As oil exporters in the Middle East cut public spending and generous handouts to adapt to the reality of low crude prices, one casualty of their plans is economic growth and the ability to reduce one of the world’s highest youth unemployment rates.
Non-oil economic expansion is set to slow to between 3.5 percent to 4 percent through 2021, compared with about 7.5 percent in the previous decade, according to the latest International Monetary Fund forecasts. At this pace, governments and private businesses would be able to create 7 million jobs, about 3 million short of the number of entrants expected in the same period, said Masood Ahmed, head of the IMF Middle East and Central Asia department.
Slower growth is a “very logical consequence of the cutting back of government spending,” Ahmed said in an interview in Dubai on Sunday. “Now the challenge would be how to accelerate the pace of job creation in the private sector because the public sector is not going to be creating as many jobs as they were doing in the past.”
Exporters from Saudi Arabia to Algeria are rushing to find alternative sources of revenue as they cut capital spending and seek to curb wage growth. Saudi Arabia’s Deputy Crown Prince Mohammed bin Salman told Bloomberg in an interview late in March that the kingdom plans to raise non-oil income by more than $100 billion by 2020 through measures that include subsidy cuts and the introduction of value-added taxation.
The IMF figures help highlight how energy-rich nations in the region probably missed the best chance to diversify their economies beyond hydrocarbons when crude prices were at $100 a barrel or higher in the past decade. While public spending fueled non-oil growth, governments used the windfall partly to hire more nationals and extend more handouts to ward off unrest.
Ahmed, the IMF official, said the priority for oil exporters “is to complement the efforts that are being made on the fiscal adjustment with efforts to create a climate and incentive structure for the private sector in these countries to a be able to function, thrive, create businesses and jobs.”
Saudi Arabia, the world’s top oil exporter, has cut spending and turned to the bond market to finance a deficit that reached about 16 percent of gross domestic product last year.
The shortfall is set to narrow to 13.5 percent of GDP this year, according to IMF forecasts. The oil price the kingdom needs to balance its budget has declined to $66.70 a barrel from an estimated $94.80 last year.
The United Arab Emirates, the second-biggest Arab economy after Saudi Arabia, scrapped subsidies on transport fuel last year. Algeria, another OPEC member, is returning to the domestic bond market for the first time in two decades to mobilize domestic resources to finance spending on projects, Finance Minister Abderrahmane Benkhalfa said in an interview in Washington this month.
Algeria is expected to post a budget gap of 15 percent of GDP this year, IMF data show, compared with an average surplus of 3.9 percent between 2000 and 2012.
“At the moment, you see quite a proactive effort in the region,” Ahmed said. “It’s a bit correlated with how much they’re impacted.”