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    Middle East and Central Asia Department

    Copyright © 2016

    International Monetary Fund

    Cataloging-in-Publication Data

    Cataloging-in-Publication Data

    Joint Bank-Fund Library

    Names: Sommer, Martin. | et al. | International Monetary Fund. | International Monetary Fund. Middle East and Central Asia Department.

    Title: Learning to Live with Cheaper Oil: Policy Adjustment in Oil-Exporting Countries of the Middle East and Central Asia / Martin Sommer, Greg Auclair, Armand Fouejieu, Inutu Lukonga, Saad Quayyum, Amir Sadeghi, Gazi Shbaikat, Andrew Tiffin, Juan Trevino, and Bruno Versailles.

    Description: Washington, DC: International Monetary Fund, 2016. | At head of title: Middle East and Central Asia Department. | Includes bibliographical references.

    Identifiers: ISBN 978-1-51352-048-3 (paper)

    Subjects: LCSH: Economic development—Middle East. | Economic development—Asia, Central. | Middle East—Economic conditions—1979- | Asia, Central—Economic conditions—1991-

    Classification: LCC HC412.A893 2016

    ISBN: 978-1-51352-048-3 (paper)

    The Middle East and Central Asia Departmental Paper Series presents research by IMF staff on issues of broad regional or cross-country interest. The views expressed in this paper are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

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    This paper was prepared by the IMF’s Middle East and Central Asia Department under the general guidance of Masood Ahmed, director of the department. The project was directed by Aasim M. Husain, deputy director, and led by Martin Sommer, deputy chief of the Regional Studies Division. Contributors to this report include Greg Auclair, Armand Fouejieu, Inutu Lukonga, Saad Quayyum, Amir Sadeghi, Gazi Shbaikat, Andrew Tiffin, Juan Trevino, and Bruno Versailles. Neil Hickey provided editorial support and Joe Procopio managed the report’s production. Hanan Altimimi Bane assisted with formatting and document preparation, with additional support from Esther George.

    This report is generally based on information as of April 2016. The macroeconomic assumptions and oil prices are consistent with those in the April 2016 World Economic Outlook. Specifically, the average Brent oil price is assumed at $36 a barrel in 2016 and $42 a barrel in 2017, gradually increasing to $51 a barrel in 2021.

    The paper focuses on policy challenges facing the countries of the Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates), Algeria, and oil exporters in the Caucasus and Central Asia (Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan). To keep the focus on the impact of lower oil prices, this study does not cover developments in those Middle Eastern and North African (MENA) oil exporters where developments are also, or primarily, driven by conflicts (Iraq, Libya, and Yemen) or by the removal of sanctions (Iran).

    The word oil is used interchangeably for both crude oil and natural gas.

    Executive Summary

    The oil exporters in the Middle East and North Africa (MENA) and the Caucasus and Central Asia (CCA) are facing an exceptionally challenging policy environment. Lower oil prices have reduced growth, opened up large budget and trade deficits, and increased financial stability risks. The proliferation of conflicts in the MENA region continues to cause severe economic damage and significant spillovers for neighbors and beyond. In the Caucasus and Central Asia, the adverse impact of lower oil prices has been compounded by slowdowns in Russia and China. All these challenges could undermine macroeconomic stability and further deepen social and political tensions. Fortunately, most MENA and CCA 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.

    In the Gulf Cooperation Council (GCC) region and Algeria, ambitious fiscal consolidation measures are being implemented this year, but budget balances will deteriorate in several countries nonetheless, given the sharp drop in oil prices. An additional substantial deficit-reduction effort is required over the medium term to preserve fiscal sustainability and, in the GCC countries, to support the exchange rate pegs. Policymakers need to be mindful of emerging signs of liquidity pressures in their financial systems and the risk of deteriorating asset quality. Deep structural reforms are necessary to improve medium-term prospects and facilitate much-needed diversification in order to create jobs for the growing labor force.

    In the CCA countries, economic activity has slowed to a two-decade low. Although currency weakening has helped mitigate the impact of external shocks on economic activity, inflation and financial sector vulnerabilities have risen, in some cases exacerbated by policy uncertainty. Stronger macroeconomic policy frameworks and better financial sector supervision are needed to maintain financial sector stability and weather exchange rate adjustments. Significant fiscal adjustment would help ensure sustainability over the medium term, along with structural reforms to boost potential growth, competitiveness, and job creation.

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