The economies of the Gulf Cooperation Council are set for a modest recovery this year on the back of a "swift and substantial" response to containing Covid-19 and an increase in oil prices, according to the Institute of International Finance. The non-oil economies of the six-member economic bloc are set to increase by an average 3.1 per cent this year after contracting 4.1 per cent last year amid movement restrictions to stem the spread of the virus, a report by the institute said. "The ongoing recovery is projected to accelerate towards the middle of 2021 as the second wave of the pandemic recedes, Covid-19 vaccines become widely available, and oil production cuts are tapered in line with the OPEC+ agreement," the report written by the institute's chief Mena economist Garbis Iradian and associate economist Jonah Rosenthal said. "High-frequency indicators, including PMI and credit [data] ... point to strong recovery in the private sector, particularly in Saudi Arabia," it added. The Gulf's economies had to contend with the twin shocks of the Covid-19 pandemic and lower oil prices last year, leading governments to run bigger deficits and tap international bond markets to plug budget shortfalls. However, improving conditions mean the aggregate fiscal deficit is set to decline to 1.2 per cent of gross domestic product this year, from 9.1 per cent in 2020, the IIF estimates. "If sustained during the rest of the year, higher oil prices will reduce immediate government borrowing and external financing needs by boosting government revenues well above our expectations," Moody's Investors Service said in a report on Thursday. The ratings agency had based its 2021 assumptions on a $40-$50 oil price range, but said a $20 per barrel increase could improve GCC fiscal revenues by around 5-10 per cent of GDP. Brent crude was trading up 1.56 per cent at $64.27 at 12.55pm on Friday. "For the sovereigns with the lowest budgetary breakevens, higher oil prices could even result in fiscal surpluses and help to reverse some of the large debt increases during 2020, provided the additional revenue is not used to fund higher than budgeted spending," Moody's said. Monetary policy in the region is likely to remain loose as central banks whose currencies are pegged to the US dollar track the Federal Reserve, which is expected to keep rates on hold until the end of this year, the IIF said. Central banks in the region have lowered their policy rates by an average of 1.25 per cent to just 0.5 per cent and have introduced liquidity measures to support businesses, particularly SMEs, it added. Banking systems remain resilient, helped by strong capital and liquidity buffers but some deterioration in asset quality is expected once loan forbearance measures ease. The Gulf's economies have witnessed declines in investment and employment, but their digital transformation is accelerating and medium-term prospects could be improved by accelerating the implementation of new technology, boosting infrastructure, reducing regulatory burdens and developing skills that are most in demand by employers, the institute said. The UAE has already made "major progress" on technology adoption, such as the development of a digital legal framework. "Such progress in digital transformation combined with other structural reforms will help the Emirates to further diversify the economy away from oil and boost potential growth," it added.