Last week’s decision by Saudi Arabia and Oman to cut energy subsidies on petrol shouldn’t have caught anyone by surprise. Every country in the GCC has been discussing ways of cutting costs since it became clear that lower oil prices are here to stay. Kuwait is expected to announce similar measures soon. The shale boom combined with a global call to reduce fossil fuels has changed the oil economies, perhaps permanently. Diversification is the way forward, but some countries are further ahead on that path than others and a period of adjustment is going to be necessary.
For the UAE and Saudi Arabia, both of which have massive financial reserves, the transition to a developed economy will be smoother, if no less necessary. But in the end, the results need to be the same: GCC countries will need to increase revenues while cutting costs. This is why GCC residents will probably see more cost -cutting measures, which will be most obvious in the removal of subsidies, while their governments work to bring in new industries and a variety of fees and even a GCC-wide value-added tax (VAT).
These measures are the smart and generally recognised path forward, even receiving endorsement from the International Monetary Fund (IMF). However, the implementation of these new measures needs to be done smartly and with ample notice, otherwise the transition is likely to be a jarring experience. Last week’s increase of petrol prices in Saudi Arabia caught some by surprise. Despite Saudi citizens still having some of the cheapest petrol in the Gulf, queues still formed at petrol stations as information took time to filter down to people. The UAE so far has led the way by informing its citizens and residents well ahead of any changes. It announced the removal of petrol subsidies one month before actually implementing the changes. Saudi Arabia and UAE are now openly talking about how and when they will implement VAT, which will be in an estimated 18 months to two years. This is the best way forward. Transparency combined with planning will ensure the region makes a smooth transition to developed, diversified economies.
