Gulf reform plans ‘accelerating’ as economies seek post-Covid boost

While regional governments responded quickly to the shock of coronavirus with lockdowns among the toughest in the world, according to the Oxford Stringency Index, the shutdown had a severe effect on the region’s non-oil economy with the IMF predicting a 5.7 percent contraction in 2020 across the Middle East.

The pandemic, along with weakened oil prices, is posing a double-pronged and serious challenge for regional governments, said Tim Callen, assistant director, Middle East and Central Asia Department, International Monetary Fund (IMF).

Speaking at the GCC Economies in 2021 and Beyond event hosted by London-based think tank Chatham House this week, Callen said the pandemic has “reaffirmed” economic challenges facing the Gulf.

“Covid has highlighted these challenges but hasn’t fundamentally changed economic direction of the countries,” he said. “It has confirmed the importance of having strong fiscal and financial buffers to manage the impact of oil price volatility and to push forward diversification efforts.”

As the Gulf countries roll out efficient and successful vaccination programmes, the expert said the IMF is expecting a regional economic rebound in 2021. “That’s not withstanding any new waves,” he added.

Tim Callen, assistant director, Middle East and Central Asia Department, IMF

With infections remaining relatively low in the Gulf, vaccinations commencing, travel reopening, and sizeable economic support in place, the IMF predicts 2.9 percent non-oil growth in the Gulf this year – slightly higher than anticipated overall GDP growth at 2.3 percent.

Important reforms

As the GCC pushes forward with its individual national vision programmes, Callen highlighted the importance of reforms.

“There needs to be a push towards working the private sector – ultimately wages and productivity will need to be in line for a sustainable regional economy.

“Training and incentives to work in the private sector will be very important and will be a key element of reforms in the coming years.”

Callen also highlighted the surge of new reforms in the last few months aimed at revitalising and opening up Gulf economies, such as the UAE’s recent moves to open up Emirati citizenship to non-nationals with certain conditions and liberalising foreign ownership laws.

Ziad Daoud, chief emerging markets economist for Bloomberg Economics, said that the Gulf countries are on a trajectory to achieving a “new equilibrium” in a new post-Covid era.

“The pandemic has amplified the need for the Gulf to rebuild its economy, politics and social system away from oil,” he said, adding that Covid may have permanently changed energy consumption habits and brought forward the date for peak oil demand, amid a global drive towards renewable energy.

“Covid is causing serious policy changes, in terms of labour markets and foreign ownership of companies,” said Daoud at the Chatham House webinar.

Ziad Daoud, chief emerging markets economist for Bloomberg Economics

Covid chink in the road

According Karen Young, resident scholar, American Enterprise Institute (AEI), the global pandemic has made regional economic diversification policies “more difficult” to roll out.

“The resilience of some sectors, such as hospitality or even private education, has been weakened in a surprising way by Covid,” she said.

Young added that Gulf countries would be “under pressure” to generate new sources of revenue and innovative policies in the coming years to balance fiscal books and shave high government wages and subsidies.


“The pressure size varies depending on the burden of the population size and diminished energy endowments,” she said.

The AEI expert predicted that the coming years would see a “squeeze” on poorer sections of society who have less access to financial service products. “We are going to see much more debate on nationalism, ageism, sexism and employment opportunities,” she said.

Karen Young, resident scholar, American Enterprise Institute

“We may have to see an increase in taxes, such as property taxes, sales tax and maybe income tax. There will soon be a larger debate about who is welcome and who is not in the countries – there will be ongoing tension over this,” added Young.

According to Callen, efforts to transform Gulf economies may be more challenging if foreign capital and skilled foreign labour become harder to attract, and the labour-intensive tourism and hospitality sectors – which are central to most diversification plans – still face significant issues until confidence in travel is fully restored.

“But the importance of a more diversified economy remains undimmed, so the reforms underway since the oil price crash in 2014 need to continue to be driven forward as the pandemic subsides,”  Callen wrote in a supporting Chatham House blog. “The pace, sequence, and timing will be paramount to their success.”