When we look at the economies of the Gulf Cooperation Council (GCC)—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates—we need to recognize one game changer that has taken place over the past year: lower oil prices. Thanks to the prudent management of their finances over the past decade, these economies are well positioned to address this new reality. But it is clear they will need to adjust their spending to lower revenues while at the same time creating enough jobs for their growing young populations. Regionally, they need to do so while continuing to play a supporting role to less well-off economies through financial assistance, remittance flows, and imports.
For most of the past decade, high oil prices fueled a large expansion of government spending, strong economic growth, and helped create employment in these countries. That period, though, has come to an end. In its place is a new reality: With low oil prices, a gradual reduction, or at least a substantial slowdown, in government spending is needed, particularly in those countries that have low fiscal buffers.
In dollar terms, export revenues in the GCC region are projected to decline by close to 300 billion US dollars between 2014 and 2015. Their government budgets will move into a substantial deficit and the current account surplus will decline sharply. The buffers that were built up by most GCC countries have allowed governments to avoid brusque cuts in government spending. However, as much of the decline in oil prices is expected to persist, governments now need to implement well-designed fiscal consolidation plans over the medium term to bring spending into line with lower revenues.
How can this be done? One area that could be prioritized is to gradually raise domestic energy prices, which remain very low in most GCC countries by any international standards. An increase in energy prices over time—with adequate compensatory measures for the lower and middle income groups—could help curb the rapid growth of domestic energy consumption, reduce existing incentives in energy intensive industries, and strengthen these countries coffers.
Most GCC countries have already initiated energy price reforms. Bahrain and Saudi Arabia have increased electricity tariffs on industry, the UAE has increased electricity and water tariffs for the general population, Oman has increased industrial prices for natural gas, and Kuwait and Qatar have increased diesel prices. But more still needs to be done.
With government spending set to slow, the GCC countries need to find alternative engines of growth. In the past, economic growth has been driven by government spending. This has certainly helped to develop these economies and improve the living standards of the population. But the economies of the GCC remain very dependent on oil. Greater economic diversification will reduce exposure to volatility and uncertainty in the global oil market, help create private sector jobs, increase productivity and sustainable growth, and establish the non-oil economy that will be needed when oil revenues start to dwindle.
The non-oil private sector also needs to provide more jobs for GCC nationals, who are graduating from universities and schools in record numbers. So far, many GCC nationals have sought jobs in the public sector, with expatriates mainly meeting the job needs of the private sector. However, this will need to change as finding jobs for the growing working age population is a key policy challenge for most GCC countries. Estimates suggest that the national labor force in the GCC could grow by 1.5 million–2 million people in the next five years. While a number of labor market interventions are being implemented to promote the employment of nationals in the private sector, success has been mixed, and these efforts will likely have to be reinforced.
Increased investment in education and skills are needed to ensure that these nationals are indeed equipped to work in the private sector, but incentives need to change so jobseekers prefer entrepreneurship and employment in the private sector to working in the public sector. And firms need the incentives to employ a growing share of nationals in their workforce.
The countries of the GCC are also important regional players and whatever happens to these countries’ fortunes impacts the whole region, be it through remittances, financial assistance, or even through confidence regarding investments. Policies in the GCC countries have potential spillovers to its neighbors, some of which are already facing significant challenges with the recent escalation of conflict and political strife.
The coming years will be challenging for the countries of the GCC. The decline in oil prices will require fiscal adjustments, and a greater emphasis on labor market and other structural reforms to switch the focus of growth away from the public and toward the private sector. This will not be easy, but success will lay the basis for strong and sustained private sector-led growth into the future, and for saving some of the countries’ wealth for future generations.