The World Bank (WB) has reported observing heavy GDP losses across all MENA country groups. It has forecast the GDP level in 2021 for developing oil importers at 9.3 percent below the counterfactual GDP level without the pandemic.
The counterfactual decline for GCC countries is 7.7 percent and 4.4 percent for developing oil exporters, the bank said in its April 2021 report..
“The sharpest declines in actual government revenues in 2020 were among the GCC and developing oil exporters, which was unsurprising given the collapse in oil prices,” the report said.
Trade sector hit
There is no doubt that the essential containment measures have harmed the world economy and trade, with severe consequences for GCC countries that rely on imports. The result is supply-side issues and disruptions to global value chains that create production problems in GCC economies.
In addition, patterns of demand are changing, with the market overall shrinking. As a result, production and productivity are dropping.
In this context, Jean Claus, CEO of Euler Hermes in the Middle East, asserts that COVID-19 hit the manufacturing sector hard on a global scale in 2020, resulting in a massive reduction in energy demand which adversely affected the GCC economies leading to a 5 percent contraction of regional GDP.
Moreover, the slump in oil and gas exports was accompanied by a plunge in tourism in the wake of the pandemic.
In an exclusive interview with Trends, Claus said that the GCC economies are highly dependent on global oil prices. Therefore, higher oil prices naturally mean higher export revenues for the oil exporters.
On the other side of the trade balance, imports also get somewhat more expensive because the producers of those goods have to pay higher energy import prices which they partially pass on to buyers. But on balance, the impact of higher oil prices on the GCC exports is much higher than the GCC imports.
However, the impact of the increasing oil prices on the GCC exports is far greater than the impact on GCC imports. As a result, the GCC economies’ trade and current account balances will improve: deficits would shrink, and surpluses will widen. Conversely, declining oil prices will lead to a deterioration of external balances, he said.
Growth expectations
Claus added that the GCC region’s real GDP is expected to grow by 2.5 percent in 2021, owing in part to “windfall” revenues from higher-than-expected oil prices, but also to a relatively quick vaccination process that has allowed the economies to reopen, including tourism.
In 2022, tourism should also significantly boost growth, resulting in a recovery in the non-oil sector as domestic consumption and investment demand improves. Thus, in 2022, we expect 3.4 percent increase in growth.
Value-Added Tax
Most Arab countries, including Saudi Arabia, Oman, and Kuwait, have recently decided to raise value-added tax, which some see as a necessary measure for boosting economic activity and keeping markets afloat.
For those countries that have previously implemented and raised the value-added tax, Claus believes it was a good move in the right direction.
The GCC governments must reduce and eventually eliminate their dependence on volatile oil revenues, as the last six years have shown, he added.
Moreover, oil prices are likely to stay lower on average and to decline in trend over the next decade, against the background of the shift to greener energy in large parts of the world, which will also lead to a positive impact on the trade volume.
On the other side, the alternative to VAT would be massive fiscal consolidation that could choke off the economies and result in lasting stagnation or decline, including decreasing trade.