Handouts pose danger to Mideast economies

The International Monetary Fund (IMF) warned on Wednesday that the huge increase in handouts that the governments of the Middle East and North Africa (MENA) have made to keep a lid on Arab Spring unrest is a danger for all the economies of the region - both rich and poor.

The budget deficits of oil-importing countries are expected to widen to 7.6 percent of gross domestic product, a 50% rise over two years, the IMF said in its Regional Economic Outlook: Middle East and Central Asia. These spending increases are going mainly to subsidies on food and fuel, while governments are investing less and borrowing more, making it harder for economies to recover, it said.

But the IMF also said the wealthy oil-exporting countries of the Gulf face a risk from the largesse they have bestowed on their populations this year. Governments have been able to cover the cost of higher subsidies, pay raises and job creation because of rising oil prices, but those may not last if the world economy slows. It warned that a decline in oil prices could push them into deficit spending.

“Oil-exporting countries have understandably increased fiscal spending to address social needs,” Masood Ahmed, director of the IMF’s Middle East and Central Asia Department, said at a conference Wednesday. “Looking forward, the widening of non-oil fiscal deficits makes many countries more vulnerable to swings in oil prices, at a time when the world economy is facing heightened risks.”

For now, the outlook for oil prices is positive. Brent futures have risen by about 7% in the past four weeks to above $111 a barrel and a survey of analysts by Reuters released on Tuesday pointed to the price averaging $106.80 next year and $108.60 in 2013, thanks to strong demand from China and India.

But global economic growth is projected by the IMF to slow to 4% annually this year and next, leading to a slight reduction in world oil prices in 2012 after two years of double-digit rise. Moreover, the IMF in Wednesday’s report termed the global economy to be in a “dangerous new phase” and said downside risks to growth are increasing.

Meanwhile, the IMF estimated that the breakeven oil price – the level that ensures that budgets are in balance at the given level of spending – has increased by more than $20 a barrel since 2008 for several petroleum-exporting countries, while the average price is only $6 a barrel higher.