## EXECUTIVE SUMMARY

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### A. Global Developments and Outlook and Implications for the GCC Region
- Global growth forecasts and recent performance
  - Global growth is forecast at 3.6 percent this year, and 3.7 percent in 2018, compared to 3.2 percent in 2016.
  - Economic activity is gaining momentum in 2017 driven by cyclical improvement in advanced economies and partial recovery in commodity prices.
  - Economic activity is projected to increase in 2017 to 2.2 percent in advanced economies and 4.6 percent in emerging market and developing economies, from 1.7 percent and 4.3 percent in 2016, respectively.
  - Global inflation remains subdued and below central bank targets in most advanced economies.

- Implications for oil markets and the GCC
  - Oil prices are trading around $60 a barrel, up from last year’s average price of $43 a barrel.
  - IMF oil price assumption (as of forecasts finalized late September) is an average price of $49 a barrel in 2018 and $53 a barrel in 2022.
  - Oil demand is expected to grow by about 1.4 to 1.5 million barrels per day in the context of higher global growth.
  - Considerable uncertainty surrounds the oil price outlook; high inventory levels and rapid U.S. shale response could limit sharp price rises.

- Financial conditions and monetary policy
  - Global financial markets have remained buoyant and supportive, with accommodative global financial conditions expected to persist as U.S. monetary policy normalization proceeds gradually.
  - GCC policy rates will likely need to be raised as U.S. rates rise given exchange rate regimes in the region, but external funding conditions for governments and the private sector should remain supportive.

- Regional growth and risks
  - In the MENA region, growth is projected to slow to 2.2 percent in 2017, from 5.1 percent in 2016.
  - Risks to the global forecast are broadly balanced in the near term but skewed to the downside over the medium term.
  - Policy choices (monetary, fiscal, structural reforms) will be crucial to shape the global outlook and reduce risks.

### B. Economic and Financial Outlook in the GCC Countries
- Aggregate growth and sectoral outlook
  - GCC countries continue to adjust to lower oil prices; fiscal consolidation has dampened growth but improved fiscal and external positions.
  - Non-oil growth is expected to increase to 2.6 percent this year, from 1.8 percent last year.
  - Overall real GDP growth is projected to slow to 0.5 percent in 2017 from 2.2 percent in 2016.
  - Medium-term growth prospects remain subdued amid relatively low oil prices and geopolitical risks.

- Growth outlook (detailed)
  - Real GDP growth in the GCC is expected to slow to 0.5 percent in 2017 from 2.2 percent in 2016.
  - Real oil GDP forecast to decline by 2.3 percent in 2017 (driven by reduction in oil output under the OPEC+ agreement).
  - Non-oil growth is expected to increase to 2.6 percent in 2017 (compared to 1.8 percent in 2016).
  - Looking to 2018:
    - Real GDP growth is expected to pick up to 2.2 percent.
    - Oil output is expected to increase by 1.9 percent (projections finalized before the decision to extend production cuts to end-2018).
    - Non-oil growth is projected to weaken slightly to 2.4 percent.
    - Over the medium-term, non-oil growth is projected at around 3.4 percent, about one half the 6.7 percent average pace achieved during 2000–15.

- Inflation
  - Inflation remains subdued.
  - In four of the six countries, CPI inflation is expected to be substantially lower in 2017 than in 2016 due to lower import prices and weaker economic conditions.
  - Looking to 2018, inflation is expected to increase due to:
    - envisaged introduction of the Value-Added Tax (VAT) in some countries;
    - assumed further increases in domestic energy prices in some cases (for example, in Saudi Arabia).

- Energy and commodity price developments
  - Natural gas export-weighted average prices decreased by about 17 percent between February 2017 and June 2017.
  - LNG supply growth from the United States, Russia, and Australia is expected to keep natural gas prices low.

- Financial sector conditions
  - Financial sectors remain resilient; banks generally remain profitable, well capitalized, and liquid.
  - With growth expected to remain relatively weak, monitoring of financial sector vulnerabilities should be enhanced.
  - Policymakers should manage evolving banking liquidity situations and support private sector access to funding; strengthening liquidity forecasting and developing liquidity management instruments are recommended.

- External accounts and financing
  - The aggregate current account balance swung from a surplus of about $240 billion in 2014 (14.4 percent of GDP) to a deficit of $46 billion in 2016 (3.4 percent of GDP).
  - Surpluses are projected in Qatar, Saudi Arabia, and U.A.E. in 2017.
  - Up to September 2017, GCC countries had issued some $70 billion in international markets.
  - Central bank reserves:
    - Fell from about $903 billion in 2014 to $705 billion in 2016.
    - Projected to reach $650 billion in 2017 as current account positions improve.

### C. Evolution of Policy Response to Fiscal, Monetary, Financial and Structural Challenges
- Fiscal adjustment and composition
  - Substantial fiscal consolidation has taken place in most countries, mainly focused on expenditure reduction.
  - Fiscal consolidation has been necessary but has weakened non-oil growth.
  - Fiscal consolidation is set to slow in the near term.

- Fiscal positions and consolidation (detailed)
  - Fiscal positions in 2016:
    - Deficits in all countries except Kuwait, which had a small surplus.
    - Particularly large deficits in Bahrain, Oman, and Saudi Arabia of over 15 percent of GDP.
    - Deficits in Qatar and the U.A.E. were less than 5 percent of GDP.
  - Fiscal outlook:
    - Fiscal deficits are expected to narrow considerably in 2017 in countries with high fiscal deficits (Bahrain, Oman, Saudi Arabia).
    - The cumulative budget deficits in the region during 2018–22 are estimated at about $160 billion.
  - Non-oil fiscal adjustment:
    - The non-oil fiscal deficit declined by about 20 percentage points of non-oil GDP during 2015–2016, mainly via expenditure cuts.
    - The non-oil fiscal balance is projected to improve by a further 14 percentage points of non-oil GDP over 2017–22 in the IMF staff’s baseline.

- Policy recommendations for fiscal frameworks
  - Continue to focus on recurrent expenditure rationalization.
  - Further energy price reforms are advised.
  - Increase non-oil revenues.
  - Improve efficiency of capital spending.
  - Fiscal consolidation should be accompanied by further improvement in fiscal frameworks and institutions.
  - Where fiscal space is available, use fiscal policy to support structural reforms that boost private sector growth and employment.
  - Maintain a strong and well-targeted social safety net to protect the most vulnerable.
  - Finance a streamlined level of government spending that provides efficient and high-quality public services.

- Non-oil revenue initiatives and expected yields
  - IMF staff estimates: revenue reforms identified by GCC governments could generate from 1.7 to 6.6 percent of non-oil GDP by 2020, depending on country-specific reforms.
  - Excise taxes:
    - Saudi Arabia introduced excises on tobacco and carbonated/energy drinks in June 2017: tobacco and energy drinks at 100 percent; carbonated drinks at 50 percent.
    - In U.A.E., implementation of excises on tobacco (100 percent), energy drinks (50 percent), and carbonated drinks (50 percent) started in October.
  - VAT:
    - GCC VAT agreement ratified; a number of countries plan to introduce VAT at the beginning of 2018.
    - VAT will be introduced at a 5 percent rate.
    - The VAT could help generate additional revenue in the range of about 1.5-3.0 percentage points of non-oil GDP.
  - Other taxes and fees:
    - Kuwait preparing a business profit tax reform to apply to all enterprises.
    - Saudi Arabia introduced/increased fees for visas and government services, a tax on vacant lands, and fees on expatriate labor and their dependents.
    - A tax of 3 percent on rents was introduced in 2016 in Abu Dhabi.

- Fiscal frameworks, institutions, and transparency
  - Medium-term fiscal frameworks established in Kuwait, Qatar, and Saudi Arabia, and in the United Arab Emirates at federal and emirate levels.
  - Saudi Arabia started publishing quarterly fiscal reports, significantly increasing fiscal transparency.
  - Macro-fiscal units operational in Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.
  - Debt management offices established in Kuwait, Oman, Qatar, and Saudi Arabia; strengthened in Abu Dhabi and Dubai.
  - Borrowing and investment decisions should be guided by a comprehensive asset-liability management strategy.

- Monetary and financial policy stance and recommendations
  - Monetary policy is expected to remain accommodative globally while normalizing gradually in the U.S.; GCC monetary responses will need to reflect exchange rate regimes and evolving external conditions.
  - Enhance monitoring of financial sector vulnerabilities, develop early warning indicators, and address data gaps to assess systemic risks.
  - Strengthen crisis management and bank resolution frameworks.
  - Continue progress in upgrading liquidity management frameworks by improving liquidity monitoring and forecasting and developing liquidity-injecting instruments.
  - Deepen domestic financial markets, especially domestic government and corporate bond markets, to support non-oil private sector growth.

### D. Other Issues and Structural Reform Priorities
- Importance of structural reforms
  - Structural reforms to diversify the economy, boost private sector development and productivity, and create jobs for nationals are critical.
  - Lower oil prices have increased urgency for GCC economies to rely less on the public sector as the main driver of growth.

- Strategic development plans and KPIs
  - All GCC countries have plans to expand the role of the nonhydrocarbon sector, targeting logistics, tourism, energy, financial services, health care, and manufacturing.
  - Saudi Arabia: Vision 2030 announced and key performance indicators (KPIs) are being established.
  - Oman and the U.A.E.: introduced KPIs; Qatar’s second national development strategy emphasizes robust monitoring and evaluation systems.

- Privatization and PPPs
  - Authorities are increasing the role of the private sector through privatization and PPPs.
  - Saudi Arabia: planning privatization programs in 16 sectors and the sale of a stake in ARAMCO.
  - Privatization planned in Oman.
  - PPP initiatives underway in Oman, Qatar, Saudi Arabia, U.A.E.

- Business environment reforms and remaining gaps
  - Recent progress includes one-stop windows for business registration and licensing, expedited customs processes, protecting minority investors in some countries, initiatives to foster SMEs, and enhanced access to finance.
  - IMF-aligned further efforts recommended:
    - Ensure publicly-funded projects in priority sectors are commercially viable to avoid future fiscal costs.
    - Ensure legal and regulatory frameworks for PPPs are well-designed to manage fiscal risks.
    - Further improve ease of doing business by enhancing access to credit and trading across borders and protecting minority investors.

- Labor market segmentation and reforms to increase nationals’ employment
  - Private sector employment is dominated by expatriates; nationals rely on public sector jobs.
  - Policy directions to encourage private sector employment of nationals:
    - Set clear expectations about limited prospects for future public sector jobs and review public sector compensation structure.
    - Make nationals more competitive through better education and training and by reducing over time wage and benefit differentials between nationals and expatriates.
    - Enhance efficiency of education spending.
  - Initiatives underway:
    - Saudi Arabia: reforming training and education systems, better targeting wage subsidies, increasing labor fees on expatriate workers, refining employment quota system.
    - Bahrain, Qatar, U.A.E.: visa system reforms to allow greater internal mobility of expatriate workers.
    - Qatar: a new draft law would grant some expatriate workers permanent residency.
    - Oman: steps to better align education and training with employer needs.

- Labor force participation and gender
  - Labor force participation rates for nationals are low in GCC countries; Saudi Arabia, Bahrain and Oman have some of the lowest participation rates in the world.
  - Significant gap between male and female participation rates in all GCC countries except Kuwait.
  - Female labor force participation is very low in Saudi Arabia and Oman.
  - Saudi policy measures to support higher female participation include subsidizing transportation and childcare costs, expanding childcare facilities, and encouraging teleworking.

- Data, transparency, and publication of IMF reports
  - Important statistical gaps remain:
    - Only Kuwait and Saudi Arabia report BoP and IIP statistics to the IMF for public dissemination in BPM6 format.
    - Only Bahrain, Qatar and Saudi Arabia publish quarterly GDP data.
    - Bahrain and the U.A.E. are the only countries reporting annual fiscal data in GFSM 2001 format.
    - Only Kuwait, Oman, Qatar and U.A.E. report monetary statistics using the current international methodology.
    - Only Saudi Arabia and the U.A.E. report financial soundness indicators to IMF for public dissemination.
  - No GCC country subscribes to the Fund’s Special Data Dissemination Standards (SDDS), although Saudi Arabia and Qatar are working with the IMF toward this objective.
  - Further economic transparency could be achieved by publishing IMF reports; not all GCC countries currently publish their IMF reports.

### Growth Risks and Key Model Findings
- Growth risks
  - Growth risks are tilted to the downside, particularly in the short term.
  - Considerable uncertainty surrounds the oil market outlook; weaker global growth, faster-than-expected U.S. monetary policy normalization, and regional conflicts could push risks downward.
  - On the upside, fiscal consolidation that boosts investor confidence and ambitious structural reforms could support stronger growth.

- Impact of oil price on U.S. monetary policy spillovers (key findings)
  - Prior evidence: an increase of 150 basis points in the federal funds rate decreases broad money growth in the GCC by more than 1 percentage point and non-oil activity by 1.5 percent two years after the shock (Prasad and Khamis, 2011).
  - New dynamic panel model finding:
    - Spillovers from U.S. monetary policy are larger when the real oil price is lower.
    - At a real oil price of $60 a barrel, a 100 basis-point increase in the U.S. real interest rate decreases annual non-oil real GDP growth by 0.13 percentage point.
    - If the real oil price falls to $40 a barrel, a 100 basis-point increase in the U.S. real interest rate would decrease annual non-oil real GDP growth by more than 0.6 percentage point.

*Source: GCC SURVEILLANCE PAPER, INTERNATIONAL MONETARY FUND.*

### EXECUTIVE SUMMARY __________________________________________________________________________ 3

### EXECUTIVE SUMMARY

### A. Global Developments and Outlook and Implications for the GCC Region
- Global growth forecasts and recent performance
  - Global growth is forecast at 3.6 percent this year, and 3.7 percent in 2018, compared to 3.2 percent in 2016.
  - Economic activity is gaining momentum in 2017 driven by cyclical improvement in advanced economies and partial recovery in commodity prices.
  - Economic activity is projected to increase in 2017 to 2.2 percent in advanced economies and 4.6 percent in emerging market and developing economies, from 1.7 percent and 4.3 percent in 2016, respectively.
  - Global inflation remains subdued and below central bank targets in most advanced economies.

- Implications for oil markets and the GCC
  - Oil prices are trading around $60 a barrel, up from last year’s average price of $43 a barrel.
  - IMF oil price assumption (as of forecasts finalized late September) is an average price of $49 a barrel in 2018 and $53 a barrel in 2022.
  - Oil demand is expected to grow by about 1.4 to 1.5 million barrels per day in the context of higher global growth.
  - Considerable uncertainty surrounds the oil price outlook; high inventory levels and rapid U.S. shale response could limit sharp price rises.

- Financial conditions and monetary policy
  - Global financial markets have remained buoyant and supportive, with accommodative global financial conditions expected to persist as U.S. monetary policy normalization proceeds gradually.
  - GCC policy rates will likely need to be raised as U.S. rates rise given exchange rate regimes in the region, but external funding conditions for governments and the private sector should remain supportive.

- Regional growth and risks
  - In the MENA region, growth is projected to slow to 2.2 percent in 2017, from 5.1 percent in 2016.
  - Risks to the global forecast are broadly balanced in the near term but skewed to the downside over the medium term.
  - Policy choices (monetary, fiscal, structural reforms) will be crucial to shape the global outlook and reduce risks.

### B. Economic and Financial Outlook in the GCC Countries
- Aggregate growth and sectoral outlook
  - GCC countries continue to adjust to lower oil prices; fiscal consolidation has dampened growth but improved fiscal and external positions.
  - Non-oil growth is expected to increase to 2.6 percent this year, from 1.8 percent last year.
  - Overall real GDP growth is projected to slow to 0.5 percent in 2017 from 2.2 percent in 2016.
  - Medium-term growth prospects remain subdued amid relatively low oil prices and geopolitical risks.

- Non-oil activity indicators
  - The non-oil economy appears to have modestly strengthened in 2017: purchasing managers’ index (PMI) for Saudi Arabia and U.A.E. has picked up from lower 2016 levels.
  - Non-oil real GDP growth showed modest recovery in Saudi Arabia in H1 2017; moderated slightly in Qatar and Bahrain but remained relatively strong.

- Energy and commodity price developments
  - Natural gas export-weighted average prices decreased by about 17 percent between February 2017 and June 2017, reflecting seasonal factors and stronger supply from the United States and Russia.
  - LNG supply growth from the United States, Russia, and Australia is expected to keep natural gas prices low.

- Financial sector conditions
  - Financial sectors remain resilient; banks generally remain profitable, well capitalized, and liquid.
  - With growth expected to remain relatively weak, monitoring of financial sector vulnerabilities should be enhanced.
  - Policymakers should manage evolving banking liquidity situations and support private sector access to funding; strengthening liquidity forecasting and developing liquidity management instruments are recommended.

### C. Evolution of Policy Response to Fiscal, Monetary, Financial and Structural Challenges
- Fiscal adjustment and composition
  - Substantial fiscal consolidation has taken place in most countries, mainly focused on expenditure reduction.
  - Fiscal consolidation has been necessary but has weakened non-oil growth.
  - Fiscal consolidation is set to slow in the near term.

- Policy recommendations for fiscal frameworks
  - Continue to focus on recurrent expenditure rationalization.
  - Further energy price reforms are advised.
  - Increase non-oil revenues.
  - Improve efficiency of capital spending.
  - Fiscal consolidation should be accompanied by further improvement in fiscal frameworks and institutions.
  - Where fiscal space is available, use fiscal policy to support structural reforms that boost private sector growth and employment.

- Structural reform priorities
  - Accelerate diversification and private sector development to offset lower government spending and ensure stronger, sustainable, and inclusive growth.
  - Step up reforms to improve the business climate and reduce the role of the public sector via privatization and PPPs.
  - Increase incentives for nationals to work in the private sector and for private firms to hire nationals.
  - Increase female labor force participation to benefit productivity and growth.
  - Implement well-sequenced and tailored structural reforms to boost productivity and investment and narrow gender labor force participation gaps.

- Monetary and financial policy stance
  - Monetary policy is expected to remain accommodative globally while normalizing gradually in the U.S.; GCC monetary responses will need to reflect exchange rate regimes and evolving external conditions.
  - Strengthen liquidity forecasting and develop liquidity management tools to help banks adjust to tighter liquidity environments.
  - Continue enhanced monitoring of financial stability risks given relatively weak expected growth.

### D. Other Issues
- General assessment
  - Growth prospects in the medium term remain subdued, underscoring the importance of accelerated diversification and private sector reforms.
  - Stronger global growth and increased trade will help GCC countries with more diversified export structures.
  - Policymakers have made a strong start in adjusting fiscal policy; the regional direction of fiscal policy is broadly consistent with the recommendations above.

*Source: GCC SURVEILLANCE PAPER, INTERNATIONAL MONETARY FUND.*

### 11.      Real GDP growth in the GCC is expected to slow to 0.5 percent this year from

### 11.      Real GDP growth in the GCC is expected to slow to 0.5 percent this year from

### Growth outlook
- Real GDP growth in the GCC is expected to slow to 0.5 percent in 2017 from 2.2 percent in 2016.
- Real oil GDP forecast to decline by 2.3 percent in 2017 (driven by reduction in oil output under the OPEC+ agreement).
- Non-oil growth is expected to increase to 2.6 percent in 2017 (compared to 1.8 percent in 2016) as fiscal consolidation generally slows and liquidity conditions improve.
- The diplomatic rift between Qatar and a number of countries is expected to have a limited impact at this stage, though some disruption in trade and financial flows will slow growth in Qatar modestly, particularly in the near term.
- Looking to 2018:
  - Real GDP growth is expected to pick up to 2.2 percent.
  - Oil output is expected to increase by 1.9 percent (projections finalized before the decision to extend production cuts to end-2018).
  - Non-oil growth is projected to weaken slightly to 2.4 percent.
  - Over the medium-term, non-oil growth is projected at around 3.4 percent, about one half the 6.7 percent average pace achieved during 2000–15.

### Inflation
- Inflation remains subdued.
- In four of the six countries, CPI inflation is expected to be substantially lower in 2017 than in 2016 due to lower import prices and weaker economic conditions.
- Looking to 2018, inflation is expected to increase due to:
  - envisaged introduction of the Value-Added Tax (VAT) in some countries;
  - assumed further increases in domestic energy prices in some cases (for example, in Saudi Arabia).

### Fiscal positions and consolidation
- Lower oil prices resulted in large fiscal deficits in 2016 despite fiscal consolidation measures.
- Fiscal positions in 2016:
  - Deficits in all countries except Kuwait, which had a small surplus.
  - Particularly large deficits in Bahrain, Oman, and Saudi Arabia of over 15 percent of GDP.
  - Deficits in Qatar and the U.A.E. were less than 5 percent of GDP.
- Fiscal outlook:
  - With oil revenues increasing and fiscal consolidation underway, fiscal deficits are expected to narrow considerably in 2017 in countries with high fiscal deficits (Bahrain, Oman, Saudi Arabia).
  - Based on IMF staff’s understanding of planned measures, fiscal deficits are expected to narrow further over the medium-term, though large deficits will persist in Bahrain and Oman.
  - The cumulative budget deficits in the region during 2018–22 are estimated at about $160 billion.
- Non-oil fiscal adjustment:
  - The non-oil fiscal deficit declined by about 20 percentage points of non-oil GDP during 2015–2016, mainly via expenditure cuts.
  - The non-oil fiscal balance is projected to improve by a further 14 percentage points of non-oil GDP over 2017–22 in the IMF staff’s baseline as policies deliver further adjustment and new policies are introduced.
- Fiscal reform measures implemented:
  - Reforming domestic energy prices.
  - Public-sector wage bill reductions: hiring freezes (Oman), limiting civil service employment growth (Saudi Arabia), streamlining wage payments/overtime/benefits (Oman, Saudi Arabia), merging ministries and reducing expatriate employment in the public sector (Qatar).
  - Significant capital spending reductions in Saudi Arabia.
  - Initiatives to increase domestic non-oil revenue mobilization.

### Employment and labor markets
- Public sector job creation for nationals has slowed in most countries, more evident in Bahrain, Oman, and Saudi Arabia.
- Private sector job creation for nationals:
  - Strong in Oman.
  - Weak in Bahrain and Saudi Arabia.
- The pace of private sector jobs creation for nationals has been slowing recently relative to 2011–14 averages.
- Unemployment:
  - Unemployment rates for nationals have edged up in Oman and Saudi Arabia.
  - Unemployment rates remain at low levels in Kuwait and Qatar due to continued public sector absorption.

### External accounts and financing
- The aggregate current account balance swung from a surplus of about $240 billion in 2014 (14.4 percent of GDP) to a deficit of $46 billion in 2016 (3.4 percent of GDP).
- With oil export revenues recovering and fiscal consolidation slowing import growth, current account balances are improving in 2017.
- Surpluses are projected in Qatar, Saudi Arabia, and U.A.E. in 2017.
- Countries have used reserves and external borrowing to finance fiscal and current account deficits.
  - Up to September 2017, GCC countries had issued some $70 billion in international markets.
  - In some cases (Qatar and Kuwait) this was used to rebuild buffers.
  - In Saudi Arabia, government external borrowing helped offset sizable financial outflows related to pension fund restructuring and Public Investment Fund (PIF) investments overseas.
- Central bank reserves:
  - Fell from about $903 billion in 2014 to $705 billion in 2016.
  - Projected to reach $650 billion in 2017 as current account positions improve.
- Real effective exchange rates moved with the U.S. dollar, which had appreciated for much of 2014–16 and declined in 2017.

### Financial sector and banking
- Most GCC central banks increased domestic policy rates in line with the U.S. Federal Reserve.
- Liquidity tightened during first half of 2016; interbank interest rate spreads increased in some countries (notably Qatar, Saudi Arabia, U.A.E.). Conditions improved in second half of 2016 and continued to ease in 2017 due to higher oil prices, increases in public sector deposits, payment of government arrears (Saudi Arabia), and central bank interventions.
- Funding shifts:
  - Non-resident deposits and wholesale funding became important alternative funding sources for banks—especially in Qatar and U.A.E.—as domestic deposit growth slowed.
  - Banks in Saudi Arabia reduced foreign assets in 2016 to ease domestic liquidity constraints; this shift has ended.
- Credit and deposits:
  - Following a broad-based deceleration across the GCC, private sector credit growth has stabilized.
- Diplomatic rift effects (since June 2017):
  - Downgrade of Qatar’s sovereign credit rating and outlook raised interbank interest rates.
  - Private sector deposits (resident and non-resident) and total liabilities to foreign banks have declined in Qatar.
  - Impact mitigated by liquidity injections by the Qatar Central Bank and increased public sector deposits.
- Overall banking system health:
  - Banks remain healthy.
  - Bank profitability weakened in some countries due to higher provisioning costs and compressed net interest margins amid intensified competition for deposits, but remains high.
  - Share of non-performing loans (NPLs) has barely changed in most GCC countries, though some loans with payment delays may be restructured rather than downgraded to nonperforming status.

*GCC Surveillance Paper — International Monetary Fund*

### 22.      Growth risks remain tilted to the downside, particularly in the short term. Considerable

### 22.      Growth risks remain tilted to the downside, particularly in the short term. Considerable

### Growth and external risks
- Growth risks are tilted to the downside, particularly in the short term.
- Considerable uncertainty surrounds the oil market outlook:
  - Weaker global growth, including if some countries pursue inward-looking and protectionist policies, could drive oil prices lower.
  - A stronger and more durable pickup in activity in advanced countries from sustained structural reforms or heightened regional political tensions could boost oil prices.
- Faster-than-expected monetary policy normalization in the U.S. could reduce investor appetite for GCC debt and the availability of cheap international financing.
- Risks from regional conflicts and geopolitical developments, including the diplomatic rift between Qatar and other GCC countries, remain.
- On the upside:
  - If ongoing fiscal consolidation boosts investor confidence, growth could be stronger than expected.
  - The growth impact of ongoing structural reforms is difficult to estimate; staff projections likely do not capture the full impact of ambitious structural reform implementation.

### Fiscal policy: progress, remaining needs, and composition
- Substantial progress has been made in adjusting fiscal policy; reductions in expenditures have been central to authorities’ strategies to address lower oil revenues.
- The compression in current expenditure during 2014–16 in most countries partly reversed the surge during 2010–13.
- The planned fiscal consolidation (incorporated in staff’s baseline projections) includes both non-oil revenue and expenditure measures; the appropriate mix depends on country circumstances.
- Policy objectives for fiscal consolidation:
  - Finance a streamlined level of government spending that provides efficient and high-quality public services.
  - Maintain a strong and well-targeted social safety net to protect the most vulnerable.
  - Create a level-playing field and vibrant environment for a diversified, job-creating non-oil private sector.
- Ongoing fiscal reform measures include:
  - Further reductions in non-wage recurrent spending (including energy subsidies).
  - Reductions in public wage bills as a share of GDP.
  - Additional cuts to capital expenditures while improving their efficiency.
  - Higher non-oil revenues (still very low in some countries), including introduction of value added taxes and excise taxes.
- Additional measures and sequencing:
  - More can be done to restrain wage and operational expenses to create room for higher social and other spending to support structural reforms and protect critical capital spending.
  - The wage bill can be reduced initially by tightening eligibility for allowances and reducing staff size by natural attrition.
  - Restructuring public sector employment should be gradual and linked with education and labor market reforms.
  - Comprehensive review of the role and functions of the state, and the size, composition, and targeting of social expenditures, with regular assessments.

### Cross-country variation in adjustment needs
- Size, scope, and urgency of additional adjustment needs vary across countries:
  - Countries with smaller deficits and substantial buffers (Kuwait, Qatar, and the U.A.E) can implement smaller and more gradual fiscal adjustments.
  - Others (Bahrain, Oman) may need larger adjustments and in some cases considerable additional policy measures to achieve front-loaded consolidation.
- Even countries with small projected budget deficits are not accumulating sufficient resources to protect future generations once hydrocarbon resources are exhausted.

### Non-oil revenue initiatives and expected yields (Box 2)
- IMF staff estimates: revenue reforms identified by GCC governments could generate from 1.7 to 6.6 percent of non-oil GDP by 2020, depending on country-specific reforms.
- Excise taxes:
  - Saudi Arabia introduced excises on tobacco and carbonated/energy drinks in June 2017: tobacco and energy drinks at 100 percent; carbonated drinks at 50 percent.
  - In U.A.E., implementation of excises on tobacco (100 percent), energy drinks (50 percent), and carbonated drinks (50 percent) started in October.
- VAT:
  - GCC VAT agreement ratified; a number of countries plan to introduce VAT at the beginning of 2018.
  - VAT will be introduced at a 5 percent rate, with some discretion for exemptions and zero-rated items within GCC agreement bounds.
  - The VAT could help generate additional revenue in the range of about 1.5-3.0 percentage points of non-oil GDP.
  - Qatar is establishing a separate and independent tax authority and has recruited experts for VAT design and implementation; Saudi Arabia’s GZAT has been hiring and training staff and reaching out to businesses.
- Other taxes and fees:
  - Kuwait preparing a business profit tax reform to apply to all enterprises.
  - Saudi Arabia introduced/increased fees for visas and government services, a tax on vacant lands, and fees on expatriate labor and their dependents.
  - A tax of 3 percent on rents was introduced in 2016 in Abu Dhabi.

### Fiscal frameworks, institutions, and transparency
- Fiscal consolidation should be accompanied by further improvements in fiscal frameworks, institutions, and transparency.
- A medium-term fiscal framework is crucial to guide fiscal consolidation and reduce implementation risks; annual budgets should be embedded in such frameworks.
- Progress reported:
  - Medium-term fiscal frameworks established in Kuwait, Qatar, and Saudi Arabia, and in the United Arab Emirates at federal and emirate levels.
  - Saudi Arabia started publishing quarterly fiscal reports, significantly increasing fiscal transparency.
  - Macro-fiscal units operational in Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.
  - Saudi Arabia has established the Bureau of Spending rationalization and the national project Management Office to strengthen public financial management.

### Debt management and financing trade-offs
- Debt management offices established in Kuwait, Oman, Qatar, and Saudi Arabia; strengthened in Abu Dhabi and Dubai.
- Borrowing and investment decisions should be guided by a comprehensive asset-liability management strategy that considers macro-financial developments, costs and risks, and trade-offs of each financing option.
- Trade-offs:
  - Placing too much public debt with local banks could crowd out private-sector credit.
  - Government debt issuance could deepen local capital markets and benchmark corporate financing.
  - External issuance reduces domestic financial system pressures but increases exposure to sudden-stop risk.
  - Issuing longer-maturity debt reduces rollover risk but involves cost trade-offs.

### Monetary, financial sector, and exchange rate policies
- Financial sectors will contend with relatively low oil prices and U.S. monetary policy normalization ahead.
  - Higher domestic interest rates from U.S. normalization will likely further constrain private-sector credit growth over time.
  - Lower oil prices could exacerbate effects of higher US policy rates on private sector credit growth and non-oil GDP growth.
- Policymakers have enhanced financial policy frameworks:
  - Examples: quantitative liquidity requirements (Bahrain); interbank benchmark rate (Oman); deepening domestic capital markets (Saudi Arabia); enhanced macroprudential frameworks (Bahrain, Qatar, Saudi Arabia); new corporate governance framework for Islamic banks (Kuwait); liquidity provision tools for Islamic banks (Oman); drafting new central bank and banking laws (U.A.E.).
- Recommendations and priorities:
  - Enhance monitoring of financial sector vulnerabilities, develop early warning indicators, and address data gaps to assess systemic risks.
  - Strengthen crisis management and bank resolution frameworks.
  - Continue progress in upgrading liquidity management frameworks by improving liquidity monitoring and forecasting and developing liquidity-injecting instruments.
  - As liquidity tightens and banks have more incentives to participate in the interbank market, central banks will need to depend more on open market operations.
  - Deepen domestic financial markets, especially domestic government and corporate bond markets, to support non-oil private sector growth.

### Liquidity pressures, bank funding, and correspondent banking
- Government deposits are unlikely to rebound to earlier levels, forcing banks to find alternative funding sources and potentially affecting banks’ ability to supply credit to the private sector.
- Authorities are taking steps to avoid withdrawal of correspondent banking relationships (CBRs):
  - GCC banks have not faced widespread withdrawal of relationships, but some money transfer operators, remittance companies, and small and medium-sized exporters have been affected.
  - Authorities are working with banks and financial institutions to ensure robust compliance with AML/CFT requirements and are maintaining open communication channels with domestic and international banks and regulators.

### AML/CFT frameworks
- Authorities are strengthening AML/CFT frameworks:
  - Upgrading legislative frameworks pertaining to AML/CFT.
  - All countries are actively conducting National Risk Assessments (NRAs) on both money laundering and terrorism financing.
  - Successful completion of NRAs and move toward a risk-based approach in AML/CFT supervision will improve management of AML/CFT risks.
  - Authorities should continue close work with financial institutions to ensure compliance with due diligence requirements.

### Currency pegs and exchange rate regimes
- Currency pegs remain appropriate due to GCC economic structure: exports dominated by oil and related products; high import content in domestic production.
- The peg to the U.S. dollar continues to provide a clear and credible monetary anchor.
- Exchange rate regimes should be periodically reviewed to ensure appropriateness as economies diversify exports and rely less on expatriate labor.

### Impact of oil price on U.S. monetary policy spillovers (Box 3) — key findings
- Prior evidence: an increase of 150 basis points in the federal funds rate decreases broad money growth in the GCC by more than 1 percentage point and non-oil activity by 1.5 percent two years after the shock (Prasad and Khamis, 2011).
- New dynamic panel model finding:
  - Spillovers from U.S. monetary policy are larger when the real oil price is lower.
  - At a real oil price of $60 a barrel, a 100 basis-point increase in the U.S. real interest rate decreases annual non-oil real GDP growth by 0.13 percentage point.
  - If the real oil price falls to $40 a barrel, a 100 basis-point increase in the U.S. real interest rate would decrease annual non-oil real GDP growth by more than 0.6 percentage point.
- Regression context and notes:
  - Models use GCC annual private sector real credit growth rates and non-oil real GDP growth rates with U.S. real interest rates and real oil price as explanatory variables, including interaction term.
  - US real interest rate is the real effective federal funds rate. Real oil price computed by deflating average spot crude oil price with US CPI using 2016 as base year; spot crude oil price is simple average of Dated Brent, WTI, and Dubai Fateh, US$ per barrel.

_Italic: Source — IMF staff (from the provided chapter content)._

### 34.      Structural reforms to diversify the economy, boost private sector development and

### 34.      Structural reforms to diversify the economy, boost private sector development and 

### Importance of structural reforms
- Structural reforms to diversify the economy, boost private sector development and productivity, and create jobs for nationals are critical.
- Lower oil prices have increased urgency for GCC economies to rely less on the public sector as the main driver of growth.
- The public-sector-led growth model has not produced the productivity gains or private sector jobs for nationals that are needed.

### Macro-structural constraints and potential gains
- Major impediments to private sector-led growth identified: skills of the labor force, the relative cost of local and expatriate labor, business regulations, and availability of credit for some countries.
- In Saudi Arabia, estimates suggest that a combination of reforms (deepen financial markets, increase trade openness, enhance worker skills, improve business environment, increase female labor force participation rate) could raise non-oil growth by 2 percentage points per annum over the longer-term relative to a no-reform scenario.
- Where fiscal space is available, fiscal policy can support the implementation of reforms to boost private sector growth and employment.

### Strategic development plans and KPIs
- All GCC countries have plans to expand the role of the nonhydrocarbon sector, targeting logistics, tourism, energy, financial services, health care, and manufacturing.
- Qatar and Saudi Arabia: improvements to logistics and transportation facilities.
- Bahrain, Oman, Saudi Arabia: key infrastructure projects to boost tourism potential.
- U.A.E.: focus on deepening the knowledge-driven economy, increasing competition, improving energy efficiency, and promoting entrepreneurship.
- Saudi Arabia: Vision 2030 announced and key performance indicators (KPIs) are being established.
- Oman and the U.A.E.: introduced KPIs; Qatar’s second national development strategy emphasizes robust monitoring and evaluation systems.

### Privatization and public-private partnerships (PPPs)
- Authorities are increasing the role of the private sector through privatization and PPPs.
- Saudi Arabia: planning privatization programs in 16 sectors and the sale of a stake in ARAMCO.
- Privatization planned in Oman.
- PPP initiatives underway in Oman, Qatar, Saudi Arabia, U.A.E. across various sectors.

### Business environment reforms and remaining gaps
- The business environment remains an issue hindering private sector growth in most GCC countries.
- Recent progress includes:
  - One-stop windows for business registration and licensing: Kuwait, Oman, Qatar, Saudi Arabia.
  - Expedited customs processes: Bahrain, Oman, Saudi Arabia.
  - Protecting minority investors: Bahrain, Saudi Arabia, United Arab Emirates.
  - Initiatives to foster SMEs: Oman and Saudi Arabia.
  - Enhancing access to finance: Bahrain, Oman and U.A.E.
  - Expedited process to connect to utilities: U.A.E.
  - Improvements in public service efficiency in Saudi Arabia and U.A.E.: merging ministries, outsourcing some services, expanding online services.
- Saudi Arabia launched the “Removing Obstacles to the Private Sector” program; implemented measures include developing capital markets, expediting customs clearance, updating companies law, and instituting a commercial mortgage law. Insolvency and competition laws are close to completion.
- IMF-aligned further efforts recommended:
  - Ensure publicly-funded projects in priority sectors are commercially viable to avoid future fiscal costs.
  - Ensure legal and regulatory frameworks for PPPs are well-designed to manage fiscal risks (IMF, 2016c).
  - Further improve ease of doing business by enhancing access to credit and trading across borders (Kuwait, Qatar and Saudi Arabia) and protecting minority investors (Bahrain, Oman and Qatar).
- The overall ease of doing business rankings deteriorated for Kuwait and Qatar in 2016.

### Labor market segmentation and reforms to increase nationals’ employment
- Private sector employment is dominated by expatriates; nationals rely on public sector jobs.
- Risks:
  - Absorbing new labor market entrants in the public sector would put pressure on fiscal sustainability.
  - Insufficient private sector job creation could increase unemployment.
- Policy directions to encourage private sector employment of nationals:
  - Set clear expectations about limited prospects for future public sector jobs and review public sector compensation structure.
  - Make nationals more competitive in the private sector through better education and training and by reducing over time wage and benefit differentials between nationals and expatriates.
  - Enhance efficiency of education spending (IMF, 2017e).
- Initiatives underway:
  - Saudi Arabia: reforming training and education systems, better targeting wage subsidies, increasing labor fees on expatriate workers, refining employment quota system with programs requiring nationals in certain sectors.
  - Bahrain, Qatar, U.A.E.: visa system reforms to allow greater internal mobility of expatriate workers.
  - Qatar: a new draft law would grant some expatriate workers permanent residency.
  - Oman: steps to better align education and training with employer needs; anticipated modernization of labor laws remains outstanding.
- Increasing formality and labor market participation, especially among women, would benefit productivity and growth.
- Improvements to labor markets and education will likely entail fiscal costs, strengthening the case for growth-friendly fiscal consolidation.

### Labor force participation evidence
- Labor force participation rates for nationals are low in GCC countries; Saudi Arabia, Bahrain and Oman have some of the lowest participation rates in the world.
- Significant gap between male and female participation rates in all GCC countries except Kuwait.
- Female labor force participation is very low in Saudi Arabia and Oman.
- Saudi policy measures to support higher female participation include subsidizing transportation and childcare costs, expanding childcare facilities, and encouraging teleworking.
- Companies could be offered fiscal incentives to build or reconfigure work spaces to accommodate women in line with social norms.

### Other issues — Improving macroeconomic statistics
- Progress is being made on economic data compilation and publication, but important statistical gaps remain:
  - Only Kuwait and Saudi Arabia report BoP and IIP statistics to the IMF for public dissemination in BPM6 format.
  - Only Bahrain, Qatar and Saudi Arabia publish quarterly GDP data.
  - Bahrain and the U.A.E. are the only countries reporting annual fiscal data in GFSM 2001 format.
  - Only Kuwait, Oman, Qatar and U.A.E. report monetary statistics using the current international methodology.
  - Only Saudi Arabia and the U.A.E. report financial soundness indicators to IMF for public dissemination.
- Compilation and dissemination of higher-frequency within-year fiscal data is important to monitor budgeted fiscal adjustment; publication of quarterly fiscal reports by Saudi Arabia is welcomed.
- No GCC country subscribes to the Fund’s Special Data Dissemination Standards (SDDS), although Saudi Arabia and Qatar are working with the IMF toward this objective.
- Only the U.A.E. has started compiling a financial balance sheet of the government.
- Further improvements needed in data on the real estate sector, household, government and corporate balance sheets, and the labor market.
- Close collaboration of national statistical offices and central banks with GCC-Stat is important for improving regional statistics.

### Other issues — Enhancing transparency and publication of IMF reports
- Further economic transparency could be achieved by publishing IMF reports; not all GCC countries currently publish their IMF reports.
- Given sizable financing needs, increased transparency is key to continue attracting investors.

*International Monetary Fund — GCC Surveillance Paper (selected excerpts).*

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_Source: https://www.imf.org/-/media/files/publications/pp/2017/pp121417gcc-outlook-and-policy-challengs.pdf_