The International Monetary Fund’s latest report on Gulf oil wealth, which contained the worrying prediction that “at the current fiscal stance, the region’s financial wealth could be depleted by 2034,” drew a hysterical response from the region’s Twitterati.
Some normally reasonable commentators questioned the validity of the analysis, while others denounced the multilateral lender as part of a neo-colonial conspiracy to subjugate the region.
In the light of the region’s proclivity for believing conspiracy theories, it is worth reminding ourselves of the IMF’s extremely high standards of professionalism. To be clear, it is absolutely not part of a neo-liberal or neo-colonial conspiracy to subjugate developing countries, if one exists. In fact, part of the IMF’s de facto mission has become to absorb the political flack for necessary but unpopular economic reforms, such as raising taxes or cutting spending. If political considerations do ever affect its research output, they serve to tone down economic conclusions that are political sensitive. For example: instead of saying: “The economy of country X is on the verge of collapse,” it will say: “The economy of country X requires urgent attention.” Governments can circumvent intransigent local opponents by blaming the IMF – a willing scapegoat – allowing them to push ahead as they try to keep their economies afloat.
So, you might ask, what does the paper entitled “The Future of Oil and Fiscal Sustainability in the GCC Region” actually say?
The first section analyzes the future path of oil prices in the light of expected technological changes, such as the falling price of renewable energy, and regulatory developments, such as the shift to zero emissions vehicles. The authors conclude that peak oil demand will probably materialize in the coming 20 years, and that, as a result, the future of oil prices is quite muted. An expectation of $55/barrel for the coming period is reasonable. The analysis is of high quality, but the conclusion does not differ much from what the IMF and its peers have been saying in the recent past.
The second section analyzes the implications for the fiscal position of Gulf countries. It concludes that their current fiscal trajectories are unsustainable in view of the likely path of oil prices, and that unless more aggressive reforms are implemented, they will have exhausted their accumulated savings by around 2035, with the precise time depending on the exact path of oil prices. As in the previous section, the projections are based on solid analysis and are completely in line with what the IMF has been saying in every single one of its Article IV reports for the six GCC countries for the last decade at least. The difference here is that they are being more transparent in their modeling assumptions, and the paper presents more of the technical details, because the paper’s audience is more academic than the policymakers usually targeted by Article IV reports.
The final section looks at the appropriate response for Gulf countries. It notes that rapid economic diversification is insufficient, and that more non-oil fiscal revenues need to be generated. It stresses the need for further government downsizing, as public sectors remain bloated. Finally, it states that oil revenues have often been used to fund local public investments; the IMF argues that the productivity of these investments has been declining. It appears to advocate something closer to the
Norwegian approach, whereby oil revenues are used to fund global investments, which deliver a higher rate of return.
The goal of this paper is clearly not to present fundamentally new ideas. In fact the economic visions of the Gulf countries reflect the same sentiments and propose the same solutions. The report was not an attempt at seizing attention among the masses or creating a media flurry, since it is an IMF staff paper – a dry, primarily academic IMF product. In fact, the paper’s title is completely sterile, in line with the IMF’s desire to avoid controversy.
The ensuing social media hysteria by the region’s Twitter users was probably the result of a slow news week. Had the report been issued at the same time as a terrorist attack or a major political event, it probably would have garnered little attention. As it happened, all it had to compete with was the figurative jousting between Donald Trump and Nancy Pelosi during the State of the Union.
Though Oscar Wilde once quipped that “consistency is the hallmark of the unimaginative,” in this case, unimaginative should not be confused with unimportant. Gulf policymakers should pay close attention to the IMF’s analysis and recommendations. The fund has been an important contributor to the region’s economic reforms for the last 30 years, and we should all hope this partnership continues.
Omar Al-Ubaydli (@omareconomics) is a researcher at Derasat, Bahrain.