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Sunday, 06 December 2020

The pandemic changes the Gulf

The coronavirus pandemic may be taking economic decisions that the Arab Gulf countries have hitherto been reluctant to take

Ahmed Mostafa , Thursday 7 May 2020
Mecca
People perform prayer as they perform social distancing near Kaaba in the Grand Mosque during the holy month of Ramadan, following the outbreak of the coronavirus disease (COVID-19), in the holy city of Mecca (photo: Reuters-Saudi Press Agency)
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In a stark disclosure, Saudi Finance Minister Mohamed Al-Jadaan admitted this week that the largest economy in the region would not “return to pre-coronavirus economic conditions, mainly as a result of the pandemic’s impact on economic activities and supply chains globally.”

In an interview with a Saudi satellite channel, the minister was candid in drawing a realistic picture of the situation. He revealed the country’s deficit figures, the drop in financial reserves and plans to borrow extensively to finance the budget deficit. Then he hinted about austerity to come.

“We will reduce expenditure, if God wills, even if some of the steps taken will be painful, but they are for the benefit of everyone, for the benefit of the country and for the benefit of citizens,” Al-Jadaan said.

Projects would be delayed to cut spending, including projects from the 2030 Vision to diversify the Saudi economy. Though he stressed that basic services for citizens would not be affected by the measures, things would not be like they were in the days before the pandemic, he said.

Saudi Arabia and other Gulf countries have been under financial strain since the sharp drop in oil prices in 2014. Even those countries with an already diversified economy and less dependent on oil revenues, like the UAE, have started to feel the consequences of the pandemic’s economic impact. Non-oil sectors of the economy have started to suffer, adding to the negative impact of falling oil prices.

Air travel and tourism in the UAE account for more than 10 per cent of the country’s GDP. With global lockdowns due to the coronavirus pandemic, this significant portion of the economy has been witnessing a sharp drop.

Another country that relies on some manufacturing and agribusiness besides oil is Oman, and it has introduced reforms intended to reduce spending and restructure the labour market.

Last week, Oman’s Finance Ministry told state companies to replace foreign workers with locals as part of efforts to develop the national workforce. Two weeks before that, Oman barred private companies from trying to lessen the economic burden of the coronavirus crisis by firing Omanis. It also urged private firms to ask non-Omani employees “to leave permanently”.

Though other Gulf countries have not yet taken such drastic measures concerning the “localisation” of jobs and off-loading expatriate workers, there is no guarantee that some might follow in Oman’s steps if in a less dramatic way.

According to the International Monetary Fund (IMF), oil exports are expected to decline by more than $250 billion across the Middle East and North Africa (MENA) region due to sharp falls in demand and drops in prices. This adds to the financial distress due to the pandemic’s affecting non-oil sectors.

Governments in the Arab Gulf countries will have to take unprecedented measures to offset the combined negative impacts of the coronavirus pandemic and falling oil prices. The latter alone were manageable until the beginning of this year, but the former is now bringing about major change in the region.

The IMF projects the region’s economy to contract by more than the global average this year. It expects the UAE’s economy to contract by 3.5 per cent, and Saudi Arabia’s economy to decline by 2.3 per cent, with the non-oil sector in Saudi Arabia to contract by four per cent this year.

It seems the coronavirus pandemic is about to take decisions the Gulf countries have been mulling over for some time but have been reluctant to take for socio-political reasons. A few years back, Gulf citizens and residents started to pay VAT on purchases for the first time and to buy fuel according to varying market rates.

Though there is still no income tax in the Gulf, other forms of levies have been introduced or existing ones increased to increase government revenue and balance budgets. Some see this as the beginning of the end of the famous abundance in the Gulf, and the pandemic could go further in curtailing the “nanny states” envied by the rest of the world.

A positive aspect is that the Gulf countries might fast-track the diversification of their economies, with less reliance on energy exports and developing their systems and regulations to be more compatible with the rest of the world.

Weaning the Gulf societies off state nursing was never going to be easy, even with the gradual introduction of measures. But with the adverse effects of the pandemic on the economies of the region, such measures are justified and might go smoothly.

The public response to guidance on protection from the virus and the control of its spread has been a good sign. People may swallow the painful pill of economic change if they consider it to be their responsibility and acknowledge that the world after the coronavirus will not be like it was before.

*A version of this article appears in print in the  7 May, 2020 edition of Al-Ahram Weekly

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