GCC oil revenues are unprecedented
Gulf nations embark on spending spree of billions of dollars, but face growing inflation as result.
KUWAIT CITY – Buoyed by record oil earnings, Gulf nations have embarked on a spending spree with hundreds of billions of dollars worth of projects but are also facing growing inflation as a result.OPEC members Saudi Arabia, the United Arab Emirates (UAE), Kuwait and Qatar along with their co-members in the Gulf Cooperation Council (GCC) Oman and Bahrain are estimated to have earned in all more than 350 billion dollars from oil last year.
Industry reports expect oil earnings of the GCC, which produces more than 16 million barrels per day (bpd), to exceed half a trillion dollars this year if oil price remains close to the record high of almost 140 dollars a barrel.
“The GCC oil revenues are unprecedented and so is the increase in public spending… which has doubled over the past five to six years,” Saudi economist Abdulwahab Abu-Dahesh said.
“Unlike in the first oil boom in the 1970s, public spending is now focused on huge infrastructure projects, in the oil, petrochemicals, ports and railways and others,” he said.
Saudi Jadwa Investment in its June economic report upgraded its projections for the kingdom’s oil earnings this year to 260 billion dollars based on an average oil price of 90 dollars a barrel for New York’s light sweet crude.
“We estimate that Saudi Arabia earns one billion dollars of oil revenues every day that WTI (light sweet oil) is above 115 dollars a barrel,” it said, raising the prospect that Saudi oil income could top 300 billion dollars for the first time.
Jadwa projections were made before Saudi Arabia raised its output by 300,000 bpd this month and before oil prices skyrocketed to nearly 140 dollars.
The kingdom, whose average annual oil earnings was just 43 billion dollars throughout the 1990s, has posted about 300 billion dollars from oil in 2005 and 2006 combined.
Riyadh foreign assets are projected to grow to 475 billion dollars by the end of 2008, according to Jadwa.
The UAE, which is producing 2.62 million bpd, posted 63 billion dollars in earnings from oil last year, while Kuwait, with a production of 2.58 million bpd, earned about 50 billion dollars.
GCC states had foreign assets of 1.8 trillion dollars at the end of last year and they are expected to exceed two trillion dollars in 2008, the Institute of International Finance (IIF) said.
The oil windfall spurred economic development with tens of billions of dollars earmarked for major energy projects and similar amounts in the real estate sector, besides huge investments in the industry and tourism.
Besides mega energy projects, Saudi Arabia is building six economic cities with over 100 billion dollars of investment.
UAE, Qatar and Kuwait are also undertaking major development projects. IIF had estimated investments in the Gulf to reach one trillion dollars over the next few years.
That has resulted in a massive rise in public spending which was cited as one of the main reasons for soaring inflation.
“Increased spending has fuelled a rapid rise in inflation, but contrary to economic theories the unemployment rate among citizens remained high because a majority of new jobs went to foreign labour,” Abu-Dahesh said.
“Inflation has eaten up people’s earnings and real income of citizens has dropped.”
According to Kuwait’s Al-Shall Economic Consultants, average public spending by GCC states last year rose by 13 percent and was higher than the increase in revenues.
All six nations have raised the salaries of their nationals, and some also increased pay for expatriates, to help them cope with inflation that has hit double figures in most of the GCC countries.
Saudi Arabia reported a 10.6 percent year-on-year inflation in April and Kuwait 10.14 percent in February, while the UAE said inflation last year reached 11.1 percent. In Qatar it was estimated at more than 13 percent.
The IIF said in its annual report that the weak US dollar, to which all GCC currencies are pegged except for Kuwait, and high inflation posed a threat to the Gulf economic boom.
The International Monetary Fund (IMF) has urged Gulf countries to curb public spending to control persistent inflation, saying fiscal policy was the only instrument available since their currencies are pegged to the dollar.
The IMF however advised Gulf states to focus spending on long-term projects or capital investment in order to help ease inflationary pressures while controlling day-to-day spending.
“We would put more emphasis on the capital expenditure side rather than the current expenditure,” IMF Middle East and Central Asia chief Mohsen Khan said.