Oil’s dramatic fall since June 2014 is emboldening Middle East policymakers. Generous fuel and food subsidies are being slashed, sales taxes are being introduced, but the most far-reaching measure so far is Kuwait’s proposed introduction of corporate taxes.

“The fact that Kuwait is going down the taxation route for corporates is a very different form of reform for revenue generation,” said Monica Malek, chief economist for Abu Dhabi Commercial Bank. After years of $100 (Dh367.3) a barrel oil and $1 trillion dollars of annual export earnings, the wealthy Gulf oil producers and those dependent on them are being forced to usher in a new reality.

For those in the region, the irony is certainly not lost that Kuwait — one of the world’s lowest cost producers and with one of the oldest sovereign funds (established in 1953) — is now being forced to introduce an across the board corporate tax rate of 10 per cent. This policy of course needs to be passed through parliament, which will be no simple task.

Kuwait’s bold move follows a Gulf-wide agreement to roll out a 5 per cent value-added tax during 2018. Gulf business hubs, using the success of Dubai as their example, have been accelerating a push to attract foreign direct investment by offering virtually tax-free living to global companies and their expats.

“It is really the outlook for ‘oil to be lower for longer’ and the view that these economies really need to diversify and not only for economic growth, but in key areas such as their fiscal position,” said Malek.

According to ADCB, all six Gulf States have introduced measures to cut fuel subsidies at the pump and raise utility prices for water and power. The UAE was the first to break the dam last summer when it introduced market based pricing for petrol.

Robin Mills, CEO of oil consultancy Qamar Energy, said the move triggered a domino effect.

“Once one country feels able to take the step of removing subsidies — as the UAE did in this case — and that seems to go okay, than other countries get some confidence in following them,” said Mills.

This is not the first time oil giants have contemplated subsidy reform and taxation. Dramatic price corrections over the past two decades led to policy proposals, but they never made it past the drawing board.

“When times are good, nobody wants to reform because it is not urgent. When times are bad, nobody wants to reform because they think it will hit the economy and the mood is down and it will just make things worse,” added Mills.

But perhaps times were too good before the oil crash. After years of generous subsidies topped off with record spending on new train and subway systems, new airlines, art museums, renowned universities and world-class football clubs, the weight of spending proved to be too much to ignore. According to the International Monetary Fund, oil exporters will have post average fiscal deficits of 13 per cent, with Saudi Arabia, the region’s largest producer, nearly 20 per cent.

Ratings agency Moody’s revised its outlook for the Saudi Arabian banking system to negative from stable, after putting governments on review in the region. The agency highlighted a 14 per cent reduction in public spending this year as a key factor behind the move in the Kingdom.

There is also a spillover effect of an economic slowdown in the six Gulf States spreading to other, less stable countries in the region, which became over-dependent on both remittances from citizens working in the region and the generosity of the oil exporters after the Arab Spring.

Egypt, analysts say, is perhaps the best example, having suffered an additional blow of terrorism attacks against tourism resorts on the Red Sea.

It succumbed to market pressure by devaluing what many say was an overvalued Egyptian pound by 13 per cent. The country’s central bank said it will pursue a more flexible currency policy to avoid draining foreign reserves.

ADCB said there are four main factors that will feed into lower economic growth even if oil hovers around $50 a barrel: lower government spending, widening fiscal deficits, an erosion of private sector confidence and a drying up of bank deposits as government owned enterprises maintain operations to avoid layoffs.

While this is a start to what may be a multi-year, painful process of reform, many say it will over time reduce dependency on the state and force diversification. “The fact that in previous oil price downturns they have not been able to do this and they are doing it now, I see that as one of the most positive developments in the region,” said Malek.

The writer is Emerging Markets Editor at CNNMoney.