In the current circumstances, the debt ratio of the GCC countries must attract attention. This is due to the recent rise in US interest rates, which brings with it potentially important add-ons to GCC government debt burden.

The World Economic Outlook data shows that the debt ratio to gross domestic product (GDP) in the GCC was 26 per cent in 2017, and expected to increase to 29 per cent this year and increase further in the next five years. But if the price of oil were to go down significantly, the debt ratio to GDP is expected to see a sharp hike. As a result, more of the GCC counties could start adopting certain taxes — i. e., value added and excise tax — to generate another source of government revenues.

To decrease the debt ratio, governments usually cut spending simultaneously with increased spending efficiency or raise more revenues by imposing taxes, or using both options. This is the common answer in academic books and the prescription usually applied by the International Monetary Fund during the consultations with the different countries. The side effect of all these scenarios introduces a symptoms of a contractionary fiscal policy.

This means that all of these likely scenarios reduce state income. Consequently, if these settings cause a severe recession, then the debt ratio may increase. A recent study shows that cutting spending is less harmful to the economic growth than a sweeping tax increase.

One of the important topics related to the debt issue is the expected increase in the value of debt servicing requirements, or the interest payments on the debt. It is obvious that interest rates will keep going up. The current expectations are for the interest rate in the US will be adjusted higher by up for four times this year.

This incremental increase in subsequent interest rate payments will be extracted from government revenues. Accordingly, available resources for the government spending on future projects will be less.

It becomes difficult to generate a state of permanent economic growth for the near term, which in turn would add to the debt ratio burden the Gulf states carry.

This picture will become ever more complicated if we add the foreign exchange rate of the US dollar to the equation. If the interest rate on the dollar continues to increase faster than that on other currencies, then the dollar will appreciate.

All oil exports transactions are paid in dollars, and hence the price of oil will decline. This implies that governmental revenues too will decline too, and makes it even more difficult to lower the debt ratio.

The rise in US interest rates indicates an expectation that the US economy will keep performing well. The IMF data displays that the during the period 2008-12, GCC countries’ growth rate was seven times as much that of the US. However, this trend is shrinking over time.

The improvements of the US economy will open an important question about the capital flows into the GCC countries. There is no doubt that the institutional quality, human capital and government policies are in favour of the US economy and the other developed economies.

Within these developments, what can Gulf governments can do? Definitely, there is no instantaneous solution.

The GCC countries have initiated gradual fiscal consolidation procedures. These measures are adopted in consultation with the IMF. These procedures should subject to yearly revisions based on the initial feedbacks from the economic performance and government budgets’ deficits.

The writer is Associate Professor of Economics at United Arab Emirates University.