Fiscal Challenges Continue to Dominate (P)GCC States

The (Persian) Gulf Cooperation Council governments have been working hard to address the rising fiscal gap following the sustained decline in oil prices, but the problems persist and further reduction in deficits and revenue diversification are required to sustain economic growth and job creation, according to economists and multilateral agencies.

(P)GCC countries (Saudi Arabia, Kuwait, the UAE, Qatar, Bahrain, and Oman) fiscal deficits are forecast to narrow in 2017 to an aggregate of 6.5% of GDP in 2017 on higher oil revenues. The narrower deficits and ongoing foreign borrowings are expected to result in banking sector liquidity easing in 2017. But as a result of the fiscal tightening, support to growth is expected to moderate, potentially impacting GDP and employment growth, Arabian Business reported.

Speaking at the recent Arab Fiscal Forum, Christine Lagarde, managing director of the International Monetary Fund called on regional governments to deepen and broaden their revenues while rationalizing spending.

“(P)GCC countries are working to introduce a harmonized VAT in 2018 along with reduction in various subsidies. The IMF expects VAT could raise anywhere from 1 to 2% of GDP, assuming a rate of 5%. Our experiences in other regions underscore the positive impact of (revenue) diversification,” said Lagarde.

Despite some recent efforts towards revenue augmentation, economists say the region needs a medium term plan to keep deficits at sustainable levels although spending cuts will reduce fiscal support to growth.

Total (P)GCC government expenditure is expected to rise by a moderate 0.4% in 2017 versus a 4.5% drop in 2016. Some (P)GCC countries are seeing a moderate increase in planned spending in their 2017 budgets, while others are seeing a smaller contraction.

“We expect further subsidy reforms to be announced in the second half of 2017, including in Saudi Arabia. Further reforms and spending retrenchment are needed in the medium term to lower fiscal deficits in Bahrain, Oman and Saudi Arabia. We see Abu Dhabi and Qatar continuing to focus on fiscal prudence despite the contained deficits forecast for 2017,” said Monica Malik, chief economist of Abu Dhabi Commercial Bank.

Clearly, austerity measures are resulting in lower growth. Oil prices are more comfortable entering 2017, supported by the production cut agreed by OPEC and non-OPEC countries.

“Higher oil price should lead to an easing of austerity programs in 2017, reducing the fiscal drag. This comes after the substantial deepening in fiscal retrenchment and reforms in 2016—aimed at limiting the widening in government deficits—that resulted in a marked slowdown in real non-oil GDP growth,” said Malik.