## Economic Prospects and Policy Priorities for the GCC Countries ## Source details **Canonical URL:** [Economic Prospects and Policy Priorities for the GCC Countries](https://www.imf.org/-/media/files/publications/cr/2023/english/1gccea2023001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1gccea2023001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1gccea2023001.pdf.json) --- ### Executive summary — Global and regional outlook - Global growth: - Global growth is estimated to slow from 3.5 percent in 2022 to 3.0 percent in 2023. - Global medium-term growth is at 3.0 percent. - Inflation and monetary policy: - Global headline inflation forecast: 8.7 percent in 2022; 6.9 percent in 2023; 5.8 percent in 2024. - Core inflation remains above target in most G20 economies; China has inflation below target and the People’s Bank of China cut policy rates since June 2023. - Risks and financial stability: - Risks are tilted to the downside; upside and downside scenarios summarized: - Upside: faster decline in core inflation, stronger China policy support, faster AE investment recovery. - Downside: volatile food and energy prices, persistent core inflation, further loss of China momentum, geoeconomic fragmentation. - Financial stability concerns: higher-for-longer rates, stress on banks and non-bank financial institutions, high borrowing costs for EMDEs, risk of capital outflows from vulnerable EMDEs. - GCC-specific near-term situation: - Non-hydrocarbon growth momentum remains strong; oil production subdued due to OPEC+ decisions. - Inflation contained; current account surpluses and fiscal balances high. - Primary non-oil deficits expected to decrease to 24 percent of GDP by 2028. ### Regional reforms, activity, and inflation dynamics - Reform agenda and progress: - Ambitious reform agendas (Vision 2030, “We the UAE 2031”, Oman Vision 2040, Qatar National Vision 2030) with accelerated implementation after the pandemic. - Main progress areas: social and business reforms, fiscal sustainability, investments in strategic industries and digital/green infrastructure. - Economic activity and projections: - GCC overall GDP growth projected at 1.5 percent in 2023 (down from 7.9 percent in 2022). - Hydrocarbon GDP: grew 7.8 percent in 2022; expected around -1 percent in 2023 due to OPEC+ cuts and unilateral Saudi cuts of 1mpbd extended to end-December 2023. - Non-hydrocarbon GDP: grew 5.3 percent in 2022; expected 4.3 percent in 2023. - Country highlights: - Saudi Arabia: H1 2023 non-hydrocarbon GDP growth ~4.5 percent. - UAE: published H1 2023 growth of 5.9 percent. - Qatar: non-hydrocarbon GDP grew 6.8 percent in 2022; expected 2.5 percent in 2023. - Bahrain and Kuwait: non-hydrocarbon growth >3 percent but slowing. - Oman: stabilizing above 2 percent. - Output gap: non-oil output gap estimated closed in 2023 for Saudi Arabia and UAE. - Inflation dynamics: - Regional inflation averaged about 3.3 percent (y/y) in 2022 (from 2.2 percent in 2021); slowed to about 1.6 percent (y/y) by August 2023. - Inflation expected: 2.6 percent in 2023 and 2.3 percent in 2024. - Tradables inflation subsided by end-2022; non-tradables drove 2023 headline inflation via housing costs. - Real estate: prices rising rapidly in Dubai, modestly in Saudi Arabia; rents picked up in Kuwait. - Wage growth remained contained; no broad wage-price spirals observed on average. ### Labor market and SDGs - Employment and unemployment: - Aggregate employment rebounded to pre-pandemic levels in 2022; Saudi nationals’ employment exceeded pre-pandemic levels. - Saudi Arabia unemployment: 5.6 percent as of 2022; latest quarterly data 4.9 percent as of 2023 Q2. - Expatriate employment fully recovered. - SDG progress: - Oman, Qatar, Saudi Arabia, UAE exceeded two-thirds of overall SDG score. - UAE fully achieved three SDGs; Saudi Arabia fully achieved two SDGs. - Female labor force participation rose >10 percent over two decades; Saudi Arabia FLFP at 37 percent in 2022. ### Fiscal positions, buffers, and risks - Fiscal balances: - GCC overall fiscal surplus: 7.7 percent of GDP in 2022 (unweighted). - Fiscal surplus expected to fall to 5.1 percent of GDP in 2023 (unweighted). - Some countries may return to fiscal deficit (example: Saudi Arabia). - Tax and revenue changes: - Bahrain doubled VAT to 10 percent in 2022. - Saudi Arabia VAT at 15 percent. - UAE introduced federal CIT of 9 percent effective June 1, 2023. - Qatar introduced Transfer Pricing regulations; Saudi Arabia implemented e-invoicing. - Net wealth and public debt: - GCC net wealth ranges from 74 percent of GDP in Bahrain to 1640 percent of GDP in Kuwait. - General government debt ratio decreased to about 43 percent of GCC GDP in 2022. - Public debt >100 percent in Bahrain despite decline in 2022. - Debt service burden averaged around 14.2 percent of GDP in both 2022 and 2023. - Fiscal space: - Fiscal space substantial for most GCC countries but constrained in Bahrain. - Most governments increased saving rates and net foreign financial assets in 2022. - Caveat: additional SWF and SOE capital expenditure may not be reflected in general government statistics. ### Financial sector, monetary transmission, and external sector - Monetary policy transmission: - GCC central banks largely matched U.S. Federal Reserve rate increases; exception: Kuwait policy rate rose 275 basis points versus 525 basis points in EFFR due to peg to an undisclosed basket. - Policy rate increases passed through to bank lending and deposit rates to varying degrees. - Credit growth moderated in most GCC countries (Saudi Arabia, Kuwait, Qatar, UAE); abundant liquidity limited lagged impacts. - Banking soundness: - Banking systems well capitalized, liquid, profitable; capital adequacy ratios above regulatory requirements. - Non-performing loan ratios generally low; UAE NPL ratio on a downward trend. - Provisions cover most NPLs; particularly prudent in Kuwait. - Banking vulnerability indicator improved to <30 percent (post-pandemic recovery). - Financial markets and flows: - 2022: GCC equities +3 percent; EMs -22 percent. - End-September 2023: GCC stock markets lost 3 .9 percent on average; MSCI EM gained +0.1 percent. - Long-term external GCC sovereign yields: rose 163 basis points in 2022 and another 70 basis points as of end-September2023 to 6.3 percent. - External issuance examples: $10 billion sovereign issuance; $6 billion sukuk; PIF green bonds $3 billion (October 2022) and $5.5 billion (February 2023). - Saudi Arabia accounted for 64 percent of total international bond issuance in 2023 to date. - UAE federal issuance since 2021: USD 8.5 billion international; AED 16.7 billion domestic (including AED 5.5 billion sukuk). - Bahrain issued US$ 4.50 billion international bonds and Sukuk in 2021 (~10 percent of GDP). - UAE syndicated loans in 2023 ~5 percent of their GDP. - External balances and reserves: - GCC current account surplus ~16.0 percent of GDP in 2022; expected to decrease to 9.6 percent of GDP in 2023. - GCC gross FX reserves increased marginally in 2022 to 19.2 percent of GDP. - Reserves average 8.3 month of imports cover (around 100 percent of IMF’s reserve adequacy metric). - Trade and FDI: - UAE FDI inflows of $26 billion in 2022 (more than 5 percent of GDP). - GCC attracted more FDI (as share of GDP) than AEs and EMDEs since the pandemic. - Regulatory reforms (e.g., UAE 100 percent foreign ownership onshore; new FDI laws in Saudi Arabia and Qatar) expected to support FDI. ### Risks, oil price assumptions, and China spillovers - Oil price baseline: - International oil prices expected to average $80.5 in 2023 and decline to about $67.5 in the medium term. - Risks: - Downside: lower hydrocarbon prices from subdued global activity; quicker decarbonization reducing demand; global recession and higher-for-longer interest rates. - Upside: reversal of OPEC+ cuts, higher oil prices from supply shortfalls, faster capital investments, accelerated reforms. - Spillovers from China: - GCC hydrocarbon exports to China represent 20 percent of total hydrocarbon exports. - China absorbs nearly 10 percent of GCC non-oil exports. - Empirical estimates (1990–2022 panel): - A 1 percentage point negative shock in China’s growth decreases GCC non-oil output by 0.24 percent in the same year. - The same shock reduces non-oil output by about 0.57 percent over the medium term (after four years). - Trade transmission: time-varying short-term effects positively correlated with China’s share in non-oil exports; correlation coefficient above 0.5. ### Policy priorities — near-term and medium-term - Near-term guidance: - Fiscal policy: remain prudent; avoid procyclical spending; use oil windfall to rebuild buffers; targeted and temporary fiscal measures to respond to shocks. - Monetary policy: continue to follow the U.S. Federal Reserve; closely monitor financial stability risks. - Medium-term fiscal strategy: - Pursue fiscal consolidation consistent with intergenerational equity and sustainability, supported by a credible rules-based MTFF. - Key consolidation components: - Non-oil revenue mobilization. - Energy subsidy phase-out. - Expenditure rationalization and efficiency gains. - Strengthening social safety nets. - Adopt integrated asset-liability management (SALM) and enhance fiscal transparency. - Fiscal frameworks and rules: - Accelerate upgraded fiscal frameworks with credible long-term anchors and legislation for fiscal rules. - Suggested rule types: spending ceilings, structural rules (e.g., Saudi structural rule smoothing oil prices over 50 years); staff estimate that an expenditure rule setting 1½-2 percent real growth in spending would have performed well given recent oil price developments. - Strengthen public communication and coordination with monetary authorities. - SALM and PSBS: - “Narrow” central/general government net worth estimated at around 688 percent of GCC GDP at end-2022. - Central/general government net financial worth estimated at negative 123 percent of GDP. - GCC’s public sector net assets estimated above 5000 percent of GDP; net financial assets around 1066 percent of GDP at end-2022. - Country range of overall public net worth: ~74 percent of GDP (Bahrain) to 1640 percent of GDP (Kuwait). - Asset composition: SWFs accounted for 22 percent of GCC total assets; fixed assets 16 percent; hydrocarbon assets 61 percent. - Liabilities ~600 percent of GDP, largely central/general government and SOEs debt. - Net Assets 688.33,3,183.11,105.552.95,029.9 (simplified balance sheet excerpt presented in source). - Net Financial Assets -122.930.41,1,105.552.91,065.9; Net Liquid Financial Assets -122.9-101.649.4-175.1 (exact figures shown in source table). - Note: PSBS estimates compiled on a best-efforts basis with significant data limitations on SOEs, social security, and pension funds. - Debt management and contingency planning: - Recommendations: lengthen maturities, reduce refinancing costs, pre-finance, build domestic markets, strengthen contingent liability assessment and monitoring, require SOE reporting and approvals for borrowing/investment. - Fiscal transparency and reporting: - Publish MTFFs, general government budgets and reconciliations, sectoral fiscal statistics, hydrocarbon revenue management strategy, and public sector balance sheet regularly. - Phase out extrabudgetary spending to reduce implementation risks. ### Financial sector reform and macroprudential policy - Strengthen macroprudential frameworks and buffers where credit growth is rapid; consider activating countercyclical capital buffer. - Modernize regulation and supervision: fully implement Basel III final reforms and adopt IFRS9 where needed; make supervision more risk-based. - Digital finance and fintech: - Regulatory sandboxes present in Bahrain, Kuwait, Oman, Saudi Arabia, UAE; digital bank licenses in Saudi Arabia and UAE; FinTech Hubs in Bahrain, Qatar, Saudi Arabia; DIFC FinTech Hive (UAE). - CBDC exploration/proofs-of-concept: Bahrain, Saudi Arabia, UAE leading; Oman assessing; Qatar exploring W-CBDC. - Strengthen AML/CFT frameworks in line with FATF standards; focus on virtual assets and VASPs. ### Green transition, SWFs, and financial-market development - Green finance and insurance: - Near-term priorities: measure and disclose climate risks; adopt robust climate risk management; develop insurance and reinsurance capacity. - Medium-term tools: phase-out energy subsidies; support green finance instruments and markets; scale up public green investment by SWFs. - SWF role: - 12 regional SWFs collectively manage assets around $4 trillion. - SWFs active in domestic mitigation projects and financing in other MENA countries. - Market development: - Develop domestic bond and sukuk markets, including green instruments; deepen local currency issuance and yield curves. - Example: UAE Dirham Monetary Framework implementation and issuance of local currency federal debt to support market development. - Fiscal and subsidy policy for decarbonization: - IMF-ENV model for Saudi Arabia: eliminating fuel subsidies estimated to achieve one third of authorities’ 2030 emissions reduction target. - CPAT tool: phasing out subsidies and using revenue for renewables would aid Bahrain’s 2035, Qatar’s 2030, and the UAE’s 2030 mitigation goals. - Renewable and low-carbon projects: - Wind projects: Kuwait Sagaya 10 MW; Oman Harweel 50 MW; Saudi Dumat Al Jandal 400 MW. - Qatar CCUS target: 5 million tons CO2 per annum by 2025. - Examples: Kahramaa (Qatar) plans up to 1000 EV charging stations by decade-end; Saudi testing hydrogen-powered trains and world’s largest solar desalination plant underway. ### Market power, firm-level evidence, digitalization, and taxation - Firm sample and methods: - Consolidated firm accounts from COMPUSTAT Global for 2000–2022; sample covers 13 ME&CA countries including GCC. - Final sample ~1300 firms and ~20,700 firm-year observations. - Markup interpretation: competitive benchmark = 1; sales-cogs ratio winsorized at 1 percent. - Market power and markups: - Average GCC markup close to 1.4 around 2010; excluding ARAMCO trend stable around 1.45 between 2010 and 2020. - GCC and ME market power higher than US; no upward trend in GCC market power over last twenty years. - Sector patterns: oil, mining, utilities highest markups; construction lowest average markups. - Country trends: Oman and Kuwait weak upward trend; Qatar, Saudi Arabia (excluding ARAMCO), UAE downward trend. - Inflation and markups: - GCC firms reduce markups in response to inflation shocks; estimated: after a 1 percent inflation shock, GCC firms reduce markups by 0.05 units relative to an average of 1.3 after two years. - Non-GCC MENAP firms do not adjust markups in response to inflation shocks. - No evidence that rising market power materially contributed to the GCC inflation surge of 2022. - VAT, excises, CIT and firm outcomes: - VAT: no significant impact on non-oil GDP growth or private consumption; inflation increases in year of VAT by 0.1 percentage points for each 1 percent VAT increase, reversing the following year. - Excise taxes: not significant for inflation or private consumption overall; small negative impact on non-oil GDP in following year; for food and tobacco, ROA declines by 0.01 for each percent increase in composite excise index (significant at 5%). - CIT on foreign companies: a one percent increase associated with -0.040*** effect on ROA (ALL FIRMS); larger negative effects for small firms (-0.455***). - Regression sample sizes and fits: - Observations: 3,840 (ALL FIRMS); 274 (FOOD AND TOBACCO ONLY); 857 (SMALL FIRMS ASSET SIDE); 1,061 (LARGE FIRMS ASSET SIDE). - R-squared: 0.635 (ALL FIRMS); 0.472 (FOOD AND TOBACCO ONLY); 0.401 (SMALL FIRMS); 0.608 (LARGE FIRMS). - Selected coefficients (exact): - Lagged Return on Assets: 0.691*** (ALL FIRMS); 0.641*** (SMALL FIRMS); 0.696*** (LARGE FIRMS). - Fed Rate (EOP): -0.135** (ALL FIRMS); -0.220*** (SMALL FIRMS). - Real GDP Growth: 0.084*** (ALL FIRMS); 0.067*** (SMALL FIRMS); 0.155*** (LARGE FIRMS). - VAT: -0.001 (ALL FIRMS); 0.215 (SMALL FIRMS); 0.027 (LARGE FIRMS). - Exise Composite Index: 0.001 (ALL FIRMS); -0.011** (FOOD AND TOBACCO ONLY); -0.011 (SMALL FIRMS). - CIT Foreign: -0.040*** (ALL FIRMS); -0.455*** (SMALL FIRMS); -0.078*** (LARGE FIRMS). - Digitalization impacts (EDAI, GTMI regressions and firm resilience): - EDAI rescaled to [0, 100]; a one-unit increase in EDAI (approximate Saudi average annual improvement 2017–2021) associated with: - 0.76*** increase in financial inclusion (regression (1): EDAI = 0.76*** (0.16); Observations = 239; Countries = 69; R2 = 0.86). - Crisis Shocks * EDAI = 0.25* effect on ROE resilience (regression (2): EDAI = 0.04 (0.09); Crisis Shocks * EDAI = 0.25* (0.13); Observations = 859; Countries = 65; R2 = 0.35). - 0.68*** association with higher GDP per capita (regression (3): EDAI = 0.68*** (0.07); Observations = 1,616; Countries = 86; R2 = 0.98). - GTMI impact: GTMI = 1.24*** (0.18) associated with higher government effectiveness (regression (4): Observations = 140; Countries = 74; R2 = 0.72). - Industry-level digital intensity associated with faster recovery post-recession for listed firms (revenue, ROA, ROE cumulative impacts at t+1 and t+6). - Policy implications on taxation and competitiveness: - Additional broadening of tax systems unlikely to create strong negative impacts per current analysis. - CIT broadening should be broad with limited exemptions; consider special treatment for small firms (e.g., simplified turnover regime at 2 percent). - Complementary reforms (labor, product markets) likely more impactful for competitiveness. ### Regional integration, industrial policy, and labor - Regional integration initiatives: - July 2023: Bahrain and Saudi Arabia MOU to jointly increase tourism flows; Saudi Arabia signed MOU with Oman for tourism. - GCC considering a unified visa for tourists and businesspeople. - Bahrain, UAE, Egypt, Jordan agreement on joint EV production using Bahrain’s FTA with the USA. - Potential transnational solar project between Bahrain and Saudi Arabia. - Industrial policy and diversification: - Use SEZs, local procurement, tax waivers, relaxed localization, profit repatriation, streamlined work permits to attract FDI. - Recommendations: enhance product market regulations, governance, anti-corruption; avoid industrial-policy measures that substitute structural reforms; apply sunset clauses, exit criteria, cost-benefit analysis. - Labor market and human capital: - Priorities: labor market flexibility, mobility for expatriates, minimum wage institutionalization, flexible work arrangements to raise FLFP. - Examples: UAE wage subsidies and training; Qatar pension expansion; Saudi FLFP reached 37 percent in 2022. - Human capital: address education quality and skills mismatches; adopt dual-education vocational systems. ### Concluding policy package (summary) - Maintain prudent near-term fiscal and monetary stances to rebuild buffers and manage shocks. - Anchor medium-term fiscal consolidation in credible rules-based MTFF, revenue mobilization, subsidy reform, and expenditure rationalization. - Continue financial sector deepening, macroprudential and regulatory strengthening, and AML/CFT enhancements. - Accelerate structural reforms, digital and green investments, and regional integration to support diversification and a smooth energy transition. *Prepared by IMF staff under the guidance of Amine Mati for the GCC Ministerial Meeting (October 5, 2023).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### A. Global Developments and Outlook - Global growth is slowing. - Global growth is estimated to slow from 3.5 percent in 2022 to 3.0 percent in 2023. - Global medium-term growth, at 3.0 percent, is at its lowest in decades. - Growth in 2023 proved more resilient than expected due to a boost from reopening of the Chinese economy, strong consumption amid tight labor markets in the United States, and robust activity in the service sector; however, the rebound is fading as excess savings decline in AEs and non-service activity shows wide-ranging slowdown. - Several cyclical and structural factors are contributing to the slowdown, including tighter monetary policy, limited fiscal buffers, high debt levels, geoeconomic fragmentation, and extreme weather shocks. - Inflation dynamics and monetary policy. - Global headline inflation is forecast to decline from 8.7 percent in 2022 to 6.9 percent in 2023 and 5.8 percent in 2024. - Core inflation remains above target for most G20 economies, implying prospects of higher-for-longer rates. - Drivers of core inflation include pass-through from past headline-inflation shocks (notably energy) and demand pressures in services; wage growth has remained contained and longer-term inflation expectations are generally well-anchored. - China is an exception with inflation below the authorities’ target and the People’s Bank of China cutting policy rates since June 2023. - The synchronization of global monetary tightening is starting to fade: some EMs (including Brazil and China) are cutting policy rates while major AEs keep policy tight through 2024 until price pressures abate. - Risks to the global outlook and financial stability. - Risks are tilted to the downside. - Upside scenario: core inflation could fall faster if pass-through from lower energy prices is stronger or profit margins compress, supporting growth and earlier monetary easing; stronger policy support in China could boost global spillovers; faster AE investment recovery could help (e.g., IRA in the US, EU Recovery Fund). - Downside scenarios: more volatile food and energy prices from climate/geopolitical shocks; more persistent core inflation; further loss of growth momentum in China; geoeconomic fragmentation. - Global financial stability risks remain elevated. - Higher-for-longer rates could weigh on activity and trigger disruptive repricing and tighter global financial conditions. - A risk-off episode could cause a sudden rise in interest rate expectations and fall in asset prices, stressing banks and non-bank financial institutions, especially those exposed to commercial real estate and interest-rate risk. - Borrowing costs for EMDEs remain high, increasing the risk of debt distress and constraining space for priority spending. - Prolonged tightening could prompt broad-based capital outflows from vulnerable EMDEs with potential spillovers to AEs. ### B. The Economic and Financial Outlook and Risks in the GCC Countries - Overall regional momentum and immediate outlook. - The GCC region’s non-hydrocarbon growth momentum remains strong, driven by higher domestic demand, increased gross capital inflows, and reform implementation. - Oil production — which depends on OPEC+ decisions — will be subdued in the near term. - Inflation is contained and current account surpluses are high. - Fiscal balances remain healthy, supported by fiscal reforms and high oil prices. - High global uncertainty is weighing on the outlook. - Fiscal and non-oil fiscal projections and drivers. - The primary non-oil deficits are expected to decrease to 24 percent of GDP by 2028, with higher non-oil revenue reflecting sustained fiscal and structural reforms and contained expenditures. - Financial sector and macro-financial conditions. - The financial sector is sound. - The regional policy stance for monetary policy should continue to follow the U.S. Federal Reserve and be accompanied by close monitoring of financial stability risks. - Continued reforms are needed to deepen financial and capital markets; strengthen macro-prudential and regulatory frameworks; ensure effective supervision (including digital and fintech activities); foster sustainable finance; and strengthen AML/CFT frameworks. - Vulnerabilities and risk channels. - External exposures via global financial tightening, higher-for-longer rates, and potential real estate stresses remain important channels of risk for the region. - Divergent global monetary policies could affect asset prices, investor exposures, and capital flow volatility with implications for the GCC. ### C. Policy Priorities - Near-term policy guidance. - Fiscal policy should remain prudent, avoiding procyclical spending and using the windfall from higher oil prices to rebuild buffers. - Targeted and temporary fiscal measures could be undertaken to respond to shocks, if and when they materialize. - Monetary policy in the GCC should continue to follow the U.S. Federal Reserve and be accompanied by close monitoring of financial stability risks. - Medium-term fiscal strategy and institutions. - Continue pursuing fiscal consolidation consistent with intergenerational equity and sustainability, supported by a credible rules-based MTFF (medium-term fiscal framework). - Key components to achieve consolidation: - Non-oil revenue mobilization efforts. - Energy subsidy phase-out. - Rationalization of expenditures while increasing their efficiency. - Strengthening social safety nets. - Application and enforcement of credible fiscal rules to help limit spending procyclicality. - Adopt an integrated asset-liability management framework and enhance fiscal transparency to strengthen MTFF credibility and mitigate risks. - Financial sector reforms. - Continue reforms to support growth and stability, including: - Deepening financial and capital markets. - Strengthening macro-prudential and regulatory frameworks. - Ensuring effective supervision of the financial sector, including digital and fintech activities. - Fostering sustainable finance. - Implementing measures to strengthen AML/CFT frameworks. - Structural reforms to support diversification and transformation. - Continue structural policies to diversify away from hydrocarbon. - Reform product market regulations, labor markets, and governance to spur growth. - Invest efficiently in digital and green initiatives to accelerate transformation and support energy transition. - Carefully calibrate industrial policy so it does not substitute for structural reforms and minimizes related inefficiencies. - Promote regional and global integration to expand markets, attract FDI, and grow trade, thereby supporting diversification. ### D. Concluding Remarks - The GCC region benefits from strong non-hydrocarbon momentum, contained inflation, high current account surpluses, and healthy fiscal balances. - High global uncertainty and downside risks call for a comprehensive policy package: - Prudent near-term fiscal and monetary stances to rebuild buffers and manage shocks. - Medium-term fiscal consolidation anchored in a credible rules-based MTFF, revenue mobilization, subsidy reform, and expenditure rationalization. - Continued financial sector deepening and regulatory strengthening. - Structural reforms and targeted investments to accelerate economic diversification and the energy transition. *Prepared by IMF staff under the guidance of Amine Mati for the GCC Ministerial Meeting (October 5, 2023).* ### 6. The GCC countries have embarked in wide-ranging reforms to achieve socio-economic ### 6. The GCC countries have embarked in wide-ranging reforms to achieve socio-economic transformation ### Reform agenda and strategic priorities - GCC countries have set out ambitious reform agendas (Vision 2030 of Saudi Arabia, “We the UAE 2031”, Oman Vision 2040, Qatar National Vision 2030). - Implementation has progressed well and accelerated after the pandemic. - Main reform progress areas: - Social and business-friendly reforms. - Efforts to enhance fiscal sustainability and resilience. - Investments in strategic industries and digital and green infrastructure. - Policy priority: Stepped-up implementation of reforms to enhance productivity, diversify economies, and prepare for the energy transition. ### Economic activity and outlook - Aggregate growth and oil production cuts: - Overall GCC GDP growth projected at 1.5 percent in 2023, down from an exceptional 7.9 percent in 2022. - GCC hydrocarbon GDP grew by 7.8 percent in 2022 and is expected to register a negative growth of around 1 percent in 2023 because of oil production cuts in line with the OPEC+ agreement and further unilateral cuts of 1mpbd by Saudi Arabia extended to end-December 2023. - Non-hydrocarbon activity: - Non-hydrocarbon GDP grew by 5.3 percent in 2022 and is expected to grow at 4.3 percent in 2023. - Country highlights: - Saudi Arabia: H1 2023 non-hydrocarbon GDP growth averaged around 4.5 percent; robust non-oil private investment and giga projects driving wholesale, retail trade, construction, and transportation. - UAE: Published robust growth of 5.9 percent in H1 2023, driven by strong domestic demand. - Qatar: Non-hydrocarbon GDP grew 6.8 percent in 2022 (FIFA World Cup effects); expected non-hydrocarbon growth of 2.5 percent in 2023 driven by public projects and the North Field LNG expansion project and spillovers to logistics, manufacturing, and trade. - Bahrain and Kuwait: Non-hydrocarbon growth slowing but remaining above 3 percent. - Oman: Stabilizing above 2 percent; slower growth reflects fiscal consolidation, higher interest rates, and base effects from 2022. - Output gap: Non-oil output gap estimated to be closed in 2023 for Saudi Arabia and UAE according to nowcasting and high-frequency indicators. ### Inflation dynamics and drivers - Regional inflation trends: - Inflation averaged about 3.3 percent (y/y) in 2022, up from 2.2 percent (y/y) in 2021. - By August 2023 inflation slowed to about 1.6 percent (y/y). - Inflation expected to be 2.6 percent in 2023 and 2.3 percent in 2024, converging with the US in the medium term given dollar pegs. - Composition and drivers: - Tradables inflation subsided by end-2022 due to higher interest rates, slowing global growth, and continued use of subsidies and caps (staple goods, gasoline, electricity, water). - Non-tradables became the main driver of headline inflation in 2023, driven by stronger activity and rising housing costs. - Real estate prices: increasing rapidly in Dubai and modestly in Saudi Arabia; rents picked up in Kuwait. - Wage growth: Remained contained; no broad wage-price spirals observed on average in the GCC due to relatively elastic expatriate labor supply and increased labor force participation. - Box 1 findings on pass-through channels: - Imported goods’ prices contributed the most to GCC inflation in 2022. - A GVAR model shows external factors (imported inflation from trading partners, mainly driven by China, and the NEER) explained about 80 percent of historical inflation dynamics in the region between 1987Q1 and 2022Q2. - Pass-through of commodity price shocks (oil, raw materials) is limited, explained by prevalence of subsidies and administered prices. - Inflation uncertainty has subsided since the COVID-19 peak though it remains above its lowest in a decade. - No evidence that the 2022 inflation surge was associated with a rise in corporate market power; firm-level analysis indicates little rise or even declines in firms’ mark-ups across sectors despite robust increases in corporate profits over 2021-2022. ### Labor market and Sustainable Development Goals (SDGs) - Employment and unemployment: - Aggregate employment rebounded to pre-pandemic levels in 2022 and exceeded it in Saudi Arabia. - Expatriate employment fully recovered from the pandemic; nationals’ employment continued upward trend. - Unemployment rates fell for the second consecutive year in 2022; Saudi Arabia reached 5.6 percent as of 2022 (latest quarterly data shows 4.9 percent as of 2023 Q2). - Unemployment rates in several countries remain above pre-pandemic levels owing to higher labor force participation. - SDG progress: - Mixed progress across GCC on the SDGs. - Four countries (Oman, Qatar, Saudi Arabia, UAE) have exceeded two-thirds of the overall SDG score. - UAE and Saudi Arabia have fully achieved three and two SDGs, respectively. - Improvements driven by: more seats for women in parliament in Bahrain, Kuwait, Oman, UAE; higher manufacturing participation in GDP and employment; enhanced access to technology; increased share of salaries in GDP in Kuwait and Oman; improved statistical performance; higher government spending on health and education. - Female labor force participation (FLFP) rose by more than 10 percent over the past two decades but remains below levels suggested by GDP per capita; female unemployment remains higher than male unemployment. - GCC countries have accelerated climate actions relevant for SDG progress. ### Fiscal developments and outlook - Fiscal balances and reforms: - GCC registered an overall fiscal surplus of 7.7 percent of GDP in 2022 (unweighted), supported by high oil prices, strong growth, and fiscal reforms that limited capital expenditures and wage increases while mobilizing non-oil revenue. - For 2023, the fiscal surplus is expected to fall to 5.1 percent of GDP (unweighted) due to lower oil prices and higher capital expenditures in some countries, with some countries (e.g., Saudi Arabia) likely to return to a fiscal deficit once again. - Tax and revenue policy developments: - Bahrain doubled VAT rate to 10 percent in 2022. - Saudi Arabia maintained VAT rate at 15 percent. - UAE introduced a federal corporate income tax (CIT) rate of 9 percent effective on June 1, 2023. - Qatar introduced new Transfer Pricing regulations; Saudi Arabia implemented a new e-invoicing mandate. - IMF analysis: Macroeconomic impact of tax broadening has been relatively small so far. - Fiscal buffers, net wealth, and public debt: - GCC net wealth varies significantly: from 74 percent of GDP in Bahrain to 1640 percent of GDP in Kuwait. - Estimated average public net worth of a single GCC country in 2021 is comparable to Norway. - General government debt ratio decreased to about 43 percent of GCC GDP in 2022 (pre-pandemic levels). - Public debt remains above 100 percent in Bahrain despite a noticeable decline in 2022. - Debt service burden averaged around 14.2 percent of GDP in both 2022 and 2023. - New borrowing plans: issuing new debt (including local currency and sukuk) to deepen domestic markets and yield curves (Oman, Saudi Arabia, UAE), service high gross financing needs (Bahrain), and finance urgent needs related to the energy transition. - Risks: oil price volatility and contingent liabilities from SOEs/GREs are main sources of vulnerability; GREs' debt and vulnerabilities declined in 2022 but high interest rates and global slowdown could weigh on corporates. - Fiscal space and savings: - Fiscal space assessed as substantial for most GCC countries but constrained in Bahrain. - Most GCC governments increased saving rates and net foreign financial assets in 2022. - Caveat: Additional capital expenditure by SWFs and SOEs may not be reflected in general government statistics. *Source: IMF — Economic Prospects and Policy Priorities for the GCC Countries (chapter content as provided).* ### 17. Global monetary policy tightening has impacted domestic financial conditions and ### 17. Global monetary policy tightening has impacted domestic financial conditions and credit growth in the GCC countries to varying degrees ### Impact of global monetary tightening on domestic policy rates and credit - GCC central banks have roughly matched the aggressive policy rate increases by the U.S. Federal Reserve during its latest monetary policy tightening cycle, consistent with fixed exchange rate regimes. - Exception: Kuwait policy rate has risen by only 275 basis points over this period—well below the 525 basis-point increase in the Effective Federal Funds Rate (EFFR)—given the peg of the Kuwaiti dinar to an undisclosed basket of currencies. - Policy rate increases have passed through to domestic bank lending and deposit rates to varying degrees across the GCC countries. - Resultant tightening of financial conditions has contributed to a moderation in credit growth in most GCC countries (Saudi Arabia, Kuwait, Qatar, and the UAE), with the lagged impact limited by abundant liquidity amid high oil prices. - Variation in private credit growth across GCC countries has mainly been driven by idiosyncratic domestic demand factors rather than higher bank lending rates to date; example: the relatively sharp fall in credit growth in Kuwait reflects land supply constraints that have rationed residential investment demand. ### Banking system soundness and resilience - Banking systems in the GCC remain well capitalized, liquid and profitable, while asset quality is generally strong. - Capital adequacy ratios remain well above regulatory requirements. - Funding remains predominantly deposit-based. - Returns on equity and assets have rebounded from pandemic lows to strong levels across the GCC, helped by healthy net interest margins as deposit rates adjust less to increases in lending rates. - Asset quality: non-performing loan ratios are generally low; in the UAE the non-performing loan ratio, influenced by legacy NPLs, is on a downward trend. - Provisions against credit losses cover most non-performing loans, and are particularly prudent in Kuwait. - Banking sector vulnerability indicator: more than 40 percent of banks sampled could potentially be in distress during the Global Financial Crisis (2008–09); improved to less than 30 percent in the following decade, worsened during the COVID-19 pandemic, and is now back to less than 30 percent. ### Financial markets, capital flows, and external sector developments - Equities: - 2022: GCC equities +3 percent; EMs -22 percent. - As of end-September 2023: GCC stock markets lost 3 .9 percent on average, the benchmark for EMs (MSCI EM) gained +0.1 percent). - Saudi Arabia is the 9th and the UAE the 29th largest in the world for equity market capitalization. - Higher weights for Saudi Arabia in the MSCI EMs index (also due to the exclusion of Russia) attracted more foreign investors. - Debt securities: - Long-term external GCC sovereign yields rose 163 basis points in 2022, and another 70 basis points as of end-September2023, to 6.3 percent. - External GCC sovereign spreads tightened slightly by 55 basis points in 2022 and stayed stable in 2023. - Debt-raising activities include a $10 billion sovereign issuance, $6 billion sukuk issuance and green bonds by the PIF ($3 billion in October 2022, and $5.5 billion in February 2023) aiding Saudi Arabia’s long-term funding diversification. - Saudi Arabia accounted for 64 percent of total international bond issuance in 2023 to date. - UAE federal government issuance since 2021: USD 8.5 billion in international bonds and AED 16.7 billion in domestic bonds (including AED 5.5 billion in sukuk). - Bahrain issued international bonds and Sukuk in 2021 (US$ 4.50 billion total, about 10 percent of GDP). - UAE received relatively large syndicated loans in 2023 accounting for about 5 percent of their GDP. - GCC equities and bond flows: - GCC have outperformed EM peers in external sovereign spreads and bond flows through ETFs and mutual funds since 2023, though cumulative flows turned negative since the second half of August 2023. - External balances and reserves: - GCC current account surplus around 16.0 percent of GDP in 2022; expected to decrease to a 9.6 percent of GDP in 2023. - GCC gross FX reserves increased marginally in 2022 to 19.2 percent of GDP. - Reserves average 8.3 month of imports cover (around 100 percent of IMF’s reserve adequacy metric). - A large part of the GCC oil windfall was accumulated abroad (including by SWFs and SOEs); some repatriation of windfall observed in 2023 to finance investment projects. - Despite overall strength, vulnerabilities remain for some countries (e.g., gross financing needs for Bahrain remain elevated through the medium term). - Trade, openness, and FDI: - Trade openness and export diversification improved in 2022; negotiation of free trade agreements revived (GCC Secretariat talks with the United Kingdom; resumed negotiations with India and Japan). - UAE signed several CEPAs and agreements to settle trade in yuan and rupee since 2022. - GCC Tourism Strategy adopted in 2022 to promote sustainable tourism and service quality improvements. - FDI: GCC have attracted more FDI (as a share of GDP) than AEs and EMDEs since the pandemic. - UAE FDI inflows of $26 billion in 2022 (more than 5 percent of GDP). - Regulatory reforms (e.g., 2021 legislative changes in UAE allowing 100 percent foreign ownership of onshore companies; PPP changes in 2022) and new FDI laws in Saudi Arabia and Qatar (allow up to 100 percent foreign ownership) expected to support further FDI. - GCC have become more central in global FDI networks, driven by the UAE, Saudi Arabia, and to some extent Kuwait. ### Financial support to the ME&CA region and cross-border flows - GCC countries have significantly increased financial support to the ME&CA region after the COVID pandemic. - Increased financial flows from the GCC to ME&CA support private investment, productivity, and growth in recipient countries and help meet external financing needs in some cases. - Net financial flows and composition have shown rises in direct investment, portfolio investment, other investment, reserve assets, and financial derivatives (series presented in figures). ### Risks to the outlook and projections - Near-term outlook: positive, supported by strong domestic activity; pace of non-hydrocarbon growth expected to be healthy driven by increased capital investment and capital inflows. - Baseline oil price assumptions: international oil prices expected to average $80.5 in 2023 and decline to about $67.5 in the medium term. - Downside risks: - Lower hydrocarbon prices from subdued global activity (short term) and a quicker shift in demand for fossil fuels (medium–long term) due to decarbonization could reduce oil demand and revenue. - A global recession and higher-for-longer interest rates would reduce trade and tourism, pressure fiscal and external balances, and adversely affect vulnerable corporates. - Upside risks: - Higher-than-expected oil production if OPEC+ production cuts are reversed. - Higher oil prices if expectations of a supply shortfall persist. - Faster capital investments and accelerated structural reforms. - Inflation: - Inflation risks remain contained, with medium-term global inflation expected to trend downward, keeping inflation pressures in the GCC low. - Caps on domestic energy and food prices in most GCC countries continue to anchor lower inflation expectations. - Potential overheating risks in some countries (SAU and UAE) from high public investment, accelerated project implementation, and foreign financing inflows. ### Box 2 — Spillovers from China growth slowdown (summary of findings and empirical estimates) - A slowdown in China’s growth would put downward pressure on oil prices and demand, reducing oil GDP and revenue in the GCC, and could also affect non-oil GDP through reprioritization of public spending and sovereign wealth fund allocations. - GCC direct exposure to China has increased: hydrocarbon exports from the GCC to China represent 20 percent of their total hydrocarbon exports, more than twice the proportion observed a decade ago. - China absorbs nearly 10 percent of GCC non-oil exports; main non-oil exports include chemical products, plastics and rubbers, machines, and metals; travel services to China are also significant (e.g., China was Dubai’s fifth-largest tourist source market in 2019). - Financial linkages: FDI from China to the GCC increased significantly, reaching more than USD15 billion in 2021 (more than twice pre-pandemic levels). - Empirical spillover estimates (panel framework, 1990–2022): - A 1 percentage point negative shock in China’s growth decreases GCC non-oil output by 0.24 percent in the same year (very short term). - The same 1 percentage point negative shock reduces non-oil output by about 0.57 percent over the medium term (after four years). - These estimates reflect direct spillover effects after controlling for global developments via time fixed effects; cumulative effects could be larger if second-round effects are considered. *Source: IMF staff analysis in "Economic Prospects and Policy Priorities for the GCC Countries" (chapter content provided).* ### Box 2. Spillovers from China Growth Slowdown (concluded) ### Box 2. Spillovers from China Growth Slowdown (concluded) ### Trade transmission of negative spillovers - Time-varying estimates of the short-term effect on non-oil (in absolute term) are positively correlated with China’s share in non-oil exports of GCC, suggesting the negative spillovers to non-oil GDP are transmitted through trade linkages. - Correlation coefficient above 0.5. ### Empirical evidence and chart notes - Output Effect of a Growth Shock in China on GCC Growth (Percent of Real Non-Hydrocarbon GDP) - Sources: WEO and IMF staff calculations. - Note: The x-axis denotes years, where t=0 is the year of the growth shock in China. The lines denote the average response of real non-hydrocarbon GDP and the shaded areas denote 90 percent confidence bands. - Short-Term Output Effect of a Growth Shock in China on GCC Growth (Percent of Real Non-Hydrocarbon GDP) - Sources: WEO and IMF staff calculations. - Note: The x-axis denotes years until which the sample ends; for example, 2010 means the sample spans from 1990 to 2010. The lines denote the average response of real non-hydrocarbon GDP in the same year of the growth shock in China and the error bars denote 90 percent confidence bands. ### Financial and macro risks from higher-for-longer global interest rates - Market implied policy rate expectations continue to shift higher-for-longer in the U.S. and EA, given still elevated core CPI inflation and robust macroeconomic data, putting upwards pressure on sovereign yield curves and bank lending rates worldwide. - A prolonged period of tight global credit conditions could: - Slow growth and credit. - Lead to repricing of financial markets and tighter financial conditions in GCC. - Trigger further bouts of global banking system turbulence. - Transmission channels to GCC banking systems: - Higher short-term dollar denominated interbank loan spreads. - Rises in credit loss rates, including on cross-border exposures. - Regional housing and real estate exposures noted: - Mortgage boom in Saudi Arabia. - Large and increasing real estate and construction loan exposure of retail banks in Bahrain. - Sharp real estate price increases in Dubai. - Overall assessment: Despite the sectoral pressures above, overall banking sector risks from the housing sector are assessed to be manageable (see Box 3 referenced in the source). *Source: 1gccea2023001 - Box 2. Spillovers from China Growth Slowdown (concluded).* ### 37. Further progress on GCC fiscal frameworks will buttress fiscal structural reforms’ ### 37. Further progress on GCC fiscal frameworks will buttress fiscal structural reforms’ ### Fiscal frameworks: objectives and design - Accelerate work on fiscal frameworks to ensure the ‘upgraded’ and enhanced fiscal frameworks incorporate credible long-term fiscal anchors and fiscal rules, and stronger institutions, to balance both short-term and long-term objectives.12 - Strengthen linkages between fiscal frameworks and budget planning and execution. - Coordinate fiscal frameworks closely with country development strategies (such as GCC countries’ Visions) to fully account for reforms’ financing needs and potential growth benefits. - Proper assessment of the fiscal stance requires full incorporation of the operations of the SWFs and SOEs, which are increasingly involved in national development strategies. - Regular public communication of medium-term and annual fiscal plans and outcomes is needed. - Enhance coordination with monetary authorities to limit risks to liquidity management and to enhance fiscal policy credibility. ### Credible fiscal rules: role and recommended features - Credible fiscal rules are crucial to delink spending decisions from oil price fluctuations and to support implementation of GCC fiscal frameworks. - Historical examples: - Oman’s and Saudi Arabia’s medium-term fiscal frameworks aimed at balanced budgets in 2024 and 2020, respectively, but were modified to focus on fiscal sustainability. - Bahrain extended its Fiscal Balance Program targeting an overall fiscal balance by 2024. - Saudi Arabia is experimenting with a structural fiscal rule based on a 50-year smoothing of oil prices in real terms.13 - The UAE uses multiple fiscal rules: a balance budget rule for the federal budget, and oil price and debt rules by local governments (Emirates). - Design and governance recommendations: - Fiscal rules should clearly delink spending from higher oil prices and be guided by and consistent with a long-term fiscal anchor. - Rules should be enshrined in legislation and detail circumstances under which they can be amended to ensure flexibility. - Fiscal frameworks should be flexible in times of major economic shocks; include possibilities to recalibrate medium-term fiscal anchors consistent with long-term objectives, with clear public communication.12 - Rules should specify correction mechanisms, escape clauses, and periodic reviews to preserve integrity and credibility. - IMF technical note for Saudi Arabia: - IMF advice favors a spending ceiling with a simple rule based on the PIH for reconciling stabilization and growth objectives. - Staff estimates that an expenditure rule setting 1½-2 percent real growth in spending would have performed well given recent oil price developments.13 ### Sovereign asset and liability management (SALM) and public sector balance sheets (PSBS) - Advances in fiscal frameworks are needed to support development of SALM frameworks to improve fiscal policy efficiency and minimize “leakages.” - SALM enhances government fiscal risks monitoring by assessing both sustainability and vulnerability risks of broader public finances to shocks, but requires information on public sector balance sheets (PSBS). - Saudi Arabia and the UAE are taking initial steps on SALM by compiling public sector financial assets and liabilities. - Given increasing roles of SWFs and SOEs in capital expenditures, moving quickly to SALM is critical to monitor public balance sheet exposures and implement cost-effective risk-based management of public sector debt and assets. - A preliminary PSBS assessment suggests the balance sheet is healthy with significant assets and limited leverage, though with notable variation across the GCC (Box 5). Key PSBS statistics (as presented) - GCC net worth and net financial assets (narrow measure): - “Narrow” measure of central/general government net worth is estimated at around 688 percent of GCC GDP at the end-2022. - Central/general government net financial worth is estimated at negative 123 percent of GDP. - Public sector (broader measure): - GCC’s public sector net assets estimated at above 5000 percent of GDP. - Net financial assets at around 1066 percent of GDP at the end-2022. - GCC overall public net worth by country: - Ranges from around 74 percent of GDP in Bahrain to 1640 percent of GDP in Kuwait. - An estimated average public net worth of a single GCC country of around 840 percent of GDP (including NPV of hydrocarbon assets). - Asset and liability structure: - Assets of the sovereign wealth funds (SWFs) accounted for 22 percent of GCC total assets. - Fixed assets represented 16 percent of total assets. - Hydrocarbon assets represented 61 percent of total assets. - Liabilities of about 600 percent of GDP composed largely of central/general government and SOEs debt. - Change over time: - Estimates show GCC net worth remained broadly stable between 2021 and 2022, at around 5000 percent of GDP. - Simplified balance sheet excerpt (2022 or latest available, percent of GDP): - Assets967.03,312.31,153.4195.85,628.5 - Non-Financial Assets782.33,152.73,935.1 - Fixed assets 2/782.339.3821.7 - Hydrocarbon 3/3,087.03,087.0 - Financial Assets155.8159.61,153.4195.81,664.6 - liquid assets155.827.6192.2375.6 - illiquid assets132.03.6135.6 - Liabilities278.7129.247.9142.9598.6 - Domestic 115.0115.0 - External163.6163.6 - Net Assets 688.33,183.11,105.552.95,029.9 - Net Financial Assets -122.930.41,105.552.91,065.9 - Net Liquid Financial Assets-122.9-101.649.4-175.1 Notes on PSBS compilation and limitations - PSBS estimates compiled on a best-efforts basis using publicly available financial statements; significant data limitations exist on SOE assets and liabilities and lack of data on social security and pension fund balance sheets. State-controlled financial institutions’ balance sheets are not included (apart from central banks). ### Debt management, cash flow, and coordination - Sound debt management strategies should: - Focus on lengthening debt maturities, reducing refinancing costs, pre-financing and lowering debt when conditions are favorable, and building deep and liquid domestic debt markets. - Strengthen assessment and monitoring of contingent liabilities. - Plans to develop frameworks for assessing and monitoring guarantees and other contingent liabilities linked to private sector participation and PPPs are important (examples: Saudi Arabia and the UAE). - Improve coordination among fiscal authorities (central and local governments, SOEs, and SWFs) to improve cash flow management and forecasting (including treasury single accounts) and strengthen risk management practices. ### Fiscal risks monitoring and management - Enhance fiscal risk monitoring by incorporating risk management strategies into fiscal frameworks (Figure 30). - Primary fiscal risk in the GCC: hydrocarbon price volatility (Figure 31); other macroeconomic and financial sources appear contained. - Substantial fiscal buffers are important to cover risks from potential contingent liabilities. - GREs’ performance remains broadly robust as measured by profitability (ROA, ROE), liquidity, and debt performance, but contingent fiscal risks from GREs should be closely monitored and pre-emptively mitigated. - Priority actions: - Address data limitations on public sector balance sheets and fiscal statistics, including government contingent liabilities. Collect regular and timely information for fiscal risk analysis and macro-fiscal risk monitoring. - Saudi Arabia leads the region with quarterly and annual internal reports on macro-fiscal risks aligned with best international practices. - Establish formal reporting requirements for SOEs and PPPs in all GCC countries. - Improve control over contingent liabilities by requiring approval of SOEs’ annual borrowing and investment plans by finance authorities; set predictable dividend payout rules; and establish clear criteria (based on credit risk assessments) for issuance of guarantees. - In the medium term, consider incorporating SOEs in overall fiscal targets to promote fiscal discipline and transparency. - Monitor long-term fiscal risks from climate change and energy transition under strong fiscal frameworks. ### Fiscal transparency and implementation risk reduction - Further enhance fiscal transparency to strengthen MTFF credibility and reduce implementation risks. - Saudi Arabia has progressed with expanded Budget Statement and higher frequency report publication; PIF financial statements publication and improved public procurement transparency noted. - Regular publication recommended for: - MTFFs, general government budgets and reconciliations with budgeted outcomes (with sufficient spending details), - Sectoral fiscal statistics, - Hydrocarbon revenue management strategy, - Public sector balance sheet. - Phasing out extrabudgetary spending can reduce reform implementation risks and improve transparency (example: Bahrain). ### Monetary policy, exchange rate pegs, and financial stability links - Exchange rate pegs remain appropriate nominal anchors given GCC economic structures and have delivered relatively low and stable CPI inflation. - Strong external positions support the pegs but central banks should regularly review pegs’ appropriateness. - Reforms to strengthen monetary policy frameworks and transmission mechanisms should continue to support transitions to more independent regimes when appropriate, including: - Deepening money and debt markets by issuing more sovereign debt across a wide range of maturities, - Developing financial market infrastructure, - Strengthening liquidity management and forecasting with better high-frequency data, appropriate government revenue/expenditure forecasts, enhanced coordination between central banks and fiscal authorities, and regular exchanges of information with SWFs and Development Banks/Funds. ### Financial sector policies, fintech, and AML/CFT - Financial regulators should monitor banks’ foreign funding liquidity and credit quality, incorporate higher-for-longer interest rate risks into stress tests, and consider measures if capital or liquidity shortfalls are identified (e.g., reviewing countercyclical capital buffer, introducing dollar-specific liquidity coverage or net stable funding ratio requirements, or strengthening dollar-specific reserve requirements).14 - Continue strengthening macroprudential policy frameworks and build buffers where bank credit growth is rapid, including activating the countercyclical capital buffer. - Modernize regulatory and supervisory frameworks: fully implement Basel III final reforms and adopt IFRS9 reporting where needed; make supervision more risk-based. - Digitalization and fintech: - Fintech can boost non-oil growth but requires careful benefits/risks assessment. - Regulatory sandboxes exist in Bahrain, Kuwait, Oman, Saudi Arabia and UAE; digital bank licenses in Saudi Arabia and UAE; FinTech Hubs in Bahrain, Qatar and Saudi Arabia; DIFC FinTech Hive (UAE). - CBDC exploration/proofs-of-concept: Bahrain, Saudi Arabia and UAE leading; Oman assessing feasibility; Qatar exploring W-CBDC. - CBDC design can affect monetary policy transmission and pose financial sector risks (e.g., deposit displacement). - Continue activity- and entity-based proportionate regulation for fintech firms. - Strengthen AML/CFT frameworks in line with FATF standards, particularly on risk-based supervision of virtual assets, VASPs, and overall AML/CFT effectiveness. *Source: ECONOMIC PROSPECTS AND POLICY PRIORITIES FOR THE GCC COUNTRIES — INTERNATIONAL MONETARY FUND (chapter content provided).* ### 46. Policymakers must also ensure that GCC financial sectors are prepared for a green ### Policymakers must also ensure that GCC financial sectors are prepared for a green future. ### Financial-sector preparedness and near-term priorities - Enhance resilience of banks to physical and transition risks from climate change and boost insurance-sector capacity to speed recovery from climate-related disasters and help offset economic costs. - Near-term policy focus: - Better understand and measure climate-related risks (including both physical and transition risks). - Prioritize implementation of methodologies for quantifying and reporting such risks, promote transparent disclosure by financial institutions, and strengthen frameworks for forecasting and analyzing risks. - Ensure adoption of robust climate risk management practices within financial institutions. - Develop insurance sectors and leverage re-insurance markets. - Create a more conducive ecosystem for green finance, including development of standardized sustainable finance taxonomies and promotion of enhanced disclosures. ### Medium-term policy tools to scale green finance - Governments can: - Support green finance through incentives and market mechanisms. - Phase-out energy subsidies. - Introduce new tools and markets to stimulate demand for investment in green technologies. - Central banks and regulators can: - Provide guidance on integrating green finance into investment decisions. - Enforce green investment disclosure standards. - Scaling up public green investment by SWFs is recommended alongside fostering private green finance. ### Role of sovereign wealth funds (Box 6) - GCC SWFs characteristics (long-term investment strategies, contribution to economic and financial diversification) make them suited to finance the transition to a green economy. - Regional scale: - 12 regional SWFs collectively managing assets around $4 trillion. - Current trends and roles: - Some SWFs (e.g., Saudi Arabia’s Public Investment Fund and the UAE’s Mubadala) play important roles in economic diversification and domestic investment; some large mitigation projects (e.g., solar and wind farms) already financed domestically. - SWFs act as minority partners, attracting international and local private investors, co-investing with asset managers, private equity funds and institutional investors in green and sustainable projects. - The One Planet Sovereign Wealth Funds (OPSWF) Network has demonstrated increased cooperation can contribute to investments in clean hydrogen and accelerate renewable energy investments. - Several GCC SWFs (from the UAE, Saudi Arabia, and Oman) are providing climate finance in other MENA countries through mitigation projects. ### Financial-market development and reform priorities - Reforms to develop and deepen domestic financial and capital markets are important: - Example: In the UAE, full implementation of the Dirham Monetary Framework and continued issuance of local currency federal debt will support domestic capital market and yield curve development. - Develop and deepen domestic corporate bond markets, including further developing green and sukuk markets and increasing their sovereign issuances. - Structural market challenges: need for longer maturities, collateral, and refinancing. - Role of central banks and financial regulators: shape financial regulations and support development of financial market infrastructure to promote deepening of domestic markets. ### Diversification, competitiveness, and industrial policy - GCC reform agendas aim to spur non-hydrocarbon growth and foster competitiveness; four out of six GCC countries (Bahrain, Qatar, Saudi Arabia and UAE) are among the top 30 most competitive economies (IMD, 2023). - Strategies deployed include Special Economic Zones (SEZs) and local procurement for government contracts with tax waivers, relaxation of localization requirements, full repatriation of profits, and streamlined work permit and foreign ownership processes. - Policy recommendations: - Continue enhancing product market regulations, good governance, and anti-corruption frameworks. - Attract FDI, enhance product market competition and business regulations, streamline administrative and regulatory requirements, further remove restrictions on foreign ownership, align tax treatments of local and foreign firms, and reduce preferential treatments for government-related entities. - Improve transparency and accountability in the public sector, and promote investment in infrastructure and R&D to improve competitiveness and productivity of non-hydrocarbon tradable sectors. - Manage industrial-policy risks: ensure compliance with WTO rules, monitor SEZ spillovers, avoid fiscal incentives evolving into fiscal burden, use rigorous calibration and monitoring, cost-benefit analysis, integration into broader reform agenda, clear exit criteria, sunset clauses, strategic workforce upskilling, and focus on export orientation. Avoid discriminatory provisions such as local content requirements in government contracts. ### Labor market reforms and human capital - Labor market reforms should focus on improving labor market flexibility and dynamism. - Examples of reforms: - UAE programs: wage subsidies and training for citizens to take private jobs, minimum wage for all workers, and a form of unemployment insurance in the private sector. - Qatar: pension schemes expanded to cover more Qatari nationals working in the private sector. - Full implementation of the new Labor Law in the UAE and Oman is required to address structural rigidities. - Enhancing labor mobility, particularly for expatriate workers, would activate market incentives, improve competition between nationals and expatriates, incentivize upskilling, attract international talent, and raise productivity. - Policies to improve female labor force participation (FLFP): - Institutionalizing minimum wage and flexible work arrangements should help significantly increase FLFP. - Saudi Arabia reforms promoting gender equality led to a record-high of 37 percent FLFP in 2022. - Human capital: - Progress has been made in education and health provision, but quality of education still lags behind AEs and EMs; need to address skills mismatches and encourage technology and science-related majors. - Adopt a dual-education system combining vocational training with apprenticeships to bridge skills gaps. ### Digitalization and inclusion - GCC has actively embraced digitalization, investing in technology infrastructure and promoting entrepreneurship and innovation. - Digital progress: - Significant acceleration in digitalization across GCC during the pandemic; several aspects of UAE and Saudi Arabia now on par with AEs. - Saudi Arabia and UAE ranked third and fourth globally as of 2022 on the GovTech Maturity Index (GTMI). - Policy recommendations: - Prioritize digital skills and infrastructure investment: training for digital literacy and workforce upskilling; reinforce digital infrastructure with focus on R&D, eCommerce, and electronic payment systems. - Encourage holistic digital adoption across sectors, foster public-private collaboration, address labor market challenges from digitalization (job displacement, skill mismatches) using social safety nets and progressive taxation to ensure equitable benefit distribution. ### Climate policies, mitigation tools, and investment priorities - GCC climate commitments and initiatives: - UAE will host COP28. - Saudi Arabia, the UAE and Bahrain announced net zero emission targets by 2050 or 2060. - All GCC countries have pledged to reduce emissions considerably over the next decade. - Saudi Arabia spearheads the Middle East Green Initiative (MGI). - Decarbonization efforts and needs: - GCC countries invested heavily in solar power; wind power projects include Kuwait's Sagaya Wind Power Plant (10 MW), Oman's Harweel Wind Power Plant (50 MW) and Saudi Arabia's Dumat Al Jandal (400 MW). - CCUS: Qatar expected to grow CCUS capabilities to 5 million tons of CO2 per annum by 2025 in line with planned LNG production increase. - Saudi Aramco and UAE’s ADNOC investing in CCUS R&D and infrastructure, though scalability remains to be tested. - Investment into renewables should be scaled up further; sovereign wealth funds could finance clean and renewable energy projects and catalyze private participation. - Examples: Qatar’s Kahramaa plans to install up to 1000 EV charging stations by the end of the decade; Saudi Arabia testing hydrogen-powered trains and working on decoupling water production from fossil fuel consumption (world’s largest solar desalination plant underway). - Clean fuels such as hydrogen are being produced by Oman, Saudi Arabia and the UAE for export; focus should be on green or at least blue hydrogen. - Fiscal and subsidy policy: - Reducing fuel subsidies to incentivize cleaner consumption: - Using the IMF-ENV model for Saudi Arabia, eliminating fuel subsidies is estimated to achieve one third of the authorities’ 2030 emissions reduction target. - The IMF CPAT tool shows phasing out subsidies and using additional revenue for renewable energy investment would go a long way in achieving Bahrain’ 2035, Qatar’s 2030, and the UAE’s 2030 climate mitigation goals. - Continue mainstreaming sustainable finance to reduce direct fiscal burdens of meeting energy transition targets and preserve net public financial wealth. *Source: ECONOMIC PROSPECTS AND POLICY PRIORITIES FOR THE GCC COUNTRIES — INTERNATIONAL MONETARY FUND* ### 57. Regional integration is gaining momentum, which could further aid diversification ### 57. Regional integration is gaining momentum, which could further aid diversification ### Regional integration: recent initiatives and projects - July 2023: Bahrain and Saudi Arabia signed a memorandum of understanding with the aim of positioning both countries as a single regional and global tourism destination, aiming to jointly increase tourism flows. - Saudi Arabia signed a memorandum of understanding with Oman to promote tourism between the two destinations. - The GCC is considering a unified visa for tourists and businesspeople that would allow entry to all GCC countries. - Bahrain and Saudi Arabia have begun discussions about a potential transnational solar project that could supply Bahrain with a fifth of its power needs. - Bahrain, the UAE, Egypt and Jordan entered into an agreement on joint EV production to use Bahrain’s FTA agreement with the USA; vehicles will also be produced for local markets. - Increasing financial support and investment initiatives by GCC governments and their SWFs are raising the GCC’s role in the wider MENAP region. ### Climate mitigation and technology notes - Carbon capture, utilization and storage (CCUS) remains costly and largely still in study stage due to significant investment needs into equipment and materials for storage and to build the needed infrastructure more broadly. For details see, Carbon Capture, Utilisation and Storage - Energy System - IEA. ### Concluding economic outlook and policy priorities (summary of findings and recommendations) - Macroeconomic outlook and risks: - The economic outlook for the GCC region is positive, supported by relatively high oil prices and ambitious reforms. - Non-hydrocarbon growth is expected to remain strong; inflation has been contained and is falling, fiscal and external positions are healthy, and financial sector is sound. Risks are balanced. - Short-term policy guidance: - Fiscal policy should remain prudent to avoid procyclicality, rebuild buffers and support disinflation. - Monetary policy should follow the U.S. Federal Reserve’s. - Financial stability risks from higher-for-longer rates should be closely monitored. - Medium-term policy guidance: - Pursue fiscal consolidation in line with the long-term fiscal anchors and supported by a credible rules-based MTFF. - Consolidation tools include: non-oil revenue mobilization, energy subsidy reform and spending rationalization while strengthening social safety nets. - Further strengthen fiscal, monetary, and prudential frameworks to support growth and stability, guarding against risks and vulnerabilities. - Structural and diversification priorities: - Leverage regional cooperation to further advance diversification. - Increase FDI and investment in digital and green initiatives to support a smooth energy transition and build on diversification efforts. *Source: 1gccea2023001 - 57. Regional integration is gaining momentum, which could further aid diversification* ### 5. We use consolidated firm accounts from a ### 5. We use consolidated firm accounts from a sample of publicly listed firms from COMPUSTAT Global for 2000–2022 ### Data and methodology - Sample construction and processing: - Sample: publicly listed firms from COMPUSTAT Global covering 2000-2022, limited to 13 Middle East & Central Asian (ME&CA) countries, including GCC countries. - Winsorization: sales-cogs (cost of goods sold) ratio winsorized at the 1 percent level. - Exclusions: observations reporting negative sales or cogs excluded. - Deflation and currency conversion: firm accounts deflated using country-level deflators from the IMF WEO database and converted to USD for cross-country comparability. - Resulting sample size: approximately 1300 firms and 20,700 firm-year observations. - Empirical approaches: - Markup measurement: markups interpreted relative to the competitive benchmark of 1 (deviations >1 indicate market power). - Local projection exercise: used to estimate the effect of a 1 percent inflation shock on sales-weighted markups in panel of GCC and non-GCC MENAP countries. - Difference-in-differences comparison framework for VAT impact: comparing B2B and B2C firms’ markup changes across the tax reform. - Digitalization regressions: fixed-effect models (and OLS for public sector GTMI due to data constraints) using the Enhanced Digital Access Index (EDAI) and controls (inflation, lagged real GDP growth, control of corruption, trade openness). Banking sector regressions include interaction with crisis episodes (Crisis Shocks * EDAI). - Firm-level recession resilience: Jorda’s (2005) local projection method applied to firm-quarter data; industry-level digital intensity proxied by (i) intangible assets share, (ii) share of inputs from digital industries, and (iii) Calvino et al. (2018) composite ICT index. ### Findings — Market power and markups - Regional comparisons: - Market power in the GCC and ME regions has been higher than in the US. - Unlike the US, GCC market power has not shown an upward trend over the last twenty years. - A significant spike in market power in 2016 is observed after the listing of Saudi Arabia’s ARAMCO. - The GCC and the ME have not followed the rising global trend of corporate market power reported elsewhere. - Summary statistics and trends: - In a perfectly competitive market, markups = 1. - The average markup in the GCC was close to 1.4 around 2010. - Excluding ARAMCO, the trend is downward and stable around 1.45 between 2010 and 2020. - Firm size and sectoral patterns: - ME displays a “superstar” phenomenon: firms with higher sales have higher market power (applies to oil, mining, and utilities sector and other sectors). - Oil, mining, and utilities sector exhibits higher market power than other sectors across the entire sales distribution (linked to OPEC+ dynamics). - Among listed firms: - Construction sector has the lowest average markups. - Oil, mining, and utilities sector and market services have the highest average markups. - Note: Low construction markups may partly reflect missing large construction firms from the sample. - Country-level patterns within GCC: - Sales-weighted average markups slightly fell overall in the GCC over the period. - Country-specific trends: - Oman and Kuwait show a weak upward trend in markups. - Qatar, Saudi Arabia (after excluding ARAMCO), and the UAE show a downward trend. - Possible explanations for downward trends include: structural reforms and stronger antitrust laws (e.g., Qatar’s competition law of 2006; Saudi’s competition law of 2019), changes in price elasticity of demand, and increased licensing agreements linked to diversification policies. ### Inflation, VAT reforms, and pass-through - Inflation shock response: - GCC firms reduce markups in response to a positive inflation shock, while firms in the rest of the ME do not adjust markups in response to inflation shocks. - Estimated effect: after a 1 percent inflation shock, firms in the GCC reduce their markups by 0.05 units relative to an average of 1.3 after two years of the shock. - Interpretation: GCC firms absorb some inflationary pressures and pass less of the price changes onto consumers; non-GCC MENAP firms appear to pass on price rises. - VAT reform effects: - VAT reforms may have lowered markups in some final product markets because VAT affects final-consumer demand rather than business-to-business interactions. - Counterfactual comparison between B2B and B2C firms suggests that final-goods firms did not experience the higher markups one would expect absent the VAT-induced demand-channel effects (qualitative evidence from figure comparisons). ### Profits, dividends, and inflation episode of 2022 - Corporate outcomes 2021–2022: - Corporate profits and dividend payouts in the GCC increased robustly over 2021-2022. - Wages rose relatively slowly compared to prices over the same period. - Contribution of market power to 2022 inflation surge: - Analysis suggests that a rise in market power did not contribute materially to the GCC inflation surge of 2022. - Staff firm-level analysis indicates little or no change in firms’ markups across various sectors in GCC countries. - Findings for GCC countries are consistent with those for advanced economies (reference to WEO Chapter 1, October 2023). ### Digitalization: EDAI, GTMI, and macro- and sectoral impacts - Digitalization context and indices: - Enhanced Digital Access Index (EDAI) combines five sub-categories: availability of infrastructure, affordability of access, educational level of the population, quality of information and communication technology services, and internet usage. Raw data rescaled to [0, 1]; EDAI rescaled to [0, 100] for regressions. - GovTech Maturity Index (GTMI) used for public-sector digital adoption (World Bank measure across four areas). - Stylized progress in GCC: - GCC countries accelerated digitalization during the pandemic; UAE and Saudi Arabia now on par with advanced economies on several dimensions. - Saudi Arabia and UAE ranked third and fourth globally on the GovTech Maturity Index (GTMI) as of 2022. - GCC still lags AEs in digital payments, fintech, and corporate-sector digital skills intensity (LinkedIn tech-skills penetration below global average for Saudi Arabia and UAE). - Regression results (EMs subsample, Table 1): - Fixed-effect and OLS estimates (with robust standard errors in parentheses): - (1) Dependent variable: Financial Inclusion (EMs). EDAI = 0.76*** (0.16). Observations = 239. Number of Countries = 69. R2 = 0.86. - (2) Dependent variable: Return on Equity (EMs). EDAI = 0.04 (0.09). Crisis Shocks * EDAI = 0.25* (0.13). Observations = 859. Number of Countries = 65. R2 = 0.35. - (3) Dependent variable: GDP per capita, scaled (EMs). EDAI = 0.68*** (0.07). Observations = 1,616. Number of Countries = 86. R2 = 0.98. - (4) Dependent variable: Government Effectiveness (EMs). GTMI = 1.24*** (0.18). Estimated by OLS due to data constraints. Observations = 140. Number of Countries = 74. R2 = 0.72. - Statistical significance notation: *** p<0.01, ** p<0.05, * p<0.1. - Interpretation of digitalization coefficients: - A one-unit increase in the EDAI (approximately Saudi Arabia’s average annual improvement of EDAI during 2017-2021) is associated with: - 0.76 percentage point increase in financial inclusion on average for EMs (regression (1)). - Increased resilience of banking sector profitability during crises via Crisis Shocks * EDAI = 0.25* (regression (2)). - 0.68*** association with higher GDP per capita (regression (3)). - Improvement in GTMI exhibits a significant and positive impact on government effectiveness (GTMI = 1.24***, regression (4)); quantile robustness implies marginal gains remain meaningful even for top-ranked GCC countries. - Corporate sector and recession resilience: - Industry-level digital intensity associated with faster recovery from recessions for listed firms. - Firm-level sample for this exercise: publicly listed firms in all six GCC countries over 2001Q1 to 2022Q4. - Dependent variables analyzed include revenue, ROA, and ROE; results indicate cumulative impacts after one quarter (t+1) and six quarters (t+6) show faster recovery for digital-intensive industries. *Source: Excerpt from IMF chapter covering firm-level market power analysis and digitalization impacts (COMPUSTAT Global sample and EDAI/GTMI regressions).* ### 9. To continue supporting the strong development of digital economy in the GCC, ### 1gccea2023001 - 9. To continue supporting the strong development of digital economy in the GCC, ### Digitalization: benefits, risks, and policy priorities - Findings: - Strong growth of the digital economy is expected to continue promoting the GCC countries’ overall and sectoral productivity and efficiency. - Risks tied to digitalization adoption and use include data privacy, cybersecurity, and digital literacy issues. - Some GCC authorities have already taken legislative measures to mitigate risks associated with the fast-growing digital ecosystem. - Policy recommendations: - Monitor progress towards national digital strategies to ensure targets are reached, or re-adjust targets as domestic/external conditions evolve. - Continue investing in digital skills literacy and digital infrastructure supported by cybercrime regulations. - Maintain focus on education, public-private collaboration, and regulatory reforms to maximize benefits, foster competition, innovation, and international integration, and minimize risks such as job displacement and skill mismatches. - Adopt a comprehensive approach involving investments in digital infrastructure, skills development, social safety nets, and progressive taxation, as well as fostering competition, innovation, international integration, and technological adoption to ensure equitable sharing of digitalization benefits. ### GCC tax reforms since 2016: scope and numeric details - Key policy changes and numeric facts: - A GCC excise tax treaty introduced in 2016 harmonized excises on products deemed harmful to human health (energy and soft drinks, and tobacco) as of 2017. - The 2016 VAT tax treaty set the stage for a uniform imposition by the GCC of a 5 percent VAT. - Since 2020, VAT rates in Bahrain and Saudi Arabia were increased to 10 and 15 percent, respectively. - All excises are levied at a rate of either 50 or 100 percent. - Bahrain remains the only GCC without any form of corporate taxation outside the oil and gas sector. - Kuwait, Qatar and Saudi Arabia tax foreign companies (outside the GCC) only. - Saudi Arabia enforces a 2.5 percent Zakat on national companies and individuals alike. - Oman has a broad CIT of 15 percent (increased from 12 percent in 2017). - The UAE introduced a federal CIT in June 2023, with a 9 percent standard rate for taxable income exceeding 375,000 UAE dirhams ($102,000). - Multinationals will be subject to the Corporate Tax under the regular UAE Corporate Tax regime until the Pillar Two rules are officially adopted by the UAE. - Significant tax incentives will remain in many UAE free zones. - After implementation of the Common External Tariff (CET) in 2003, all non-GCC products, except for those exempted, are subject to 5 percent customs duty. ### Macroeconomic analysis of tax changes: methodology and controls - Methodology: - Standard Jordà (2005) method used in a cross-country fixed effects panel analysis. - Sample period for analysis: 2007-2022 (with some series only available as of 2015). - Impact studied for the first two years following each tax shock. - Controls included: - World GDP growth. - Average federal reserve rate. - International oil prices. - COVID stringency index (OxCGRT) to control for different lockdown procedures across GCC countries. ### Empirical results: VAT, excises, and corporate income tax (CIT) - VAT: - Results indicate no significant impact of VAT on non-oil GDP growth nor on private consumption. - Inflation increases in the year of the VAT increase by 0.1 percentage points for each 1 percent VAT increase, but reverses in the following year to a similar magnitude. - Inflation of tradable goods follows the same observation, while non-tradable goods experience a price reduction in the year after VAT increases. - Excise taxes: - Excise taxation (computed as an average over the 7 main existing excise categories) is not found to impact inflation or private consumption significantly. - Excise taxes have a small negative impact on non-oil GDP in the year following their increase, potentially due to temporary increases in smuggling or imports of similar lower-taxed goods from neighboring countries. - Excises are significant for food and tobacco companies: ROA is declining by 0.01 for each percent increase of the composite excise tax index (significant at the 5% level for ROA, but only for food and tobacco companies). - Corporate income tax (CIT): - Changes to CIT levied on foreign companies is found to significantly impact ROA negatively (p < 0.01). - A one percent increase in foreign corporate income tax is associated with a reduction of 0.04 percent in ROA. - Large firms are impacted by CIT changes noticeably less than smaller firms. - Firm-level impact overall: - The impact of VAT increases on ROA is found to be insignificant for large and small firms alike, indicating a well-functioning VAT refund system across the GCC. - Recent broadening of GCC tax systems had a relatively small impact on the GCC economies based on macroeconomic and firm-level analyses. ### Regression and firm-financial findings (selected exact numeric entries) - Regression sample sizes and fit: - Observations: 3,840 (ALL FIRMS); 274 (FOOD AND TOBACCO ONLY); 857 (SMALL FIRMS ASSET SIDE); 1,061 (LARGE FIRMS ASSET SIDE). - R-squared: 0.635 (ALL FIRMS); 0.472 (FOOD AND TOBACCO ONLY); 0.401 (SMALL FIRMS); 0.608 (LARGE FIRMS). - Number of country_id: 6 across regressions. - Selected coefficient magnitudes (with significance as reported): - Lagged Return on Assets: 0.691*** (ALL FIRMS); 0.641*** (SMALL FIRMS); 0.696*** (LARGE FIRMS). - Fed Rate (EOP): -0.135** (ALL FIRMS); -0.220*** (SMALL FIRMS). - Real GDP Growth: 0.084*** (ALL FIRMS); 0.067*** (SMALL FIRMS); 0.155*** (LARGE FIRMS). - VAT: -0.001 (ALL FIRMS); 0.215 (SMALL FIRMS); 0.027 (LARGE FIRMS). - Exise Composite Index: 0.001 (ALL FIRMS); -0.011** (FOOD AND TOBACCO ONLY); -0.011 (SMALL FIRMS). - CIT Foreign: -0.040*** (ALL FIRMS); -0.455*** (SMALL FIRMS); -0.078*** (LARGE FIRMS). - ROA distribution over time: - Charted ROA average and standard deviation values shown for 2007–2022 period (visual data present in source). ### Policy implications and recommendations on taxation and competitiveness - General guidance: - Additional broadening of tax systems will unlikely create a strong negative impact, based on current analysis. - CIT broadening or introduction should be broad without too many exemptions, but could give special consideration for small firms. - Targeted measures to support small firms: - Businesses below the countries’ VAT thresholds could be exempted from CIT and subject to a simplified regime on turnover (e.g., 2 percent). - Streamline fees that target business activity to reduce administrative and financial burdens that tend to hit SMEs particularly hard. - To reduce a possible impact on investment decisions, consider loss carry forward, accelerated depreciation and investment tax credits. - Wider reform context: - Taxes are not the only determinants of competitiveness; reforms to the labor and product market structure would likely have an even greater impact and thus should continue across the GCC. - A well-coordinated approach on additional tax types, as done with VAT and excise implementation, can help avoid competitive disadvantages for first movers. *Source: IMF — "GCC: Economic Prospects and Policy Challenges for the GCC Countries" (excerpts provided).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1gccea2023001.pdf_