Austerity, subsidy cuts, and diversification are buzz words in the Gulf states right now.

Market Watch Blog AGSIW | Karen E. Young | Feb 12, 2016

Austerity, subsidy cuts, and diversification are buzz words in the Gulf states right now. While budget deficits are projected across the Gulf Cooperation Council for 2016, the intensity of economic reform has so far been mild and measured. Governments are testing public appetite and consent for reform, what some analysts have termed a renegotiation of the rentier bargain, and perhaps more euphemistically, the Gulf social contract.

With this edition, Market Watch introduces our Economic Reform Barometer, which will monitor initiatives taken by Gulf states as they seek fiscal, monetary, and labor policy changes to meet the challenge of reduced state revenue from natural resources. We will update the barometer on a regular basis. The key trend is a reversal in fiscal expenditure, in a major shift in the way states in the GCC have been steadily increasing spending on public sector wages, infrastructure, and social services over the last decade.

For example, government spending on public sector wages accounted for as much as 45 percent of total outlays in Saudi Arabia, according to the International Monetary Fund. For Gulf states, maintaining public sector wage expenditure, without increases for the thousands of young job seekers entering the workforce every year with a preference for government employment (some 300,000 per year in Saudi Arabia), will present a challenge.

Chart 1: Budget Reversals: Changes in Fiscal Expenditure; Source: HSBC Research, Regional Central Banks

Fiscal Policy Measures

The greatest number of changes across the GCC states have been on fiscal policy. The reduction of subsidies, particularly in gasoline, has occurred quickly, with momentum from the fall of oil revenue a publicly understood driver necessitating reforms. There is renewed discussion, and nominal agreement, across the GCC to institute a value-added tax by 2018, though previous initiatives have not been implemented.

Chart 2: Gasoline Prices per Liter (in U.S. dollars); Source: HSBC Research, Bloomberg

Chart 3: Tax Take, Government Tax Revenue as Percentage of GDP; Source: HSBC Research, IMF

Fuel SubsidiesTax IncreasesPublic Sector Lay-offsElectricity, Water Subsidies 
Oman33% price increase for premium fuel, 22% for regularExpected 3% increase in corporate tax
Saudi Arabia50% or > price increaseNew land taxNone announced, though the Ministry of Labor reports complaints of unpaid workers from construction firms with government contractsIncreases for residential and corporate users for electricity
KuwaitUnder discussionPlans announced for tax on local and foreign companies, to increase fiscal revenue by $596,840,000, 2 billion Kuwaiti dinars (8% rise)Reductions in staff (as much as 34%) at Kuwait Water and Electric Authority;Kuwait Airways has reduced staff of 1,350 Kuwaiti nationalsUnder discussion
Qatar30% petrol price increaseStaff reductions at Qatar Rail, Qatar PetroleumIncreased the price of residential electricity and water and more than doubled the cost of its postal services
United Arab EmiratesSubsidies reduced; Monthly price set by board; Highest price across the GCCAbu Dhabi raised water tariffs; tariffs in Dubai are generally higher for water and electricity
Bahrain60% price increase; cuts in food price support as wellRaises import duty on tobacco from 100% to 200%Prices will rise for all expatriates, industrial and private sector on both water and electricity


Monetary Policy Measures

Bond issuesSWF asset salesCentral Bank FX salesCurrency Peg
OmanCommercial lending to government; first sukuk issuedNo change
Saudi ArabiaYes, domestic issues in summer 2015, international expected 2016YesNo change
KuwaitNo change
Qatar$15 billion debt issuance Sept. 2015No change
United Arab EmiratesYes, by emirate, not federalYesNo change
Bahrain$1.5 billion Nov. 2015, at higher premium than 2014 issueNo change

Stay tuned as the policy environment evolves.

This article was originally published by the Arab Gulf States Institute in Washington (AGSIW)

Dr Karen E Young is a former senior resident scholar at the AGSIW. She is a resident scholar at the American Enterprise Institute in Washington and a senior advisor at Castlereagh Associates.