Arab countries must put in place development strategies that place the private sector at their heart and focus on diversification to reduce vulnerability to future oil-price shocks, says Oussama Kanaan, director, Middle East Centre for Economics and Finance (CEF), IMF.
Speaking ahead of the Euromoney Conference in Kuwait on September 26, Kanaan, says in an interview: “We’re going to be living with low oil prices for quite a while – and there are no indications that conflict (in the region) will end any time soon. It’s important that countries prepare for significant challenges in terms of putting in place a prudent economic policy. They need to prepare for a continuation of this challenging environment.”
The drop in oil prices has seriously affected the public finances of the region as a whole. All Gulf Cooperation Council (GCC) members have had to initiate a reform programme to reduce budget deficits. Some had to adjust more than others – depending on their reserves and their deficits. The greater the subsidies in the budget, the harder it’s been.
On what have oil-exporters been doing to reduce the impact, he says the GCC nations need to take difficult action. But many are adjusting and making progress. It has required tough measures – such as raising the price of petrol and oil-fuel products, as well as electricity. Adjusting to lower oil prices requires a sound planning framework, first and foremost, but also good communications networks to keep the public informed and to manage expectations. Measures have been taken across the region – but there is still much uncertainty in terms of the ability of countries to adjust to new realities.
But for the oil importers the shock was a good thing – obviously - but they have also lost a lot of remittances from the oil-exporting nations. And foreign aid contributions have become more uncertain.
On the external threats the Arab region faces, he says the threat is twofold. “On the one hand you have dynamic emerging market countries like China growing much faster than Arab countries, and proving to be tough competitors in terms of trade. On the other hand you have uncertainty around the openness of trade with the region’s partner countries in Europe and beyond.”
In order to tackle this, Arab countries need to continue to make their economies more competitive. To provide a foundation for private sector development that is global in its outlook and competitive. It is hugely important for countries in the Arab region to keep diversifying their economies – especially given the oil price shock. Countries must put in place development strategies that place the private sector at their heart and focus on diversification to reduce vulnerability to future oil-price shocks.