Moving ahead full stride

The wave of protest and political change in the Maghreb and some countries of the Levant has, without a doubt, also impacted the Gulf States.

By Nael Shehadeh (IN FOCUS)

Published: Sat 26 Nov 2011, 8:57 PM

Last updated: Tue 7 Apr 2015, 9:54 AM

As a result, throughout 2011, the Gulf Cooperation Council (GCC) countries have responded to the unprecedented challenge mainly with a number of economic and financial policies.

Upon his return from back surgery in the United States, King Abdullah of Saudi Arabia announced two wide-ranging social packages of approximately $130 billion, mainly focusing on generating employment opportunities for young and unemployed Saudis. This is a key area given that the kingdom faces a severe unemployment problem with the public sector currently providing approximately 80 per cent of the total employment of Saudi nationals. In contrast, the number of Saudi nationals employed in the private sector only represents 10 per cent of total employment. With the high number of Saudi youth entering the job market every year, the public sector will continue to struggle to absorb incoming fresh graduates. The packages announced by the King are therefore aimed at stimulating private sector employment generation.

For the kingdom, there are also more medium to long-term budgetary issues to consider. While for the moment Saudi Arabia can easily accommodate large spending ventures, the medium-term pressure on the budget and the corresponding need for a sustained high oil price to support continued outlays will increase the more such spending allocation becomes the norm rather than the exception. Maintaining an upward curve on current commitments is thus subject to question marks for the kingdom in the long run. The bottom line is that in order to safeguard further growth, Saudi Arabia will have to ensure that its private sector leads the growth creation process, including in the employment of nationals. At this stage, the economic packages announced do little to put the kingdom on this path. The United Arab Emirates is in a fairly stable economic position, yet the country faces similar difficulties as other GCC states, including high food prices and rising economic costs. Economic incentives announced so far include new subsidies on bread and rice, a promise of an increase in military pensions by 70 per cent, and a pledge of $1.9 billion in housing loans (of which almost $1.6 billion are allocated for the northern emirates). The government of Abu Dhabi has also pledged roughly $600 million of housing loans to its citizens, which should amend some of the lack of social housing for nationals. Not much can be done towards food inflation as most of this is imported inflation. However, deeper economic reforms in order to create further opportunities for UAE nationals in the private sector are expected to be in focus.

The government of Qatar pledged a package of $8.1 billion including salary hikes in both the public and private sectors (to the tune of $2.75 billion) and increase in pensions as well as benefits for private sector workforce. Given that less than 10 per cent of Qataris work in the private sector, the increases will mainly, although not exclusively, benefit the local community. The state of Qatar enjoys a very different situation from its neighbours, with an unemployment level estimated at around 0.5 per cent, a recent GDP growth rate of 15 per cent and the highest GDP per capita in the world. There are as a result no significant social tensions to be concerned about. More efforts thus are needed to promote young Qataris in entrepreneurship as a way to encourage nationals to migrate to the private sector. One way would be to provide interest-free loans to young business entrepreneurs and only schedule reimbursements on interest once they break even.

The government of the Sultanate of Oman pledged $1.3 billion in new social benefits in addition to the creation of 50,000 new jobs. The financial package includes increases to both public sector wages and pensions. There is also the pledge by the other GCC states to come to the aid of Oman with an additional $10 billion over the coming years. A unique aspect as far as Oman is concerned is that the ruler, Sultan Qaboos bin Said, also announced a number of political reforms including a review of the constitution and a cabinet reshuffle following corruption claims, and promised to give more legislative power to the elected parliament.

Changes announced in Kuwait include a grant to every citizen of $4,000 and an increase of subsidies in regard to certain food staples. The public sector already represents a large proportion of the workforce in the GCC, but Kuwait possesses the highest public sector workforce out of the GCC with 93 per cent. Institutions play a more important role in Kuwait and tensions and political inertia have blocked fundamental attempts to adopt pragmatic and necessary policies. Indeed, there is an important split between the parliament and the ruling family, stopping most development plans. Any changes in the foreseeable future will have to come after resolving this institutional deadlock.

Bahrain is under a more pronounced situation altogether given that the initial peaceful demonstrations for social improvements and accountability of elected officials deteriorated into a sectarian and violent confrontation. The government has tried to put forward some social policies including a $6.6 billion package to construct new homes. Bahrain is further expected to benefit from the $10 billion package announced by its GCC neighbours. The departure of international firms and investors has already seriously undermined Bahrain’s position as a financial hub in the GCC and its ambition to be an attractive point of investment in the region, and it will certainly struggle to regain international confidence. In this context, Bahrain looks likely to remain dependent on regional assistance.

Overall, it can be said that major challenges appear on the horizon for the countries in the GCC despite their largely positive financial position. Youth unemployment remains a key challenge in the GCC, currently standing at 23 per cent. There is a need for more entrepreneurship and private sector stimulations if the GCC states want the future generation to be an active part of the growth process. This is even more of a necessity if the state wants to be able to absorb the new workforce that is coming on the job market every year. The public sector cannot remain the preferred option any longer. This also points to the additional need for continued economic diversification in order to decrease the dependency on oil receipts.

Only economic diversification efforts can decrease some of the vulnerability to oil price fluctuations and help in stabilising some of the inflation rates across the GCC.

Nael Shehadeh is an Associate Researcher at the Gulf Research Center Foundation

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