What does cheap oil mean for the Arab world?

As the price of oil falls, the discussion is heating up on what the impact will be for countries in the Arab World – especially online through the popular Arabic hashtag النفط_دون_50_دولار #    translating to “oil below US$50 . The World Bank’s Chief Economist for the Middle East and North Africa, Shanta Devarajan, weighs in on the conversation.

Oil Exporters

On the one hand, with the oil exporters, many of them prepared their budgets for the coming fiscal year based on an oil price of US$80 or US$85 a barrel. That meant that now that they are getting less revenues than US$85, if they want to keep the expenditures at the same level, they are going to run a bigger deficit.

So, some of the wealthier Gulf countries have large reserves – Saudi Arabia has reserves of US$900 billion – so they can actually run a deficit, which they are running to the tune of about 6% of Gross Domestic Output.

But I think some of the other countries, particularly the countries with fewer reserves, like Algeria and so on, will have to make a decision:  whether they can cut expenditures or continue to borrow to finance the deficit.

Oil Importers

Now for the oil importers, the situation is quite different. Because for them – first of all – the decline in the price of oil is a benefit. Their current account would improve, because the cost of imports would have gone down.

And, it’s a benefit to the budget – because almost all of them are still subsidizing fuel – but if the domestic price doesn’t change, then since it costs them less to import they’re actually getting a benefit on the budget. Then, their budget deficit will improve as a result of the fall in the price of oil.

Subsidies

The fuel subsidies – which sometimes make up about 10% of GDP in these countries – will get reduced, as we have already seen in Kuwait, with the diesel subsidies, we’ve seen it in the United Arab Emirates, with the electricity subsidies.

And this is one way of adjusting to the lower oil price, and since the price of oil has come down, the impact on the economy will be that much less.

But I think there has to be some kind of expenditure rationalization. In Algeria, I gather, the feeling is that they do not want to cut the investment budget but they might cut the current budget – that is the administrative budget – in order to accommodate the decline in oil prices.

Growth, Aid and Remittances

There’s going to be some second round effects that we need to keep in mind. One is: if the price of consumer goods comes down, because consumer goods need fuel for transport and things like that, we’re going to see an increase in consumption.

And food consumption in particular is like 40% of the budgets of many of these households. So we could see a slight uptick in growth, particularly in the oil importers.

But it’s going to be mild, it’s not going to be a big effect. Then the final effect, again mostly for the oil importers, is whether there is going to be an effect on remittances and on aid from the Gulf countries – which are both substantial parts of their GDP, particularly in places like Jordan and so on.

Now, the experience in the past has been that there is a decline in remittances, but it’s not a drastic decline when the price of oil falls.

And on the Gulf aid to these countries: previous years when the price of oil has fallen, what we observe is that the bilateral aid goes down but the multi-lateral aid – the aid from the Arab Fund, or the aid from the Kuwait Fund, or from the Arab Development Bank, has stayed up, or even gone up a little bit, in order to compensate for the decline in the bilateral aid.

This article is published in collaboration with The World Bank’s Voices and Views: Middle East and North Africa Blog. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Shantayanan Devarajan is the Chief Economist of the World Bank’s Middle East and North Africa Region.  

Image: An employee fills a test tube with mineral oil from the Vankor deposit owned by Rosneft company at a quality control laboratory of the Krasnoyarsknefteproduct oil product company in Krasnoyarsk, Siberia, October 10, 2014. REUTERS/Ilya Naymushin.