The International Monetary Fund considered that the ongoing fiscal adjustment in the Gulf Cooperation Council (GCC) countries would be less costly on the non-oil economy than previously expected. It noted that the drop in oil prices between 2014 and 2016 weighed on the fiscal positions of GCC countries, as their aggregate fiscal account shifted from a surplus of 12.7% of non-oil GDP in 2014 to a deficit of 14.5% of non-oil GDP in 2016. It said that GCC countries responded by reducing government spending to contain the deterioration of their fiscal position, which weighed on non-oil growth, as government spending growth and non-oil GDP growth are positively correlated. However, the Fund considered that the relationship between government spending and non-oil GDP has recently weakened in the region, which means that the significant decrease in public spending has had a limited impact on non-oil growth. In fact, it said that an increase of one percentage point in expenditures was associated with a growth of 1.4 percentage points in non-oil GDP in the 1990-2007 period, while it coincided with an expansion of 0.6 percentage points in non-hydrocarbon GDP in the 2008-16 period. It attributed the weakening of the relationship between government spending and non-oil growth to factors that relate to the economy, which include higher imports, low efficiency of public investments and supply-side challenges. In addition, the IMF said that fiscal consolidation in terms of reduced current spending has a limited impact on economic activity, while investment expenditures have a larger impact on non-oil GDP growth. 
Source: International Monetary Fund