World Bank’s official says more work to be done for GCC economies to break away from oil
RIYADH: Despite persistent efforts in the Gulf Cooperation Council to pursue reforms in the times of economic expansion, more work needs to be done to achieve a sustainable growth model with low hydrocarbon dependence, said a senior World Bank official.
“The GCC has been very successful in the past couple of years in enduring a twin shock of COVID-19 pandemic and dropping oil prices. The reforms, together with a competent health system, helped contain the number of COVID-19 cases and expedited the opening of these economies compared to other parts of the world,” Issam Abou Sleiman, regional director of the GCC for the World Bank, told Arab News.
According to Abou Sleiman, more work needs to be done to make the GCC resilient to the price fluctuations in the hydrocarbon industry, even though it is the primary source of revenue in this region. This can be achieved by balancing revenue and expenditure.
In 2021, the GCC nations picked up from a GDP contraction of 4.9 percent and rebounded to an expansion of 3 percent, and the World Bank expects the expansion to go up to 5.9 percent this year.
There is also a better way to reach the lower-income population than subsidizing or redistributing the income of the wealth in the GCC.
Issam Abou Sleiman, regional director of the GCC for the World Bank
What they are up against
“Four of the six GCC countries have taken some measures by introducing the value-added tax. Saudi Arabia has even increased the VAT during the pandemic, but more needs to be done on the revenue side,” he said.
As for the expenditure side, Abou Sleiman said that the wage bill and the subsidy scheme are both areas for improvement.
“The wage bill in the GCC is very high compared to similar countries around the world, and it is coming from the public sector that the region is looking to right-size,” he added.
The wage bill came from a social contract that existed for decades, but with a growing population, this formula no longer serves the purpose and has increased the fiscal deficit.
“There is also a better way to reach the lower-income population than subsidizing or redistributing the income of the wealth in the GCC,” said Abou Sleiman.
The subsidy schemes must be substituted with a more effective social safety net targeted toward the lower 40 percent of the income pyramid.
For example, Saudi Arabia in January introduced a modern social safety net that will have a much more significant impact on the low-income population than the traditional subsidy schemes.
“A balance between the revenue and expenditure sides, together with the governments’ vision of economic diversification, will allow these economies to become less and less dependent on the fluctuations of oil prices,” Abou Sleiman said.
The growth in 2022 will be mainly driven by the hydrocarbon market, which is likely to expand by 12 percent.
“The GCC benefited from the supply chain shocks and rising oil prices. However, despite the reigning fuel prices, the countries broke historical trends by carrying on its economic reform,” said Abou Sleiman.
Four countries in the GCC — Saudi Arabia, Bahrain, Qatar, and Oman — have witnessed noticeable transformations in the past couple of years to change the fabric of the economy and make it less driven by the government.
“The move toward an economy reliant on the private sector is focused on diversifying into non-oil sectors, and it is expected to continue in the coming years and cause a spillover within the GCC and the MENA region,” he said.
Preparing for the future
Abou Sleiman also tackles a vital topic focused on job creation among the young generation, especially women. “In an economy like Saudi Arabia, where the focus is on growing the tourism, entertainment and digital sectors, the focus should be on those young people who are much more educated today than years ago,” Abou Sleiman said.
The country only started incentivizing women to go into the labor market in 2019; however, seeing women flood into the labor job market in a short period brings a huge wave of optimism, according to Abou Sleiman.
“Statistically speaking, women are more educated than men, and when proper laws are put into place to drive them to the job market, this will bring a higher level of income for the Saudi and the GCC families,” he added.
Abou Sleiman also addressed the need to move the GCC infrastructure from state-owned enterprises to the private sector. “This will bring foreign investment, foster cost efficiencies, and encourage competitiveness in the region.”
Despite showing great optimism, Abou Sleiman only fears the reform needed for this kind of transformation would be halted in periods when oil prices go up. The other risk factor is the dependence of the monetary policy on the US dollar.
“While this could be good to tame inflation from a demand perspective, it will also impact the investments in the region,” added Abou Sleiman.