GCC countries will have to create new revenue streams as lower oil prices may keep their budgets deficit in the medium term, indicates a recent report by the International Monetary Fund (IMF).
IMF estimates a cumulative fiscal deficit of $900bn for the six Gulf nations and Algeria between 2016 and 2021.
Revenue mobilisation should focus on designing broad-based tax systems; it says and notes that the GCC is planning to introduce a VAT or value-added tax in the coming years.
Revenue measures by way of value-added tax can contribute to lifting the GDP of the GCC countries.
For example, introducing a 5% VAT could raise about 1.5% of GDP by 2018, points out IMF regional chief Masood Ahmed.
But, he stresses such measures will take longer for effective implementation, and hence the authorities concerned should ensure “implementing them in a sustained way, and building the institutional capacity to be able to do this is going to be important”.
Many Gulf countries can introduce phased adjustments thanks to the “comfortable financial surplus” amassed over years of high oil revenues, he suggests.
The budgets of almost all non-GCC countries are also projected to remain in deficit by the end of the decade. Therefore, IMF says further saving measures are needed over the medium term to restore fiscal sustainability, rebuild buffers, and save sufficiently for future generations.
In the GCC, ambitious fiscal consolidation is also required to support the fixed exchange rate regimes.
Oil prices have shed some 70% from their mid-2014 peak value to $40 a barrel. The IMF says markets expect prices to recover modestly to $50 by the end of this decade.
Export receipts in Middle East and North Africa (Mena) oil exporters have declined by $390bn last year, which represents 17.5% of their GDP in 2015.
The ample surpluses of the GCC countries besides Algeria, another major oil exporter in the Mena region, have turned into significant deficits, projected to average 12.75% of GDP (Gross Domestic Product) in 2016 and remain at 7% over the medium term, despite the implementation of sizeable deficit-reduction measures.
Over the past decade, oil exporters in the GCC and the wider Mena region have enjoyed large external and fiscal surpluses and rapid economic expansion on the back of booming oil prices.
However, with oil prices plunging in recent years, surpluses have turned into deficits and growth has slowed, raising concerns about unemployment and financial risks.
In addition to balancing their budgets, the GCC countries face a major challenge ensuring that the private sector grows in a way that provides employment, Ahmed says.
Clearly, it should be the immediate priority of the GCC countries to revitalise their private sector and create incentives for nationals to seek private sector instead of public sector jobs.
An economy that depends on a single commodity will be at risk during a period of sluggish growth. For this reason, diversifying economies away from oil and gas is the need of the hour.
This, as IMF says, will be a real transformation of the economies going forward.
Viewpoint
