Economic Costs, the Arab Spring and the GCC

The wave of protest and political change in the Maghreb and some countries of the Levant has, without a doubt, also impacted the Arab Gulf States. As a result, throughout 2011, the Gulf Cooperation Council (GCC) countries have responded to the unprecedented challenge mainly with a number of economic and financial policies. These policies differ from one country to another, but all aimed primarily at avoiding potential social unrest. This short report will outline and analyze some of the main policy packages implemented across the GCC, evaluate their structure, and assess their overall fiscal sustainability.

Upon his return from back surgery in the United States, King Abdullah of Saudi Arabia announced two wide-ranging social packages of approximately $130 billion, mainly focusing on generating employment opportunities for young and unemployed Saudis. This is a key area given that the kingdom faces a severe unemployment problem with the public sector currently providing approximately 80 percent of the total employment of Saudi nationals. In contrast, the number of Saudi nationals employed in the private sector only represents 10 percent of total employment. With the high number of Saudi youth entering the job market every year, the public sector will continue to struggle to absorb incoming fresh graduates. The packages announced by the King are therefore aimed at stimulating private sector employment generation.

While the announced economic packages have certainly alleviated any existing tensions, it is clear that the policies themselves only deal with short-term problems rather than the structural issues facing the country. For one, even though the packages are aimed at increasing private sector activity, the announcement on additional public sector jobs will have the opposite effect. The jobs created will only add to the large mass of civil servants in the kingdom, a policy that is simply not sustainable or productive in the long term. Second, with the kingdom announcing new unemployment benefits starting at around SR2,000, compared to an average wage in the public sector of SR3,000, there is little incentive for Saudis to consider private sector employment. Third, the continued significant wage differential between the public and private sectors restricts the incentives further. The fact that the average private sector wage roughly stands at only a third of public sector wages provides an imbalance that current policies do not address. The end result would be either a continued flow to the bloated public sector or a move by discouraged private sector workers to leave and claim unemployment benefits.

For the kingdom, there are also more medium- to long-term budgetary issues to consider. While for the moment Saudi Arabia can easily accommodate large spending ventures, the medium-term pressure on the budget and the corresponding need for a sustained high oil price to support continued outlays will increase the more such spending allocation becomes the norm rather than the exception. Once the increases in wages and pensions are passed, it will be very difficult to take these benefits away. Similarly, there is no certainty that the good economic environment of the past years will be reproduced indefinitely with the IMF already forecasting that GDP growth in Saudi Arabia could decrease by almost half, from 6.5 percent to 3.6 percent, from 2011 to 2012. Maintaining an upward curve on current commitments is thus subject to question marks for the kingdom in the long run. The financial assistance pledged by the GCC to some of the countries that underwent social unrest during the Arab Spring will only add to the future budgetary burden. The bottom line is that in order to safeguard further growth, Saudi Arabia will have to ensure that its private sector leads the growth creation process, including in the employment of nationals. At this stage, the economic packages announced do little to put the kingdom on this path.

Given its small national population, the United Arab Emirates (UAE) is in a fairly stable economic position, yet the country faces similar difficulties as other GCC states, including high food prices, high level of youth unemployment, and a shortage of affordable housing. There is also the issue of development in the five smaller northern emirates financed through the federal budget. Economic incentives announced so far include new subsidies on bread and rice, a promise of an increase in military pensions by 70 percent, and a pledge of $1.9 billion in housing loans (of which almost $1.6 billion are allocated for the resource-poor northern emirates) to relieve some of the bottlenecks in this region and in the capital Abu Dhabi. Affordable housing will remain a key issue in the years to come. As such, the government of Abu Dhabi pledged roughly $600 million of housing loans to its citizens, which should amend some of the lack of social housing for nationals.

As in other GCC states, the difficulty in the UAE will stem from weaning people off the cradle-to-grave social system and constructing a viable private sector that attracts and integrates the national population. Moreover, the rising education of the national population over the years has increased the expectations on what role the citizens should play in their societies. What was once seen as a privilege, i.e. getting a share of oil receipts, is increasingly not sufficient anymore. The forecasted inflation rate has almost doubled from last year and the sharp increase in military pensions will further strain the country’s fiscal condition in the long run. Not much can be done towards food inflation as most of this is imported inflation. However, deeper economic reforms in order to create further opportunities for UAE nationals in the private sector and a sharp increase in social housing will be necessary for the viability of the UAE’s future budget.

The government of Qatar pledged a package of $8.1 billion including salary hikes in both the public and private sectors (to the tune of $2.75 billion) and increase in pensions as well as benefits for private sector workforce. Given that less than 10 percent of Qataris work in the private sector, the increases will mainly, although not exclusively, benefit the local community. The state of Qatar enjoys a very different situation from its neighbors, with an unemployment level estimated at around 0.5 percent (the lowest in the GCC and one of the lowest in the world), a recent GDP growth rate of 15 percent and the highest GDP per capita in the world. There are as a result no significant social tensions to be concerned about.

However, the General Secretariat for Development Planning is forecasting for Qatar a drop in the growth of GDP from 15 percent to 5.1 percent in 2012, mostly due to stagnation in hydrocarbon supply. This deceleration of growth, coupled with an almost doubling rate of inflation, might add some complications in the medium run. The private sector workforce endows Qatar with dynamism in its labor market; however, the number of employers and business owners remains at a low 0.5 percent of the total population. More efforts thus are needed to promote young Qataris in entrepreneurship as a way to encourage nationals to migrate to the private sector. One way would be to provide interest-free loans to young business entrepreneurs and only schedule reimbursements on interest once they break even.

Following protests, which escalated in February 2011 with the killings of some protestors by security forces, the government of the Sultanate of Oman pledged $1.3 billion in new social benefits in addition to the creation of 50,000 new jobs. The financial package includes increases to both public sector wages and pensions. There is also the pledge by the other GCC states to come to the aid of Oman with an additional $10 billion over the coming years. It remains unclear exactly how that sum is to be transferred, the timings associated with it, or what, if any, restrictions might be applied to its disbursement. A unique aspect as far as Oman is concerned is that the ruler, Sultan Qaboos bin Said, also announced a number of political reforms including a review of the constitution and a cabinet reshuffle following corruption claims, and promised to give more legislative power to the elected parliament.

While the increase in wages should ease some social tensions in the short term, the absorption of 50,000 new workers in the public sector is unlikely to be sustainable in the long term especially if corresponding reforms to increase the participation in the private sector are not met. Thus, initial steps announced so far are unlikely to be sufficient, and deeper social and institutional reforms increasingly seem like a necessity. The alternative would be an increased reliance on more financial support from the GCC neighbors.

Changes announced in Kuwait include a grant to every citizen of $4,000 and an increase of subsidies in regard to certain food staples. The public sector already represents a large proportion of the workforce in the GCC, but Kuwait possesses the highest public sector workforce out of the GCC with 93 percent. The high ratio of civil servants is an attempt to absorb the young workforce graduating every year, but with the high birth rates there are serious doubts that Kuwait will be able to continue absorbing graduates at this rate. A recent article in the Financial Times said that the Gulf region is currently struggling, on the one hand, to increase public sector wages and benefits, and on the other hand increasing the number of nationals in the private sector workforce. So far, the progress made to increase the private sector workforce has mostly benefited foreign labor, and more important measures are to be applied in order to increase local participation in the private workforce.

Institutions play a more important role in Kuwait as compared to its GCC neighbors, and tensions and political inertia have blocked fundamental attempts to adopt pragmatic and necessary policies. Indeed, there is an important split between the parliament and the ruling family, stopping most development plans. Some of that tension was heightened when, in 2010, the parliament attempted to pass a law that required the government to buy back all personal debt of the Kuwaiti citizens. These tensions led the government to block any economic measures passed by the parliament and vice versa. Any changes in the foreseeable future will have to come after resolving this institutional deadlock.

Bahrain is under a more pronounced situation altogether given that the initial peaceful demonstrations for social improvements and accountability of elected officials deteriorated into a sectarian and violent confrontation. The kingdom thus is faced with deep social divisions that are not likely to be healed soon. The government has tried to put forward some social policies including a $6.6 billion package to construct new homes. Bahrain is further expected to benefit from the $10 billion package announced by its GCC neighbors. The result is that the kingdom’s GDP is expected to rise again by 3.6 percent in 2012 and 4.7 percent in 2013, although this is from a low base after the sharp drop in 2011. Given the widespread protests, departures of international firms and investors has already seriously undermined Bahrain’s position as a financial hub in the GCC and its ambition to be an attractive point of investment in the region, and it will certainly struggle to regain international confidence. In this context, Bahrain looks likely to remain dependent on regional assistance. Further, given the political nature of the conflict, any economic packages announced will not bring about a resolution of the crisis.

Overall, it can be said that major challenges appear on the horizon for the countries in the GCC despite their largely positive financial position. Youth unemployment remains a key challenge in the GCC, currently standing at 23 percent. Countries like Kuwait or Saudi Arabia support a very large public sector, which will prove to be a burden on the fiscal balance even if oil prices stay at the current levels.

There is a need for more entrepreneurship and private sector stimulations if the GCC states want the future generation to be an active part of the growth process. This is even more of a necessity if the state wants to be able to absorb the new workforce that is coming on the job market every year. The public sector cannot remain the preferred option any longer. This also points to the additional need for continued economic diversification in order to decrease the dependency on oil receipts. A study by the Institute of International Finance (IIF) is suggesting a net gain from the Arab Spring for oil exporters (the GCC’s GDP growth is increasing from 4.7 percent in 2010 to 6.5 percent in 2011), which far exceeds public spending so far. This is, however, a short-term position that does not negate the need for more long-term structural policies of adjustment. Rising commitments will undoubtedly put a strain on public finance and the study already suggests that oil receipts are funding a larger proportion of government spending than before the Arab spring. Only economic diversification efforts can decrease some of the vulnerability to oil price fluctuations and help in stabilizing some of the inflation rates across the GCC. To conclude, institutional change across the GCC, and not economic policies, will prove to be the real source of social appeasement.

For additional reading on this topic please see:

The Role of International Loans and Capital in Egypt's Transition
One Year of the Arab Spring: Global and Regional Implications
The Economics of the Arab Spring