Why Gulf countries are following fiscally stringent policies amid high old prices

As oil prices reach recent highs, a number of countries in the Middle East have unveiled fiscal measures designed to balance their budgets after two years of Covid-19 pandemic-related spending. Bahrain is following this trend: in October 2021 it released a plan designed to balance the budget by 2024 (see analysis). In addition to doubling the value-added tax (VAT) to 10%, the plan includes a reduction in government expenditure, a streamlining of cash subsidies to citizens and the introduction of new revenue initiatives.

Although Bahrain previously aimed to balance the budget by 2022, it revised this target due to the economic disruption created by the pandemic. “While the pandemic resulted in prolonging fiscal balance targets to beyond 2022, the government’s discipline in curtailing expenditure raises expectations that it will narrow the fiscal deficit gap and achieve a fiscal balance in the coming years,” Yaser Al Sharifi, group chief strategy officer of the National Bank of Bahrain, told OBG. “Furthermore, amid the economic recovery seen in 2021 and a higher oil price environment, one could expect a robust economic performance in 2022, which will further support the government’s fiscal situation.”

Surplus

In mid-December 2021 Saudi Arabia, the Gulf’s largest economy, announced that it expected to post its first budget surplus in eight years in 2022. The Saudi government estimated that it will achieve a surplus of SR90bn ($24bn) in 2022, equivalent to around 2.5% of GDP. This comes after the Kingdom recorded a deficit of 2.7% of GDP the previous year, which followed an 11.2% deficit in 2020 as the pandemic weighed heavily on the economy.

With oil prices sitting above $100 a barrel in early and mid-2022 – levels not seen since 2014 – the anticipated turnaround will be driven by both an rise in revenue and a reduction in public spending. Government revenue is forecast to increase by around 12%, to SR1.05trn ($266.7bn) over the year. Despite this increase, government expenditure is budgeted to decline by 6%.

Taxes

Elsewhere in the region, a number of countries are looking to strategies to improve their fiscal position. In January 2022 the UAE announced that it would introduce a tax on corporate earnings. The 9% tax, applied to earnings over Dh375,000 ($102,000), will come into force in July 2023 as the country seeks to align itself with international tax standards. The tax will also help to diversify the UAE’s budget revenue and further reduce its reliance on hydrocarbons.

The introduction of corporate tax is the latest in a series of fiscal measures from the federal government. In 2018 the country implemented a 5% VAT, which was followed by a 5% Customs duty on imports. Despite the planned introduction of corporate tax, the UAE remains a competitive business destination: companies operating in free zones across the country are exempt from the tax, and there is still no personal income tax.

The introduction or raising of taxes is an approach that a number of countries in the region have employed in recent years. Saudi Arabia increased its VAT to 15% in 2020, while in April 2021 Oman introduced its own 5% VAT. Qatar and Kuwait are the only two GCC members yet to introduce VAT following the signing of the Common VAT Agreement in 2016.

Funding the Transformation

These efforts come as countries in the Gulf look to recover from the pandemic and reduce their reliance on hydrocarbons. Governments across the region have sought to diversify their respective economies by investing heavily in non-oil industries and renewable energy.

With the pandemic resulting in significant levels of government spending to address the resultant health and economic fallout, there were concerns about how this would affect long-term economic development and diversification plans. Although the initial stimulus resulted in spending being directed towards health care and financial assistance for citizens, Gulf countries remain generally committed to their transformation strategies, with some even looking to accelerate them.