GCC urged to develop more export industries

New ICAEW report says Gulf states are more dependent on commodity exports than they were 10 years ago despite diversification agenda

Falling oil prices will pose a challenge to GCC oil exporters unless governments step up their diversification efforts and develop more export industries, according to a new report by the Institute of Chartered Accountants in England and Wales (ICAEW).

In its latest quarterly Economic Insight report, the accountancy and finance body said expanding competitiveness across a broader range of export industries will require improvements in education, skills and innovation to be successful.

It said GCC economies are now more dependent on commodity exports than they were 10 years ago despite the diversification agenda.

Commodities still account for 86.8 percent of Saudi Arabia's total goods exports by value and nearly two thirds of the UAE's.

Even Bahrain, with the fewest hydrocarbon resources of any GCC economy, relies on commodity exports for nearly three-quarters of goods exports, the report said.

Vernon Soare, executive director, ICAEW, said: "With global oil prices forecast to fall over the medium-term, the need to broaden the industrial base is becoming more pressing.

"While the GCC economies have the infrastructure and financial means to advance their manufacturing output and export potential, more attention needs to be paid to fostering innovation in order to compete more effectively in international markets."

Currently the UAE, Bahrain and Saudi Arabia rank in the top half of the World Bank's Knowledge Index, a comparison of 145 countries and their ability to develop modern competitive industries, coming 41st, 52nd and 53rd respectively.

However, the report said that with competition from other emerging markets intensifying, the GCC countries must now improve education, increase labour productivity and attract more foreign direct investment to progress their skill- and technology-intensive manufacturing sectors.

Improving the pace of labour productivity, or output per worker, will also help GCC economies to prosper in the cut and thrust of international markets, the study, produced by ICAEW's partner, the Centre for Economics and Business Research, added.

Despite strong GDP growth and high oil prices, several of the GCC economies have experienced falling labour productivity for some time, a trend which accelerated after 2009.

Average annual labour productivity growth in Kuwait fell from 6.9 percent in the five years to 2007 to zero percent in the five years to 2012.

In Bahrain, labour productivity has actually fallen in recent years, declining by one percent in 2012 compared to the previous year.

However the report said the amount of output produced per worker is improving in the UAE with marginal productivity growth recorded in 2011 and 2012. Saudi Arabia, Oman and Qatar have also recorded improvements in productivity over the five years to 2012.

Charles Davis, director, Cebr, said: "Strong investment will continue to see growth across the GCC outpace the rest of the world, but the prospect of falling oil prices due to increasing global supply, will put pressure on the GCC economies to diversify and grow their high-tech manufacturing industries.

"Fortunately, the region will remain a key destination for foreign direct investment flows over the coming years, providing a welcome boost to labour productivity by introducing domestic workforces to new technologies, production techniques and management procedures."

The report also showed the pace of expansion in Saudi Arabia is expected to remain strong with the economy forecast to grow 4.3 percent in 2014 while economic growth of 4.5 percent is expected in the UAE this year.

Sustained investment in infrastructure will support growth in Qatar over the next few years, with GDP expected to rise by 6.3 percent in 2014 while GDP growth in Oman is expected to fall 3.6 percent in 2014 as growth in oil production slows, the report said.

It added that growth in Bahrain will dip slightly in 2014 as it suspends expansion of its main oil field while GDP growth in Kuwait is expected to reduce to 2.5 percent in 2014, down from three percent in 2013, due to weaker oil production.

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