(Bloomberg) -- The International Monetary Fund has become more optimistic about economic growth prospects for Gulf Arab states, but is urging governments to retain social spending as a resurgence in coronavirus cases clouds the region's outlook.
Economic output in the six countries comprising the Gulf Cooperation Council is now set to shrink 6% this year, less than the 7.1% contraction forecast in July, according to the updated regional outlook for the Middle East and central Asia published Monday. The improvement was fueled by an upward revision for the region's largest economy, Saudi Arabia.
Output in the kingdom is seen shrinking 5.4% this year, a more moderate contraction than the originally forecast 6.8%, and one of the lowest among its peers. Its finances were brightened by austerity measures including tripling the value-added tax and higher customs fees. Still, its budget deficit is expected to stand at 12% of GDP this year, according to Saudi officials.
In the short term, the uptick in coronavirus cases regionally poses the main risk for Middle East economies, said Jihad Azour, the IMF's director for the Middle East and central Asia.
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“This is why we think the priority is still for countries to keep the focus on providing whatever is needed in terms of public spending,” Azour said in an interview.
While growth in the Gulf is contracting, fiscal and current-account deficits are ballooning. The fiscal deficit is set to widen to more than 9% of gross domestic product this year, the IMF said. It predicts a current-account shortfall of nearly 2% of GDP, versus a 5.8% surplus last year, before a modest recovery in 2021.
The economic fallout of the pandemic is expected to cause the largest output contraction in the past 20 years for most countries in the region. Many of the other oil exporters aren't expected to fare as well as Saudi Arabia, whose economy performed better than expected in the second quarter and is seen improving in the third, Azour said.
Neighboring United Arab Emirates is forecast to see its GDP shrink 6.6% this year before recovering in 2021, while Oman will dive into a 10% contraction.
The crisis is also set to increase government debt in the region. This year, oil exporters are expected to post the highest rises in government-debt-to-GDP ratios, the IMF said.
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