies to more efficient social safety nets. In particular, reforming universal fuel price subsidies would help contain rapidly rising domestic energy consumption.

Heightened oil-price volatility has also reinforced the need to cast spending within a multi-year framework to ensure sustainability and improve demand management tools. One option for managing such volatility is to adopt a formal fiscal rule, perhaps involving a country-specific aggregate expenditure cast in a three-year rolling budget combined with a debt ceiling. In practice, most GCC countries simply base their budget on a conservative oil price, with no explicit guidance as to how or whether additional revenues will be spent. In addition to diminishing the relevance of the budget as a planning document and as an indicator of government priorities, reliance on within-year discretionary adjustments risks generating permanent entitlements that may be difficult to scale back in the event of lower oil prices. It may also magnify boom-bust cycles.

Financial sector stability and development. Over the medium term, the MENAP oil exporters should continue their efforts to promote the development of the financial system, to improve its efficiency and further increase its resilience. The banking sector remains broadly sound in the GCC countries because banks have high capital buffers, in some cases helped by large government capitalization (Qatar, the United Arab Emirates). Nevertheless, potential vulnerabilities could emerge through spillovers from the nonbank financial sector to the banking sector (Kuwait), the overhang of the real estate sector (Bahrain, the United Arab Emirates), and the interconnectedness between the different segments of the banking system (wholesale and retail banks in Bahrain). Resolution of nonperforming loans of banks in many non-GCC countries (Algeria, Iran), and restructuring of banks (Iraq, Sudan) require continued attention. Finally, debt restructuring in Dubai may imply postponing the realization of losses and a new bout of rollover risk in a few years, especially if asset prices fail to recover as anticipated.

Credit to the private sector began to pick up in 2010 in several countries–including the GCC countries, Algeria, and Yemen. Continued efforts will be needed to support the development of the financial system and enhance its regulation and supervision, in order to improve its efficiency and further increase its resilience. Supervisors in all countries should put in place incentives for banks to develop efficient risk management practices. Particularly important are steps to enhance access to credit for small and medium-sized enterprises, the promotion of appropriate instruments for housing finance, and development of domestic debt markets to provide the basis for long-term financing. In the more developed financial systems, existing macroprudential tools should be further refined to manage the credit cycle without fueling inflation, particularly in countries, such as those of the GCC, where monetary policy is constrained by a currency peg.

Selected Economic Indicators: MENAP Oil Exporters1


Real GDP Growth5.
(Annual change; percent)
Iran, I.R. of5.
Saudi Arabia4.
United Arab Emirates8.
Consumer Price Inflation5.98.811.
(Year average; percent)
Iran, I.R. of13.511.918.425.410.812.522.5
Saudi Arabia-
United Arab Emirates3.69.311.
General Government Fiscal Balance5.813.210.312.9-
(Percent of GDP)
Iran, I.R. of2.00.02.4-0.2-
Saudi Arabia7.724.615.834.4-4.77.712.8
United Arab Emirates34.518.115.416.5-12.6-1.36.5
Current Account Balance11.221.917.918.
(Percent of GDP)
Iran, I.R. of5.
Saudi Arabia13.627.824.327.86.18.719.8
United Arab Emirates7.715.
Sources: National authorities; and IMF staff estimates and projections.

2011 data exclude Libya.

Central government.

Consolidated accounts of the federal government and the emirates Abu Dhabi, Dubai, and Sharjah.

Sources: National authorities; and IMF staff estimates and projections.

2011 data exclude Libya.

Central government.

Consolidated accounts of the federal government and the emirates Abu Dhabi, Dubai, and Sharjah.

Prepared by Ananthakrishnan Prasad and David Robinson with input from country teams.

The earthquake in Japan in early March and subsequent concerns about the safety of nuclear energy plants add more uncertainty to the path for oil.

The projections for the MENAP oil exporters for 2011 exclude Libya for all economic variables.

If Saudi Arabia’s oil production were to remain unchanged at the level of January 2011, its forecasted growth rate would decline to 4.7 percent.

This is based on an oil price assumption of US$107.16 per barrel for 2011.

In 2010, Libya hosted about 1.5 million migrant workers, mainly from Egypt and Tunisia.

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