The Middle East economy is expected to grow by 2.4 percent in 2018, after modest contraction this year, and would further expand at a faster 4 percent in 2019, a report from accountancy and finance body ICAEW said.
The economic outlook is however weighed by a possible extension of OPEC’s output cut deal, which ends on March 2018, and could further dent the public finances of the region’s major oil producers that belong to the group, ICAEW said.
“Governments across the region are unlikely to find any solace in the oil market, which looks likely to require an extension of OPEC’s production cut deal merely to stabilize prices around $45-50. In this case governments would come under further pressure to prioritize public spending in growth-enhancing areas and find new revenue sources in order to stop public debt from accelerating,” the report, produced in partnership with Oxford Economics, noted.
The Gulf Cooperation Council’s decision to implement value-added tax (VAT), as one way to generate non-oil revenue, by January 1, 2018 could dim the Middle East economic horizon as it translates to higher cost of living in households affected by the new levy.
“Together with the impact of a weaker dollar on import costs, these pressures are expected to drive consumer price inflation at the GCC level from just 1.2 percent in 2017 to 4.7 percent in 2018, and 3.5 percent in 2019,” the report said.
The IMF however said the introduction of VAT across the GCC would boost the region’s GDP by about 1.5 percent. The UAE on Sunday implemented a federal tax on tobacco products and energy and fizzy drinks, following Saudi Arabia’s lead which introduced excise taxes on the same items earlier this year.
“GCC countries need to shift focus toward deeper, multi-dimensional fiscal policy and institutional reforms. These will help to secure long-term fiscal sustainability, and also support the development of vibrant private sectors,” Tom Rogers, ICAEW Economic Adviser and Associate Director of Oxford Economics, said.
“Furthermore, by boosting investor and market confidence, they can also start a virtuous cycle of stronger investments, including FDI, and output growth in the near term.”
The report also mentioned that while Oman is benefiting from trade diversion, due to the trade blockade against Qatar by Gulf neighbors, the windfall would be modest and temporary “and does little to address the more fundamental challenges the economy faces.”
“Oman’s government has not been as aggressive in cutting expenditure recently as other GCC economies, and as a result the squeeze on spending is having to last longer,” the report said.
“Getting the deficit under control soon in Oman is critical, and if the OPEC deal needs to be extended beyond 2018 Q1 this will require yet more difficult policy choices to be made by the Omani government in order to achieve financial stability,” Michael Armstrong, FCA and ICAEW Regional Director for the Middle East, Africa and South Asia, said.