On Oct. 25 Christine Lagarde, the managing director of the International Monetary Fund (IMF), issued a warning of sorts to Gulf Cooperation Council (GCC) countries: Curb spending or risk budget deficits in the near future.

Lagarde is right about advocating a more transparent and streamlined budgetary process. While we need to be concerned about falling oil prices, cutting spending across the board may not be necessary yet. Substantial savings could be achieved by improving energy efficiency, for example, which could plug any revenue gaps resulting from falling oil prices.

The IMF official delivered her comments at the IMF-GCC meeting, where senior IMF officials meet annually with GCC ministers of finance and central bank governors to discuss the global economic developments especially as they relate to GCC economies. This year’s meeting, which was held in Kuwait, which holds the rotating GCC presidency, witnessed the official launch of the IMF-Middle East Center for Economics and Finance in Kuwait. According to Lagarde, the center is “a premier location for economics training for government officials” and it has already provided training to more than 3,600 officials from the 22 Arab League member states.

She noted that the GCC economies have been amongst the best performing in the world in recent years and that the “near-term” outlook is positive, with growth of about 4.5 percent projected in 2014-15. Particularly, she expected that growth in the non-oil sector would remain strong at about 6 percent, driven by large investments in infrastructure and private sector confidence.

However, the recent fall in oil prices, by about 25 percent since June, is a cause for concern. It could affect fiscal and external balances. While the substantial fiscal buffers that have been built up in most countries over the past decade will allow governments to maintain spending plans in the near-term, “in almost all GCC countries it increases the urgency for fiscal consolidation in the medium-term.”

She called for substantial reforms in economic decision-making. On the fiscal side, this could involve reforms to the annual budget process and the introduction of a medium-term budget framework. She also called for the introduction of a “formal macro-prudential policy framework,” to clarify responsibilities and coordination among regulators.

Kuwait’s finance minister, who hosted the meeting, also called for fiscal reform to cope with weak oil prices. “We must undertake comprehensive economic reforms including the reform of imbalances in public finances,” he said. “This must be undertaken through strengthening of efforts to diversify away from oil and decrease dependence on oil revenue, which is now inevitable.”

A few years ago, the IMF urged GCC countries to spend more to help mitigate the effects of the global financial crisis. At that time, it was preoccupied with “global imbalances” resulting from the crisis. Accordingly, GCC countries adopted expansionary budgets that doubled government spending in just five years, which may turn out to be unsustainable if oil prices continue their decline.

For example in Saudi Arabia, during the past five years, government expenditure jumped from $147 billion in 2009 to $247 billion in 2013, an increase of 68 percent.

It was relatively easy to raise expenditure because the years of the global crisis coincided with significant windfalls: Average oil prices rose 69 percent from around $62 per barrel in 2009, to $105 in 2013. In addition, to make up for lost production in troubled countries, GCC oil production also rose 19 percent during the same period from around 14.5 million barrels daily in 2009, to 17.2 million in 2013. The combined effect of rising prices and production resulted in sharp increases in revenue. The combined gross domestic product of GCC countries reflected that increase; it rose from $955 billion in 2009 to $1.6 trillion in 2013, and is expected to reach $1.75 trillion by the end of 2014, an increase of about 83 percent since 2009.

Throughout the crisis, the GCC economy sustained healthy economic growth rates, after the initial shock. However, those rates have been shrinking, even before the recent drop in prices. In 2013, GDP grew by 4.1 percent, down from 5.6 percent in 2012 and 7.7 percent in 2011. In 2014 and 2015, it is expected to grow by about 4.5 percent. However, the actual rates would depend on how long oil prices will remain low.

As calls for reform were associated in the past with declining revenue from oil, the current volatility in oil prices should provide the right environment for reforms as well.

The IMF is not usually good at taking into consideration local circumstances and has been frequently accused of advocating “one-size-fits-all” policies. In 2009, its advice was to increase expenditure across the board. Its advice emanated from concerns about “global imbalances” and had little to do with the special GCC circumstances.

This week, the IMF director appeared to be conscious of the two main challenges facing GCC countries: Raising economic diversification levels and national employment rates. She conceded, “The future success of the GCC economies will be closely tied to ongoing efforts to boost the employment of nationals in the private sector and to increase economic diversification.” She suggested that the policies being implemented to achieve these objectives have not succeeded: “Getting the economic incentives right so as to encourage workers to seek employment in the private sector and firms to produce in export-oriented sectors is a key missing element of policies to date.”

Let us hope that the IMF is not advocating cutting spending across the board this time, because that may not be necessary yet or advisable. There are many areas where savings could be made painlessly, while improving economic efficiency.

A promising source of saving lies in energy efficiency schemes that could cut energy costs without reducing living standards. The Saudi Center for Energy Efficiency has made a persuasive case about the need and value of reducing waste in energy consumption. Rationalizing energy consumption could reduce public spending by as much as a third in relatively short time, thus thwarting any negative effects from falling oil prices, while improving economic efficiency overall.

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