Fiscal position of AGCC improves on oil boom

www.timesofoman.com By Palazhi Ashok Kumar

MUSCAT — Though fiscal position of the Gulf and Middle East economies are seen improving on considerable rise in oil prices, importers have to pay through the nose for their imports from Europe and a few Asian markets.

More precisely, because of the steep fall in the value of dollar and an unprecedented rise in the value of euro consumers are paying more dollars for importing goods from Europe and Asia. According to yesterday’s international cross-currency rates, one euro is equal to $1.076, and one dollar is equal to 0.9289 euro, with the result that the Gulf and Middle East consumers ending up paying more on their imports from countries with strong currencies.

The euro and a few other Asian currencies, including the Japanese yen, are expected to test new highs against dollar in the next two months as the value of dollar is expected to fall further against major international currencies, foreign exchange dealers forecast yesterday.

Till today, the price of oil is fixed in dollar and the largest oil consumer in the world is the United States.

“Technically speaking, when you pay one dollar you get only 0.929 euros and when you pay one euro you get $1.076, making the euro stronger and dollar weaker,” foreign exchange dealers added.

Oil-producing countries in the region are extremely exposed to trade shocks because of their heavy dependence on oil export earnings. Oman has estimated a fiscal deficit of RO400 million for the year 2003, constituting over 15 per cent of the total revenue. As the price of Oman crude in the international market has been considerably increasing in the last two-and-a-half months, and likely to remain firm at least till March-end, the budgeted deficit of RO400 million will come down drastically and help achieve a balanced fiscal situation. The price of Oman crude on March 14 stood at $30.64 a barrel.

During the last three decades, the drop in oil prices in the international market affected Gulf economies adversely on more than one occasion and the steep fall in oil price had prompted Gulf economies to embark on highly focussed diversification programmes. The currencies of Gulf economies have been pegged to the US dollar and any fall in the value of dollar could have a negative impact on the imports of Gulf economies.

During 1991-95, most economies in the region were stuck with instability because of Gulf war. However, it did not have any tangible adverse impact on some of the economies in the region, including Oman. In fact, consequent rise in oil prices boosted the economic expansion.

Though the budgeted deficit for the year 2002 was RO380 million, the actual deficit for the year reduced to below RO100 million, because of the significant increase in oil price in the second half of 2002.

The largest oil consumer in the world is the United States while the Middle East has the largest proven oil reserves.

According to the International Energy Agency (IEA), the world crude oil production surged by 1.96 million barrels per day (bpd) in February this year. Opec crude supply rose by 1.5 million bpd, Venezuela adding 850,000 bpd and Saudi Arabia 330,000 bpd. Non-Opec supply increased by 340,000 bpd.

According to BP statistical review, the total oil production per day in the Middle East stood at 22.23 million as of December-end 2001. The daily oil production of Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, Syria, UAE, Yemen and others stood at 3.68 million, 2.41 million, 2.14 million, 959,000, 783,000, 8.76 million, 551,000, 2.42 million, 458,000 and 49,000, respectively. Total proven oil reserves of Middle East countries as of 2001-end stood at 685.6 billion barrels — Iran 89.7 billion barrels, Iraq 112.5 billion barrels, Kuwait 96.5 billion barrels, Oman 5.5 billion barrels, Qatar 15.2 billion barrels, Saudi Arabia 261.8 billion barrels, Syria 2.5 billion barrels, UAE 97.8 billion and Yemen 4 billion barrels.

Though war fears would continue to heat up prices, a war would result in a fall in prices. During the Gulf war, a decade ago, oil prices spiked past $40 a barrel at over $41 because of disruption in oil supply. The oil installations of Kuwait were attacked and supplies had been affected.

IEA had said that effective Opec spare capacity fell to 1.7 million bpd in February, and could drop below one million bpd in early March. This is less than the potential loss of supply in the event of war in Iraq.

Cash crude prices climbed further last month, with averaging $35.73 and product prices outpaced crude, boosting refining margins in all major refining centres.

Oil demand for 2003 stands unchanged at 78.01 million bpd. Low European demand in January was offset by strong growth in Asia and North America, driven partly by fuel switching into oil in Japan and in the US. Chinese apparent demand growth is expected to slow after strong gains in January, especially if prices remain high.

Increase in world oil price had aided increase in government expenditures of all Gulf economies in the past. Because of increase in oil price, during 1980 in particular, Oman’s fiscal situation had improved significantly. During 1981-85, the domestic economy entered into an expansionary phase. However, the beginning of 1986-90, as a result of steep fall in oil prices and decline in world oil demand led the nation to a severe economic crisis. Fall in oil price had even affected one of its previous development plans and the government was forced to re-work its target set in the plan.

Over the last few years, oil price fluctuated considerably and so were the external current account balances and fiscal positions of oil exporting countries.

Nevertheless, the promising policies coupled with sound macro economic management to address internal and external imbalances may help Gulf nations to achieve a higher growth. In fact, the uptrend in euro is making vacations in Paris and Rome more expensive for Arab (including the Gulf) tourists, but offering relief to manufacturers by making their goods cheaper in comparison to those of European competitors. As the currencies of the six-member Arab states have been pegged to the US dollar, the fiscal positions of these governments will not suffer.