The oil business has long served as the foundation for the GCC’s affluence and phenomenal development. It accounts for around half of the GDP of the region, which holds 56 per cent and 40 per cent of the world’s proven conventional oil and gas reserves.
Given how global energy consumption is projected to increase by 50 per cent from 2005 to 2030 — with fossil fuels to provide the dominant supply — it would be natural to assume that oil alone can assure uninterrupted prosperity for the Gulf. Unfortunately, this strong dependency also poses major challenges when market fluctuations begin to unfold.
In the same intensity that higher prices usher in more economic windfalls, lower prices can also wreak havoc on the overall economy. While oil producing countries can somehow adjust their volumes as they see fit, global economic fluctuations are simply out of their control. Clearly, there is an urgent need to look towards alternatives to offset the prevailing slump, and this is where the importance of accelerating economic diversification comes in.
Diversification weans the local economy from overreliance on oil and its derivatives by taking explorative steps towards other promising fields such as infrastructure, real estate, tourism and manufacturing. Many internationally recognised indicators such as logistics capability, commerce and competitiveness are not directly related to the oil trade and yet form part of the basis for gauging a country’s economic strength.
The World Bank’s 2014 classification ranked the UAE 27th globally and first in the Arab world on the Logistics Performance Index, followed by Qatar (29), Saudi Arabia (49), Bahrain (52), Kuwait (56), and Oman (59).
Member states will have to look closer at other non-oil channels that can help streamline government budgets and sustain GDP growth in order to counter the losses inflicted by fluctuating oil prices. These key sectors include Islamic banking and finance, waste management, aluminium production, construction and communications.
These may still not be enough to provide full economic security in the event of protracted oil price fluctuations.
The UAE is an excellent model of successful economic diversification within the GCC. Although the country has the world’s sixth largest proven oil reserves of approximately 98 billion barrels as well as the seventh largest gas reserves of 215 trillion cubic feet, it also managed to rely on its non-oil economic activities for 68.6 per cent of its GDP between 2012 and 2014.
Investments into the local non-oil sector in fact rose 8.1 per cent from 2013 to Dh963.144 billion in 2014. The UAE is proof that a major oil exporter can explore other horizons and thrive beyond its oil wealth through visionary leadership and the full cooperation of the private sector.
The process of economic diversification is not an easy task for any government. It entails a clear determination of what best serves the citizens and what suits current political and economic circumstances to promote transparency and integrity. In some cases, it might even necessitate a shift to a more effective monetary policy.
But as the UAE and other diversification-driven GCC states have shown, the rewards more than make up for the struggles.
The writer is Managing Director of Orient Planet PR & Marketing Communications.
