Region of Gulf Cooperation Council (GCC) witnessed another year of disappointing economic performance in 2017, however expectation shows that economic growth should improve between 2018 and 2019, according to the World Bank’s biannual Gulf Economic Monitor released on Monday in Kuwait.
The report discussed that the region achieved a growth of 0.5 percent in 2017, the weakest since 2009 and down 2.5 percent from the previous year.
The GCC region’s economies experienced flat or declining growth as lower oil production and tighter fiscal policy took a toll on activity in the non-oil sector. External debt issuance continued to rise in an attempt to help finance large fiscal deficits.
Economic growth is expected to strengthen gradually, helped by the recent partial recovery in energy prices, the expiration of oil production cuts after 2018, and an easing of fiscal austerity.
The World Bank expects growth to firm to 2.1 percent in 2018 and rise to 2.7 percent in 2019. Growth in Saudi Arabia is expected to rebound close to 2 percent in during 2018-19 and to strengthen similarly elsewhere in the region.
World Bank Country Director for the GCC Nadir Mohammed indicated that policies shift their attentions towards deeper structural reforms needed to sever the region’s longer-term fortunes from those of the energy sector.
"While the recent increase in oil prices provides some breathing space, policy makers should guard against complacency and instead double down on reforms needed to breathe new life into sluggish domestic economies, to create jobs for young people and to diversify the economic base. Any slippage could negatively impact the credibility of the policy framework and dampen investor sentiment," he added.
There are several downside risks that may weigh on economic activity such as lower than expected oil prices which could exert pressure on the OPEC producers to extend or deepen their production reduction agreement.
Although fiscal and current account balances are improving, the region continues to face large financing needs and remains vulnerable to shifts in global risk sentiment and the cost of funding. Geopolitical developments and relations between regional states could slow growth prospects.
Slow implementation of country's reform plans arising from weak institutional capacity will take away any benefits of fiscal adjustment and structural reforms that aim to diversify their economies.
On the long run, dominance of the hydrocarbon sector in the GCC economies requires implementation of structural reforms.
The terms of trade shocks in 2008-09 and in 2014-16 barely affected the dominance of the hydrocarbon sector in the GCC, with the bulk of the adjustment so far driven by spending cuts rather than the emergence of other sectors of trade exchange.
Structural reforms should focus on economic diversification, private sector development, and labor market and fiscal reforms.
Implementing structural transformation programs requires continuing political commitment from the GCC governments.
Saudi Arabia has shown considerable leadership in this regard, given that it aims to implement the 12-vision realization plans associated with its Vision 2030 to significantly transform the economy over the next 15 years by lifting the private sector share of the economy from 40 to 65 percent and the small and medium enterprise contribution to GDP from 20 to 35 percent.
Practice Manager at the World Bank Kevin Carey announced that transforming from an oil-dependent economy to a self-propelled, human capital-oriented one requires some fundamental changes in the mindset; some also call this a new social contract.
"GCC countries do not need to discard their existing social contracts but rather to upgrade them to reflect new realities of low for long oil prices, increasing global competition and the long-term threats from technological and climate change," added Carey.
As with other Arab countries, GCC states also face challenges linked to sustainability, equity and welfare when it comes to their pension systems. These issues need to be addressed urgently to prevent any negative impact on economic growth, fiscal sustainability, and labor market stability.
Among the potential solutions that could help improve pension outcomes, the Gulf Economic Monitor reiterates the importance of improving efficiency by reducing the prevailing fragmentation in many of the GCC pension systems and strengthening the governance of pension institutions.
If GCC countries wish to attract global talent, they will also need to consider potential solutions for expatriates that help to meet their long-term pension and financial security needs, concluded the report.
