The Gulf double squeeze
Ahmed Mostafa, , Tuesday 3 Nov 2020
The Covid-19 pandemic and declines in global oil prices will put further pressure on Gulf economies, writes Ahmed Mostafa


As the second wave of the coronavirus pandemic hits, the prospects of global economic recovery are dimming, and the world is anticipating a double-dip recession.

In this context, the Arab Gulf region is particularly prone to a double squeeze from both the pandemic and long-depressed oil prices. Yet, many analysts are playing down the socio-political implications this economic hardship might have on the countries of the Gulf Cooperation Council (GCC).

Qatar, one of the most-affected economies in the region as a result of the decline in oil prices, is the first country in the GCC, which also includes Oman, Bahrain, Kuwait, Qatar, Saudi Arabia, and the United Arab Emirates (UAE), to decide on introducing an income tax to make up for declining revenues.

Oman, whose economy is set to contract by 10 per centthis year, plans to introduce a personal income tax on wealthy individuals in 2022, its Finance Ministry said last Sunday, according to Reuters.

Earlier this year, when the first wave of the pandemic came in tandem with deteriorating oil prices, the International Monetary Fund (IMF) estimated that the GCC countries would lose a quarter a trillion dollar this year from revenues from oil exports.

The estimate was based on a scenario that saw a recovery towards the end of the year. With a second wave of the pandemic, and oil prices going down again to stand at below $40 a barrel, these losses might be revised to indicate billions more of national incomes evaporating.

The IMF previously forecast that the Gulf economies could shrink by three per cent on average, which it might review now to stand at an even higher percentage.

The impact of the double squeeze is not the same on the six countries of the GCC. While Qatar has more accumulated income, it has also been suffering from a boycott by its neighbours since 2017. Doha has, however, found room to support its ally Turkey with billions of dollars, and last week it also provided a billion dollars to cash-strapped Oman.

The UAE might be the least hurt by the squeeze, with its budget deficit of around six per cent of GDP. This is because the Emirati economy is the most diversified among the GCC countries, with energy revenues being no more than a third of national income, while for the rest it constitutes between 70 to 90 per cent.

Almost all the GCC governments have had to borrow to cover their budget deficits, and some have had to issue sovereign bonds for the first time. The six countries have thus far borrowed more than $50 billion, while estimates put expected government borrowing at $100 billion.

How this is reflected in the lives of ordinary people also varies from one country to another, but there are common factors like the restructuring of government bureaucracy, the main employer of Gulf citizens, and the delay or postponement of projects, which impacts local businesses.

A professor of political sociology in a GCC country told Al-Ahram Weekly that the nature of the social fabric and the political system in the GCC made it unlikely that the economic squeeze would have any impact on the indigenous population.

“Tribal and family bonds between local citizens, combined with the unique relationship type between the rulers and their peoples, make Gulf societies immune to the developments witnessed by other countries in the region,” he commented.

People anticipate that changes are inevitable, however, even though they believe the policies of their governments will not deprive them of most benefits. Even so, that might not be plausible, as structural changes in the Gulf economies will likely mean some perks will nevertheless have to disappear.

However, the Gulf professor said that “basic services like health and education or housing will not be affected … On the contrary, governments will invest more in these sectors as part of keeping public spending up to encourage the economy to grow.”

Talking to ordinary people in the major Gulf cities indicated that people were aware of the hardships likely to be faced due to the pandemic, low oil prices, and other factors. But there was a trust in their governments that these “will be doing the right thing” to take them through these difficult times.

If this is true for local citizens, the case is different for expatriate workers, however.

Hundreds of thousands, if not millions, of immigrant workers have already left the Gulf countries or are preparing to do so. The hope of recovery after the first wave of the pandemic is fading, and its impact will be felt back home in their original countries.

The World Bank has previously projected that remittances by migrant workers to low and middle-income countries will drop by 7.2 per cent to $508 billion in 2020 followed by a further decline of 7.5 per cent to $470 billion in 2021. These estimates will now be revised down, meaning that labour-exporting countries will suffer losing more billions of dollars in the coming months.

The GCC countries host almost a fifth of the global immigrant work force, mainly from Asia and some Arab countries, as well as fewer from western countries.

Tens of billions of dollars used to flow annually from the GCC countries to India, Bangladesh, the Philippines and some Arab countries. Though these countries might have witnessed a short-lived spike in remittances from immigrant workers in the Gulf, a steep decline now looks inevitable.

One Dubai-based banking analyst explained the recent increases in remittances by saying that “most of those leaving the Gulf for good transfer all their savings back to their home countries, which is more than their normal monthly or annual remittances.”

This trend is continuing and will probably increase with more job cuts in the Gulf.

The global economic recovery is now about to be reversed by an expected second recession, and this will dampen global oil demand, leading to further declines in oil prices. The increased squeeze on the Gulf economies will make it harder for governments to avoid painful policy shifts.

As one western observer put it, the impact will not be a blanket squeeze of the same level, as some countries will be more affected than others. The least-affected will be the UAE, followed by Saudi Arabia, then Qatar followed by Kuwait, and then Oman and Bahrain.

However, all expatriates in the GCC countries will feel the squeeze far more than locals.

*A version of this article appears in print in the 5 November, 2020 edition ofAl-Ahram Weekly

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