More taxes could shield GCC from protectionism, says IMF

December 20, 2024, 11:50 AM

Saudi finance minister Mohammed Al-Jadaan and IMF managing director Kristalina Georgieva at a meeting in Washington, DC in October

New tax revenues needed
Subsidies must be curbed
Attracting FDI a priority

GCC countries should consider new taxation options to shore up their public finances and shield their economies from rising global protectionism, according to the International Monetary Fund.

That means regional governments need to continue diversifying away from fossil fuels and boost the role of the private sector, all the while identifying new tax revenues and curbing subsidies, among other policy priorities, the IMF found in a 74-page paper released on Thursday.

“Clearly the pattern has been that diversification is happening,” said Amine Mati, IMF’s mission chief for Saudi Arabia and head of the GCC division, at a launch event for the report hosted by the Arab Gulf States Institute in Washington, DC.

“Our message has been that all of these reforms that many of these countries have done to encourage the private sector, improving the business climate, should continue irrespective of what happens to oil prices.”

Uncertainty around the speed of the energy transition and the outlook for oil prices could similarly have negative repercussions for the region, unless it takes steps to consolidate public finances now that local economies are growing.

GCC countries should continue experimenting with new tax revenues, whether on the VAT, corporate, personal or property fronts.

“Any measures that help diversify the economy and increase the revenue base will be important,” said Mati. “Clearly personal income tax is one of the sources, but also widening the base, removing some of the exemptions.”

Miyajima added: “Different countries have different preferences over which ones to introduce first and there are probably lower hanging fruits, like introducing VAT first.”

The GCC should also reduce its large government footprint by streamlining public sector employment and resulting salary payments, and cutting down on subsidies.

According to Mati, the six member states of the GCC should also ensure sovereign wealth funds’ growing involvement domestically does not just replace local governments’ outsized economic roles.

That would only crowd out private investment by picking winning and losing industries, Mati noted. The focus should rather be on further spurring foreign direct investment.

“It’s important that the project feasibility and project assessment that is engaged by the sovereign wealth fund is done on as much as a commercial basis as possible,” Mati said.

The economies of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates have successfully navigated geopolitical uncertainty in recent months, and enjoy a positive short-term economic outlook, according to the new IMF report.

“Over the past year, spillovers from regional conflicts on the GCC countries have been limited, with trade, tourism and investment flows remaining largely unaffected,” said Ken Miyajima, a senior economist in the IMF’s Middle East and Central Asia Department and lead for Qatar, at the AGSI event.

GCC countries should work even harder to toughen their economies and budgets as the conflicts in Ukraine and Gaza and threats of mounting trade restrictions out of the US and China raise the “spectre of geoeconomic fragmentation”, according to the report.