GCC needs enhanced non-oil fiscal revenue and re-evaluation in savings approach, says IMF
May 06 2020 09:12 PM

Faster economic diversification will not resolve the fiscal challenge on its own in the Gulf Co-operation Council (GCC), hence requiring enhanced non-oil fiscal revenue and re-evaluation in their approach to savings, according to a research paper of the International Monetary Fund (IMF).
This comes in the wake of oil market undergoing fundamental change and that the new technologies are increasing the supply of oil from old and new sources, while rising environmental concerns move the world gradually away from oil. This spells a significant challenge for oil-exporting countries, including those of the GCC, which account for a fifth of the world's oil production.
Although the importance of non-oil sectors has increased in recent decades, many of them rely on oil-based demand either in the form of public spending of oil revenue or private expenditure of oil-derived wealth, it said, adding the 2014–15 oil price shock, which notably slowed non-oil growth in most of the region, was a stark reminder of this dependence.
Finding that the ongoing reform efforts in the region to provide momentum over the next five years, but they need to be accelerated; IMF, in its latest report, said the fiscal revenue the GCC governments generate from the hydrocarbon industry is much higher than what is generated from non-hydrocarbon industries.
Thus, even full replacement of the hydrocarbon industry with non-oil activity would still create a "significant" revenue shortfall, it said.
While this has begun to change with the recent introduction of VAT (value added tax) and excises in some countries, there is "significant" potential to build on this progress, it said.
"As the region transitions toward a non-hydrocarbon economy, moving from wide-ranging fees toward fewer broad-based taxes, for example, could provide much-needed revenue diversification while also reducing distortions and facilitating small and medium enterprises development," it added.
Suggesting that the countries should re-evaluate their approach to saving; the IMF paper said in the past, a significant portion of oil proceeds were used for public investment which created non-financial wealth and supported rapid economic development.
But the impact on non-hydrocarbon growth has been typically short-lived and, as the economies have developed, growth multipliers from these investments have begun to decline, it said.
"Therefore, from the optimal portfolio allocation and wealth preservation perspectives, financial saving will be more important going forward. Meanwhile, emphasis could be made on sustained structural reforms to generate lasting non-oil growth momentum," it added.
The research paper said with continued improvements in energy-saving technologies, adoption of renewable sources of energy, and a stronger policy response to climate change, the world’s demand for oil is expected to grow more slowly and eventually begin to decline in the next two decades.
"If these expectations materialise, they would reshape the economic landscape of many oil-exporting countries, including those in the GCC," it added.

There are no comments.

LEAVE A COMMENT Your email address will not be published. Required fields are marked*