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Mon 18 Jul 2016 01:49 PM

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GCC gov'ts urged to rethink cost cutting to wipe out deficits

New report says GCC countries are facing budgetary problems which could result in long-term deficits if not addressed

GCC gov'ts urged to rethink cost cutting to wipe out deficits

GCC countries are facing budgetary problems which could result in long-term deficits if not addressed, according to new research by management consultancy Strategy&.

The study said that while every GCC government has announced spending cuts to conserve budgets, conventional cost-cutting is only a short-term fix and could potentially slow a country’s growth over time.

Strategy& said GCC government entities should try to achieve sustainable reductions in their budgets while also reinforcing investment in the services that are essential to long-term security and robust growth.

It said that even if GCC governments can grow non-oil revenues by 10 percent annually over the rest of this decade and the average price per barrel of oil returns to $50, their budgets would still need to be reduced by approximately $100 billion on an annual basis - 7 percent of the GCC’s total GDP - in order to eliminate fiscal deficits.

Fadi Adra, partner with Strategy&, said: “The GCC’s budgetary problems are not a cyclical condition that will resolve themselves with time. The price of oil for example, which contributes to three-quarters of GCC government revenues, has fallen to its lowest levels in over a decade, while the cost and demand for core public services continues to rise."

According to Strategy&, governments must articulate a strategy, transform the existing cost structure, build critical capabilities needed to execute the strategy funded by cost savings and reorganise the operating model for optimal performance.

Rawia Abdel Samad, director of the Ideation Centre, the think tank for Strategy& in the Middle East, said: “Adopting ‘Fit for Service’ initiatives are worth the effort because the leaders of GCC member states cannot simply cut costs by conventional means if they are to transform the cost base of their future governments and create a more sustainable future.

"By adopting a ‘Fit for Service’ approach, GCC governments for example can achieve 20-40 percent reductions in their cost structures.”

Some GCC governments have already taken steps to adopt initiatives aligned with a ‘Fit for Service’ approach, the report said.

In Dubai, for example, the government has worked to develop the appropriate operating models and become more customer-centric, having developed a rating system for all its service delivery channels. Furthermore, Smart Government is a key pillar in the Smart Dubai initiative that aims to improve the city experience for residents and visitors of Dubai with more than 500 current and planned smart services.

Sevag Papazian, principal with Strategy&, added: “It is easy to see why conventional cost-cutting has become the default solution to budgetary shortfalls in the public and private sectors. It is simple to mandate across-the-board budget cuts. However, such conventional cost-cutting is a short term fix that uses today’s numbers to disguise tomorrow’s crises.

"By using a ‘Fit for Service’ approach, GCC government leaders can undertake an economic and governmental transformation that will set their budgets on the right track and provide the volume and quality of services that their constituents are demanding for the long-term.”