Crumbling Prices Gave Gulf States a Terrifying Glimpse of a post-Oil Future. Can They Adjust? | Opinion

"My grandfather rode a camel, my father rode a camel, I drive a Mercedes, my son drives a Land Rover, his son will drive a Land Rover, but his son will ride a camel."
This was the well-known saying by Sheikh Rashid Bin Saeed Al Maktoum, a key visionary of the modern United Arab Emirates (UAE), prophesying oil won't fuel Gulf economies forever.

Decades after Sheikh Rashid uttered the famous line, the unprecedented dual shock of plunging oil prices and the COVID-19 pandemic jolted the Arab states of the Gulf into kicking off key reforms. On May 11, Saudi Arabia announced austerity measures, "tripling its VAT to 15 per cent and cutting a cost-of-living allowance for government workers," Bloomberg reported. Bahrain, meanwhile, slashed ministries and government agencies spending by 30 percent.

Still, even this might not be enough. Bloomberg's Chief Middle East economist Ziad Daoud believes more needs to be done. "It is a master shock. A sense of urgency is needed but we have not seen serious measures so far," he told me. Indeed, systemic issues faced by the $1.6 trillion Gulf economy remain unaddressed: not just its dependency on fossil fuels, but the notorious rigidity of its labour market, segmented between citizens and foreign workers, local monopolies, low innovativeness and weak business environments.

The International Monetary Fund (IMF) believes the clock is ticking for Gulf states as the world is "gradually moving away" from oil. "The region's financial wealth could be depleted by 2034" and the need for reforms "more urgent" than previously expected, it said.

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A social contract in doubt

Even as the region's economy stumbles and a seismic change looms, decision-makers are reluctant to act, given the vast political implications. For decades, Gulf states have relied on a paternalistic model of governance to ensure political stability: profits generated by the oil and gas sector are redistributed to citizens via generous wages, subsidies, social benefits and modern public infrastructures.

But "the 'magic decade' of 2003-2014 when oil revenues surged is over," writes Karen Young, a resident scholar at the American Enterprise Institute (AEI). "Neither the model for government revenue nor spending patterns" have been adjusted as states expenditure stayed flat following the oil bust of 2014, to an average of $550 billion per year, while revenues decreased drastically.

"Breaking these things is a political decision, not an economical one. People know it has a political cost to take into account, maybe they are not willing to do that now," Daoud said.

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In Oman, an heavily indebted Sultanate in the south-east corner of the Arabian Peninsula, a financial crisis is fast approaching. Public debts have been multiplied by twelve since 2014 and the government might rapidly run out of options to fund several large budget deficits in the row.

In this context, abruptly scaling down Oman's wide-reaching social welfare system could become a painful imperative to avoid debt overload, a sovereign default or a bailout by neighboring countries, which would presumably come at the cost of a less independent foreign policy.

According to Daoud, however, 2020 is so far eerily similar to the aftermaths of the 2014 oil crisis. "Have we seen any measures that would transform the Gulf's rentier economy to one that is productive? Not really, they are signs that they want to keep the labour market segmented."

So far, priority has not been given to reducing the overwhelming public sector wage bill but rather barring private companies from firing locals and ensuring dozens of thousands of foreign workers who lost their job throughout the crisis will return to their countries of origin.

Top-down or bottom-up

In recent years, Gulf states launched ambitious policies, such as Saudi Arabia's multi-billion 'Vision 2030', to reduce their dependence on oil, increase SMEs contribution to GDP and diversify their economies by developing knowledge-based industries and various sectors ranging from tourism to entertainment, sport, logistics, technology and fintech.

Most of Gulf's diversification strategies, however, rely heavily on public spendings as the private sector has largely failed to expand independently from governmental initiatives. As governments across the region cut down on public spendings amidst the COVID-19 crisis, concerns arise over some projects, such as Neom, Saudi Arabia's futuristic megacity. Oman's government-owned entities have already been requested to "stop the implementation of any new projects."

"Maybe we need such an unbelievable storm to highlight our fragility and the lack of economic diversification made over the past 20-30 years," Kuwaiti investor and advisor Ali Al-Salim told me. "Why aren't we leaders of the solar energy industry? Why are we buying solar technologies from foreign consortiums and haven't developed these ourselves?". He added that the private sector has to work hand in hand with universities on R&D projects.

According to Al-Salim, the private sector remains "addicted" to a rentier model which consists of running profitable foreign brand's concessions rather than innovate locally.

Analysts agree on saying voluntarist governmental policies should aim at providing the right legal framework, facilitate foreign investments and serve as a support for the business community to lead key changes, promote innovation and educate youth on risk acceptance.

On May 02, the realization began to set in in Saudi Arabia's. Riyadh's Finance Minister declared the Kingdom might never go back to "the way things were before" the COVID-19 pandemic. "It's very important that we take very tough and strong measures, and they might be painful, but they're necessary," Mohammed al-Jadaan said. Not long after, on May 11th, Reuters reported that the Kingdom will triple its value-added tax to 15 per cent and suspend a cost of living allowance for state workers.

Less than a century after the first discoveries of oil transformed the region, economic realities of a changing globalized world are beginning to dictate a new social contract between Gulf citizens, governments and ruling families. The question is whether the region can change fast enough.

Sebastian Castelier is a journalist who reports on Gulf countries and South Asia labour migration.

The views expressed in this article are the author's own.​​​​​

Crumbling Prices Gave Gulf States a Terrifying Glimpse of a post-Oil Future. Can They Adjust? | Opinion | Opinion