Crisis Austerity in Oil-Rich Gulf May Test Political Balance

Photographer: Duncan Chard/Bloomberg

The coronavirus pandemic is hitting Gulf Arab economies hard and emboldening the region’s dynastic rulers to push through unpopular fiscal measures that will impact their citizens. The question now is how long their resolve will last.

Saudi Arabia, the biggest Arab economy, tripled its value-added tax and trimmed allowances for government workers. Oman cut salaries of new state employees.

Even in the United Arab Emirates — a financial and commercial hub with the Gulf’s most diversified economy — there are calls for overhauling a so-called “rentier state” model, which depends on hydrocarbon wealth to support government jobs for citizens, generous benefits and a largely tax-free environment. A prominent Emirati lawyer recently called introducing corporate tax “unavoidable.”

Yet for all the talk of accelerating overdue changes, there were also moves to protect state jobs and shield nationals employed in the private sector, casting doubt on whether the downturn will prompt deeper reforms that outlive the crisis.

“The global economic recession has become a trigger for real reconsideration of the fundamentals of the economic models in the Gulf,” said Ayham Kamel, head of Middle East and North Africa at Eurasia Group. “In Saudi, Crown Prince Mohammad bin Salman wants change, but it’s far from easy to kill off the rentier-state model.”

Austerity will affect Saudis like Mohammed, who works for the state, like almost two-thirds of his compatriots. When his pay was cut by 1,000 riyals ($266) a month after a cost-of-living allowance was canceled, the 29-year-old doctor said the measures were necessary. But he also hopes they’ll be reversed later, like they were in past crises.

“If it’s temporary, one or two years, I can adapt,” he said, asking to withhold his full name. “My concern is that more taxes will be permanent — and that will be an issue.”

Thrift may be in place for longer this time given the fiscal outlook. And with less money to spend on citizens, governments could face increased public scrutiny of how their oil wealth is used.

In an unusual move for Saudi Arabia’s state-friendly media, local newspaper Okaz recently published two columns questioning the policy changes.

“Citizens worry that the pressure on their living standards will outlast the current crisis,” wrote columnist Khalid Al-Sulaiman. “Increasing VAT from 5% to 15% will have a big effect on society’s purchasing power and will reflect negatively on the economy in the long term.”

Fiscal Woes

Almost all the countries in the region are expected to run budget shortfalls of 15%-25% of economic output, leading to a build-up of debt, dwindling reserves, and tough choices. Saudi Arabia’s economy is forecast to contract by 2.9% this year, the most since 1999, according to Bloomberg Economics, with risks of an even deeper downturn.

Saudi Arabia Triples VAT, Cuts State Allowances Amid Crisis