Abstract
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Although these countries were major suppliers of world savings in the 1970s, they seem less likely to fulfill that role in the decade ahead
Many economic observers are looking to the 1990s with a measure of apprehension stemming from perceptions that the world economy is in danger of being starved of capital. While a full analysis of this proposition is well outside the scope of this article, a quick assessment does suggest that current account surpluses—which reflect what individual countries inject into the world capital markets—seem likely, ex ante, to fall short of potential demands for capital.
In the United States, for example, while a further narrowing of the external current account deficit is widely expected, few foresee the emergence of a surplus on the horizon. In Europe, accelerated integration is expected to boost investment and capital requirements, with Germany—a long-term surplus country—making new demands of its own on international capital markets. Overall, the combined current account position of the European Community is expected to be roughly in balance through at least the middle of this decade. While Eastern Europe and the Soviet Union present a new, and potentially enormous, addition to the demand side of the global capital market, developing countries throughout much of the Third World also seem sure to run a significant aggregate deficit, as many struggle to reform their economies and grow out of their debt problems with external financial support.
Attention turns then to the few remaining countries and regions that might be capable of generating surpluses, and through them, contributing to the seemingly large potential demands of the world capital markets. Japan, the newly industrializing countries of Asia, and the oil-rich countries surrounding the Persian Gulf come immediately to mind. This article concentrates on the latter group, focusing on Saudi Arabia, the United Arab Emirates (UAE), Kuwait, Oman, Qatar, the Islamic Republic of Iran, and Iraq, with a view to assessing what contribution, if any, may be forthcoming.
Rise and fall of surpluses
Collectively, these countries assumed considerable importance as suppliers of capital to international financial markets from 1973–80, after the oil shocks of the 1970s resulted in a quadrupling of oil prices on world markets. Following negligible aggregate surpluses in previous years, their collective surplus soared to nearly $60 billion in 1974 (see chart). Almost without exception, these countries recorded successive large surpluses during the remainder of the decade, though their surpluses were declining until 1979, when, buoyed by a further oil price hike, they quickly rebounded to about $60 billion, peaking at $90 billion the following year, before falling back again to about $60 billion in 1981. In these seven years, the cumulative aggregate surplus of this group of countries topped $400 billion. Thereafter, the combined surplus faded away, reflecting falling oil prices, and some of the major countries recorded current account deficits.
Oil export receipts, imports, and current account balance for selected Middle East countries1
(In billions of US dollars)
Citation: Finance & Development 28, 004; 10.5089/9781451951790.022.A012
Source: IMF data.1Saudi Arabia, the United Arab Emirates (UAE), Kuwait, Oman, Qatar, Iran, and Iraq.Oil export receipts, imports, and current account balance for selected Middle East countries1
(In billions of US dollars)
Citation: Finance & Development 28, 004; 10.5089/9781451951790.022.A012
Source: IMF data.1Saudi Arabia, the United Arab Emirates (UAE), Kuwait, Oman, Qatar, Iran, and Iraq.Oil export receipts, imports, and current account balance for selected Middle East countries1
(In billions of US dollars)
Citation: Finance & Development 28, 004; 10.5089/9781451951790.022.A012
Source: IMF data.1Saudi Arabia, the United Arab Emirates (UAE), Kuwait, Oman, Qatar, Iran, and Iraq.Behind these overall trends, a number of factors were at work. To begin with, the radical changes in the world oil market at the end of 1973 entailed a burgeoning of oil revenues and an enormous increase in current account surpluses of oil exporters. (The circumstances in which these developments took place are well documented—see for instance, The World Economic Outlook, IMF, June 1981.) However, domestic policies in these countries soon changed, and they took advantage of their oil wealth to develop their economies and diversify their production bases and, thus, to expand job opportunities. Taken together, these policies entailed a large expansion in budgetary spending directed toward infrastructure, the development of social services, and schemes for promoting agriculture and manufacturing. Increased spending on defense by many of these countries also absorbed an important share of the higher oil earnings.
Much of these expenditures had a high import component; also, indirectly, the buoyant conditions and a surge in domestic purchasing power produced a large demand for consumer goods from abroad. As a result, imports rose very sharply and quite steadily after 1973 for almost a decade. Total imports of goods and services by the group increased roughly tenfold from 1973 to 1982, reaching nearly $90 billion. The sharp deterioration in current account positions after 1981, however, caused most governments to rein in domestic spending from about 1983, with the result that total imports declined by approximately half over the next four years. From 1987, imports began picking up again as conditions firmed in the oil market.
Naturally, developments varied widely among the different countries of the group. When oil revenues started falling in the early 1980s as the market softened, Saudi Arabia continued to place high priority on its program of domestic economic diversification and development; it aimed at striking a balance between supporting domestic activity on the one hand and limiting foreign asset drawdowns on the other. Thus, while government expenditures were indeed cut very sharply during the period, efforts were made—with reasonable success—to shift the composition of government expenditures in such a way as to promote efficiency and productivity gains in the non-oil sectors. Meanwhile, current account deficits—which were recorded in every year after 1982—were kept well within bounds by fiscal restraint. In contrast, Kuwait, and to some extent the UAE also, demonstrated, through their policy stances during the 1980s, a stronger preference for foreign investment; the resulting interest income from abroad was seen as an alternative form of diversification through which the budget and the balance of payments could be shielded somewhat from the vagaries of the oil market. For most of the 1980s, war put considerable strain on the economies of Iran and Iraq; while Iran avoided deficits (and actually paid off its foreign debt) mainly through domestic austerity, Iraq recorded a succession of large current account deficits, which were financed through heavy external borrowings.
In sum, the experience reveals that the large surpluses of the 1974–81 period were probably more in the nature of a transitory phenomenon, born of the two exceptional oil price surges, rather than a feature of a long-term, structural surplus. On the contrary, the record shows that these countries in one way or another soon developed the absorptive capacity for much higher levels of imports.
Prospects for the 1990s
Can the global financial system once again anticipate large external current account surpluses in these countries, or are the trends of the past few years likely to persist? The answer must begin with some guesses about the course of the oil market—a hazardous field for conjecture. Indeed, hindsight demonstrates that the only really reliable aspect of oil price forecasts was the caveat that most respectable forecasters were prudent enough to make, namely, that their projections were subject to a wide margin of error. Now, in the aftermath of a major conflict in the Middle East, and given the difficulty of assessing the timing and costs of reconstruction at this stage, forecasting becomes even more difficult.
Clearly, oil market developments in the years ahead will be shaped to some degree by the recent events in the region. These have drawn attention once again to the security of oil supplies in importing countries, to the role of strategic reserves, and to the economic consequences of an unstable world oil market. The recent recession has contributed to a decline in oil consumption of the industrial countries, and it now seems likely that consumption will grow somewhat more slowly over the medium term than foreseen earlier, owing to increased conservation efforts in some countries. At the same time, on the supply side, efforts to boost oil production capacity have been stepped up, stimulated in part by the loss of 4 1/2 million barrels a day of production from Iraq and Kuwait. As a result, market conditions, which were gradually expected to tighten over the medium to longer term before the crisis, may now be relatively soft over the next year or two. Furthermore, as exports from Iraq and Kuwait are eventually resumed, the available spare capacity will be enhanced substantially. The course of future oil prices will, therefore, once again depend importantly upon the ability of the Organization of Petroleum Exporting Countries to restrain oil output.
For purposes of this exercise, the world oil price is assumed to remain unchanged in real terms through 1995 (from a base of about $18.50 per barrel estimated for 1991), and to rise subsequently at about 3 percent annually, reflecting expectations of a longer-term tightening of oil market conditions. Though the timing of a resumption of crude oil production and exports by Kuwait and Iraq is difficult to assess at this stage, differing assumptions in this regard would not materially affect the projections in this exercise; in effect, any delay in restoring export capacity in Kuwait or Iraq is likely to be offset by higher production of other countries in the group. For the group as a whole, crude oil production (after having increased only modestly in 1990–91), is assumed to grow at an annual rate of about 4 percent in the period 1992–2000. This assumption is based upon the expectation that world oil consumption will increase at a moderate pace (say 1 1/2 percent a year) and that total oil production in other areas will not change significantly over the decade.
These assumptions would lead to a scenario in which rising imports (initially bloated by postwar reconstruction in some countries) would result in a significant current account deficit in the first half of the decade, which would move into a small surplus in the latter half as real oil prices pick up.
Behind this aggregate scenario are a number of prospective developments relating to individual countries. During the first half of the 1990s, all the larger countries of the group seem likely to run current account deficits. In absolute terms, the largest such deficit is expected to be that of Kuwait, where imports of goods and services pertaining to reconstruction alone could be $50 billion or more over the next four or five years; meanwhile, investment income from Kuwait’s extensive foreign asset holdings, though appreciable, will be lower than in the past few years, reflecting large war-related drawdowns. The scale and timing of the reconstruction of Iraq is more difficult to gauge, and there are many uncertainties regarding Iraq’s existing debt problems and arrears, as well as war reparations. Here, a rather small current account deficit of about $2 billion is assumed, one which is arguably on the low side. For Iran, deficits in the region of $3–4 billion annually are foreseen as reconstruction proceeds under the Government’s announced development plan and as pent up demand for imports by the private sector—after years of control—is gradually satisfied under a more liberal exchange regime. Saudi Arabia is expected to continue to record current account deficits over the period, though on a relatively modest scale. Of the remaining three countries, Oman is expected to be roughly in equilibrium over the period. Thus, only Qatar and the UAE are expected to run current account surpluses. Though large relative to their own economies, the surpluses in prospect for Qatar and the UAE are quite small even in the context of the regional external position.
Projections stretching into the second half of the decade must be treated as illustrative rather than as anything approaching a forecasting exercise. Largely as a result of the assumed strengthening of the real oil price, the current account positions of all members of the group would appear likely to move into surplus after about 1997, though the aggregate surplus would in relative terms be negligible through the end of the period.
The shift in external positions from significant deficits in the first half of the 1990s to marginal surpluses in the closing years of the decade demonstrates in one sense the sensitivity of this exercise to oil price assumptions. At the same time, however, from the standpoint of world savings, alternative oil price assumptions might not lead to very different conclusions. On the one hand, if oil prices are somewhat lower than assumed here, countries may be reluctant (or unable in some cases) to draw down foreign assets or reserves much further. Hence, there might well be a tendency to tighten the stance of domestic demand so as to restrain imports. Conversely, if oil prices were to strengthen appreciably, and this were to show signs of persisting, most countries would have ample room to expand aggregate demand and utilize their potentially larger foreign savings domestically—as they did in the late 1970s—rather than channel them into world savings.
Thus, the actual evolution of events depends not only upon the assumptions regarding the world oil market but also upon the policy actions and strategies of the countries themselves. The choice between domestic investment and consumption, on the one hand, and foreign investment on the other, is one issue. Past experience may not be a reliable guide to the choices that will be made. For the immediate future, there is clearly a prospect of highly profitable investment at home—in the form of reconstruction in some countries—that would inevitably point to current account deficits. For the longer term, the trade-offs between investment at home and investment abroad may well point to a return to small surpluses, at least in some countries, as the limits to profitable domestic investment opportunities are reached.
A second issue concerns the financing of the current account deficits foreseen in this exercise over the next few years. For some countries, reconstruction and development can be financed by a temporary rundown of foreign assets, or by borrowing on the strength of them. But a further imponderable is the extent to which policy responses will encourage private capital flows to contribute to financing the deficits in prospect. Thus, insofar as these countries adopt and maintain a macroeconomic policy framework that will ensure low inflation and give confidence and the necessary incentives to the private sector, private capital flows can play an important role in the overall financing picture.
New from the IMF
1991 Annual Report on Exchange Arrangements and Exchange Restrictions
by the Exchange and Trade Relations Department
The exchange and trade systems of individual IMF member countries are reviewed in the comprehensive volume. The 1991 report includes for the first time Bulgaria, Czechoslovakia, and Namibia. The descriptions generally relate to the end of 1990, but also cover significant developments in early 1991. You’ll receive the most accurate and current facts available in an easy-to-read, standard format.
Available in English, vii + 587 pp.
ISBN 1-55775-179-X. (paper) 1991
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