The Arab world's energy exporting states are not saving enough of their oil windfall and as a group may start running a fiscal deficit in 2016 if current policies do not change, the International Monetary Fund warned on Tuesday.

"Together with substantial oil revenue risks, this prospect underscores the need for countries to build or strengthen their fiscal and external buffers," the IMF said in a report.

In 2012, total state spending in the six Gulf Cooperation Council members - Saudi Arabia, the UAE, Kuwait, Qatar, Oman and Bahrain - climbed 9.7 percent, a Reuters calculation based on IMF data shows.

That is much less than the 17.7 percent jump in 2011, when governments boosted social welfare and infrastructure spending to ease social tensions during the Arab Spring uprisings.

The IMF expects growth in the GCC's state spending to slow further in coming years; it forecasts an average rise of just over 4 per cent annually in 2013-2018, compared to the 15 per cent clip seen over the last decade, its data shows.

But on current indications, this spending restraint will not be enough to prevent state budgets in many countries from going into the red, the IMF predicted. Bahrain is currently the only GCC country in the red; it is expected to be followed by Oman as soon as in 2015, and Saudi Arabia in 2018.

The combined budget surplus of 11 Arab oil exporters, including those in North Africa, is now projected to decline to 4.2 percent of gross domestic product in 2013 from 6.3 percent last year. In April this year, the IMF projected a 4.7 percent surplus for 2013.

REVENUES

Even as spending grows too fast, revenues are threatened by the risks of lower oil prices and a drop in global demand for Arab oil, the IMF added. Oil export receipts account for over 80 percent of government revenues in the region, and the IMF said the most important threat to revenues was now the possibility of excess supply in the global oil market.

"Notwithstanding the tightness caused by unexpected production disruptions and elevated geopolitical risks in the summer of 2013, a combination of weak global oil demand growth and strong supply growth from unconventional sources in the non-Opec countries could reduce demand for Opec oil by about a half-million barrels per day by 2016," the IMF said.

Most Arab oil exporters now need an oil price above $90 to balance their budgets at forecast production levels, the IMF said, adding that rising volatility in oil production meant uncertainty over revenues would increase.

"A sustained period of oil prices remaining $25 below the baseline...would lead to deficits from 2015 onward in all countries except Kuwait and the UAE...in the absence of a fiscal policy adjustment," the IMF said.

Kuwait is projected to have the lowest budget break-even oil price of $52 per barrel this year, while Yemen tops the table with as much as $215, the IMF report showed.

The benchmark Brent crude oil price has averaged $108 per barrel so far this year, down from $112 in the same period of 2012. A Reuters poll last month forecast the price would ease to $106.5 in 2014.

The IMF said Arab governments should search for new, non-oil sources of revenue. Most governments in the region, particularly in the GCC, say they understand the risks and are taking steps to manage them, including policies to diversify their economies and create private sector jobs for their citizens.

Also, most Gulf oil exporters have used their oil windfalls to build up huge fiscal reserves and pools of foreign assets, which would allow them to keep spending even if their state budget balances turned negative. Low public debt levels mean it would probably not be hard for them to borrow money. - Reuters