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As oil prices reach seven-a-half-year highs, a number of countries in the Middle East have unveiled fiscal measures designed to balance their budgets after two years of pandemic-related spending.
Saudi Arabia, the Gulf’s largest economy, in mid-December announced that it expected to post its first budget surplus in eight years in 2022.
The government has estimated that it will achieve a surplus of SR90bn ($24bn) this year, equivalent to 2.5% of GDP. This comes after the Kingdom recorded a deficit of 2.7% of GDP last year, which followed an 11.2% deficit in 2020 as Covid-19 weighed heavily on the economy.
With oil prices currently sitting above $100 a barrel – levels not seen since 2014 – the anticipated turnaround will be driven by both an increase in revenue and a reduction in spending.
Revenue is forecast to increase by around 12%, to SR1.05trn ($266.7bn).
Despite this increase in revenue, largely driven by high oil prices, Saudi government expenditure is budgeted to fall by 6%.
Mohammed Al Jadaan, the minister of finance, told local media that the surplus would be used to bolster government reserves hit by the pandemic, support national development funds, strengthen strategic economic and social projects, and partially repay debt.
In terms of the latter, the government has forecast public debt will decline from 29.2% of GDP to 25.9% this year, while the economy is expected to grow by 7.4% in 2022, up from 2021’s expansion of 2.9%.
This plan may be compared to the fiscal rationalisation strategy of neighbouring Bahrain, which late last year released a plan designed to balance the budget by 2024.
In addition to doubling the country’s value-added tax (VAT) to 10%, the plan includes a reduction in expenditure, a streamlining of cash subsidies to citizens and the introduction of new revenue initiatives.
Although Bahrain was previously aiming to balance the budget by 2022, it was forced to revise this target as a result of the economic disruption created by the pandemic.
“While the Covid-19 pandemic resulted in prolonging fiscal balance targets to beyond 2022, the government’s discipline in curtailing expenditure raises expectations that it will narrow the fiscal deficit gap and achieve a fiscal balance in the coming years,” Yaser Alsharifi, group chief strategy officer of the National Bank of Bahrain, told OBG in January.
“Furthermore, amid the economic recovery trend in 2021 and a higher oil price environment, one could expect a robust economic performance in 2022, which will further support the government’s fiscal situation.”
Elsewhere in the region, a number of countries are looking to different strategies to improve their respective fiscal situations.
In late January the UAE announced that it would introduce a tax on corporate earnings. The 9% tax, applied to earnings over Dh375,000 ($102,000), will come into force in July next year as the country seeks to align itself with international tax standards.
The tax will also help to diversify the UAE’s budget revenues and further reduce its reliance on hydrocarbons.
The introduction of the corporate tax is the latest in a series of fiscal measures introduced by the federal government. In 2018 the country implemented a 5% VAT, which was followed by a 5% Customs duty on imports.
Despite the planned introduction of corporate tax, the country remains a competitive business destination. Companies operating within free zones remain exempt from the tax, while there is no personal tax.
The introduction or raising of taxes is an approach that a number of Gulf countries have employed in recent years.
Saudi Arabia increased its VAT to 15% in 2020, while in April last year Oman introduced its own 5% VAT.
Qatar and Kuwait are the only two GCC members yet to introduce VAT following the signing of the Common VAT Agreement in 2016.
These efforts to improve their fiscal situation come as countries in the Gulf look to recover from the pandemic and reduce their reliance on hydrocarbons.
For a number of years governments across the region have sought to diversify their respective economies by investing heavily in non-oil industries and renewable energy.
With the pandemic resulting in massive government spending to address the resultant health and economic fallout, there were concerns about how this would affect long-term economic development plans.
Although the initial stimulus resulted in much spending being directed towards the health care sector and financial assistance for citizens, Gulf countries remain generally committed to their transformation strategies, with some even looking to accelerate them.
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As the largest economy in the Arab world, Saudi Arabia’s priorities are to ensure that its budget remains in surplus, bolster government reserves, continue to spend prudently, invest in the non-oil sector to support diversification of the economy and repay outstanding debts gradually.
And while Saudi Arabia and other oil producers are currently benefiting from rising revenues, they are also having to pay bigger import bills for food and everything else. So rising oil and gas prices could to some extent be offset by rising prices of imports.
Once the Ukraine crisis is over, oil prices will eventually decline to a level ranging from $95-$100 a barrel. This automatically means a slight reduction of oil revenues.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London