Gulf states exercise fiscal restraint despite oil windfall


Al-Monitor Pro Members


Dr. Robert Mogielnicki 

Senior Resident Scholar, Arab Gulf States Institute in Washington 


Sept. 6, 2022

Bottom Line:

Governments in Gulf Cooperation Council (GCC) member states are in strong fiscal positions owing to elevated energy prices. Most regional states are poised to enjoy their first annual budget surplus in several years. Having recently emerged from the coronavirus-induced economic downturn, all GCC states will be cautious in their spending, preferring to double down on existing initiatives, strategies and projects.

The utilization of newfound financial resources will range from boring and practical (Oman and Bahrain) to slightly more experimental and riskier (Saudi Arabia and the UAE). Spending increases will be targeted, such as policies to ease inflationary pressure. Much of the surplus revenue will flow to or through sovereign wealth funds, while the digital economy and technology-oriented initiatives are likely to serve as key destinations for newfound financial resources.

Background Facts:
  • GCC governments planned their 2022 budgets using conservative estimates of oil prices ranging from $50-$65 for the year.
  • The US Energy Information Administration forecasts suggest that the spot price of Brent crude oil will average $105 per barrel in 2022 and $95/b in 2023.
  • Saudi Arabia posted a $15.3 billion budget surplus in the first quarter of 2022 and a $20.8 billion budget surplus in the second quarter.
  • The Saudi government is reportedly considering allocating newfound financial resources to the Public Investment Fund (the sovereign wealth fund reinvigorated by Mohammed bin Salman) and the National Development Fund (established under MBS), with the remainder being kept as foreign reserves.
  • Qatari officials planned for oil revenues of QAR 154.0 billion and a marginal deficit of QAR 8.3 billion over 2022, but first quarter figures from the Ministry of Finance showed QAR 59.4 billion in oil revenues (~39% of expected annual oil revenues) and a QAR 13.6 billion (~$3.7 billion) surplus.
  • Qatar is likely to use windfall to support gas production expansion plans as well as bolster strategic sectors in Qatar National Vision 2030, such as manufacturing, finance and tourism.
  • Oman posted a $2 billion budget surplus for the first half of 2022. The sultanate is expected to trim government debt and boost spending on projects — likely those in less developed parts of the country outside of the capital, Muscat.
  • Oman has also increased its budget for development projects by 22% year-on-year to 1.1 billion rials.
  • Kuwait is preparing for the country’s first budget surplus since 2014 at an estimated 6.2% of GDP and will likely use newfound fiscal resources to replenish the country’s General Reserve Fund.
  • The UAE government's net operating surplus rose to $9.9 billion in the first quarter of 2022, more than doubling the amount posted for the same period in 2021. The financial position of oil-rich Abu Dhabi is significantly stronger than that of the remaining emirates.
  • In April, Bahrain announced plans to double its contribution to the Future Generations Reserve Fund by putting away $2 from every barrel of oil exceeding the $80 threshold.
Alternative Scenarios:

​​​​​​Scenario 1: Gulf governments stick closely to their conservative 2022 budgets and stash away surpluses in rainy day funds for future generations.

  • GCC governments want to convey a sense of fiscal prudence, ensuring that hard-fought gains in fiscal consolidation and other economic reforms over the past couple of years do not dissipate amid this period of higher energy prices. The Saudi Minister of Finance indicated that an allocation of any surplus would not happen until the beginning of 2023. Several GCC governments plan to replenish wealth and development funds — presumably to reserve funds for the longer-term and future generations.
  • Yet regional governments will face pressure to share the wealth. Countries like the UAE, Saudi Arabia and Bahrain have already expanded welfare benefits for low-income citizens and made it easier for families to find housing and purchase homes. Capital and overall spending in Saudi Arabia has been higher than the initial 2022 budget forecasted. Sovereign wealth funds receiving cash injections may need to spend it sooner rather than later to meet local investment commitments (the Saudi Public Investment Fund) or given a lack of readily available fiscal policy alternatives (Kuwait Investment Authority). Countries like Qatar face increased spending needs over the short term, owing to natural gas production expansion plans and to encourage post-FIFA World Cup development momentum.

​​​​​​Scenario 2: Gulf governments shower generous financial incentives upon their citizens and boost spending across many segments of their economy.

  • GCC countries have a mixed historical track record of adhering to fiscal consolidation efforts and austerity programs. GCC regions have taken recent steps to insulate their citizens and residents from inflationary pressures, and other policy announcements seek to attract high-net-worth individuals and skilled professionals. All of these initiatives entail costs. After years of austerity measures following the 2014-15 oil price slide and urgent coronavirus-induced budget cuts in 2020, many citizens and expatriates now expect a fiscal boost, adding pressure on regional governments.
  • Yet the overall trend in the region is toward less — not more — state support. Gulf citizens already enjoy relatively strong social safety nets. GCC governments also possess increasingly flexible economic policy tools, such as new taxes, to adjust according to changing economic environments. Allocating resources toward initiatives and segments of the population that help recycle investments domestically and over the long term is now a key policy objective. Rather than wide-ranging spending initiatives, governments are likely to prioritize state support for a narrower set of industries that can help future-proof their economies.
Conclusion - Most Likely Scenario:

Conservative planning for 2022 budgets and a continuation of elevated energy prices will enable GCC countries to enjoy substantial budget surpluses this year. Most spending increases this year will be narrow in scope and targeted to address specific issues such as inflation or high-priority development projects. Countries with weaker fiscal capacity, such as Oman and Bahrain, are opting to reduce economic vulnerabilities by managing high government debt and replenishing savings. Kuwait must likewise reserve financial resources to ensure fiscal maneuverability amid political paralysis and constraints on decision-making.

Government surpluses in Saudi Arabia and the UAE will flow through defined institutional channels initially but are likely to be redirected toward ambitious development projects and other initiatives intended to enhance the livability and investment climate of each country. In July, MBS announced THE LINE, a new iteration of one component of Neom, as well as the creation of an $80 billion fund to help finance the megaproject. Beyond its existing gas production expansion plans, Qatar must identify niche, investable economic areas wherein it can compete against larger neighbors.

Despite varying levels of surplus revenues expected, all GCC governments are likely to deploy a greater share of resources toward their digital economies, technology-oriented industries and initiatives with strong technology components. Regional officials view investments in the digital economy and hi-tech initiatives as worthwhile in both good and bad economic times. In August, G42 — a UAE-based AI and cloud computing company backed by Mubadala Investment Co. — launched a $10 billion technology growth fund in partnership with the Abu Dhabi Growth Fund to focus on technology investments in emerging markets.

Contributor Background:

Dr. Robert Mogielnicki’s professional affiliations span top-tier research institutes, academic institutions, NGOs and consultancies. He is a Senior Resident Scholar at the Arab Gulf States Institute as well as an Adjunct Assistant Professor at Georgetown University and a Professorial Lecturer at George Washington University. He serves as an Adviser with Freedom House and an External Consultant with Eurasia Group. Dr. Mogielnicki is the author of "A Political Economy of Free Zones in Gulf Arab States" (Palgrave Macmillan 2021), and he is currently working on an edited volume about the political economy of sovereign wealth funds in the Middle East and Asia. He is a Term Member at the Council on Foreign Relations and a member of the Board of Advisers at Henley & Partners, an investment migration firm. The Middle East Policy Council listed Dr. Mogielnicki in their inaugural 40 Under 40 awards for influential Middle East experts. He holds a DPhil from Magdalen College, University of Oxford.

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