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Capt. Daniel Omale
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This article is taken verbatim from the Economist magazine of March
26th to April 1st, 2016. It is a direct reflection of Nigeria’s economic
future.
“FAST cars whizz around, malls are full of expensive luxuries and
cranes dominate the skyline. But scratch the shimmering surface of the
Gulf and you soon find countries hurting from the low oil price,
currently around $38 a barrel. Growth is slowing and unemployment is
rising. Policymakers even dare utter a three-letter “t” word until
recently taboo: tax.
Oil is central to the six Gulf Co-operation Council (GCC) states,
which have used the windfall of the past few years to spend lavishly.
Unlike many oil exporters, such as Nigeria and Venezuela, they have high
foreign-exchange reserves and low debts to cover short-term gaps. But
public spending is generous and the private sector is heavily reliant on
oil to boot. To be sustainable in an era of lower prices, the rulers
must change the structure of their economies.
The IMF reckons the lower oil price knocked $340 billion off Arab
oil-exporting states’ government revenues in 2015. This year is looking
worse. Moody’s, a ratings agency, this month downgraded Bahrain and Oman
and put on watch the other four GCC states: Saudi Arabia, Kuwait, the
United Arab Emirates (UAE) and Qatar. “It’s the end of an era for the
Gulf,” says Razan Nasser of HSBC in Dubai. “And we’re only just starting
to see the effects.”
Oil receipts typically account for more than 80% of GCC government
revenues, rising to over 90% of Saudi Arabia’s budget before the crisis.
Dubai, one of the emirates making up the UAE, is an exception, with oil
accounting for only 5% of revenues. That is because it has successfully
diversified: tourism and services account for most of its government
revenues.
Governments are reacting to the squeeze on their incomes with a
mixture of strategies, drawing down reserves and taking on debt on the
one hand, and imposing spending cuts on the other. Last year they made
tweaks, such as curbing benefits for public servants. This year will be
tougher. Oman has told all state-owned enterprises to remove perks such
as cars. Qatari companies including Al Jazeera and the Qatar Foundation,
a cultural organisation, have laid off employees. With such tweaks
Kuwait, the UAE and Qatar, which have small populations and high
foreign-exchange reserves, can get by for a decade.
But the other three states are in a trickier position. Oman and
Bahrain have relatively low reserves. Oman posted a larger than expected
budget deficit in 2015, at almost 16% of GDP. By the end of 2017
Bahrain’s debt is expected to reach 65% of GDP. It needs an oil price of
$120 to balance its books. The two have other concerns, too. Bahrain’s
Shia-majority population bristles at being ruled by a Sunni monarchy.
There is a lack of leadership in Oman; Sultan Qaboos is, again, in
Germany being treated for suspected cancer.
Observers are particularly concerned about Saudi Arabia, which Barack
Obama will visit to meet Gulf leaders next month. It has huge
foreign-currency reserves—roughly $740 billion at the end of 2014—but is
drawing them down at a clip, taking out about $115 billion in 2015. At
30m, its population is the Gulf’s biggest, and it has a sprawling royal
family to pamper.
Happily, predictions that the oil price will not rise quickly are
focusing minds on all sorts of structural reforms. “This is good for the
Gulf; it will be a rich period for policy-making,” says Nasser Saidi,
an economist in Dubai. The UAE cut fuel subsidies last year, and other
states are following suit. Bahrain removed subsidies on some food items.
Saudi Arabia raised the cost of electricity and water. Oman is printing
the cost of the fuel subsidy on household electricity bills to prepare
the population for paying the whole lot.
But with real prices now near the subsidised prices, there is less
room for savings from cuts than there was a few years ago. And outgoings
remain high. It is not just that the Gulf states are committed to large
infrastructure projects—metros, financial centres, ports and railways.
They spend billions of dollars on wages and handouts to their rapidly
growing populations. The relatively young states need to spend cash on
education. And they are embroiled in costly wars in the region.
Making matters worse, cuts in spending affect the nascent private
sectors where, apart from the UAE and Bahrain, most activity is linked
to oil, such as services to the industry; and to public spending, such
as construction. Economic growth is slowing. “The lack of
countercyclical measures is amplifying the pain,” says Ms Nasser. Banks
are getting tougher on loans just when the state wants to encourage more
small businesses. By some reckonings, the private sector in the Gulf
contributes less to GDP now than in earlier decades.
The GCC countries need to do much more if the books are to balance in
the future. Diversification, long talked about, has to happen now,
although it is harder to do it in bad times. Plans look good on
paper—encouraging tourism and logistics, for example—but more uncertain
in real life. Saudi Arabia is not keen on Westerners trampling around
the kingdom.
A modest value-added tax, long discussed, of up to 5%, will be
introduced across the region by 2018. Oman has raised corporate tax from
12% to 15%. Other states are considering taxing expatriates’ incomes.
But above all, the public sector has to stop acting as the main
employer. That would be a big shift. Gulf citizens have got used to
earning without doing much. Private firms are not creating enough jobs
to keep up with the number of young people graduating from university,
and large expatriate workforces provide tough competition. Gulf rulers
fear that cutting spending would alter the social contract in which
largesse buys their people’s quiescence.
But they have no choice. A new generation of younger leaders, such as
Saudi Arabia’s Muhammad bin Salman and Muhammad bin Zayed in the UAE,
are more willing to make tough changes. The GCC states have had an
amazing few years in which they built up infrastructure and saved. But
they did too little to prepare for a post-oil future. Now they must
catch up.”
Unfortunately, Nigeria seems submerged in its deep slumber; it may be too late to catch up.
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