A sustained increase in oil prices over the past two years has driven an economic recovery in the Gulf Cooperation Council (GCC) countries, but government-led reforms need to continue to keep up the momentum, according to the World Bank’s biannual Gulf Economic Monitor released on Tuesday in Riyadh.
Economic growth for the GCC region is expected to reach 2 percent in 2018, up from negative 0.3 percent in 2017, thanks in part to higher oil production and a slower pace of fiscal consolidation.
With fiscal and external imbalances narrowing, the region has remained largely immune to the financial volatility that beset other emerging market economies in mid-2018. The World Bank expects economic growth for the region to strengthen gradually in the medium term to 2.7 percent by 2020 as high energy prices and rising government spending lift output and sentiment.
Growth in Saudi Arabia is expected to rebound to around 2 percent in 2018-2019 from a contraction in 2017, and to strengthen similarly across the GCC countries. External and fiscal imbalances are also expected to narrow, with Saudi Arabia and the UAE achieving near fiscal balance by 2020 and, along with Qatar and Kuwait, returning to current account surpluses during 2018-20.
“Gulf countries have implemented some notable reforms in recent years, including the rolling back of costly and distortionary subsidies, the implementation of a VAT, and business environment and labor market reforms,” said Issam Abousleiman, World Bank Country Director for the GCC. “But it is critical that GCC countries stay the course, not least because any loss in momentum could hinder their ability to draw in long-term investors, that are crucial for diversification efforts.”
Looking forward, there are several downside risks to the regional economic outlook. Global trade tensions, global financial volatility, and geo-political tensions could dampen global demand and trade, affect access to and cost of financing and weigh down hydrocarbon prices. A key domestic risk for the GCC region is a slowing in the pace of reforms due to higher oil prices.
The Gulf Economic Monitor focuses the reform lens on four key areas where further progress is needed. On the fiscal front, GCC countries have yet to systematically explore public wage bill and employment reforms as a strategy to anchor longer term fiscal sustainability and to improve service delivery. Governments should also note that spending better rather than spending more will likely be the key to unlocking productivity gains from infrastructure spending. Business environment and labor market reforms are needed to increase private investment, to foster job creation, and to ensure that Gulf nationals have the skills required by the private sector.
The Monitor also draws attention to a separate but critical aspect of long term sustainability, namely the management of water resources in the region, as GCC countries have some of the highest levels of water consumption globally and are highly dependent on energy-intensive water desalination. Because the management of water resources is a cross-sectoral issue, governments will need to ensure that policies and strategies are integrated and applied consistently across these sectors. Governments would need to prioritize water conservation, management of aquifers, recycling, desalination, agricultural use and coastal management.