Global oil prices decreased by more than half between July 2014 and October 2016, from USD 112 per barrel to around USD 50. Whatever the explanation for the significant decline, whether due to supply and demand or because of competition among producers over market share, it will likely fluctuate and remain unstable in the near future. An International Monetary Fund (IMF) study published in October 2015 predicted that global oil prices would not reach 2014 levels in the medium-term and that the average price per barrel would not exceed USD 63 until 2020.
In light of these forecasts, the low price will have various benefits and drawbacks for non-oil producing countries in the Middle East, such as Egypt, Jordan, Morocco, and others. Their relationship to the decline in global oil prices is a complicated one and not simple enough to say that these countries will clearly benefit from lower prices all along the way. There will be negative consequences that should be considered to estimate the benefits for these countries from the significant fall in global oil prices. This is particularly since the economies of these countries have many connections (in the fields of trade, direct and indirect investment, employment, tourism, financial and oil aid) with the economies of oil-producing countries that will be adversely affected by the decline.
Positive and negative consequences
Many experts highlight that the most positive effects of the fall in global oil prices on non-oil producing Middle East countries is to enhance their overall balance sheets and “relatively” improve ongoing transactions. This is due to the reduced cost of energy subsidies and fuel imports. It results in better rates of inflation, growth, poverty rates, eases the pressure on the exchange rate, and increases foreign currency reserves.
However, a fall in oil prices that experts predict over the next three to five years could result in some adverse effects for non-oil producing Middle Eastern economies. The most critical of the effects would be a decline in investment, tourism, and remittances from expatriates in oil-producing countries, as well as reduced aid and fewer loans from oil-producing to non-oil producing countries.
Egypt - most affected
Both positive and negative effects were significantly noticeable in Egypt, which is one of the largest non-oil economies of the Middle East. On the one hand, the Egyptian government has benefited from the decline in global oil prices. It was able to reduce its budgetary support for petroleum-based products during the fiscal year of 2015 – 2016 to EGP 51 billion, a 28 per cent reduction from the previous fiscal year. The Ministry of Finance also estimated support for petroleum-based products for the current fiscal year 2016 - 2017 to be approximately EGP 35 billion, a reduction of 45 per cent compared to the previous year.
In contrast to the positive effects on the Egyptian economy as a result of the decline in global oil prices, there have been many adverse consequences. The Egyptian economy's ability to provide hard currency suffered, as crude oil exports still account for about 40 per cent of total Egyptian exports. Furthermore, a report by SeaIntel Maritime Analysis revealed that lower oil prices would allow cargo ships to avoid Suez Canal crossing fees by taking the longer route around Africa instead.
The report concluded that the decline in fuel prices means ships can afford to take the longer route around South Africa, saving USD 235,000 per journey. It added that if Egypt wanted to improve its economic condition, it needed to reduce Suez Canal transit fees by almost 50 per cent, despite the fact that the Egyptian government has recently spent about USD 8 billion on its expansion.
Some observers also worry about the negative consequences of the decline in global oil prices on the economies of the key Gulf oil-producing states, especially Saudi Arabia, the United Arab Emirates and Kuwait, which are the most important countries providing economic aid to Egypt since the June 30 protests in 2013. They note that those countries’ budgets may be exposed to a great shock in the medium and long term, as a result of declining oil export revenues. This would make them less able to continue providing economic support to Egypt in the future. Saudi Aramco’s decision since the beginning of October last year to stop supplying Egypt with petroleum products is an indicator of this recent shift.
Also, some experts see the increasing likelihood of a medium term fall in future direct and indirect investments to Egypt from the Arab oil-producing countries, particularly from Saudi Arabia. Riyadh had recently notified Cairo that it would abandon some of its Egyptian projects under a plan to rationalize fiscal expenditure recently set by the Kingdom to reduce its budget deficit. Saudi Arabia also postponed the implementation of other projects in Egypt, including large investment projects off the Red Sea.
With regard to remittances from Egyptians working in oil-producing Arab countries, a number of observers expect the countries to take austerity measures that may worsen conditions for the workforce. By extension, this will affect the size and number of remittances received by Egypt, which accounts for the second largest foreign currency earnings after exports. The negative effect will inevitably spread to Egyptian banking service returns as well as retail banking products and loans for purchasing flats, shops, and cars.
Observers add that the Saudi authorities’ decision to impose new fees on foreign labor, including Egyptians, would have several consequences. Among them, a broad spectrum of some one million Egyptian workers would be unable to afford the new fees, particularly those working in crafts. They point to the fact that Cairo recently informed Riyadh that the new fees could increase the attempts to enter Saudi territory illegally as well as attempts to overstay residency periods.
Varying effects on the Jordanian economy
As is the case in Egypt, the Jordanian economy has experienced different effects due to the declining global oil prices over the past period. On the one hand, GDP increased by 1 per cent and the budget deficit fell by 24 per cent in the fiscal year of 2015 as a result of shrinking energy bills. The Jordanian government announced that the cost of imports of oil and petroleum products fell 31.2 per cent in the first eight months of this year to USD 1.65 million, compared with the same period of the previous year. A number of officials said that every drop in oil dollars from the USD 100 level would save Jordan’s budget USD 24 million, which it would have paid to oil import and subsidies.
It seems that the economic benefits resulting from the oil price decline translated to benefits for citizens. At the start of 2015, the Jordanian authorities reduced fares on all means of petrol and diesel passenger transport by 10 per cent. On the other hand, it is believed that the fall in global oil prices would improve the productivity of a number of the main industrial sectors in Jordan, namely those industries whose production depends on oil derivatives and accounts for about 40 per cent of the cost, such as phosphate, potash, fertilizer and cement. It is, therefore, likely that these industries will increase their production and exports, which will positively impact productivity and create new jobs. It also improves the state's ability to attract hard currencies that strengthen foreign currency reserves at the Central Bank. The drop in global oil prices will also help to save major national companies, such as Royal Jordanian airlines and steel companies, after suffering substantial losses resulting from a slowdown in activity due to raised fuel prices.
Regarding adverse impacts on the Jordanian economy from the reduction in global oil prices, the Jordanian government’s plans to invest in renewable energy projects, which usually flourish when oil prices are high, may be hampered. Some projections also predicted a potential decline in the future pace of Gulf aid because of the economic situation in those countries, especially Saudi Arabia.
It is noteworthy that at the end of last year, Jordan obtained JOD 2.469 billion from a Gulf grant allocated to it during the years 2012-2015. The three Gulf donor countries were Saudi Arabia, Kuwait, and the United Arab Emirates. Jordanian government figures showed that the amount constituted only 93 per cent of the total value of the Gulf grant amounting to JOD 2.658 billion, which the three states had pledged the Kingdom in 2011.
On the other hand, it appears that the fall in global oil prices contributed to the decline in the total remittances of Jordanians working abroad to around USD 2.5 billion during the first eight months of this year, a 2.8 per cent decline compared to the same period last year.
Observers have attributed the decline in remittances to several reasons, the most important of which is the fall in oil prices impacting Arab Gulf states. This in turn affected workers as some countries were forced to cancel planned migrations of Jordanian workers. According to official reports, the estimated number of Jordanians working abroad is more than 500,000, mostly in Saudi Arabia, the UAE, and Kuwait.
Effects on the Moroccan economy
The different effects of lower global oil prices extend from Egypt and Jordan to Morocco. On the positive side, this decrease contributed to an alleviation in Morocco's trade deficit by reducing the import bill. Figures for this year, until the end of August, reveal that the cost of Morocco's energy imports fell by about USD 1.15 billion, or 25.5 per cent, to USD 3.5 billion. This is compared with USD 4.6 billion in the same period last year.
The decline in global oil prices has encouraged the Moroccan government to take the political decision it has avoided for years. Which is the removal of subsidies on petrol and diesel, that fell from about USD 5.7 billion five years ago to a current value of USD 1.6 billion. This was one of the factors contributing to reducing the budget deficit to around 3.5 per cent this year, having been 7.2 per cent five years ago. The Head of Government, Abdelilah Benkirane, said that for every dollar added to the price of a barrel, it costs the Moroccan state budget about MAD 60 million (USD 6 million) a year.
On the downside, the situation has delayed Morocco’s receipt of aid from Qatar, Saudi Arabia, the UAE and Kuwait, which they had committed to five years ago in light of the Arab Spring. The assistance is worth up to USD 5 billion, paid for evenly by the four countries for the period 2012-2016.
Morocco was supposed to receive all of this support by the end of this year. However, by the end of May 2016, the total value of aid given by the Gulf states to the country did not exceed USD 2.79 billion, according to a report issued by the Ministry of Economy and Finance. Those donations consisted of USD 920 million from the Kuwaiti Fund for Development, and USD 850 million from Qatar Fund for Development, USD 540 million from the Saudi Fund for Development, and USD 481 million from the Abu Dhabi Fund for Development.
The bottom line is that the global decline in oil prices has had many positive and negative effects. The results varied from one Arab country to another and depended on the nature of its economy and the extent of its reliance on donations from the Gulf oil-producing states. The following table illustrates the overall positive and adverse effects of the fall in oil prices on the economies of non-oil producing Arab countries.
