Financial reserves of oil-producing countries vulnerable to depletion

A specialized economist said that the financial reserves and surpluses of oil-producing countries are vulnerable to depletion in the event of continuing decline of global oil prices and with the pace of public spending remaining around the current high levels.
Professor of economics at the College of Administrative Sciences, Kuwait University, Dr. Mohammed Al-Saqqa said in an interview with Kuwait News Agency (KUNA) on Sunday that the economies of oil-producing countries (including Kuwait) are facing a real challenge represented in the growth of public spending without “control” to high levels amid the decline witnessed in oil prices in global markets approaching the level of USD 80 per barrel (bd).
Al-Saqqa added that this growth in public spending resulted in the consequent rise in the minimum level of the price of an oil barrel, necessary to balance the budgets of oil-producing countries, which reached levels “that can not be supported by the trends in oil prices in the future if this fall was to continue.” The projected oil price in Kuwait’s state budget is USD 75 pb.
He predicted that some oil-producing countries would face a deficit in their public finances in the remaining part of the current fiscal year and the coming years if oil prices continued to decline, or even if they stayed on the currently low levels.
He explained that the developments in oil prices in the recent period would have consequent trends that are important for the public finances in the oil-producing countries. The first is the high proportion of the contribution of oil revenues in total public revenues to high levels in some cases exceeding 90 percent, while the second trend concerns the disruption of the relationship between the current spending and the state’s capital spending.
The professor added that in spite of the importance of capital spending in supporting competitiveness of oil economies, the growth in public spending has focused mainly on the current expenditure of various forms, such as salaries and subsidies provided by the State for many goods and services such as gasoline, water, electricity and other.
Al-Saqqa pointed out that the main risk in these developments are attributable to the fact that should the current expenditure rises, it would become difficult to control it in the future, noting that world experiences proved that the financial reform programs, which aim to control the current expenditure, have never been easy.
He said that the oil prices have begun to retreat to levels that would threaten the ability of oil-producing countries in the region to continue expansionary spending which they resorted to in the past few years out of their belief that the current trends in oil prices will continue at high levels and that the era of cheap oil has gone irrevocably.
He pointed out that this belief prompted some oil-producing countries to raise the levels of support for necessary and unnecessary products while others tended to raise the salary levels that would cost the current spending huge money.
However, Al-Saqqa explained that part of the growth in public spending was “positive” when it came in the form of an increase in capital spending to support infrastructure, which would raise the capacity of local economies in these countries to withstand higher levels of investment, especially coming from the private sector and support the contribution of the non-oil sector in the state’s GDP and try to diversify away from oil.
Asked about his expectation for oil orice in the coming period, Al-saqqa anticipated that oil prices would continue their low levels because of several factors, chiefly the decline in the growth prospects of the world economy, increase of the supply of non-conventional energy sources and, in particular, shale oil and gas operations and increase of the efficiency of energy consumption.

Kuna.net