Gulf oil exporters must cut spending and narrow their budget shortfalls to keep their currencies pegged to the dollar, the International Monetary Fund said.

While substantial foreign assets have allowed the six members of the GCC to fix the value of their currencies to the greenback, keeping the status quo comes at a price as lower crude prices strain public finances, the lender said in a report titled “Learning to Live with Cheaper Oil.”

“When a country faces prolonged fiscal and external deficits, policy adjustment must come from fiscal consolidation measures,” the IMF said in the report authored by Martin Sommer, deputy chief of its regional studies division. Maintaining the currency pegs “will require sustained fiscal consolidation through direct expenditure cutbacks and non-oil revenue increases,” it said.

As investors increased bets that currency fixes may become too expensive to maintain, the United Arab Emirates and Saudi Arabia renewed their commitment to their pegs -- with the latter also said to ban betting against its currency. Gulf oil producers’ budgets swung from surplus to deficit as Brent crude fell by as much as 75 percent from June 2014 to January this year, before a partial recovery in recent months.

Even after cutting spending, the combined budget gap in the GCC region -- which also includes Kuwait, Qatar, Bahrain and Oman -- as well as Algeria is expected to reach $900 billion for the period 2016-2021, and represent 7 percent of their gross domestic product in the final year, the IMF said.

Bond Sales

Their debt-to-GDP ratio is expected to rise to 45 percent in 2021 from 13 percent last year as governments issue debt to plug their budget gaps.

Foreign assets give governments a varying amount of “fiscal space” to cope with lower oil prices, with Kuwait, Qatar and the U.A.E. enjoying sizable buffers to finance “more than 20-30 years of projected deficits,” the IMF said.

Even so, the GCC and Algeria need a fiscal “adjustment” of about 10 to 15 percent of gross domestic product, with every $10-increase in the price of oil reducing that amount by about the equivalent of 4 percent of GDP, the IMF said. The lender expects oil to rebound to about $50–$55 a barrel by the end of this decade, based on futures markets.

GCC members can tackle imbalances via non-oil income and public spending measures, the report said. A value-added tax of 5 percent would raise the equivalent of about 1.5 percent of the region’s GDP, while boosting public investment efficiency could save the equivalent of about 2 percent of economic output, it said. - Bloomberg