Cut Spending, Increase Revenue
World Economy

Cut Spending, Increase Revenue

The International Monetary Fund’s Managing Director Christine Lagarde has estimated that in the Middle East and North Africa as a whole, oil exporters lost more than $340 billion of revenues last year because of low crude prices, equivalent to 20% of their combined gross domestic product.

“The size and likely persistence of this external shock means that all oil exporters will have to adjust by reducing spending and increasing revenue,” Lagarde said speaking on Monday at the two-day Arab Fiscal Forum,  organized by the Arab Monetary Fund in Abu Dhabi, Albawaba reported.

She added: “Most (Persian) Gulf Cooperation Council countries are now in a position where they can pace their adjustment over several years and thus limit the impact on growth.”

She did not specify which of the six (P)GCC (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and UAE) economies were not in that position. The IMF is confident that (P)GCC economies can make the large fiscal adjustments they need to cope with a period of low oil prices, she said.

The oil producing region should continue to invest in building tax administration capacity that could eventually allow for the introduction of personal income tax.

She said the oil-exporting countries have been heavily affected by the recent plunge in oil prices.”Not only have oil prices fallen by around two-thirds from their most recent peak, but supply and demand-side factors suggest that they are likely to stay low for an extended period. The size and likely persistence of this external shock mean that all oil exporters will have to adjust by reducing spending and increasing revenue,” the managing director general said.

  Reducing Impact

She said the fiscal adjustment needs vary from country to country. For instance, due to their prudent policies, most members of the (P)GCC are now in a position where they can pace their adjustment over several years and thus limit the impact on growth.

“It is also worth remembering that (P)GCC economies have made large fiscal adjustments in the past,” Largarde said, adding that they can “do it again.”

At the same time, she stressed that these economies need to strengthen their fiscal frameworks and re-engineer their tax systems by reducing their heavy reliance on oil revenues and by boosting non-hydrocarbon sources of revenues.

This would help bolster growth and job creation and at the same time help to maintain debt sustainability and strengthen resilience, she told the Arab finance ministers. It also provides a unique opportunity to design tax systems that emphasize fairness, simplicity and efficiency.

  Introducing VAT

She asked the (P)GCC bloc to start the revenue generating efforts by putting in place a simple system that initially focuses on VAT, at a low single-digit rate, such a tax could raise up to 2% of GDP.

Add to this a greater emphasis on corporate income tax, as well as property and excise taxes. Progress is already visible in many countries, as in Kuwait, for example, the IMF has assisted in the study and design of broad-based taxes, such as VAT and business profit tax.

“This work has contributed to a national dialogue on why and how Kuwait should diversify its revenue sources,” the fund’s top official said.

Proponents of reform argue that this would allow the country to better manage the fiscal risks associated with volatile oil prices, she said.

In his remarks on the occasion, Obaid Humaid Al Tayer, minister of state for financial affairs of the UAE said that the (P)GCC nations have strengthened their institutions to boost competitiveness and economic sustainability.

The region has embarked on economic reforms process, he said referring to the withdrawal of state handouts on petroleum products, which was a bold policy initiative.

Speaking to reporters on the sidelines of the forum, Darwish Al Balouchi, deputy finance minister of Oman, said that the (P)GCC nations have agreed to introduce Value Added Tax at the rate of 5%. The proposed levy will be introduced in 2018, he said.

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