analysis

Gulf states need to keep the pace on economic reforms

Whatever be the hardships, this is needed to support higher expenditure targets

13:20 January 13, 2018

A report by the International Monetary Fund lists quite a few challenges for the Gulf economies ... but some of the insights presented can be vigorously challenged. For instance, the report suggests that ever since the drop in oil prices, fiscal consolidation has focused on the reduction of expenditure.

This is true but conveniently overlooks the steady reforms concerning revenue generation. In fact, budgets released by some GCC states for fiscal 2018 confirm a rise — rather than decline — in spending.

Total expenditure in Saudi Arabia’s 2018 budget is projected at $261 billion, the largest ever in the kingdom’s history. Oman’s 2018 assumes expenditures of $32.5 billion, up a steep 6.8 per cent on 2017.

GCC countries are undertaking revenue-enhancement measures such as excise tax and value-added tax as well as higher fees on governmental services. Saudi Arabia, the UAE and Bahrain have applied excise tax on tobacco products plus energy and fizzy drinks, and the first two concurrently introduced VAT at the start of the year.

The IMF report also notes the average unemployment rate in the Gulf states, assumed to be 12 per cent, undoubtedly significant. Joblessness among locals is not a cause of concern in both the UAE and Qatar. Kuwait has a unique case with regard to employment among locals, as about 90 per cent of Kuwaiti nationals work for the government and other state institutions.

It is rightly argued that this situation is not sustainable even in normal economic conditions.

Unemployment is a cause of concern in Saudi Arabia, Bahrain and Oman. What’s worse, demographic realities only add to the challenge, as more of the young enter the job market seeking opportunities meeting their career expectations and financial compensation. In fact, joblessness among the youth was the spark for the socio-political challenges in Bahrain and Oman in early 2011.

Another test relates to the role played by the petroleum industry in GCC economies. The IMF assumes that oil and gas sector accounts for about 75 per cent of total treasury revenues and places the well-being of GCC economies at the mercy of developments in the oil market.

This very point was driven home during the oil price drop-off, as Gulf economies struggled to adjust and resorted to reducing subsidies, increasing charges for state services and considering taxes. Make no mistake, the measures are not popular among locals let alone the expatriates. Immigrant workers, in particular, are among the worst affected.

Oil exports account for about 65 per cent of total revenues of the six-nation grouping. Again, this is abnormal, thereby requiring diversification of sources of exports. This is no easy job. On a positive note, the fall in oil prices has rekindled talks and desires to diversify GCC economies away from oil by capitalising on the historical opportunity.

The writer is a Member of Parliament in Bahrain.