IMF urges higher state spending in Gulf countries in 2011

"Where fiscal space is available, particularly in the GCC (Gulf Cooperation Council)... and signs of either self-sustaining private sector activity or overheating are absent, fiscal policy should remain expansionary," the IMF said, speaking of Middle East and North Africa (MENA) oil exporters.

But it also said in its quarterly regional outlook released on Sunday in Dubai that "beyond 2011, most countries should turn to consolidation as they tackle critical medium-term challenges."

It noted that fiscal balances are expected to improve with the recovery in oil prices and non-oil activities.

"For the GCC, the improvement is particularly large, by almost 7 percentage points of GDP between 2009 and 2011," the fund said.

Several GCC countries were able to implement a financial stimulus in the wake of the global financial crisis, expanding their investment spendings, thanks to an "ample fiscal space owing to low debt levels and large buffers built up during the pre-crisis years," it said.

But the IMF said that even countries with ample fiscal space beyond 2011 should consolidate their finances "to ensure sustainable use of oil and natural gas revenues and to pursue intergenerational equity."

It warned that depending on oil revenues keeps fiscal balances in oil exporting countries vulnerable to downside risks, while it recommended enacting fiscal measures to ensure progress in reorienting spending, rationalising energy subsidies and diversifying revenue sources.

The recommendations apply to all oil exporters in the MENA region, and the IMF underlined that GCC countries are spending on general infrastructure and education projects that may complement private sector activity and thereby promote greater economic diversification.

As for the impact of energy subsidies, it noted that implicit fuel subsidies relative to GDP are estimated to have amounted in 2008 to seven and eight percent in Kuwait and the United Arab Emirates respectively, compared to five percent in Qatar.

The IMF also recommended introducing taxes on the non-oil sector to reduce dependence on oil revenues, pointing out that GCC countries are considering a region-wide introduction of a value-added tax regime.

Oil-rich UAE raised petrol prices twice this year in a bid to cut subsidies.

The IMF had earlier this month forecast steady economic recovery in the GCC region, with gas-rich Qatar leading the march with 16 percent projected GDP growth this year, and 18.6 percent in 2011, compared to 8.6 percent in 2009.

Growth in Saudi Arabia is forecast to reach 3.4 percent in 2010, and 4.5 percent next year, from a modest 0.6 percent in 2009.

Meanwhile, the UAE's economy should rebound by 2.4 percent this year, and expand by 3.2 percent in 2011, after contracting by 2.5 percent last year.

Kuwait GDP is forecast to expand by 2.3 percent in 2010, after contracting by 4.8 percent last year, and then to grow by 4.4 percent in 2011.

Bahrain's economy should register 4.0 percent growth this year and 4.5 percent next year, compared to 3.1 percent in 2009, while Oman's GDP should grow by 4.7 percent in 2010 and 2011, compared to 3.6 percent in 2009.

Saudi Arabia is expected to register the highest inflation in the GCC at 5.5 percent in 2010, while the UAE and Qatar, which suffered the highest inflation rates during the boom years -- of 12.3 and 15 percent respectively in 2008 -- will see these drop 2.0 and 1.0 percent respectively in 2010, the IMF said.