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Prepared by Ali Alreshan, Sohaib Shahid, Gazi Shbaikat (lead), and Vahram Stepanyan, under the supervision of Padamja Khandelwal. Research and editorial support was provided by Tucker Stone and Diana Kargbo-Sical.
The analysis in this paper is based on budgetary expenditures. Due to data limitations, the analysis does not include extra-budgetary spending by governments or by non-financial public entities.
See, for example, “Tax Policy Reforms in the GCC Countries: Now and How?”, 2015, and “Diversifying Government Revenue in the GCC: Next Steps”, 2016.
Further progress to increase non-oil revenue was achieved in 2017 mostly through new/higher fees for government services in all the GCC countries and higher excise taxes in the UAE and Saudi Arabia.
The group includes: Algeria, Angola, Iran, Kazakhstan, Mexico, Nigeria, and Russia.
This is also why social benefits as a share of GDP are much lower than in other oil exporters and EMs (Figure 2).
The correlation between movements in oil prices and government spending was much lower in the 1990s.
Some of these benefits are captured in the category of other current spending or may be outside the central government budget.
Per capita growth in the long term is estimated at about ¾ percentage points higher following fiscal reforms in advanced counties and almost 2½ percentage points higher in developing countries (IMF, 2015a).
A review of major consolidation episodes between 1945–2012 shows that countries have on average adjusted by 1.6 percent of GDP annually for an average period of 3 years. The larger the initial deficit, level of public debt, and inflation, and the lower the initial growth, the larger the size of adjustment. Adjustment size also increases with the duration of the consolidation period when accompanied by an easing of monetary conditions and an improvement in credit conditions (Escolano and others, 2014). Other reviews of previous adjustment cases point to the tendency of countries to frontload adjustment—more than 50 percent of adjustments took place in first year (Tsibouris and others, 2006)
Countries that increased the share of indirect taxation, matched by lower direct taxation, saw their growth accelerate (IMF 2015a), consistent with other findings in the literature that corporate income taxes have the most negative effect on growth, followed by labor income taxes, then consumption taxes and property taxes (see for example Arnold and others, 2011).
For instance, Chile accompanied fiscal adjustment in the 1970s and 1980s with PFM reforms (strengthening of budget control and cash management systems), introduction of MTFF and establishment of copper stabilization fund, establishment of large taxpayer units, and implementation of a large privatization program and labor market reforms. Ireland introduced in the mid-1990s multi-year budgeting, a Fiscal Responsibility Act, a budgetary rule, a debt rule, pension reforms, large privatization and PPPs programs, and labor market reforms.
Adjustments were identified as declines in the level of the nominal non-oil primary balance rather than as declines in the balance as share of non-oil GDP to avoid the impact of movement in the latter which may overstate or understate the size of adjustment. 14 adjustment cases were identified using this criterion; all 6 countries in the 1980s, Kuwait, Oman, and Saudi Arabia in 1990s, and all countries except Bahrain in the ongoing downturn since 2014. The analysis however, reports the change in both the nominal non-oil primary balance and the non-oil primary balance as a share of non-oil GDP during these adjustment cases.
Oil revenue declined by more than 80 percent during the oil price downturn 1982–86, by 22 percent during 1991–94, 27 percent in 1998, by 30 percent in 2009, and by 70 percent during 2014–16.
The 2000s adjustment includes some consolidation in 2001 and during financial crisis in 2008/9 but were not reported in table as they did not meet criteria of consolidation for two years and more than 5 percent.
Over the long term, anchoring the growth rate of expenditures in line with growth in non-oil revenue could also play a role in reducing the exposure of GCC countries’ fiscal positions to oil price volatility. IMF (2016b) examines non-oil revenue measures that can help support fiscal adjustment in GCC countries.
According to World Development Indicators (World Bank-2016), the share of population between ages 0-24 is 33 percent, on average, among all the GCC countries. Saudi Arabia has the highest share of 40 percent of total population, while the UAE has the lowest share of 25 percent.
For example, Saudi Arabia has restored government employee allowances that were reduced last year.
This paper uses U.S. retail prices as benchmark prices, in line with earlier IMF work (see, for example, IMF, 2015, 2016, 2017).
IMF (2017), based on a sample of Arab countries, estimates that a removal of subsidies can provide a cumulative growth dividend of about 2 percentage points over six years for every percentage point of GDP in reduced subsidies if the resources are redirected into productive investment.
The Emirate of Abu Dhabi started reforming electricity and water subsidies in 2014.
An automatic price mechanism is already in place in Qatar.
The IMF’s Fiscal Affairs Department has developed the Public Investment Management Assessment (PIMA) – a comprehensive framework to assess the quality of public investment management and identify the priorities for reforming it (IMF, 2015b) – that could be useful for governments in the GCC countries.