Raising taxes in the Gulf

Omar Salem/AFP/Getty Images

Saudi men shop with their children at a mall in Jeddah late on September 17, 2009 ahead of celebrations for Eid al-Fitr.

Balancing and maintaining economic growth with fiscal consolidation is no easy or popular task, particularly in the Gulf.

Economies in the region are undergoing a transformation from their traditional source of revenue — oil — but that process requires investment and spending, and often higher taxation. These are hard policies to implement when trying to maintain economic growth and is generally unpopular with civilians.

Bahrain Finance Minister Sheikh Ahmed bin Mohammed Al Khalifa, told the Gateway Gulf Investment Forum in Bahrain Wednesday that the challenge facing his country, and the rest of the oil-rich Gulf, was “interesting.”

“On the one hand you’re dealing with aspirations, you’re dealing with goals, you’re dealing with the competitiveness of an economy and on the other hand you want to achieve sustainability over the medium term and long term,” he said during a panel entitled “Aligning Fiscal Policy to Economic Growth.”

“(But) fiscal sustainability is clearly important for long-term investment, investors want to know the economy they’re investing in is sustainable.”

The oil price fall of 2014 fast-forwarded the necessity for economic diversification among Gulf nations that have traditionally relied on oil for much of their revenues. Major Gulf oil exporters in the region, from Saudi Arabia and the United Arab Emirates to Qatar and Kuwait, saw their economic growth stall and budget deficits rise amid the fall in revenues.

That has prompted a sea-change in government spending in the region with countries within the Gulf Cooperation Council (GCC) — Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain, and Oman — having introduced reforms to reduce their deficits, such as implementing a value-added sales tax (VAT) and cutting energy subsidies.