Effective investment policies represent one of the most important pillars of development for any country. These policies and their implementation reflect significantly on the growth rates and lead to an improvement in living standards and the creation of jobs.
While the approach to investment in the Gulf has varied from one country to another, the increased coordination between the Gulf Cooperation Council (GCC) countries since the launch of the common market in 2008 have brought these policies closer.
At present, despite differences in implementation, speed of reform and infrastructure, these policies are similar throughout the GCC. But some elements need to be reconsidered to make the most of the private sector and bring in more foreign direct investment (FDI).
Firstly, there is a lack of harmony between local and foreign investments, which has an impact on the flow of investment into the GCC.
The GCC needs to find mechanisms to develop the legislative structure and investment legislation in a manner that allows local and foreign investors to invest more funds in the economy, the size of which is expected to reach $1.4 trillion (Dh5.14 trillion) this year.
There are many legislations restricting foreign investment in the GCC markets. Gulf stock markets put many restrictions on foreign fund flows, and there are also restrictions on ownership of financial institutions and banks.
Restrictions
This is one of the main reasons responsible for the slump in GCC stock markets. Local and foreign capital do not like restrictions. It is true that GCC countries have allowed foreign investment in joint stock companies, including banks, but within specific ratios that do not surpass 20 per cent. However, this ratio does not constitute a strong motivation for foreign investors due to several considerations.
Firstly, the ratio comprises a psychological obstacle due to restrictions that are not favoured by investors in general. Secondly, the ratio is very modest when compared to the capacity of the potential flow of foreign capital.
In other areas of investment, such as industry, real estate and the service sector, the situation is even more complicated. Company laws in Gulf countries have been in place for many years with no changes.
Gulf capital tends to be protectionist. GCC countries are reluctant to invest in their local markets, with the exception of traditional sectors, such as trade and real estate. This comes at a time when investments in the industrial and service sectors, financial markets and new technologies are very modest compared to the investment capabilities of the GCC.
This inconsistency has negatively affected investment at a time when global financial markets are recovering from the repercussions of the financial crisis.
Reluctance
Meanwhile, Gulf bourses are still suffering because of the reluctance of Gulf capital to trade. Foreign capital is also not encouraged to enter the GCC markets.
As a result, Gulf economies will lose significant and important investments which can contribute to the growth of these economies on the one hand, and the development of GCC financial markets on the other.
It is imperative for GCC institutions concerned with development to find quick solutions to these constraints, by encouraging domestic investment and convincing local investors to work in a fair competitive environment.
Also important is development of investment legislation, especially the company law, so as to attract more foreign investments and easing restrictions on foreign investments in Gulf stock markets.
Such procedures are necessary because the goal is not confined to attracting investors, but also includes the utilisation of modern technology and global marketing expertise that often coincides with the flow of foreign investments.
Dr Mohammad Al Asoomi is a UAE economic expert and specialist in economic and social development in the UAE and the GCC countries.
