AMF: Oil Price Fall Hits Real GDP in Major Arab oil Exporting Countries

A decrease in oil price in the major Arab oil-exporting countries leads to negative effects on the real GDP and its demand and supply components, the Arab Monetary Fund said in a study. The study, authored by El Mostafa Bentour, reveals that the oil sector is still an important determinant of economic activity in the Arab oil-exporting countries and called for more diversification efforts. In line with its continuous efforts to support the decision-making process in the Arab countries, AMF released the study on ‘Macro and sectoral implications of oil price decrease on oil-exporting Countries’. The study assesses the effects of oil price decreases on all other real sectors than the oil sector for Arab net oil-exporting countries. Results show that a decline in oil price shock leads to negative effects on the real Gross Domestic Product (GDP) and its principal demand and supply components.

Consequently, the study calls for more efforts to build more resilience towards oil fluctuations by diversifying fiscal revenues. As diversification towards creating more non-oil revenues advances, this leads to gradually decoupling changes in public spending from changes in oil prices. This paper assesses the effects of a negative oil price shock on the real GDP and its demand and supply components for nine Arab oil-exporting countries, namely, Algeria, Bahrain, Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia, and the UAE.

Using a Bayesian Vector Autoregressive (BVAR) approach, the paper assesses the effects of oil price decreases on all other real sectors than the oil sector. On the demand side, this study dealt with a quantitative assessment of the impact of the decline in oil prices on the real variables of: GDP, total imports of goods and services, non-oil exports of goods and services, total private consumption, government consumption and total investments. From the supply side, the effects were assessed considering the manufacturing sectors, the construction sector, the whole sale and tourism services, the transport and communication services and other services that includes financial and banking services.

Results show that, generally, the real sectors (excluding oil sectors) in major oil exporting countries are more vulnerable to the oil price fluctuations and the demand and supply sectors as well are highly affected by the oil price decreases. Consequently, it is important to build more resilience towards oil fluctuations by building a fiscal policy that stems mainly from diversifying sources of government revenues through other sources of income. As the process of diversification advances creating more non-oil revenues, this leads to gradually decoupling changes in public spending from changes in oil prices.