Dubai: GCC countries should have strong fiscal policy framework that supports longer term stability in economic growth across the region, said Dr Raja Bin Monahi AlMarzoqi Al Baqmi, President, Gulf Monetary Council and former IMF Advisor addressing the IMD Business Forum on Thursday.
Economic activity in the GCC largely led by government spending is strongly correlated to oil prices which has resulted in huge cyclical fluctuations in macroeconomic fundamentals.
“Countries in the GCC lack a long term fiscal framework. What we currently have are annual budgets and the budgetary allocations are impacted by the oil prices resulting in huge variations in government spending, which is the key driver of economic activity,” he said.
For long term stability, Al Baqmi called for fiscal frameworks that will ensure stability in government spending. “Under the current situation, it is difficult for business to forecast the economic growth trends, making it extremely difficult to make informed investment decisions,” said Al Baqmi.
In the context of the sustained low oil prices, governments across the region are making efforts diversify their economies while stabilising the government finances through a combination of fiscal consolidation through cuts in government spending and augmenting of revenues through new sources such as taxes and fees.
New reality
Historically, GCC governments opted for contraction in government spending during times of low oil prices and expanded spending when the prices recovered. Al Baqmi said under the new reality of prolonged low oil prices the region needs to stabilise its economies by bringing certainty in the long term spending that will enable the private sector to plan ahead.
While the recent measures announced across the region mark the beginning of a new era in fiscal reforms, Al Baqmi said the regional governments should work towards GCC Monetary Union, that will substantially reduce cost of doing business and expand the size of the market that will increase volume of trade and investment flows.
The annual IMD Business Forum in Dubai examined the challenges and opportunities businesses in the Gulf countries are facing in the wake of rapid digital transformation and economic diversification, brought on by the fall in oil prices and global economic uncertainty.
“For the foreseeable future, the world will not be a stable or predictable place like it used to be. Even commodities such as oil, which now costs a fraction of the price it commanded a few years ago, cannot be relied on. VUCA (volatile, uncertain, complex, and ambiguous) is the new normal and will stay that way,” said Dominique Turpin, President of IMD
Speakers said the businesses in Gulf countries will have to adapt to the new realities whether this means upgrading to a more digitalised way of doing business, diversifying to take advantage of new opportunities or entering new markets.
Turpin urged business leaders in Gulf countries to anticipate changes in the competitive environment and to be aware of new market dynamics around competition. “If a business is serious about differentiating itself from the competition, then it must innovate on all dimensions all the time, not just product innovation: think also about new processes and a new business model,” he said.
