State of the Arab World Economy report 2016: Diversify, tax, slash subsidies

Published December 15th, 2015 - 05:18 GMT
Doha's spiral mosque, located in the Qatar Islamic Culture Center. (Shutterstock/monotoomono)
Doha's spiral mosque, located in the Qatar Islamic Culture Center. (Shutterstock/monotoomono)

The GCC countries will enjoy better budget balances but face some turbulence if there is a reduction or removal of subsidies and/or implementation of taxes, a report released on Monday said.

The report, entitled "The State of the Arab World Economy in 2016", released ahead of today's opening of the Arab Strategy Forum, which is part of Mohammed bin Rashid Global Initiatives, said the impact of reducing or eliminating subsidies and increasing taxes "will depend on whether such policies are indeed implemented, and on how significant and quick the changes are".

"The UAE has successfully implemented some rationalisation of energy prices for the consumer with no difficulties, but it is not yet clear whether such progress will be replicated in other countries. Should such policies spread across the region, the results might eventually include better budget balances, but some difficulties," said the report. 

The report prepared for the eighth Arab Strategy Forum in collaboration with Foreign Affairs magazine, said foreign direct investment, FDI, flows to the wider Arab region will diminish as a result of the decrease in oil prices but this will have a minimum effect on the countries that enjoy diversification of the economy such as the UAE, Qatar and the wider GCC region.

The report suggests that while the Arab world's economic problems are likely to compound in 2016 rather than improve significantly in the backdrop of "low oil prices, persistent failure to diversify economies, civil wars and their spillover effects, and less than average educational opportunities", the Gulf countries, will do better than their neighbours elsewhere in the region.

"Over a slightly more extended timeframe, the answer will depend on where oil prices go. If oil remains at $45 bbl, the region will be capital-short. On the other hand, if the price tops $70 bbl over an extended period, the energy-exporting countries will build up a $6 trillion treasure chest over the next 10-15 years. If oil returns to $100 bbl, that number goes up to $9 trillion. Determined leaders can buy their way out of a lot of problems with that kind of money," it said. Offering a glimpse of the future, the report recommends solutions that can be adopted to tackle the geopolitical and economic challenges that are likely to impact world strategies in 2016.

Among its most dominant observations on the state of the world in 2016, the report forecasts the potential for a new proxy war in the Middle East with the current turbulences likely to escalate well into 2016. Analysing the war in Yemen, the report reveals that the Coalition States can claim to have achieved their combat objectives. However, a durable settlement would require external diplomatic intervention as well as a serious commitment by local parties.

The report highlights the advancement of Daesh in recent years and its transformation from a local faction into a leading force globally. It suggests that the major challenges the region will face economically as a result of the large displaced refugee population, especially Jordan, Lebanon, and Kurdistan and potentially Tunisia, Egypt, Turkey and Iran.

Analysing the economic state of Egypt, the report forecasts a slower growth given the increasing challenges with regard to tourism.

The report expects a slowdown of Chinese investments in foreign energy resources during 2016, both for domestic reasons and because lower oil prices will make fewer oil projects attractive.

But the scarcity of good domestic investment opportunities inside China might lead to capital outflows, some of which will presumably end up in the Middle East. Private overseas Chinese capital may begin to flow to the Middle East as also to other parts of the world, and luxury real estate - both commercial and residential - could be a prime target of these investments.

By Isaac John

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