Following the onset of the crisis, all the GCC (Gulf Cooperation Council) governments quickly stepped in to support aggregate demand and to ensure the largely uninterrupted continuation of their ambitious development agendas. Government expenditure has underpinned economic growth in the region at a time when private sector behavior has been characterized by persistent risk aversion and credit constraints. For instance in Saudi Arabia, public sector GDP growth in 2010 attained 5.9 percent, whereas the private sector mustered a much more modest, but still internationally respectable 3.7 percent.
In spite of growing optimism about the global recovery until recently, the Gulf governments have been slow to embrace explicit exit strategies, even though government budgets have typically projected far slower expenditure than revenue growth. On the whole, however, policymakers have typically recognized the exceptional uncertainty of the international environment and used continued fiscal stimulus spending to underpin confidence and growth. With the onset of a period of political instability in North Africa, this approach has left them in a position where policy continuity has once again presented itself as a logical response to the evolving circumstances.
Virtually all the GCC governments have embarked on the new fiscal year with a permissive fiscal stance. In some cases, this stance is further amplified by a pre-emptive desire to address mounting concerns emanating from the global commodity price pressures, most notably in the area of food. A series of measures adopted in recent weeks has further significantly loosened the fiscal policy of most Gulf governments. While these efforts to move toward a more inclusive growth paradigm build on a realistic recognition of social needs in important areas such as employment and housing, they also create new challenges in terms of ensuring the efficiency of government spending and the longer-term sustainability of policy. By contrast, near-term concerns over macroeconomic stability seem largely unwarranted in view of the significant windfall produced by oil price appreciation.
Saudi Arabia responded to the global economic crisis with one of the most forceful stimulus packages among the leading economies. While fiscal policy has remained permissive, 2011 initially promised to involve some scaling back of the stimulus. Although the budgeted 7.4 percent increase in spending took the projected total for 2011 to a record SR580 billion ($155 billion), the increment was the slowest since 2003. At the same time, government revenues were projected to rise twice as fast - by 15 percent - to SR540 billion ($144 billion). Echoing the 2010 budget, the government foresaw a SR40 billion ($10.7 billion) deficit, equivalent to 2.3 percent of GDP on the assumption of a roughly $54 per barrel oil price, up from approximately $47 in 2010. The budget continued a well established pattern of prioritizing capital spending which was projected to account for a historically high 44 percent of total expenditure. Education remains a spending priority with a 26 percent share of the total, followed by 12 percent to health, social, and security services.
Saudi Arabia has recently taken steps to significantly boost government spending beyond the levels envisaged in December. A SR135 billion package of measures was announced in February, including one-year unemployment benefits and various loan write-offs. Social benefits for families were boosted, while SR3.5 billion was allocated support household expenses. SR15 billion was allocated to the General Housing Authority, SR40 billion to the Real Estate Development Fund and SR30 billion to the Saudi Credit and Savings Bank. All Saudi students studying abroad are now to be covered by a state scholarship program while another SR100 million was allocated for financial support for students. Inflation allowances of state employees were made permanent.
An even larger SR350 billion set of measures was unveiled on March 18, equal to some 20 percent of the country’s GDP and some 56 percent of total government spending in 2010. Even though not all the planned expenditure is immediate, the package directly boosts living standards by providing for a special bonus worth two months’ salary to all public sector employees while students will receive two extra months of scholarship support. The public sector minimum monthly wage is increased from SR2,185 to SR3,000. Adding precision to the commitment made in February, all job seekers are to be paid SR2,000 a month. 60,000 new jobs are created at the Ministry of the Interior. Additional benefits go to members of the military. Significant funding was also devoted to the upkeep of mosques and the religious establishment.
Housing constitutes a key priority where, again, the measures promulgated in February are fleshed out. SR250 million will be spent on building 500,000 new housing units around the country, something that should cover at least two years’ projected housing deficit. The upper limit of the loans made by the Real Estate Development Fund is to be increased from SR300,000 to SR500,000. The Ministry of Health is provided SR16 billion and funding for private hospitals is due to be quadrupled to SR200 million.
The UAE has the most complex fiscal system of the GCC states due to its federal structure. But it has also tended to follow its own course in fiscal policy, partly due to the severity of the most recent business cycle which saw rapid development in areas such as real estate followed by a dramatic crash, especially in Dubai. Unlike its Gulf neighbors, the UAE - both on the federal and the emirate levels - is pursuing a degree of fiscal consolidation having dramatically increased government outlays in the pre-crisis years.
The UAE fiscal system is composed of three budgets, led by the government of Abu Dhabi budget which in 2010 made up almost three-quarters of the national total, clearly in excess of the emirate’s share of the aggregate national GDP. Also the government of Dubai produces its own budget which in 2010 accounted for 12.5 percent of the national aggregate. Federal spending historically comprises up to a fifth of total government spending and its share in 2010 was just over 15 percent. In addition to federal government operations, the budget covers the finances of the five northern emirates.
Little current information is available about the Abu Dhabi budget. The emirate’s 2010 budget projected an AED84.9 billion ($23.1 billion) deficit on the assumption of a $60 per barrel oil price, an outcome that appears to have been at least largely avoided due to a far higher actual oil price. This marked a second consecutive year of planned deficit spending after an estimated AED126.5 billion shortfall in 2009. The government had originally projected an AED42.6 billion deficit on the assumption of a $50 per barrel oil price. Reflecting the general nationwide thrust of fiscal tightening, Abu Dhabi government spending in 2010 was projected to fall from AED251.7 billion to AED207.5 billion. However, this was in part because the government had in 2009 undertaken important exceptional measures such as injecting AED16 billion in local banks.
Abu Dhabi’s oil-related revenues in 2009 were estimated at AED121.8 billion in 2009, followed by AED118.7 billion in 2010. Total budgeted revenues in 2010 were AED122.6bn.
Continuing the consolidation trend of 2010, Abu Dhabi intends to balance its books this year. In reality, the fiscal position of the emirate is likely to be significantly stronger since the budget excludes revenues from important state-owned entities, including the Abu Dhabi National Oil Company. To date, Abu Dhabi appears to have covered its deficits through transfers from government-related entities, most notably the Abu Dhabi Investment Authority and the Abu Dhabi Investment Council.
Also Dubai’s 2011 budget seeks to trim government spending with the objective of cutting the deficit from AED6 billion ($1.6 billion) to AED3.8 billion ($1 billion). Overall expenditure is set to fall to AED33.7 billion ($9.2 billion), which is below the levels seen in 2009-2010. 43 percent of this is allocated to the “economic sector”, which includes infrastructure, transport, and tourism. Social development, including health care and education, will claim 24 percent of the total. AED7.5 billion ($2 billion) of the budget - or some 23 percent — is allocated to infrastructure projects, down from AED10.7 billion in 2010. Government revenues are projected to reach AED29.9 billion ($8.1 billion). Of this, 61.7 percent is due to come from fees and fines while 23.3 percent is tax revenue, Unlike elsewhere in the region, the proportion of oil revenues is a modest 8.4 percent and an additional 6.7 percent will be generated by investment income.
Dubai is planning to use bonds as the principal way of covering its deficits. Although the emirate does not currently have a formal sovereign debt rating and concerns persist about the financial health of some government-related companies, Dubai five- and 10-year issues of $1.25 billion last year attracted subscriptions of $5 billion.
Also the UAE federal budget reflects the general theme of fiscal consolidation, reversing a 21 percent increase in spending to AED42.2 billion ($11.5 billion) 2009. In November, the government approved an AED122 billion budget for three years. The 2011 budget allocation of AED41 billion is down on AED43.6 billion in 2010. The budget effectively freezes a number of programs, something that has generated considerable controversy, given the acute spending constraints of various government-funded organizations, notably in health care and education. Education, health, pension, and social assistance account for 46% of the total spending. AED1.6 billion has been earmarked for roads and public works. Federal government revenues are set to total AED38 billion, something that would produce an unprecedented AED3 billion budget deficit. The federal government has historically balanced its books.
The revenue side of the federal budget reflects the multi-tier political system of the UAE. The AED43.6 billion budget in 2010 was due to receive AED16.6 billion of its revenues from Abu Dhabi, although the actual contribution appears to have been only AED14.3 billion. AED1.2 billion was due to come from Dubai, but only AED500 million had been received by November. Various federal bodies account for the rest, with for instance the telecommunications company Etisalat contributing 50 percent of its profits. Efforts are underway to obtain contributions also from the other emirates, especially as Abu Dhabi’s contribution this year is expected to decline to AED11.6 billion. The bulk of federal spending is devoted to the five northern emirates.
The prospect of a federal budget deficit has fueled ongoing efforts to establish a federal government debt market. The Federal National Council (FNC) in December authorized the government to issue federal debt "only if necessary" to fund the projected budget gap. The public debt law limits government debt to 25% of GDP or AED200 billion, whichever is lower.
The Kuwaiti Cabinet in January approved draft 17.9 billion Kuwaiti-dinar ($64 billion) budget for the 2011-12 fiscal year. The government projects a sharp 38.3 percent increase in revenues to KD13.4 billion ($48.1 billion) on the assumption of $60 per barrel oil price, a figure that is 40 percent up on the $43 estimate used last year. Expenditure is set to climb by 9.9 percent to KD17.9 billion ($64.3 billion), a figure roughly equal to 50 percent of the country’s GDP. Kuwait operates the most heavily oil-dependent fiscal system in the Gulf region, where oil revenues are due to make up an estimated 93 percent of the total revenues in 2011-12.
The 2010-11 budget foresaw total revenues of KD9.7 billion ($34.8 billion) and expenditure of KD16.3 billion ($58.4 billion). In practice, however, the strength of the oil price is likely to have produced budgetary oil revenues of nearly KD20 billion. Moreover, it appears that government spending has fallen somewhat short of the original budget projections, which should allow Kuwait to close 2010-11 with a surplus of approximately KD4.5 billion or more. The government recorded a surplus of KD5.5 billion (following allocations to the Reserve Fund for Future Generations) during the first three quarters of the fiscal year as revenues were 56 percent above the targeted levels.
The budget revenues reached KD15.1 billion ($54.2 billion), of which oil made up KD14.1 billion. Actual expenditures totaled KD8.1 billion ($29 billion), including KD1.5 billion allocated to the Reserve Fund. The surplus typically declines in the closing months of the fiscal year as spending accelerates.
This year’s projected budget deficit of KD4.5 billion ($16.1 billion) is 40.7 percent below the 2010-11 figure, although it accounts for 14 percent of GDP, something that formally contravenes the commitments Kuwait has made under the Gulf Monetary Union. However, the spending total includes a second KD1.1 billion ($3.9 billion) payment to cover a deficit in the pension scheme. The third and final payment is due in 2014-15. In reality, of course, the favorable oil price outlook is likely to produce a far more favorable fiscal outcome. The budget should be breaking even at a price of just over $70 per barrel. A $90 oil price should generate a surplus of close to KD3 billion.
One source of uncertainty concerning the fiscal outlook for Kuwait is the persistent stand-off between the government and the Parliament, something that resulted in a virtual stalemate before the most recent elections. The tense relationship has once again delayed the implementation of the country’s new five-year economic development plan and associated initiatives. Also a dispute over the management of Kuwait Petroleum Corporate has delayed key decision, among other things on the new Al-Zour refinery and upgrades of the existing ones.
Qatar’s massive infrastructure commitments have resulted in stance rapid increase in government spending over a number of years, something that looks likely to carry over into the 2011-12 fiscal year.
Nonetheless, 2011-12 offers a contrast with Qatar’s more fiscally permissive neighbors as the country envisages a 22.5 billion Qatari riyals ($6.1 billion) surplus. Government revenues are projected to increase by 27 percent to a record QR162.5 billion (44.5 billion), while expenditure is set to total QR139.9 billion ($38.4 billion), a 19 percent increase on 2010-11. The cautiousness of the fiscal stance is further underscored by the unchanged oil price assumption of $55 per barrel, something that now appears relatively low by regional standards. The proportion of government revenues coming from oil and gas is set to remain fairly low — 46 percent of the total in 2010-11, down from 64.6 percent in 2006-07.
A remarkable 41 percent of the Qatari budget is allocated to infrastructure projects which include the ongoing Doha International Airport project, the New Doha Port, and a railway. The allocation for public sector projects is 19 percent above the previous fiscal year. The budget offers relatively few new initiatives in the area of social policy, however. Among other things, public sector salaries were increased by 10 percent. Even the allocation for the health care sector was raised by a relatively modest 3.6 percent to QR8.8 billion. Education is to receive QR 19.3 billion - up 12 percent over 2010-22 - and housing QR5.2 billion - a 100 percent increase.
Having issued a $50 billion bond to local banks in January for the purposes of draining excess liquidity and funding infrastructure spending, the Qatari government has indicated that there are no near-term plans for further bond issuance. The Qatari budget recorded a surplus equal to 17.5 percent of GDP (QR19.4 billion) in July-September with government revenues doubling Y/Y. This followed a deficit equaling 23.2 percent of GDP in April-June.
The Omani budget for 2011 foresees a 14.1 percent increase in government revenues to 7.3 billion Omani rials ($18.9 billion), with oil revenues in fact projected to rise by 22.4 percent to OMR5 billion ($12.9 billion) to make up 68.0 percent of the total. The assumed oil price of $58 per barrel is up 16 percent on the $50 applied in 2010. Gas revenues are projected to increase by 15.0 percent to OMR920 million ($2.4 billion), or 12.6 percent of total. By contrast, the proportion of other revenues is set to contract by 8.2 percent to OMR1.4 billion ($3.7 billion).
Government expenditure this year is expected to rise by 13.2 percent to OMR8.1 billion ($21.1bn). Reflecting the government’s ambitions to boost hydrocarbons extraction, the budget foresees an 11.5 percent increase in the allocation to the sector to OMR1.6 billion, or 19.9 percent of the total. Defense and security spending will account for OMR1.7 billion, or 20.3 percent of the total. Education spending is set to total OMR927 million and health care spending 335 million, figures that still represent fairly low proportions by regional standards.
The government foresees an OMR850 million ($2.2 billion) deficit this year, which would be mainly financed from state reserves. Although Oman had budgeted for an OMR800 million (2.1 billion) deficit last year, the average oil price of $76 per barrel significantly exceeded the budget assumption of $50 while there was a gradual increase in oil production volumes.
The fiscal situation in Bahrain was thrown into some confusion following a wave of unrest in February-March. Nonetheless, the budget approved by the government in January for 2011-2012 is likely to serve as a reasonable indication of future spending. The two-year budget projects an oil price of $80 per barrel, a pronounced increase from the $60 figure used in the 2009-2010. In spite of this, the government is projecting deficits as the break-even oil price is now estimated to stand at $97-100 per barrel.
The aggregate government revenues of BD4.4 billion ($11.8 billion) in 2011-2012 are set to exceed the 2009-2010 level by 18.9 percent. BD3.9 billion of this total will come from the oil sector. Revenues are expected to be roughly equally split into BD2.193 billion in 2011 and BD2.247 billion in 2012. Government expenditure is due to rise by 26.2 percent to BD5.3 billion, of which BD2.565 billion is to be spent this year and BD2.687 billion next year. Of the two-year total, BD1.1 billion will be devoted to projects. Education will claim BD657 million while spending on health projects will total BD534 million. Infrastructure, including roads and sewage, will received BD341 million. BD150.8 million will be devoted to new housing. Total government spending on subsidies in the areas of essential foodstuffs, housing, and utilities will reach BHD868.4mn. The budget allocates BD21 million a year into a reserve fund for future generations.
The government deficit is projected at BD372.7 million in 2011 and BD440.4 million in 2012. In addition, Bahrain in early February announced $417 million on new spending to address social concerns. Families will receive BD100 million, split equally between 2011 and 2012. Government subsidies on essential food will rise from BD88.9 million to 132.9 million while social assistance spending will increase from BD28.8 million to 40 million. The government has also relaxed its drive to enforce outstanding utility bills which are said to total BD62 million. This continues a pattern of loose fiscal policy as the government in 2009-2010 spent BD427.7million in excess of the budgeted amount.
Additional pressures will be created by the downgrading of Bahrain’s sovereign debt. Moody’s in August revised Bahrain’s rating from A2 to A3 and offered a negative outlook for the financial services sector. Standard & Poor’s in March revised their rating from A- to the lowest investment grade rating, BBB. Also Fitch made two successive downgrades to BBB. On the other hand, Bahrain is set to benefit from a USD10bn support fund agreed by the Gulf Cooperation Council in March. This represents a potentially significant step by the GCC toward European Union-style cohesion funding for weaker member states and regions and for the benefit of general economic stability and growth. A similar commitment was made to Oman.