MIDDLE East and African oil producers are set for losses of $300 billion this year as a result of the low-price environment, but their strong cash balances will insulate most from the effects of potential expenditure adjustments, according to the International Monetary Fund (IMF).
In an op-ed piece originally published in Asharq Al-Awsat, director of the IMF’s Middle East and Central Asia Department Masood Ahmed said significant challenges were being presented to oil exporters, while benefits for importers “remain contained”.
“The steep decline in oil prices presents new economic realities for countries in the Middle East and Africa (MENA) region,” Mr Ahmed wrote.
“All oil exporters in the region, with the exception of Kuwait, will now have to dip into their accumulated savings or borrow to finance deficits in their government budgets for this year.”
Mr Ahmed said the combination of unexpectedly strong conventional production, weak demand, and OPEC’s decision to maintain production levels had led to a steep price decline and uncertainty about where the trend is headed.
He said the uncertainty made it difficult for policymakers to respond to the depressed price.
Mr Ahmed said it was likely exporter governments would use their strong bank balances to avoid immediate impacts on growth, expenditure and living standards, but warned an extended low price environment could spell serious trouble for governments.
“Foreign asset buffers are exhaustible and many MENA oil exporting countries will empty their buffers within a few years if policies remain unchanged and if oil prices stay low,” he said.
Mr Ahmed warned it was high time for countries to reassess medium term spending plans as part of a “gradual but decisive adjustment to lower oil prices”.
“Reducing capital expenditure in a phased manner will probably be unavoidable given the magnitude of the task, but preference should generally be given to reining in recurrent expenditures and reducing generalised energy subsidies, which remain large in many countries even with the new lower oil prices,” he said.
“In addition, lower oil prices could present incentives to craft new plans, or rekindle longstanding existing ones, to raise non-oil revenue collection.”
Mr Ahmed said previous growth models based on rising government spending may no longer be applicable and that the private sector must become “a much more self-sufficient engine of growth”.
He said while lower prices would be a relief for the region’s oil importers, the benefits were being offset by other issues such as deteriorating demand and a fall in prices of other non-oil export commodities.
“Even so, growth prospects for the Middle East, North Africa, Afghanistan and Pakistan oil importers in 2015 are expected to show a significant improvement over 2014,” he said.
“It is important to recognise that the future course of oil prices remains highly uncertain.
“Countries would be well-advised to avoid entering into spending commitments that would be hard to reverse if oil prices returned to higher levels or in the face of other adverse developments.
“The key is to use this period of lower oil prices to step up the reform efforts that would support faster and more inclusive growth and create better jobs for the population.”