Oil prices may be showing some signs of weakness these days, but they still remain higher than they have been for most of the past four years. That in turn prompts a perennial question for the oi-rich countries of the Middle East: whether they are willing and able to sustain their much-needed economic reform programs when there appears to be no immediate requirement to do so.
Governments in the Gulf region have been under sustained pressure to remodel their economies since late 2014, when oil prices plunged from over $100 a barrel (bbl) to less than $50/bbl, dragging budgets into deficit. The higher prices of recent weeks – Brent crude has been selling for more than $70/bbl since early April – means the pressure has been easing on finance ministries and many are now looking forward to running budget surpluses this year, for the first time in many years.
The changed circumstances already seem to be having an impact on policy-making, with purse-strings being loosened and new taxes delayed.
In the UAE, for example, the authorities announced in May that all serving and retired government employees would be given an extra month’s pay to mark the centenary of the birth of the country’s founding father Sheikh Zayed Bin Sultan Al-Nahyan, at an estimated cost of some AED1.6bn ($435m).
In the same month in Kuwait, parliament voted to delay the introduction of a value-added tax (VAT) until 2021. To date Saudi Arabia and the UAE are the only countries among the six members of the Gulf Cooperation Council (GCC) to have implemented VAT, even though all six had originally agreed to do so at the same time.
It is understandable that such decisions might be made. After several years of impressing upon their populations that austerity measures were unavoidable because of low oil revenues, governments now find the logic of that argument harder to sustain. London-based Capital Economics estimates that, at $80 a barrel, the Gulf region’s annual export revenues would be $170bn higher this year than last year. Prices aren’t quite at that level right now, but they’re not far off.
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