After the initial shock of the June 5 measures, the Qatari economy and financial markets are adjusting to the impact of the diplomatic rift, International Monetary Fund noted.
“The initial concern that trade disruptions could affect the implementation of key infrastructure projects has been mitigated by the availability of an inventory of construction materials and of alternative, and competitive, sources of imports. In addition, Qatar is accelerating efforts to further diversify sources of imports and external financing, and to enhance domestic food processing”, the Fund stated in its Middle East and Central Asia Regional Economic Outlook released yesterday.
Qatar’s exports to these countries have been broadly maintained, including large volumes of gas supplied to Oman and the United Arab Emirates. Reactions in GCC financial markets have also been benign, with initial spillovers rapidly dissipating. Over the longer term, a protracted rift could slow progress toward greater GCC integration and cause a broader erosion of confidence, reducing investment and growth and increasing funding costs in Qatar and possibly the rest of the GCC, the IMF document said.
On the growth prospects among GCC members, the Fund said that overall growth is projected to bottom out at about 0.5 percent in 2017 as the Opec-led deal reduces oil output. In contrast, non-oil growth is expected to recover to about 2.6 percent in 2017–18 as fiscal consolidation, which has weighed significantly on growth over the past couple of years.
GCC countries with larger buffer are adjusting their fiscal positions gradually. This is allowing them to keep non-oil growth broadly steady. The diplomatic rift between Qatar and several other countries is expected to have a limited impact on growth in the region at this stage , although a protracted rift could weaken medium-term growth prospects, not only for Qatar but also for other GCC countries.
According to the IMF document, lower oil prices have contributed to large fiscal deficits across MENAP (Middle East, North Africa, Afghanistan and Pakistan)oil exporters. Deficits jumped from 1.1 percent of GDP in 2014 to 10.6 percent of GDP in 2016, but are expected to ease to 5.2 percent of GDP this year on the back of a modest recovery in oil prices and significant deficit-reduction efforts. Five-year cumulative budget deficits are projected to be $320bn over 2018–22.
About half of MENAP oil exporters (Iran, Kuwait, Qatar, United Arab Emirates) had fiscal deficits of less than 5 percent of GDP in 2016, while the other half had deficits well above 10 percent of GDP.
The countries with low deficits typically have substantial buffers (Qatar, Kuwait, United Arab Emirates), or are less dependent on oil revenues (Iran), and are planning a gradual fiscal adjustment to the lower oil price environment. Fiscal consolidation plans in the GCC region include measures ranging from further reductions in non-wage recurrent spending, reductions in public wage bills as a share of GDP, additional cuts to capital expenditures, and higher non-oil revenues, particularly the introduction of value-added taxes (projected to start being introduced in January 2018) and excise taxes. Policymakers also need to take advantage of low oil prices to finalise energy price reforms.
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