The boom in the Gulf countries’ revenues from the sale of oil after its price hike this year represents the “last chance” for these countries to benefit from these funds, before the world reduces its dependence on fossil fuels, according to a report by The Economist magazine.
The magazine published a report explaining the potential spending aspects of the surplus obtained by these countries, taking advantage of the huge revenues with the rise in crude prices, due to the recovery of the global economy from the Covid pandemic, and Russia’s invasion of Ukraine, and the potential risks that they will face to implement huge projects such as the Neom city project in northwest Saudi Arabia.
And in the period from last January to June, the price of a barrel of Brent crude rose from $80 to more than $120 (currently about $95).
The International Monetary Fund expects energy exporters in the Middle East and Central Asia to receive $320 billion more in oil revenue than previously expected, a figure equivalent to about 7 percent of their GDP, over the next five years.
The report says that the rise in oil prices increases the financial strength of the Gulf states at home and abroad, and leads to increased public spending and directs money to all parts of the world.
This year’s “surprise profits” provide the opportunity to correct conditions that have prevailed since the drop in oil prices in 2014, such as measures to reduce public spending and increase taxes.
The magazine says that Bahrain, whose public debt has risen to 130 percent of GDP in 2020, assuming oil will reach only $60 a barrel, may reduce its debt by about 12 percentage points this year.
Oman’s debt burden is expected to fall by more than 20 percentage points of GDP.
But other countries such as Saudi Arabia will seek to provide oil profits, rather than spending.
Mohammed al-Jadaan, the Saudi finance minister, says that the oil money will not be touched at least this year, and then it will be used, in 2023, to increase foreign reserves and revenues of the sovereign wealth fund.
Bahrain will also use some of its surplus to refinance the investment fund, which it has drained during the pandemic.
However, the pressure to spend will be severe. The UAE announced that it would double the social welfare budget for poor citizens from 2.7 billion dirhams to 5 billion dirhams.
Eligible families will receive stipends for housing and education, as well as an allowance to offset higher food and energy costs.
Saudi Arabia can reduce the value added tax, which has reached 15 percent.
“You have a political tool that you didn’t have before,” says Nasser Saidi, a Lebanese economist who runs a consulting firm in Dubai. “Instead of increasing spending or hiring, you can lower the value-added tax.”
But the thinking remains in the post-oil phase. “Of course we are all happy because the price of oil is high, but the focus should remain on the non-oil economy,” says an executive at Bahrain’s sovereign wealth fund.
But figuring out what that means in practice is no easy task. Some sovereign wealth managers in the Gulf say they face challenges because they aim to provide oil wealth for future generations, yet they are required to provide capital in order to increase non-oil growth, a task that involves a lot of risks, and it is a problem facing the Gulf countries.
The report indicates that the region is full of mega projects that it considers “failed” from previous boom periods, such as the neighborhood that Saudi Arabia wanted to be a competitor to Dubai, and the billions that the UAE spent on artificial islands and did not succeed, and the failure of its plans to be a center for semiconductor manufacturing and a center for health tourism .
The Economist says that the city of “NEOM” is ready to absorb a large part of the oil money this time, and Saudi Arabia also wants to host the Asian Winter Games in 2029, and Dubai has a plan to create 40,000 jobs in “Metaverse” within five years.
The oil boom gives Saudi Arabia billions to pay to resorts and theme parks as part of developing the tourism sector, which it says will be the center of its post-oil economy.
But Saudi officials cannot provide proper assessments that confirm that 100 million tourists will choose to visit the kingdom each year.
The report called on the Gulf countries to focus on areas where they enjoy clearer competitive advantages, and suggested investing in water desalination technologies, as Israel did, and green energy technologies such as hydrogen.
The boom will certainly reshape Gulf relations with the rest of the world, as evidenced by US President Joe Biden’s trip to Jeddah, according to the magazine, which referred to the money Riyadh is spending to polish its reputation in other areas, such as golf, where it has already established a competition for championships. “BGA”, and the Formula 1 race, which attracted singing stars, such as Justin Bieber and Mariah Carey.
The current crisis in low- and middle-income economies is giving the Gulf countries “great influence”. Saudi Arabia and the UAE have already provided loans to poor countries over the past two decades, and played a role in this context that was earmarked for advanced economies and international institutions such as the World Bank.
But this may be the “last chance” for the Gulf states. Rich and poor countries alike are complaining about rising energy costs, which makes their efforts to reduce dependence on fossil fuels even more urgent.
Kuwaiti investor Ali Al-Salem says: “There is a feeling that the days are numbered…the current state of Europe will not allow it to be in this vulnerable position now…which raises a question: Will the Gulf do that too?”