The GCC countries were advised by experts to impose taxes as a must.
These experts are justifying such a decision by the fact that low oil prices should be an ‘opportunity’ to diversify their economies. As a matter of fact, these countries were recently urged to introduce taxes, control public wages to fight oil price drop as according to experts, all GCC oil export revenues are expected to be $275bn lower in 2015 than 2014.
Last week, managing director of the International Monetary Fund Christine Lagarde, called the GCC countries to introduce stricter spending reforms, including more taxes and a rigorous control over their public expenditure.
In effect, the fall in the price of oil according to a panel of experts, has created a ‘pressing need’ for the GCC countries to impose taxes.
This year, the economy of the UAE is expected to grow 3 % only, as per the central bank governor who on Monday said before adding the country would reconsider any unnecessary investments, whilst at the same time would still be continuing with its spending, though with lot more rationalising. The central bank had already informed back in July that the UAE government would trim state spending.
In parallel, the introduction of VAT is favoured by the above panellists over other options such as cutting subsidies or spending, which were said to be difficult to implement at this stage. There are also concerns that this could erode the country’s cost competitiveness. However, while the UAE and Oman are likely to kick start a VAT system first, with possibly other GCC countries following, Qatar is expected not to introduce taxes for the moment.
Oil exporting countries in the GCC have been struggling to cope with the ongoing not so dire straits of low oil prices with more than $2.5 trillion in reserves and very low debt.
The International Monetary Fund’s managing director Christine Lagarde urging the GCC Countries to introduce a range of spending reforms, including more taxes and a rigorous control over their public expenditure, said:
“At the moment, a large share of fiscal and export revenues in the GCC come from oil,” and that,
“ . . . The fiscal and current account balances in the region are deteriorating sharply, with the fiscal balance projected by the IMF to be in a deficit of 12.7 % of the gross domestic product in 2015. Growth is also expected to slow, with IMF projection suggesting 3.2 % in 2015 and 2.7 % in 2016, compared to 3.4 % in 2014.”
But she indicated that the GCC countries should be prepared for a sustained period of low oil prices whilst facing this pressure from a “position of strength”.
To date, some Gulf countries have adopted reforms as low oil prices have started to bite. The UAE for instance, is definitely looking to implement a VAT scheme and has already deregulated fuel prices this year while Saudi Arabia is studying a similar move.
“With more than two million people potentially demanding work in the GCC by 2020, and given the fiscal constraints on further increasing government employment, private sector job creation needs to be stepped up,” she said advising that the GCC should be shifting growth from the public sector to the private sector. She added:
“Governments are already implementing many policies in this direction, and important progress is being made. Nevertheless, continued efforts are needed to encourage nationals to seek employment in the private sector and for firms to hire them.”
Meanwhile, Bahrain’s revenues having dropped by 60% to 70% due to low oil prices have on the other hand made it likely to implement additional subsidy cuts and charges for government services to boost its internal revenue.
Consequently, the country chasing economic diversification will be launching an industrial strategy early 2016 mainly in a tentative move towards a recovery from oil-price turbulence.
Like all GCC countries, Bahrain subsidises commodities such as food, fuel, electricity, and water but these are now challenging the country’s budget as revenues are diminishing because of the lowered oil prices. It has already started cutting some subsidies and is looking at electricity and fuel that are under study for implementation next year.
Bahrain is seriously looking at creating more employment especially that tied with export-based industries.