Oil price drop: IMF paper urges to be clear on reforms

 An IMF working paper published recently has urged oil exporting countries in the Middle East to spell out their medium-term adjustment plans to counter the effect of oil price crash. 

The paper authored by Bruno Versailles, an Economist in the IMF’s Middle East and Central Asia Department, says, “Medium-term adjustment plans, including clear policy objectives and contingency scenarios, should be spelled out as soon as possible. Plans that are growth-friendly, equitable and phased in over time are the best bet to reduce any adverse economic and social effects.”

The oil exporters should increase their non-oil revenues by considering greater income-tax progressivity, wider use of VAT, and higher property taxes. It also advocates cutting expenditures, but exempting social-security related expenditures. 

“There is space to do this given the run-up in wage, administrative and security-related expenditures over the past decade,” the working paper notes.

Streamlining public investment and increasing its effectiveness should also be a priority.

The paper suggests devaluing currencies as one of the solutions for oil exporting countries, but said such a measure would not be effective in the GCC countries. 

GCC is better off by maintaining their fixed exchange rates, but need to kick-start more reforms early on.

The discussion paper also cautions that millions of new job seekers will enter the job market in the region in the next decade and this should be tackled.

“Recommendations to this end include further improving the business environment, increasing incentives for nationals to work in the private sector and making workers’ skills more relevant to the private sector by improving the quality of education,” it adds.