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Fiscal reform drive across the GCC shows faltering signs

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Most GCC countries have recently begun to reverse these cuts, while in some cases such as in Kuwait, higher oil prices have begun to exert upward pressure on subsidy spending bills once more.
WEDNESDAY 04, SEPTEMBER 2019

The 2014 oil slump prompted GCC governments to launch fiscal consolidation programmes, which included cuts to spending, energy price reforms and new non-oil revenue measures.

According to Moody’s, the policy measures and reforms implemented since 2014 managed to relatively slow down fiscal deterioration caused by lower oil prices which caught GCC sovereigns off guard.

Between 2015-18, all GCC countries undertook to exercise spending rationalisation and—although less significant—some delivered substantial forms of energy price reforms and introduced new economic-diversification measures. However, progress has been uneven across the region and so far skewed towards spending cuts.

Moody’s stated that the implementation of fiscal consolidation measures and reforms have been uneven across the six GCC sovereigns and so far more concentrated on the expenditure side. GCC sovereigns trimmed their total expenditures by an equivalent of about five to eight per cent of 2018 GDP in the initial years of the fiscal adjustment, but some of them began reversing these cuts as early as 2017 when oil prices began to rise from their 2015-16 lows.

According to the Bahraini finance ministry, government spending in the Kingdom remained broadly unchanged during 2014-18. In contrast, Qatar, Oman, Saudi Arabia and Kuwait implemented the largest initial spending cuts with Qatar remaining the only one to maintain its spending restraint through 2018.

Backtracking trends

Most GCC countries have recently begun to reverse these cuts, while in some cases such as Kuwait, higher oil prices have begun to again exert upward pressure on subsidy spending bills. According to Moody’s, total government spending across the GCC rose by about 10 per cent in 2018.

Additionally, Oman is considering introducing value-added tax (VAT) in 2021, further delaying a fiscal consolidation measure that economists say could be politically sensitive at a time of sluggish growth and high unemployment.

The Sultanate said that it would increase its revenue base by introducing VAT which the government expected to be implemented in 2021, according to a bond prospectus distributed to investors earlier in July 2019. Likewise, Oman’s increase in the corporate tax rate in 2018 has only had a small fiscal impact—at around 0.3 per cent of GDP.

Most of the governments have implemented new or increased miscellaneous fees for government services across the region—these added relatively little to their overall revenue intake, explained Moody’s. Excise taxes on tobacco, alcohol and sugary beverages were rolled out in five countries

excluding Kuwait, but the fiscal impact of this measure has been very small, at only around 0.3 per cent of GDP across the region.

Fiscal reforms

The agreement by the six-member bloc to introduce VAT is believed to be part of a broader strategic shift by the respective governments to move their economies away from depending on

 hydrocarbon revenues. In a bid to boost and retain foreign investment in the country, the UAE implemented regulations to stimulate non-oil economic growth earlier this year following the issuance of a new investment law by the President of UAE, HH Sheikh Khalifa bin Zayed Al Nahyan.

The new FDI law will be integrated with several supplementary laws and a list of incentives to lead future FDI trends with an aim to reach between $1111.5 billion in investments. Additionally, financial regulators in the UAE has provided a legal framework for foreign investors that guarantees their investor rights, property rights, arbitration, insolvency and corporate laws.

The UAE’s new debt law is also set to deepen financial markets, allowing the emirates to tap a wider pool of financing options and create a government yield curve. The new Public Debt Law enables the UAE to issue sovereign bonds, enabling the country to tap a wider pool of financing options and creating a government yield curve to bolster the country’s secondary debt market.

Similarly, Saudi Arabia is also restructuring and opening its nonhydrocarbon economic activities, rethinking the role of foreign investors as the Kingdom looks to ease fiscal burdens and do away with dependence on oil, focusing on technology, entertainment and FDI.

PwC said that the introduction of VAT in Saudi Arabia has brought in more funds than the expat levy and excise taxes combined, and it tripled the amount from taxes on income and capital gains. Under Crown Prince Mohammed bin Salman’s Vision 2030, Saudi Arabia introduced a series of economic transformation reforms aimed at reducing the Kingdom’s high reliance on oil.

According to the Arab Monetary Fund’s September 2018 Outlook Report, the reforms implemented across the GCC improves business climate supports economic activities during the forecast horizon.

Similarly, Bahrain introduced VAT for the first time in the Kingdom in January 2019, following a $10 billion aid package offer from the Kingdom’s wealthier neighbours Saudi Arabia, UAE and Kuwait to avoid the risk of a debt crisis in the country, which was also tied to fiscal reforms.

The country is yet to introduce other reforms, including changes to the pension system and a new subsidy programme in a bid to fix its public finances. However, the Kingdom’s oil minister stated that oil will be excluded from value-added tax (VAT), part of an essential goods exclusion from the tax.

More significantly, Saudi Arabia’s increased levy on expatriate workers and a implementation of a new levy on their dependants has generated approximately one per cent of GDP in additional fiscal revenue in 2018. The Kingdom plans to increase these further in the next couple of years and expects to more than double its contribution to the budget.

The budgets approved by GCC sovereigns in 2019 offer a preview of what shape fiscal policy may take in the medium term. This is carried out in an environment where moderate oil prices and steady social pressures to maintain high living standards exist, in a bid to ensure employment for nationals entering the labour force each year.

The majority of GCC countries’ 2019 budgets targeted higher spending than in 2018, and only Oman and Bahrain are targeting spending cuts related to their actual or estimated outcomes for 2018. Moody’s suggests that—with the exception of Bahrain and Saudi Arabia—GCC countries’ 2019 budgets contain no significant new non-oil revenue and cost saving measures.

TAGS: FISCAL REFORM VAT OIL GCC CROWN PRINCE MOHAMMED BIN SALMAN VISION 2030 FDI
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