## EXECUTIVE SUMMARY — ppea2020065

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### A. Global Developments and Outlook
- COVID-19 caused "the deepest global recession since the Great Depression."
- Growth shock:
  - Global growth: estimated 8 percent (y/y) contraction in 2020Q2.
  - Advanced economies: contracted by 11.1 percent (y/y) in 2020Q2.
  - Emerging market economies: contracted by 5.4 percent (y/y) in 2020Q2.
- Sectoral impacts:
  - Hardest hit: tourism, transportation, services, and construction.
  - IT-intensive activities fared much better.
- Policy responses:
  - Fiscal: higher health spending, relaxation of tax obligations (particularly for employers), increased social safety net spending.
  - Monetary/financial: lowering policy interest rates, relaxation of macroprudential rules, microprudential guidance (e.g., encouraging banks to accept delays in interest payments), liquidity support to sustain credit flows.
- Financial markets and oil:
  - Central bank and fiscal support reduced uncertainty and boosted investor risk appetite; debt issuance by firms and sovereigns remained strong.
  - Global oil demand: from 100 million barrels per day in 2019Q4 to 83 million barrels per day in 2020Q2 (IEA).
  - Brent price: doubled from its April low but remained "more than 30 percent below its end-2019 level."
  - Production changes (April vs. prior): OPEC crude production fell by 20 percent; Russian output fell by 12 percent; U.S. output fell by 8 percent.
- Public debt and capital flows:
  - Public debt ratios reached all-time highs in advanced and emerging market economies.
  - Capital outflows from emerging economies at onset have not reversed.
- Outlook (October 2020 WEO and MCD REO; info as of end-September):
  - Global GDP: projected to contract by 4.4 percent in 2020; growth of 5.2 percent in 2021.
  - Advanced economies: contraction of 5.8 percent in 2020; rebound to 3.9 percent in 2021.
  - Emerging market economies: contraction of 3.1 percent in 2020; rebound to 6.1 percent in 2021.
- Risks:
  - Substantial risk of long-lasting scarring from prolonged unemployment, bankruptcies, and erosion of human capital.
  - Uncertainty about timing and deployment of safe and effective vaccines.

### B. The Economic and Financial Outlook in the GCC Countries
- Health/epidemiological snapshot (as of November 1, 2020):
  - Confirmed COVID-19 cases in the GCC: 938,000.
  - Deaths in the GCC: 8,400.
  - Total cases per 100,000: range between 1,000 (Saudi Arabia) and 5,400 (Bahrain); GCC average 1,580 cases per 100,000.
  - New daily cases fell by 50 percent since mid-June; mortality rates far below emerging and advanced economies.
- Containment and mobility:
  - Measures: curfews, travel restrictions, closures (schools, universities, malls, mosques), social distancing, mandatory quarantine, suspension of workplace attendance.
  - Mobility: declined sharply in March; recovering but remains well below pre-pandemic levels.
  - Oxford Lockdown Stringency Index: GCC containment measures stricter than global average.
- Real activity:
  - GCC non-oil GDP: grew by 0.1 percent (y/y) in 2020Q1; contracted by 9.7 percent (y/y) in 2020Q2 (excluding Kuwait).
  - Saudi Arabia: retail and wholesale, accommodation, and transportation particularly hard hit.
  - PMI: declined in March/April; recovered from lows but remain at multi-year lows in Saudi Arabia and UAE.
- Oil production and oil GDP:
  - GCC crude production: 21.1 mb/d in April (from 18.5 mb/d in March) after OPEC+ ended in early March; dropped to 14.7 mb/d in June with new OPEC+ agreement; around 16.3 mb/d in September.
  - Real oil GDP: contracted by 1.7 percent (y/y) in 2020Q1 and contracted sharply in 2020Q2.
  - Saudi Arabia real oil GDP: fell by 5.3 percent (y/y) in Q2.
- Corporate sector:
  - Corporate earnings deteriorated in H1 2020.
  - Out of 565 firms: 36 percent experienced losses in 2020Q2 vs 26 percent in 2019Q2.
  - Excluding financial and real estate: 40 percent experienced losses in 2020Q2 vs 27 percent in 2019Q2.

### C. Policy Priorities (Immediate, Medium, and Structural)
- Immediate priorities:
  - Contain the pandemic, treat infected, and support households and firms.
  - Keep fiscal and monetary policy accommodative until recovery is well-established.
  - Gradually shift from broad-based to targeted support for households and viable firms.
  - Plan carefully to withdraw support without disrupting recovery.
- Medium-term fiscal strategy:
  - Pursue substantial and sustained fiscal consolidation once recovery is established to rebuild buffers and reduce vulnerabilities.
  - Balance adjustment speed to avoid excessive dampening of growth; countries with high debt need faster adjustment.
  - Key fiscal measures: phase out subsidies; reform public wage bills; ensure high efficiency of infrastructure spending; create space for social spending; diversify government revenues; reduce fiscal procyclicality to oil price swings.
- Structural reforms to boost private-sector-led growth and jobs:
  - Labor market reforms to reduce public sector wage premiums and encourage nationals to work in private sector.
  - Enhance education and skills; increase female labor force participation.
  - Address SME credit constraints: promote well-designed credit guarantee schemes; strengthen credit information availability; support digital technology adoption to enlarge financing options.

### D. Concluding Remarks
- The GCC faces a double shock: COVID-19 and lower oil prices, causing sharp deterioration in external and fiscal balances and fiscal strains in higher-debt countries.
- Authorities implemented mitigation: fiscal packages, relaxation of monetary and macroprudential rules, liquidity injections; recent signs of improvement.
- Credible medium-term adjustment and structural reforms are essential to rebuild buffers, reduce vulnerabilities, and support a durable private-sector-led recovery.

*Prepared by Daniel Kanda (Lead), Nooman Rebei, Yang Yang, Moayad Al Rasasi, Hatim Bukhari, and Tian Zhang; editorial support by Esther George and Nataliya Bondar. Paper updated with data available as of November 4.*

### Policy measures enacted (selected items)
- Tax deferrals or exemptions (mostly for businesses).
- Job support and other social benefits for households.
- Cuts in policy interest rates tracking the Federal Reserve.
- Deferral of loan repayments for bank customers (up to six months in some measures).
- Relaxation of macroprudential rules and liquidity injections into banking systems.
- Some governments cut or reprioritized expenditure or raised non-oil revenues to meet health and social priorities.
- Aggregate observation: monetary easing (policy rate reductions) in the GCC exceeded the global average; aggregate fiscal response smaller than many other regions.

### Growth outlook and GDP projections for GCC
- Non-oil economy: projected to contract by 5.7 percent in 2020; recover to 2.9 percent in 2021.
- Real oil GDP: projected to contract by 6.2 percent in 2020; grow by 1.2 percent in 2021 (assuming production in line with OPEC+ through end-2021).
- Overall real GDP: projected to contract by 6 percent in 2020 (pre-COVID October 2019 projection was 2.6 percent growth).
- 2021 overall GDP growth: anticipated to strengthen to 2.3 percent, contingent on containing COVID-19.

### Inflation, credit, external balances, and fiscal finances (selected exact figures)
- Inflation:
  - Dropped from 0.2 percent (y/y) in January 2020 to -0.5 percent (y/y) in June 2020.
  - Increased to 2.4 percent (y/y) in July and August, driven by Saudi Arabia where inflation jumped to over 6 percent after VAT increase from 5 percent to 15 percent in July.
  - GCC inflation forecast: 1.5 percent in 2020 and 2.9 percent in 2021.
- Credit growth: mostly positive but uneven—robust in Saudi Arabia and Qatar; near zero in Oman and UAE.
- External balances and trade:
  - Oil exports: projected to shrink by around $150 billion (37 percent) in 2020 vs 2019.
  - Imports: projected to drop by 14 percent due to weaker domestic demand and lower import prices.
  - Current account: from surplus of 5.8 percent of GDP in 2019 to deficit of 1.8 percent of GDP in 2020.
  - Financial account: from surplus of $26.5 billion in 2019 to deficit of $92.2 billion in 2020 (partly reflecting increased overseas investments by some GCC Sovereign Wealth Funds).
- Fiscal balances and financing:
  - Aggregate fiscal deficit: projected to increase to 9.2 percent of GDP in 2020 from 2 percent of GDP in 2019; projected to narrow to 5.7 percent of GDP in 2021.
  - Fiscal financing needs: staff estimates suggest increase by 8.7 percentage points of GDP to 13.5 percent of GDP in 2020.
  - Government debt issuance: $59 billion in the year to October 2020 vs $44 billion in 2019.
  - Debt maturing: over $100 billion projected to mature between 2021-2025.
  - Country buffers: ample in Kuwait, Qatar, Saudi Arabia and the UAE; significantly weaker in Bahrain and Oman.
  - Bond markets: Bahrain and Oman saw significant increases in bond spreads relative to other GCC countries.

### Financial sector soundness and selected indicators (exact figures)
- Pre-crisis: banks well capitalized and liquid with relatively low NPLs.
- Temporary measures (loan payment postponements up to six months) could conceal asset quality deterioration.
- Supervisory recommendation: proactively ensure appropriate provisioning.
- Financial soundness indicators (selected exact figures):
  - BHR: Capital Adequacy (Tier 1) 2019 = 18.1; 2020 Q2 = 17.1. NPLs to Total Loans 2019 = 4.8; 2020 Q2 = 4.5. Loans to Deposits 2019 = 71.5; 2020 Q2 = 69.5. Return on Assets 2019 = 1.1; 2020 Q2 = 0.4.
  - KWT: Capital Adequacy (Tier 1) 2019 = 18.5; 2020 Q2 = N/A. NPLs to Total Loans 2019 = 1.5; 2020 Q2 = N/A. Loans to Deposits 2019 = 106.0; 2020 Q2 = 108.9*. Return on Assets 2019 = 1.2; 2020 Q2 = N/A.
  - OMN: Capital Adequacy (Tier 1) 2019 = 18.9; 2020 Q2 = 18.3. NPLs to Total Loans 2019 = 3.4; 2020 Q2 = 4.0. Loans to Deposits 2019 = 109.2; 2020 Q2 = 109.9. Return on Assets 2019 = N/A; 2020 Q2 = N/A.
  - QAT: Capital Adequacy (Tier 1) 2019 = 17.5; 2020 Q2 = N/A. NPLs to Total Loans 2019 = 1.8; 2020 Q2 = N/A. Loans to Deposits 2019 = 122.4; 2020 Q2 = 121.5*. Return on Assets 2019 = 1.6; 2020 Q2 = N/A.
  - SAU: Capital Adequacy (Tier 1) 2019 = 18.1; 2020 Q2 = 17.7. NPLs to Total Loans 2019 = 1.9; 2020 Q2 = 2.3. Loans to Deposits 2019 = 77.1; 2020 Q2 = 75.4. Return on Assets 2019 = 1.8; 2020 Q2 = 1.0.
  - UAE: Capital Adequacy (Tier 1) 2019 = 16.5; 2020 Q2 = 16.4. NPLs to Total Loans 2019 = 6.5; 2020 Q2 = 7.4. Loans to Deposits 2019 = 94.0; 2020 Q2 = 95.9. Return on Assets 2019 = 1.6; 2020 Q2 = 0.9.
  - Note: (*) Indicates these ratios reflect 2020 Q1 data.

### Labor market impacts and policies
- Saudi nationals unemployment: rose by 3.6 percentage points to 15.4 percent in 2020Q2.
- Nationals more likely to be in managerial/professional roles and able to work from home; expatriates concentrated in low-skill jobs.
- Policy measures: use of unemployment funds to finance nationals’ salaries; support for foreign workers less clear.
- UAE measures: encourage remote working and salary cuts; provide subsistence support for workers in need irrespective of nationality; offer grace periods on expired visas for expats to make job arrangements.

### Risks to the GCC outlook
- Downside skew from pandemic evolution and oil market uncertainty.
- Weaker global growth or pandemic resurgence could lower oil demand and prices or require further OPEC+ actions.
- Changes in global risk appetite could limit external borrowing for governments and private sectors, notably Bahrain and Oman.
- Geopolitical developments could weigh on confidence and growth.
- Delays in fiscal adjustments and structural reforms could weaken fiscal sustainability.
- Upside risk: faster-than-expected adoption of safe and effective vaccines.

### Short-term and sectoral policy guidance (selected items)
- Short-term:
  - Continue health measures and increasingly well-targeted support to households and firms.
  - Maintain accommodative fiscal and monetary policy until recovery solidifies.
  - Carefully withdraw broad-based temporary support; shift to targeted support for most affected sectors (e.g., transportation, tourism) and viable firms.
  - Coordinate fiscal and monetary/financial policies to avoid simultaneous withdrawal that could stress businesses.
- Preparedness for second wave:
  - Be ready to re-impose restrictions and provide policy support where fiscal/financial space allows.
  - Recognize lower oil revenues reduce fiscal space for renewed support.
- Fiscal guidance:
  - Reorient spending toward safety nets and targeted schemes for credit-constrained SMEs, affected sectors, and unemployed.
  - Support basic consumption needs of expatriate workers unable to exit due to travel restrictions.
  - For countries with limited fiscal space, fiscal consolidation is an immediate priority.
- Monetary guidance:
  - With U.S. policy rates likely to remain low, GCC monetary policy should remain accommodative.
  - Central banks should be ready to provide liquidity; careful timing needed when withdrawing liquidity support.
- Financial sector guidance:
  - Gradually withdraw temporary borrower support as clarity improves.
  - Return to strong pre-COVID regulatory and supervisory approaches.
  - Ensure provisioning levels increase and loan classifications reflect realistic borrower viability post-COVID.

### Medium- and long-run fiscal challenges and sustainability (exact figures and findings)
- Sustainability gaps (percent of non-oil GDP) estimated with substantial variation:
  - Baseline average fiscal sustainability gap across GCC: 32.7 percent of non-oil GDP.
  - Table 1 (Projected Fiscal Indicators in 2020, percent of non-oil GDP):
    - Bahrain: Oil revenue 12.6; Non-oil primary balance -19.6; Gross debt 143.4; Gross assets 54.2; Fiscal gap (Long run budget constraint) 16.3; Fiscal gap (PIH) 18.8.
    - Kuwait: Oil revenue 55.4; Non-oil primary balance -92.2; Gross debt 30.2; Gross assets 858.9; Fiscal gap (Long run budget constraint) 65.2; Fiscal gap (PIH) 69.3.
    - Oman: Oil revenue 32.3; Non-oil primary balance -57.5; Gross debt 121.4; Gross assets 81.5; Fiscal gap (Long run budget constraint) 48.9; Fiscal gap (PIH) 50.9.
    - Qatar: Oil revenue 36.7; Non-oil primary balance -34.2; Gross debt 97.8; Gross assets 317.7; Fiscal gap (Long run budget constraint) 21.2; Fiscal gap (PIH) 24.6.
    - Saudi Arabia: Oil revenue 17.1; Non-oil primary balance -32.8; Gross debt 42.9; Gross assets 89.2; Fiscal gap (Long run budget constraint) 22.4; Fiscal gap (PIH) 21.1.
    - UAE: Oil revenue 15.7; Non-oil primary balance -27.1; Gross debt 45.4; Gross assets 296.7; Fiscal gap (Long run budget constraint) 21.2; Fiscal gap (PIH) 24.7.
  - Footnote assumptions: IMF 2020c-consistent long-term oil demand forecasts; nominal interest rate 6 percent; inflation 2 percent; non-oil real GDP growth 3 percent in long term.
- Sensitivity analysis (Table 2, fiscal gaps under alternative scenarios; percent of non-oil GDP):
  - Bahrain: Baseline 16.3; Higher oil demand 13.1; Lower oil demand 17.0; Lower interest rate 17.1; Higher interest rate 15.6.
  - Kuwait: Baseline 65.2; Higher oil demand 42.9; Lower oil demand 70.5; Lower interest rate 74.0; Higher interest rate 56.5.
  - Oman: Baseline 48.9; Higher oil demand 41.1; Lower oil demand 51.0; Lower interest rate 51.3; Higher interest rate 46.6.
  - Qatar: Baseline 21.2; Higher oil demand 5.0; Lower oil demand 24.7; Lower interest rate 25.4; Higher interest rate 17.1.
  - Saudi Arabia: Baseline 22.4; Higher oil demand 8.1; Lower oil demand 25.3; Lower interest rate 24.8; Higher interest rate 20.2.
  - UAE: Baseline 21.2; Higher oil demand 13.9; Lower oil demand 23.0; Lower interest rate 24.2; Higher interest rate 18.4.
- Primary implications:
  - All GCC countries assessed to have substantial long-run sustainability gaps absent further fiscal adjustment.
  - Results reflect large non-oil structural primary deficits and assumed long-run oil market trends.
  - Adjustment timing trade-offs: "Immediate full adjustment" closes gap quickly but causes sharp short-run contraction; "Gradual adjustment" feasible but takes decades; "No measures beyond 2025" highlights need for continued action.
  - Periodic re-evaluation recommended due to uncertainty in oil deposits, oil prices, investment returns, and non-oil growth.
  - Note: Oman announced an ambitious medium-term fiscal adjustment plan in early November after these fiscal forecasts were finalized.

### Key areas for fiscal and structural reform
- Fiscal reforms:
  - Reduce overall spending envelope while protecting/improving efficiency of social spending.
  - Continue domestic energy price reforms.
  - Increase infrastructure investment efficiency and focus on green projects.
  - Broaden non-oil revenue base (accelerate VAT implementation where not yet adopted; consider property taxes; replace numerous business fees with corporate income tax; consider progressive personal income tax over longer horizon).
- Public sector wage bills:
  - Compensation gaps between public and private sector for nationals typically about 30–50 percent.
  - Wage bills remain high as percent of GDP; Kuwait public wages rose to 14 percent of GDP during 2010–18 from 11 percent during 2000–2009.
  - Except for Oman, Qatar and the UAE, wage bills stand above 10 percent of total GDP.
  - Policy: anchor wage bill growth in medium-term fiscal plans, focus on quality public services, undertake sectoral expenditure reviews, strengthen public service delivery mechanisms.
- Energy subsidies:
  - Gradual subsidy cuts already implemented in many countries (electricity, gasoline, other fuels).
  - Low oil price environment offers window to further reform domestic energy pricing to reduce subsidies; accompany with stronger social safety nets.
- Revenue measures and taxation:
  - Excise taxes and VAT: GCC agreement to introduce excises and VAT; some countries have not yet implemented them and should do so once recovery is underway.
  - Saudi Arabia increased VAT rate to 15 percent.
  - Potential to increase VAT over time; comparable benchmarks: other Middle Eastern countries 15.6 percent; other regions 17.2 percent.
  - Property taxes: consider targeting high-value properties with high thresholds.
  - Strengthen tax administration as non-oil revenue mobilization expands.

### Structural reforms to boost non-oil growth and SME financing
- Labor market reforms to facilitate private sector job creation for nationals; reduce public employment growth.
- Education and training to match private sector skill demands.
- Increase female labor force participation: female participation currently about 32 percent (nationals average); male participation about 83 percent.
- Potential labor force growth: additional 2.5 million GCC nationals by 2025 depending on participation rates.
- Measures: conditional unemployment assistance, active labor market programs, remove expatriate labor mobility restrictions (sponsorship), recent reforms noted in Qatar and Saudi Arabia.
- Business environment and capital markets:
  - Improve legal infrastructure, governance, reduce corruption, support SMEs, increase corporate financing options including capital markets.
  - Domestic capital market development to increase private sector financing and fund strategic infrastructure.
- SME finance and credit information:
  - SMEs under-lent relative to GDP contribution.
  - Credit Guarantee Schemes (CGSs): improve transparency, align with public finance frameworks, publish detailed financial reports and contingent fiscal cost assessments.
  - Expand Public Credit Registries (PCR) and Private Credit Bureaus (PCB) coverage; grant non-bank financial institutions access to credit data to improve competition and reduce costs for SMEs.
  - VAT implementation correlated with surge in credit information coverage.
- Digital finance and open banking:
  - Promote digitalization, open banking, fintech regulatory sandboxes.
  - Examples: Central Bank of Bahrain mandated open banking by 30th June 2019; Emirate NBD API Sandbox in UAE; Saudi initiatives via Fintech Saudi, SAMA, and Capital Markets Authority.
  - Strong digital infrastructure and e-government (UAE ranked 21 in 2020 UN E-government survey) support digital deregulation to promote internet-based businesses.

### Social spending, human capital, and infrastructure priorities
- Social spending: governments devote around 8 percent of GDP on average to social spending.
- Education:
  - School enrollment broadly comparable to AEs but international test scores indicate room to improve quality.
  - Increase efficiency of education spending to improve outcomes.
- Health:
  - Infant mortality rate in the GCC is twice that of AEs despite comparable per capita incomes—scope to strengthen healthcare systems highlighted by COVID-19.
- Social safety nets:
  - Crisis exacerbated vulnerabilities for fragile households.
  - Strengthen social assistance and social insurance with wider coverage and better targeting, including expatriate low-wage workers unable to exit region.
- Infrastructure and green investment:
  - Most GCC countries have high-quality infrastructure relative to peers; all except Kuwait rank better than average AE in efficiency.
  - Improve efficiency of public projects to increase value for money.
  - Prioritize green projects: alternative energy sources and less energy-intensive buildings to support energy price reforms.

*Source: ECONOMIC PROSPECTS AND POLICY CHALLENGES, INTERNATIONAL MONETARY FUND.*

### EXECUTIVE SUMMARY __________________________________________________________________________ 4

### EXECUTIVE SUMMARY

### A. Global Developments and Outlook
- The COVID-19 pandemic has resulted in "the deepest global recession since the Great Depression."
- Lockdowns and containment measures led to an estimated 8 percent (y/y) contraction in global growth in 2020Q2.
  - Advanced economies contracted by 11.1 percent (y/y) in 2020Q2.
  - Emerging market economies contracted by 5.4 percent (y/y) in 2020Q2.
- Hardest hit sectors: tourism, transportation, services, and construction. IT-intensive activities fared much better.
- Since May, many countries relaxed lockdowns, but increases in new infections undermined confidence and prospects for a sharp rebound.
- Policy responses:
  - Fiscal: higher spending on health care, relaxation of tax obligations particularly for employers, increased spending on social safety nets.
  - Monetary/financial: lowering policy interest rates, relaxation of macroprudential rules, microprudential guidance (e.g., encouraging banks to accept delays in interest payments), liquidity support for financial sectors to sustain credit flows.
- Global financial markets:
  - Central bank and fiscal support measures reduced uncertainty and boosted investor risk appetite; debt issuance by firms and sovereigns remained strong despite fragility in the real economy.
- Oil market developments:
  - Global oil demand fell from 100 million barrels per day in 2019Q4 to 83 million barrels per day in 2020Q2 (IEA).
  - Brent price doubled from its low in April but remained "more than 30 percent below its end-2019 level."
  - Compared to April, OPEC crude oil production fell by 20 percent; Russian output fell by 12 percent; U.S. output fell by 8 percent.
- Public debt and capital flows:
  - Fiscal relaxation and economic contraction caused public debt ratios to reach all-time highs in advanced and emerging market economies.
  - Capital outflows from emerging economies at the onset of the crisis have not reversed.
- Outlook (forecasts from October 2020 WEO and MCD Regional Economic Outlook, based on information as of end-September):
  - Global GDP projected to contract by 4.4 percent in 2020, with growth of 5.2 percent in 2021.
  - Advanced economies: contraction of 5.8 percent in 2020; rebound to 3.9 percent in 2021.
  - Emerging market economies: contraction of 3.1 percent in 2020; rebound to 6.1 percent in 2021.
- Risks:
  - Substantial risks of long-lasting scarring from high and prolonged unemployment, bankruptcies, and erosion of human capital.
  - Uncertainty about timing and deployment of safe and effective vaccines.

### B. The Economic and Financial Outlook in the GCC Countries
- Health and epidemiological situation (as of November 1, 2020):
  - Confirmed COVID-19 cases in the GCC: 938,000.
  - Deaths in the GCC: 8,400.
  - Total cases per 100,000 in the GCC: range between 1,000 in Saudi Arabia and 5,400 in Bahrain; GCC average 1,580 cases per 100,000.
  - Since peaking in mid-June, new daily COVID cases in the GCC have fallen by 50 percent.
  - Mortality rates in the region are far below rates in emerging and advanced economies.
- Containment measures implemented in the GCC:
  - Curfew and travel restrictions; closures of schools, universities, shopping malls, retail outlets, mosques, and public parks; social distancing; mandatory quarantine after travel; suspension of employee attendance in private and public work.
  - Mobility declined sharply in March and, while recovering, remains well below pre-pandemic levels.
  - Oxford Lockdown Stringency Index shows containment measures in the GCC have been stricter than the global average.
- Real activity in the GCC:
  - GCC non-oil GDP:
    - Grew by 0.1 percent (y/y) in 2020Q1.
    - Contracted by 9.7 percent (y/y) in 2020Q2 (excluding Kuwait for which Q2 data is not yet available).
  - Saudi Arabia: retail and wholesale, accommodation, and transportation sectors were particularly hard hit.
  - PMI indicators declined in March/April and, although recovered from lows, remain at multi-year lows in Saudi Arabia and UAE.
- Oil production and oil GDP:
  - GCC crude oil production jumped to 21.1 mb/d in April (from 18.5 mb/d in March) after the ending of the OPEC+ agreement in early March.
  - With the new OPEC+ agreement, GCC oil production dropped to 14.7 mb/d in June and was around 16.3 mb/d in September.
  - Real oil GDP contracted by 1.7 percent (y/y) in 2020Q1 and contracted sharply in 2020Q2.
  - Saudi Arabia real oil GDP fell by 5.3 percent (y/y) in Q2.
- Corporate sector performance:
  - Corporate earnings deteriorated in H1 2020.
  - Out of 565 firms with data, 36 percent experienced losses in 2020Q2 compared to 26 percent in 2019Q2.
  - Excluding financial and real estate sectors: 40 percent experienced losses in 2020Q2 versus 27 percent in 2019Q2.

### C. Policy Priorities
- Immediate priorities:
  - Continue to meet health and economic needs arising from COVID-19: contain the pandemic, treat those infected, and support households and firms.
  - Fiscal and monetary policy should remain accommodative until the recovery is well-established.
  - Gradually shift support from broad-based measures to targeted support for households and businesses most in need, and for firms those likely to be viable in the post-COVID environment.
  - Careful planning required to withdraw support without disrupting the recovery.
- Medium-term fiscal strategy:
  - Once recovery is established, pursue substantial and sustained fiscal consolidation to rebuild buffers and reduce vulnerabilities.
  - Adjustment speeds should balance fiscal strength with avoiding excessive dampening of growth—countries with high debt levels need to adjust more quickly.
  - Key fiscal measures:
    - Phase out subsidies.
    - Reform public wage bills.
    - Ensure high efficiency of spending on infrastructure.
    - Create space for additional social spending.
    - Diversify sources of government revenues.
    - Reduce the procyclicality of fiscal policy with respect to oil price swings.
- Structural reforms to support private sector-led growth and job creation:
  - Labor market reforms to reduce large public sector wage premiums and encourage nationals to work in the private sector.
  - Enhance education and skills.
  - Continue to increase female labor force participation.
  - Address constraints on SME access to credit:
    - Promote well-designed credit guarantee schemes.
    - Strengthen availability of information needed for assessing credit risks.
    - Support adoption of digital technologies to enlarge financing options.

### D. Concluding Remarks
- The GCC faces a double impact from the coronavirus and lower oil prices, with low oil prices causing a sharp deterioration of external and fiscal balances and fiscal strains in countries with higher debt levels.
- Authorities have implemented appropriate mitigation measures: fiscal packages, relaxation of monetary and macroprudential rules, injection of liquidity into the banking system; there are recent signs of improvement.
- Credible medium-term adjustment and structural reforms are essential to rebuild buffers, reduce vulnerabilities, and support a durable, private sector-led recovery.

*Prepared by Daniel Kanda (Lead), Nooman Rebei, Yang Yang, Moayad Al Rasasi, Hatim Bukhari, and Tian Zhang; editorial support by Esther George and Nataliya Bondar. Paper updated with data available as of November 4.*

### 13.        GCC governments have enacted a range of economic policy measures to mitigate the

### ppea2020065 - 13.        GCC governments have enacted a range of economic policy measures to mitigate the

### Policy measures enacted
- Deferral or exemption from taxes and fees (mostly aimed at businesses).
- Job support and other social benefits (aimed at households).
- Cuts in policy interest rates as the Federal Reserve reduced rates.
- Deferral of loan repayments for bank customers.
- Relaxation of macroprudential rules.
- Injection of liquidity into the banking system.
- Some governments cut expenditure, reprioritized spending within existing budget envelopes, or raised additional non-oil revenues to meet new health and social priorities without increasing overall spending.
- Aggregate observation: monetary easing (measured by the reduction in the policy rate) in the GCC has exceeded the global average, while the aggregate fiscal response has been smaller than in many other regions.

### Growth outlook and GDP projections
- Non-oil economy: projected to contract by 5.7 percent in 2020; recovery to 2.9 percent growth forecast for 2021.
- Real oil GDP: projected to contract by 6.2 percent in 2020 and grow by 1.2 percent in 2021 as countries produce in line with the OPEC+ agreement through end-2021.
- Overall real GDP: projected to contract by 6 percent in 2020 compared with the pre-COVID-19 October 2019 projection of 2.6 percent growth.
- 2021 overall GDP growth: anticipated to strengthen to 2.3 percent, contingent on progress in containing COVID-19.

### Inflation and credit
- Inflation trend: dropped from an average of 0.2 percent (y/y) in January 2020 to -0.5 percent (y/y) in June 2020; increased to reach 2.4 percent (y/y) in July and August (driven by Saudi Arabia where inflation jumped to over 6 percent due to VAT increase from 5 percent to 15 percent at the beginning of July).
- GCC inflation forecast: projected at 1.5 percent in 2020 and 2.9 percent in 2021 as domestic demand recovers.
- Credit growth: mostly remained positive in 2020 but uneven across countries—robust in Saudi Arabia and Qatar; near zero in Oman and UAE.

### External balances and trade
- Oil exports: projected to shrink by around $150 billion (37 percent) in 2020 compared to 2019.
- Imports: projected to drop by 14 percent due to weaker domestic demand and lower import prices.
- Current account balance: projected to decline from a surplus of 5.8 percent of GDP in 2019 to a deficit of 1.8 percent of GDP in 2020.
- Financial account: expected to drop from a surplus of $26.5 billion in 2019 to a deficit of $92.2 billion in 2020 (partly reflecting increased overseas investments by some GCC Sovereign Wealth Funds).

### Fiscal balances and financing needs
- Aggregate fiscal deficit: projected to increase to 9.2 percent of GDP in 2020 from 2 percent of GDP in 2019; projected to narrow to 5.7 percent of GDP in 2021.
- Fiscal financing needs: staff estimates suggest an increase by 8.7 percentage points of GDP to 13.5 percent of GDP in 2020.
- Government debt issuance: amounted to $59 billion in the year to October 2020, above total issuance of $44 billion in 2019.
- Debt maturing: over $100 billion of debt projected to be maturing between 2021-2025.
- Country-specific buffers: financial buffers remain ample in Kuwait, Qatar, Saudi Arabia and the UAE; significantly weaker in Bahrain and Oman.
- Bond markets: Bahrain and Oman have seen significant increases in bond spreads compared to other GCC countries.

### Financial sector soundness and risks
- Pre-crisis position: banks well capitalized and liquid with relatively low NPLs.
- Temporary support: measures allowing postponement of loan payments for up to six months could temporarily conceal deterioration in asset quality.
- Risk factors: continuation of low oil prices or COVID-19 resurgence could cause deterioration in asset quality and capital in some banks.
- Supervisory recommendations: banks and supervisors need to be proactive in ensuring appropriate provisions to mitigate risks from worsening asset quality.

### Financial soundness indicators (selected exact figures)
- BHR: Capital Adequacy (Tier 1) 2019 = 18.1; 2020 Q2 = 17.1. NPLs to Total Loans 2019 = 4.8; 2020 Q2 = 4.5. Loans to Deposits 2019 = 71.5; 2020 Q2 = 69.5. Return on Assets 2019 = 1.1; 2020 Q2 = 0.4.
- KWT: Capital Adequacy (Tier 1) 2019 = 18.5; 2020 Q2 = N/A. NPLs to Total Loans 2019 = 1.5; 2020 Q2 = N/A. Loans to Deposits 2019 = 106.0; 2020 Q2 = 108.9*. Return on Assets 2019 = 1.2; 2020 Q2 = N/A.
- OMN: Capital Adequacy (Tier 1) 2019 = 18.9; 2020 Q2 = 18.3. NPLs to Total Loans 2019 = 3.4; 2020 Q2 = 4.0. Loans to Deposits 2019 = 109.2; 2020 Q2 = 109.9. Return on Assets 2019 = N/A; 2020 Q2 = N/A.
- QAT: Capital Adequacy (Tier 1) 2019 = 17.5; 2020 Q2 = N/A. NPLs to Total Loans 2019 = 1.8; 2020 Q2 = N/A. Loans to Deposits 2019 = 122.4; 2020 Q2 = 121.5*. Return on Assets 2019 = 1.6; 2020 Q2 = N/A.
- SAU: Capital Adequacy (Tier 1) 2019 = 18.1; 2020 Q2 = 17.7. NPLs to Total Loans 2019 = 1.9; 2020 Q2 = 2.3. Loans to Deposits 2019 = 77.1; 2020 Q2 = 75.4. Return on Assets 2019 = 1.8; 2020 Q2 = 1.0.
- UAE: Capital Adequacy (Tier 1) 2019 = 16.5; 2020 Q2 = 16.4. NPLs to Total Loans 2019 = 6.5; 2020 Q2 = 7.4. Loans to Deposits 2019 = 94.0; 2020 Q2 = 95.9. Return on Assets 2019 = 1.6; 2020 Q2 = 0.9.
- Note: (*) Indicates that these ratios reflect 2020 Q1 data.

### Labor market impacts
- Saudi nationals unemployment: rose by 3.6 percentage points to 15.4 percent in 2020Q2.
- Nationals vs expatriates: nationals more likely able to work from home due to concentration in managerial and professional positions; expatriates usually work in low-skill jobs.
- Policy measures: some authorities used unemployment funds to finance salaries for nationals; support for foreign workers who are not generally entitled to such support is less clear.
- UAE measures: encouraging remote working and salary cuts; providing subsistence for workers in need irrespective of nationality; offering grace periods on expired visas to allow expats to make alternative job arrangements.

### Risks to the outlook
- Downside skew driven by pandemic evolution and oil market uncertainty.
- Weaker global growth or pandemic resurgence could lower oil demand and oil prices or require additional OPEC+ actions.
- Changes in global risk appetite could limit external borrowing for some governments and private sector, notably Bahrain and Oman.
- Geopolitical developments could weigh on confidence, investment and growth.
- Delays in fiscal adjustments and structural reforms could weaken fiscal sustainability.
- Upside risk: faster than expected adoption of safe and effective COVID-19 vaccines.

### Short-term policy priorities
- Continue health measures to contain the pandemic and treat infected, and support households and firms with increasingly well-targeted measures.
- Maintain accommodative fiscal and monetary policy until recovery is well-established.
- Withdraw broad-based temporary support carefully; shift to more targeted support for households and businesses most in need.
- Tailor support to sectors still affected (e.g., transportation and tourism) and distinguish viable post-COVID businesses from non-viable ones.
- Coordinate fiscal and monetary/financial sector policies to avoid simultaneous withdrawal that could stress businesses.

### Preparedness for a second wave
- Be ready to re-impose restrictions and provide more extensive policy support where fiscal and financial policy space allows.
- Recognize lower oil revenues reduce fiscal space for renewed support.
- Once pandemic impact abates, implement credible medium-term fiscal adjustments and rebuild financial buffers while advancing structural reforms for non-oil growth.

### Fiscal policy guidance
- Reorient government spending towards safety nets and timely temporary and targeted schemes for credit-constrained SMEs, most affected sectors, and unemployed individuals.
- Support basic consumption needs of expatriate workers who cannot exit due to travel restrictions.
- For GCC countries with limited fiscal space, fiscal consolidation is an immediate priority.

### Monetary policy guidance
- With U.S. policy rates likely to remain low, GCC monetary policy should remain accommodative.
- Central banks should be ready to provide liquidity; main challenge is timing withdrawal of liquidity support to maintain smooth banking system functioning.

### Financial sector policy guidance
- Gradually withdraw temporary borrower support as clarity about post-COVID period increases.
- Return to strong pre-COVID regulatory and supervisory approaches.
- Ensure provisioning levels are gradually increased and loan classifications reflect realistic views of borrower viability post-COVID.

### Medium- and long-run fiscal challenges
- Fiscal consolidation needed to reduce deficits, strengthen buffers, and ensure sustainability.
- Estimated sustainability gaps (in percent of nonoil GDP) range from about 16 percent in Bahrain to 65 percent in Kuwait (subject to large uncertainty).
- Drivers: large non-oil structural primary deficits and expected long-term decline of oil revenues as a share of GDP.
- Announced plans in Qatar, Saudi Arabia, and UAE—if fully implemented—will help contain medium-term pressures but additional long-run measures will be needed.
- Urgency greatest for Bahrain and Oman where buffers are low.
- Strengthening medium-term fiscal frameworks will: guide pace of adjustment, set expenditure paths consistent with revenue expectations, resist spending pressures, and support intergenerational saving objectives.
- Note: Oman announced an ambitious medium-term fiscal adjustment plan in early November after the fiscal forecasts in this paper were finalized.

### Key areas for fiscal reforms
- Reduce overall spending envelope while creating space for and improving efficiency of social spending.
- Continue reforms to domestic energy prices.
- Increase efficiency of infrastructure investment with greater focus on green projects.
- Broaden non-oil sources of revenue.

### Public sector wage bills
- Public sector employment preferred by many nationals; compensation gaps between public and private sector for nationals typically about 30–50 percent.
- Wage bills remain high as percent of GDP despite earlier downward trend; in Kuwait public wages rose to 14 percent of GDP during 2010–18 from an average of 11 percent during 2000–2009.
- Except for Oman, Qatar and the UAE, wage bills stand above 10 percent of total GDP (the average level observed in AEs).
- Higher wage bills have not on average produced better service delivery; government effectiveness indicator improved in UAE and Saudi Arabia but deteriorated in other countries despite increased wage spending.
- Policy recommendation: ensure wage bill policies are fiscally sustainable by identifying drivers of wage bills, anchoring growth in medium-term fiscal plans, focusing compensation and employment policies on providing quality public services, undertaking sectoral expenditure reviews and strengthening mechanisms for public service delivery.

### Energy subsidy reforms
- Most countries have gradually implemented energy subsidy cuts in recent years, increasing prices of electricity, gasoline, and other fuels.
- Example: Saudi Arabia increased gasoline prices, introduced a monthly indexation mechanism to export prices, and increased electricity prices.
- Energy consumption per capita in the GCC remains very high.
- Low oil price environment provides a window to further reform domestic energy pricing to reduce fuel subsidies, yielding savings and broader economic, social, and environmental benefits.
- Such reforms should be supported by stronger social safety nets to protect purchasing power of lower income households.

*Italic: IMF staff analysis as presented in the source content.*

### 33. There is a need to increase the

### 33. There is a need to increase the

### Social spending and human capital
- Governments in the region devote around 8 percent of GDP on average to social spending.
- Strengthening education systems is key to ensuring nationals have the skills in demand in the private sector and to support diversification efforts.
  - School enrollment rates are broadly comparable to advanced country levels, but standardized international test scores indicate significant room for improving the quality of education.
  - Increasing the efficiency of education spending is required to improve outcomes (see Figure 17).
- Health outcomes: despite comparable per capita income levels, the GCC’s infant mortality rate is twice that of AEs, indicating scope to strengthen healthcare systems.
  - The COVID-19 pandemic has magnified health challenges and highlighted the need to strengthen health systems.
- Social safety nets:
  - The crisis has exacerbated economic and human challenges for fragile households.
  - Social safety nets should be permanently strengthened, with social assistance and social insurance systems featuring wider coverage and better targeting.
  - Support should include expatriate low-wage workers, especially those who have lost their job and are unable to exit the region.

### Infrastructure and green investment
- Most GCC countries have already attained a high quality of infrastructure relative to global peers (Figure 18).
  - In terms of efficiency, all countries except Kuwait rank better than the average AE.
- Given ambitious investment programs under national agendas, higher efficiency in implementing public projects would increase the “value for money” of sizable capital spending programs (Figure 19).
- Investment priorities within the spending envelope:
  - Increase focus on green projects, including development of alternative energy sources and less energy-intensive buildings (to support reforms to raise domestic energy prices).
  - Green investment is defined as investment necessary to reduce greenhouse gas and air pollutant emissions.

### Revenue measures and taxation
- Additional revenue measures will be needed to expand fiscal space; a comprehensive review of tax policy options is needed.
- Excise taxes and VAT:
  - GCC countries have agreed to introduce excises on tobacco and certain types of sugary drinks and a value-added tax. Not all have done so.
  - Countries still to implement these taxes should move to do so as soon as possible once the recovery is underway.
  - Over time, there is scope to increase the VAT rate; Saudi Arabia recently increased the VAT rate to 15 percent.
    - Comparable benchmarks: other Middle Eastern countries (15.6 percent) and countries in other regions (17.2 percent).
  - Potential distortions from substantial VAT rate differentials between GCC countries may need interim assessment.
- Property taxes:
  - Could be considered as an efficient revenue source due to immobility of the tax base when supported by accurate valuation systems.
  - Property taxes can target high-value properties by setting a high threshold to indirectly target higher-income groups.
- Broader tax reform:
  - Replacing numerous business fees with a corporate income tax could strengthen ease of doing business.
  - Over a longer horizon, scope exists for progressive personal income taxation.
  - As non-oil revenue mobilization expands, strengthening tax administration will be important.

### Structural reforms to boost non-oil growth
- A broad range of reforms is needed to diversify away from oil revenues and boost non-oil growth.
- With further growth in government employment no longer sustainable, labor market reforms are required to facilitate private sector job creation for nationals.
- Measures to strengthen the business environment:
  - Fill remaining gaps in legal infrastructure, tackle corruption, and improve governance.
  - Support SME development, increase corporate financing options (including capital markets), and improve financing options for start-ups.
- Country example: In Saudi Arabia, Vision Realization Programs underpinning Vision 2030 are moving from design to implementation.

### Labor market reforms and demographics
- Labor force participation and growth:
  - Labor force participation rate of nationals on average remains low in the GCC: about 83 percent for men and 32 percent for women.
  - Participation has risen over the past decade with potential for further increases as highly educated nationals, especially women, enter the labor force.
  - Depending on participation rates, the labor force could grow by an additional 2.5 million GCC nationals by 2025.
- Policy measures to increase private sector employment of nationals:
  - Strengthen education and training to provide skills demanded by the private sector.
  - Remove remaining impediments to female participation, including ensuring adequate access to childcare facilities.
  - Make unemployment assistance conditional on participation in job search and training activities.
  - Use active labor market programs—targeted training, job search assistance, and time-limited wage subsidies—to support female and youth employment.
  - Remove restrictions on mobility of expatriate labor (sponsorship programs) that contribute to wage differentials and disincentivize hiring nationals.
    - Progress noted: Qatar and Saudi Arabia have recently announced reforms to increase expatriate labor market flexibility; Qatar also introduced minimum wage regulations for expatriates.
  - Ease restrictions on residency and job opportunities for expatriates to improve their contribution to domestic savings, investment, consumption, and growth.
    - UAE measures include long-term residency visas for large investors and special talents and expanded majority expatriate ownership of businesses in non-strategic sectors.

### Business environment, trade, and FDI
- Preconditions for broad-based private-sector growth include a predictable and simple legal framework, robust institutions, favorable business climate, appropriate incentives, low corruption, and a strong education system.
- Domestic capital markets:
  - Well-developed domestic capital markets would promote growth by increasing private sector access to financing and providing finance for strategic infrastructure projects.
- GCC-wide internal market:
  - Despite low trade barriers under the GCC Customs Union Agreement (2003), intra-GCC non-oil trade remains low at around 10 percent of total non-oil trade.
  - FDI inflows into GCC have stalled, averaging around 1.5 percent of regional GDP despite announced diversification strategies.
  - Further reducing non-tariff barriers would help boost trade and investment.

### SME development and financing
- SMEs are vital for diversification and private sector-led growth but face limited access to finance.
  - SME share of total loans is much lower than its contribution to GDP in the GCC (Figure 22).
- Credit Guarantee Schemes (CGSs):
  - CGS design and operation should be built on sound legal and operational bases, aligned with public finance management frameworks.
  - Most CGSs with available information have clearly defined eligibility criteria but can improve transparency of lending rate policies and align with risk-based pricing to limit moral hazard.
  - Detailed financial reports on CGSs should be regularly published, including assessments of contingent fiscal costs.
- Credit information and registries:
  - Facilitate widespread availability of high-quality borrower information to enable efficient KYC and credit risk assessment.
  - Expand coverage of Public Credit Registries (PCR) and Private Credit Bureaus (PCB) and promote open and non-discriminatory access to PCR/PCB data.
  - In the GCC, share of population covered by PCBs and PCRs is considerably lower than the average of AEs (Figure 23).
  - For some countries, PCRs/PCBs provide data only for banks, excluding financing companies that play a significant role in SME lending and face higher NPLs than banks.
  - Granting equal access to credit data for non-bank financial institutions would improve competition and potentially lower financing costs for creditworthy SMEs.
  - Countries implementing VAT (Saudi Arabia, Bahrain, UAE) experienced a surge in credit information coverage; similar effects are expected in others that adopt VAT.
- Digital finance and open banking:
  - Embracing digital technology can close the credit information gap.
  - Open banking allows licensed third parties access to customers’ financial data with consent, offering real-time visibility into liquidity and solvency.
    - Central Bank of Bahrain mandated adoption of open banking by all banks by 30th June 2019.
    - Emirate NBD launched an API Sandbox in UAE to co-create fintech solutions; UAE is developing a common regulatory framework covering stored value facilities and payment systems.
    - Saudi Arabia promotes digital finance through Fintech Saudi, SAMA, and the Capital Markets Authority.
  - Promoting the digital economy could yield significant growth dividends.

### Digitalization (Box 2 highlights)
- Technology is changing the economic and financial landscape and created new digital opportunities during the COVID-19 pandemic (e-commerce, telehealth, online education, remote work).
- Average ICT adoption in the GCC is close to that of AEs.
  - Some countries lifted bans on teleconferencing applications during the crisis.
  - Strong digital infrastructure (5G rollout and fiber expansion) suggests that enhanced digital de-regulation could promote internet-based businesses.
  - E-government is increasing: UAE ranked 21 in the 2020 UN E-government survey; most remaining GCC countries are among the top-50.

### Concluding remarks and policy priorities
- Short-run priorities to respond to COVID-19 impacts:
  - Increased healthcare and social safety net spending, tax relief for employers, and supportive financial conditions for companies and households, increasingly targeted to those most in need.
- Medium- and long-term priorities given fiscal strains:
  - Fiscal consolidation is needed to ensure sustainability while supporting a more inclusive and greener recovery; the speed of adjustment should balance fiscal needs and adverse impacts on activity and depend on country circumstances.
  - Adjustment is particularly urgent for Bahrain and Oman, where debt is elevated and financing pressures are rising.
  - Fiscal adjustment requires reforms to both expenditure and revenue:
    - Reorient spending away from public employment and energy subsidies toward social spending (education, health care, social safety net).
    - Improve spending efficiency and emphasize climate-friendly infrastructure.
    - Increase taxation of the non-oil sector where appropriate; move ahead with VAT where not yet implemented; consider property taxation; replace multiple business fees with corporate income taxes.
- Structural reforms to increase private sector-led inclusive growth:
  - Boost female participation rates.
  - Strengthen education and training to equip nationals with private sector skills.
  - Remove sponsorship-system restrictions on expatriate workers (recently done by Qatar).
  - Continue reforms to develop local financial markets, strengthen governance frameworks, and support young and dynamic SMEs.

*Source: ECONOMIC PROSPECTS AND POLICY CHALLENGES, INTERNATIONAL MONETARY FUND.*

### References

### References

### Listed References
- Callen, T., R. Cherif, F. Hasanov, A. Hegazy, and P. Khandelwal, 2014, “Economic Diversification in the GCC: Past, Present, and Future,” IMF Staff Discussion Note 14/12.
- International Monetary Fund, 2020a, “World Economic Outlook,” Washington, October (forthcoming).
- International Monetary Fund, 2020b, “Regional Economic Outlook for the Middle East and Central Asia,” Washington, October (forthcoming).
- International Monetary Fund, 2020c, “The Future of Oil and Fiscal Sustainability in the GCC Region,” Middle East and Central Asia and Research Department, No 20/01.
- International Monetary Fund, 2020d, “Social Spending for Inclusive Growth in the Middle East and Central Asia,” Middle East and Central Asia and Research Department, No. 20/12.
- International Monetary Fund, 2018, “Public Wage Bills in the Middle East and Central Asia,” Middle East and Central Asia and Research Department.
- International Monetary Fund, 2016a, “Economic Diversification in Oil-Exporting Arab Countries.”
- International Monetary Fund, 2016b, “Managing Government Compensation and Employment—Institutions, Policies, and Reform Challenges.”
- International Monetary Fund, 2012, “Macroeconomic Policy Frameworks for Resource-Rich Developing Countries,” IMF Policy Paper.
- International Monetary Fund, 2015, “The Commodities Roller Coaster: A Fiscal Framework for Uncertain Times,” IMF Fiscal Monitor.
- Kanda, Daniel, 2011, “Modeling Optimal Fiscal Consolidation Paths in a Selection of European Countries.” IMF WP/11/164.
- Kanda, D., and M. Mansilla, 2014, “Modeling Appropriate Fiscal Targets and Optimal Consolidation Paths for Resource-Rich Countries: The Case of Suriname.” IMF WP/14/121.
- Mirzoev, T., and L. Zhu, 2019, “Rethinking Fiscal Policy in Oil-Exporting Countries.” IMF WP/19/108.

*Appendix material summarized below is from the same content unit.*

### Appendix I — Summary of Policy Responses to COVID-19 in the GCC (Percent of GDP, excluding reallocation)
- Overall Fiscal Stimulus (reported per country)
  - Bahrain: 5.6% GDP ($2 bn) (BD737 million)
  - Kuwait: 1.5% GDP ($1.6 bn) (KD500 million)
  - Oman: - 5% GDP (-$3.1 bn) (-OR1.2 billion)
  - Saudi Arabia: 3.8 percent of GDP ($26.1 bn) (SAR 98 billion)
  - Qatar: 0.2% of GDP
  - U.A.E.: 2% of GDP ($7.2 bn) (AED26.5 bn)
- Revenue Measures (reduction in-)
  - Bahrain: 0.3% GDP ($93 million) (BD35 million); exemptions on various government fees.
  - Kuwait: Various taxes and fees were temporarily suspended. Tax deadlines, fines, and penalties were also relaxed.
  - Oman: Many taxes and fees were deferred for the period from March to end-September.
  - Saudi Arabia: 2% GDP ($13.3 bn) (SAR50 bn); VAT rate and customs tariff increases in 2020H2.
  - Qatar: 0.2% of GDP (QR 1.2 billion)
  - U.A.E.: N/A
- Expenditure Measures
  - Bahrain: 5.3% GDP ($1.8 bn) (BD702 million)
  - Kuwait: 1.5% GDP ($1.6 bn) (KD 500 million)
  - Oman: - 5% GDP (- $3.1 bn) (- OR 1.2 billion)
  - Saudi Arabia: (SAR 48 billion)
  - Qatar: 1.92.1% GDP & ($12.8 bn) (-SAR48 bn); outside of budget, employment support also provided through unemployment benefit fund.
  - U.A.E.: Nil; Qatar entry shows “N/A” for some items.
- Cumulative Rate Cuts
  - Bahrain: 125 bps
  - Kuwait: 125 bps
  - Oman: 170 bps
  - Saudi Arabia: 125 bps.
  - Qatar: 175 bps
  - U.A.E.: 125 bps
- Other Monetary and Financial Measures (selected items and pledges)
  - Bahrain: Up to 27.9% GDP ($9.8 bn) (BD3.7 bn); easing of liquidity coverage, curtailing the regulatory liquidity ratio, releasing the capital conservation buffer, easing some LTV limits, and delaying payments up to six months.
  - Kuwait: Reduction of capital buffers and increase in maximum lending ratio, unlocking RO 8 billion worth of liquidity; cutting the policy rate and other interest rates; reduction of the required margin for Loan-to-Value ratio for housing loans.
  - Oman: Loan payment deferrals, lending facilities and loan guarantees mainly for SMEs and support to points of sales and electronic payment; liquidity injection in banks 3.4% GDP ($23.2 bn) (SAR87.2 bn).
  - Saudi Arabia: 2.% GDP ($13.3 bn) (SAR50 bn); QCB to provide liquidity support to banks.
  - Qatar: 7.6% GDP ($27 bn) (AED100 bn) consisting of zero-interest rate collateralized loans to banks (AED 50 billion) and allowing the use of banks’ excess capital buffers (AED 50 billion); halving of banks’ required reserve requirements from 14% to 7% and relaxation of the Net Stable Funding Ratio and the Advances to Stable Resources Ratio effective through end-2021.
- Notes in the appendix
  - The information included in the table is not meant to be exhaustive on all measures taken by countries.
  - The overall budget impact for some countries is not yet clear as some measures may come from reallocations and not extra spending.
  - Estimates of the cost of some measures not available.
  - Pledged stimulus, which may or may not be used in full.

### Appendix II — Long Run Fiscal Sustainability in the GCC: Key Findings and Projections
- Conceptual framing
  - Fiscal sustainability question: if authorities take no further fiscal measures from now onward, can they maintain that posture over the long run? If yes, the fiscal position is sustainable (sustainability gap = zero); if not, inaction will lead to continuously rising debt-to-GDP and growing interest payment burdens.
  - For resource-rich economies, assessments often rely on the permanent income hypothesis (PIH): sustainable non-oil fiscal position constrained to be no larger than the annuity value of the wealth of a country. PIH variants include targets to keep wealth constant as a share of GDP or in per-capita terms; modified PIH incorporates investment in physical capital.
  - Mirzoev and Zhu (2019) find that in the presence of uncertainty the PIH may not be consistent with either fiscal sustainability or intergenerational equity.
  - Alternative methodology: evaluate the long run intertemporal budget constraint directly (Kanda and Mansilla (2014); Kanda (2011)). Fiscal sustainability gap equals the change in the non-oil structural primary balance that, if maintained forever, ensures the constraint is met.
  - Long run projections depend on parameters including nominal discount rate, long-term non-oil GDP growth rate, and inflation.

- Assumptions used in the calculations
  - Global demand for oil slows in the coming years and peaks around 2040 (given the effects of COVID-19, this may now be too optimistic).
  - Real oil prices average $51 a barrel and higher cost producers exit the market to ensure demand and supply balance.
  - Absent fiscal adjustment, government primary spending increases in line with non-oil growth (i.e. the ratio of spending to non-oil GDP remains unchanged).

- Baseline assessment of sustainability gaps (long run budget constraint)
  - The fiscal sustainability gap based on the long run budget constraint is estimated at 32.7 percent of nonoil GDP on average across GCC countries, with variability across countries.
  - Table 1. Projected Fiscal Indicators in 2020 (percent of non-oil GDP)
    - Bahrain: Oil revenue 12.6; Non-oil primary balance -19.6; Gross debt 143.4; Gross assets 54.2; Fiscal gap (Long run budget constraint) 16.3; Fiscal gap (PIH, constant wealth as percent of non-oil GDP) 18.8.
    - Kuwait: Oil revenue 55.4; Non-oil primary balance -92.2; Gross debt 30.2; Gross assets 858.9; Fiscal gap (Long run budget constraint) 65.2; Fiscal gap (PIH, constant wealth as percent of non-oil GDP) 69.3.
    - Oman: Oil revenue 32.3; Non-oil primary balance -57.5; Gross debt 121.4; Gross assets 81.5; Fiscal gap (Long run budget constraint) 48.9; Fiscal gap (PIH, constant wealth as percent of non-oil GDP) 50.9.
    - Qatar: Oil revenue 36.7; Non-oil primary balance -34.2; Gross debt 97.8; Gross assets 317.7; Fiscal gap (Long run budget constraint) 21.2; Fiscal gap (PIH, constant wealth as percent of non-oil GDP) 24.6.
    - Saudi Arabia: Oil revenue 17.1; Non-oil primary balance -32.8; Gross debt 42.9; Gross assets 89.2; Fiscal gap (Long run budget constraint) 22.4; Fiscal gap (PIH, constant wealth as percent of non-oil GDP) 21.1.
    - UAE: Oil revenue 15.7; Non-oil primary balance -27.1; Gross debt 45.4; Gross assets 296.7; Fiscal gap (Long run budget constraint) 21.2; Fiscal gap (PIH, constant wealth as percent of non-oil GDP) 24.7.
  - Footnote on Table 1: Fiscal gaps are estimated based on forecasts of long-term oil demand that is consistent with IMF 2020c, a nominal interest rate of 6 percent, an inflation rate of 2 percent and a non-oil real GDP growth of 3 percent in the long term.

- Sensitivity analysis (Table 2: Fiscal Gaps Under Alternative Scenarios, percent of non-oil GDP)
  - Scenario definitions: High oil demand = global oil demand grows 3 percentage points more per year than baseline; Low oil demand = global oil demand grows 3 percentage points less per year than baseline; Lower interest rate = interest rate is 0.5 percentage point lower than baseline; Higher interest rate = interest rate is 0.5 percentage point higher than baseline.
  - Table 2 results
    - Bahrain: Baseline 16.3; Higher oil demand 13.1; Lower oil demand 17.0; Lower interest rate 17.1; Higher interest rate 15.6.
    - Kuwait: Baseline 65.2; Higher oil demand 42.9; Lower oil demand 70.5; Lower interest rate 74.0; Higher interest rate 56.5.
    - Oman: Baseline 48.9; Higher oil demand 41.1; Lower oil demand 51.0; Lower interest rate 51.3; Higher interest rate 46.6.
    - Qatar: Baseline 21.2; Higher oil demand 5.0; Lower oil demand 24.7; Lower interest rate 25.4; Higher interest rate 17.1.
    - Saudi Arabia: Baseline 22.4; Higher oil demand 8.1; Lower oil demand 25.3; Lower interest rate 24.8; Higher interest rate 20.2.
    - UAE: Baseline 21.2; Higher oil demand 13.9; Lower oil demand 23.0; Lower interest rate 24.2; Higher interest rate 18.4.

- Primary implications and policy considerations
  - Fiscal positions in all GCC countries are assessed to have substantial sustainability gaps in the long run, despite large asset buffers in most cases, unless further fiscal adjustment is implemented (relative to 2020).
  - These baseline results primarily reflect large non-oil structural primary deficits and assumed long run trends in oil markets; absent consolidation, large overall fiscal deficits will emerge as oil revenues trend downward.
  - Fiscal adjustment strategies anchored by each country’s long-term fiscal sustainability gap are critical for GCC countries to respond appropriately to the changing outlook.
  - Long run projections carry large margins of uncertainty (total oil deposits, oil price volatility, investment returns, non-oil growth). Periodic re-evaluations of long run fiscal sustainability gaps are needed.
  - Trade-offs in adjustment timing:
    - “Immediate full adjustment” closes the fiscal gap immediately to the level consistent with the long run budget constraint, but would generate a very large and destabilizing short-run contraction.
    - “Gradual adjustment” is more feasible but requires more cumulative adjustment and may take 2-3 decades to achieve fiscal sustainability, leaving vulnerability to shocks.
    - “No measures beyond 2025” assumes IMF staff projected baseline fiscal path until 2025 and no adjustment thereafter, demonstrating the importance of continued progress until sustainability is achieved.
  - Long run net debt levels are path dependent and influenced by initial net debt, chosen fiscal adjustment path, borrowing costs, and economic growth. More rapid adjustment is associated with more rapid accumulation of assets and lower long-run net debt.

*International Monetary Fund — ECONOMIC PROSPECTS AND POLICY CHALLENGES*

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_Source: https://www.imf.org/-/media/files/publications/pp/2020/english/ppea2020065.pdf_